Facts of the Case

The petitioners, real estate developers in Haryana, were granted development licences subject to payment of External Development Charges (EDC) to the Haryana Urban Development Authority (HUDA), now Haryana Shahari Vikas Pradhikaran (HSVP), for creation of external infrastructure such as roads, drainage, sewerage, and other public facilities.

The Income Tax Department alleged that the developers failed to deduct Tax Deducted at Source (TDS) on these payments under Section 194C, treating them as payments for execution of work. Consequently, the petitioners were treated as assessees in default under Section 201 and exposed to interest and penalty proceedings.

The developers approached the Delhi High Court challenging the applicability of TDS provisions to EDC payments, contending that such payments were statutory levies and not contractual payments.

Issues Involved

  1. Whether External Development Charges paid to HUDA/HSVP constitute payments to a contractor for carrying out work under Section 194C.
  2. Whether statutory nature of EDC excludes liability to deduct TDS.
  3. Whether developers can be treated as assessees in default for non-deduction of TDS.
  4. Whether a formal written contract is necessary for applicability of Section 194C. 

Petitioner’s Arguments

  • EDC is a statutory charge imposed under development laws and licence conditions.
  • Payments are compulsory exactions and not consideration under a contract.
  • HUDA/HSVP acts as a State authority performing public functions.
  • No contractor–contractee relationship exists between developers and the authority.
  • Therefore, Section 194C should not apply. 

Respondent’s Arguments

  • EDC payments are directly linked to external development works undertaken for the benefit of the developers’ projects.
  • The obligation arises from licence conditions creating a binding arrangement between the parties.
  • Even in the absence of a formal contract, the arrangement qualifies as a contract for work.
  • Hence, payments fall within the scope of Section 194C and TDS was mandatory.

Court Order / Findings

  • Section 194C applies where payment is made to a contractor pursuant to an arrangement for execution of work.
  • The statutory origin or method of computation of EDC does not alter the character of the payment.
  • Developers were under a binding obligation to pay EDC for external development work to be executed by the authority.
  • Once payment is made in connection with such work, the provisions of Section 194C are attracted.

Important Clarification by the Court

  • A formal written contract is not essential for invoking Section 194C.
  • Statutory payments can still be contractual in substance if linked to execution of work.
  • Developers making EDC payments are required to comply with TDS obligations under the Income-tax Act.

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

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