Facts of the Case

The petitioners, being real estate developers, were required to pay External Development Charges (EDC) to Haryana Shahari Vikas Pradhikaran (HSVP), formerly known as HUDA, as a condition for obtaining development licences from the State authorities.

The Income Tax Department initiated proceedings against the petitioners for failure to deduct Tax Deducted at Source (TDS) under Section 194C of the Income Tax Act, 1961 on such payments. The Department treated the developers as assessees-in-default under Sections 201(1) and 201(1A), asserting that the payments were made for execution of development work. 

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 real estate developers are liable to deduct TDS on EDC payments.
  4. Whether proceedings under Sections 201 and 271C for non-deduction of TDS are sustainable.

Petitioner’s Arguments

  • EDC is a statutory charge imposed by the State Government as a licensing condition.
  • Payment is made to a statutory authority performing governmental functions.
  • There is no contractual relationship between the developer and HSVP/HUDA for execution of work.
  • HSVP does not act as a contractor but as an instrumentality of the State.
  • Therefore, Section 194C relating to payments to contractors is not applicable.

Respondent’s Arguments

  • EDC payments are linked to development works such as roads, sewerage, drainage, and infrastructure.
  • HSVP undertakes such works for the benefit of the developers’ projects.
  • Payments made for such works fall within the definition of “work” under Section 194C.
  • Consequently, failure to deduct TDS attracts liability under Sections 201 and 271C. 

Court Order / FINDINGS

  • EDC is levied under statutory provisions as a precondition for development.
  • The payment is made to a governmental authority in exercise of its regulatory functions.
  • There is no contractor-contractee relationship between the developer and HSVP.
  • Absence of such relationship excludes applicability of Section 194C.

 Important Clarification by the Court

  • Statutory charges paid to government authorities for regulatory purposes cannot be equated with contractual payments.
  • The applicability of Section 194C depends on the existence of a contract for carrying out work.
  • Payments made pursuant to statutory obligations without a contract do not attract TDS under Section 194C.

 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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