Facts
Puri Constructions Pvt. Ltd. (the petitioner) is in the business of construction, promotion, and development of land and real estate. The petitioner was granted a license to carry out a development project under the Haryana Development and Regulation of Urban Areas Act, 1975. As part of this project, the petitioner paid External Development Charges (EDC) to the Haryana Shahari Vikas Pradhikaran (HSVP) on the directions of the Department of Town and Country Planning (DTCP).
The Assessing Officer opined that the EDC payments fell within the ambit of Section 194C of the Income Tax Act, which mandates the deduction of tax at source (TDS) for payments made to contractors and subcontractors. Consequently, the petitioner was deemed in default for non-deduction of TDS and was subjected to a penalty under Section 271C. The petitioner contended that payments made to HSVP, an agency executing external development work for the state government, should be treated as payments to the government and therefore exempt from TDS under Section 196.
Issues
- Whether the EDC payments made by the petitioner to HSVP fall within the scope of Section 194C, thereby necessitating TDS.
- Whether HSVP is a government entity, thereby exempting the EDC payments from TDS under Section 196.
Judgement
The High Court of Delhi held that the provisions of Section 194C were applicable to the EDC payments made by the petitioner to HSVP. The court observed that:
- HSVP, although under a statutory enactment and performing functions akin to governmental obligations, is not part of the government.
- The payments made by the petitioner to HSVP were pursuant to an arrangement for executing external development work, which falls under the purview of Section 194C.
- The mere fact that the payments were directed by the DTCP does not change the nature of the payments as they were made to a contractor (HSVP) executing work on behalf of the state government.
Analysis of the Judgement
Scope of Section 194C: Section 194C of the Income Tax Act mandates TDS for payments made to any resident contractor for carrying out any work in pursuance of a contract between the contractor and a specified person. In this case, HSVP was executing external development work as an agency of the state government, and the petitioner was responsible for making the payments. The contractual relationship between HSVP and the state government, as evidenced by the directives from the DTCP, brings the payments within the ambit of Section 194C.
Scope of Section 194C: The most fundamental aspect of the judgement is the recognition that under Section 194C, a direct contractual relationship between the paying party and the contractor is not a requirement. Instead, the statute mandates a contractual relationship between the contractor and a “specified person.” The Explanation clarifies that the state government qualifies as a specified person. Consequently, payments made to HSVP for External Development Charges (EDC) are subject to TDS, as HSVP has an implicit contractual relationship with the Haryana Government to carry out the External Development Works (EDW).
HSVP’s Status: The court’s interpretation that HSVP, despite being a statutory body performing state functions, is not the government is critical. Section 196 exempts payments to the government, RBI, and certain corporations from TDS. However, HSVP does not fit into these categories. The statutory enactment and governmental functions performed by HSVP do not elevate its status to that of the government for the purposes of Section 196.
Implications of the Judgement: This judgement clarifies that payments made to entities like HSVP, even when performing governmental functions, are subject to TDS under Section 194C if they are executing works in pursuance of a contract. The Delhi HC distinguished the judgements in Santur Infrastructure (P.) Ltd. v. Asstt. CIT 2019 SCC OnLine ITAT 24457; Satya Developers (P.) Ltd. v. Jt. CIT 2022 (6) TMI 687 (ITAT – Delhi); Spaze Tower (P.) Ltd. v. Jt. CIT 2022 (5) TMI 1344 (ITAT – Delhi) and Perfect Constech (P.) Ltd. v. Addl. CIT 2020 (12) TMI 1158 (ITAT – Delhi) [at paragraph 74].
Compliance and Penalty: The judgement also highlights the necessity for compliance with TDS provisions to avoid penalties. The petitioner was held in default for non-deduction of TDS and subjected to a penalty under Section 271C. This serves as a cautionary tale for other developers and contractors to ensure proper TDS deductions to avoid similar penalties.
Conclusion: The Delhi High Court’s ruling in this case reinforces the applicability of Section 194C to payments made for development works executed by statutory bodies like HSVP. This decision is pivotal for developers and contractors engaged in similar transactions, emphasizing strict adherence to TDS requirements to ensure compliance and avoid penalties.
Case title: Puri Constructions (P) Ltd. v. CIT, (2024) 462 ITR 326