Facts of the Case

A batch of writ petitions was filed by various real estate developers challenging proceedings initiated by the Income Tax Department for failure to deduct Tax Deducted at Source (TDS) under Section 194C of the Income Tax Act, 1961.

The petitioners had made payments towards External Development Charges (EDC) to the Haryana Shahari Vikas Pradhikaran (HSVP), formerly known as HUDA, pursuant to directions issued by the Department of Town and Country Planning, Haryana.

The Revenue authorities treated these payments as contractual payments for work, alleging that the developers were liable to deduct TDS under Section 194C. Consequently, notices were issued under Sections 201(1) and 201(1A), along with proposals for penalty under Section 271C for failure to deduct tax at source.

Issues Involved

  1. Whether payment of External Development Charges (EDC) to HSVP/HUDA constitutes payment to a contractor for carrying out work under Section 194C of the Income Tax Act, 1961.
  2. Whether developers are liable to deduct TDS on such statutory payments.
  3. Whether proceedings under Sections 201 and 271C for default in TDS deduction are sustainable. 

Petitioner’s Arguments

  • EDC is a statutory levy imposed by the State Government as a condition for development licenses.
  • Payment is made to a governmental authority, not to a contractor for execution of work.
  • HSVP acts as an instrumentality of the State and not as a private service provider.
  • Therefore, Section 194C relating to contractual payments is inapplicable.
  • Consequently, notices for TDS default and penalty are illegal and liable to be quashed.

Respondent’s Arguments

  • The Revenue contended that EDC payments are for execution of external development works such as roads, sewerage, water supply, etc.
  • Such payments, according to the Department, fall within the scope of “work” under Section 194C.
  • Failure to deduct TDS attracts liability under Section 201 and penalty under Section 271C.

Court Order / Findings

  • External Development Charges are statutory payments collected by a governmental authority.
  • The payment is not made under a contractual relationship for carrying out work.
  • HSVP does not act as a contractor executing work on behalf of the developer.
  • The charges are levied in exercise of statutory powers for infrastructure development.

Important Clarification by the Court

  • Statutory payments made to government authorities for regulatory purposes cannot be equated with contractual payments.
  • Absence of a contractor–contractee relationship is crucial for Section 194C applicability.
  • The judgment is confined to the issue of TDS liability on EDC payments.

Sections Involved

  • Section 194C — TDS on payments to contractors
  • Section 201 — Consequences of failure to deduct TDS
  • Section 201(1A) — Interest for failure to deduct TDS
  • Section 271C — Penalty for failure to deduct tax
  • Relevant provisions of the Income Tax Act, 1961

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/YVA13022024CW94832019_190341.pdf

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