Facts of the Case

The petitioners, real estate developers in Haryana, were granted licences for development of residential and commercial projects 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, sewerage, drainage, and public utilities.

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

 Issues Involved

  1. Whether EDC payments to HUDA/HSVP constitute payments to a contractor for carrying out work under Section 194C.
  2. Whether the statutory nature of EDC excludes applicability of TDS provisions.
  3. Whether developers can be treated as assessees in default for failure to deduct TDS.
  4. Whether a formal written contract is necessary to invoke 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 functions as a State authority performing public duties.
  • No direct contractor–contractee relationship exists between the developers and the authority.
  • Therefore, TDS provisions under Section 194C should not apply. 

Respondent’s Arguments

  • EDC payments are directly connected with external development works executed 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 written contract, the arrangement constitutes a contract for work.
  • Hence, payments fall within Section 194C and TDS was required to be deducted.

Court Order / Findings

  • Section 194C is attracted where payment is made to a contractor pursuant to an arrangement for execution of work.
  • Licence conditions and statutory framework placed the developers under a binding obligation to pay EDC for external development works to be carried out by the authority.
  • The fact that EDC is computed or recovered through statutory mechanisms does not alter the nature of the payment.
  • Once payment is made in connection with work to be executed by the authority, it qualifies as a contractual payment for purposes of TDS.

Important Clarification by the Court

  • A formal written agreement is not essential for applicability of Section 194C.
  • Statutory payments may still be contractual in substance if linked to execution of work.
  • Developers making EDC payments are obligated to comply with TDS provisions.
  • Failure to deduct TDS can result in consequences under Sections 201, 201(1A), and 271C.

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

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