Facts of the Case

The petitioners, real estate developers, made payments towards External Development Charges (EDC) to Haryana Shahari Vikas Pradhikaran (HSVP)/HUDA as mandated under development licenses granted by the State authorities.

The Income Tax Department held that the petitioners failed to deduct Tax Deducted at Source (TDS) on these payments under Section 194C of the Income Tax Act, 1961, treating them as payments for execution of development work. Consequently, proceedings were initiated under Sections 201(1) and 201(1A), treating the petitioners as assessees-in-default for non-deduction of TDS. 

Issues Involved

  1. Whether External Development Charges (EDC) paid to HSVP/HUDA constitute payment for carrying out “work” under Section 194C of the Income Tax Act, 1961.
  2. Whether such payments are statutory levies or contractual payments.
  3. Whether developers are liable to deduct TDS on EDC payments.
  4. Whether proceedings under Sections 201 and 271C are legally sustainable.

Petitioner’s Arguments

  • EDC is a statutory charge imposed by the State as a condition for grant of development license.
  • Payment is made to a statutory authority and not to a contractor engaged by the developer.
  • There is no direct contractual relationship between the developer and HSVP/HUDA for execution of work.
  • Therefore, Section 194C relating to payments to contractors is not applicable. 

Respondent’s Arguments

  • EDC payments are directly linked to execution of external development works such as roads, drainage, sewerage, and infrastructure.
  • HSVP/HUDA undertakes such works for the benefit of the developers’ projects.
  • Payments made in connection with such work fall within the ambit of “work” under Section 194C.
  • Hence, TDS deduction is mandatory.

Court Order / FINDINGS

  • Section 194C applies when payment is made for carrying out work pursuant to an arrangement.
  • EDC payments are connected with execution of external development work by the authority.
  • The fact that charges are imposed under statutory provisions does not exclude the applicability of TDS.
  • Payments made for development work undertaken for the benefit of the payer fall within the scope of Section 194C.

 Important Clarification by the Court

  • Statutory nature of payment alone does not exempt it from TDS obligations.
  • Absence of a formal contract with the authority is not decisive if payment relates to execution of work.
  • Urban development authorities are not treated as the Government for TDS exemption purposes.
  • Developers may still contest penalty proceedings on factual grounds.

Sections Involved

  • Section 194C — TDS on payments to contractors
  • Section 201(1) — 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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