2019 (9) TMI 686 - AT - Income Tax

Penalty proceedings u/s 271C - TDS u/s 194C on payment of external development work charges ('EDC') - reasonable cause for non-deduction of tax at source by the assessee company - HELD THAT - We find that under the facts and circumstances it is clearly borne out that assessee did had bonafide reason for not deducting the TDS. Firstly, for the reason that the license was granted by DTCP which is a Governing authority and it has clarified that EDC charges are paid to HUDA; and secondly, DTCP has issued a clarification to the effect that no TDS is required to be deducted precisely. Precisely on similar set of facts, this Tribunal in the case of RPS Infrastructure Ltd. vs ACIT 2019 (9) TMI 39 - ITAT DELHI has deleted the penalty - No penalty is leviable u/s 271C and same is directed to be deleted. - Decided in favour of assessee.

Issues Involved:
1. Levy of penalty under section 271C for failure to deduct tax at source under section 194C on payment of external development work charges (EDC).
2. Applicability of section 196 of the Income Tax Act, 1961.
3. Privity of contract between the assessee and Haryana Urban Development Authority (HUDA).
4. Reasonable cause for non-deduction of tax at source.

Detailed Analysis:

1. Levy of penalty under section 271C for failure to deduct tax at source under section 194C on payment of external development work charges (EDC):
The assessee challenged the penalty imposed under section 271C for not deducting TDS on EDC payments made to HUDA. The Assessing Officer (AO) had levied penalties amounting to ?7,96,000 and ?7,16,000 for the assessment years 2014-15 and 2015-16, respectively. The CIT(A) confirmed the AO's order, stating that the assessee failed to deduct TDS as required under section 194C. However, the Tribunal found that the assessee had a bona fide reason for not deducting TDS, supported by the clarification from DTCP that no TDS was required on EDC payments.

2. Applicability of section 196 of the Income Tax Act, 1961:
The assessee argued that under section 196, any payment made to the Government is not liable for TDS. Since the EDC was paid to HUDA at the direction of DTCP, a wing of the Government of Haryana, the payment should be considered as made to the Government. The Tribunal agreed with the assessee's interpretation, noting that the payment was indeed made to the State Government through DTCP, which has no separate legal existence.

3. Privity of contract between the assessee and Haryana Urban Development Authority (HUDA):
The assessee contended that there was no direct contract with HUDA. The EDC payments were made to DTCP, the license-granting authority, which then directed the payments to HUDA. The Tribunal acknowledged that DTCP and HUDA are separate entities governed by different acts and that the payments were made as part of the license agreement with DTCP, not HUDA. This distinction was crucial in determining that section 194C was not applicable.

4. Reasonable cause for non-deduction of tax at source:
The Tribunal found that the assessee had a reasonable cause for not deducting TDS, given the clarification from DTCP and the absence of a direct contractual relationship with HUDA. The Tribunal referred to the case of RPS Infrastructure Ltd. vs. ACIT, where similar facts led to the deletion of the penalty. The Tribunal also cited the Supreme Court's judgment in Commissioner of Income Tax vs. Bank of Nova Scotia, emphasizing that penalty under section 271C requires proof of contumacious conduct, which was not present in this case.

Conclusion:
The Tribunal concluded that the assessee had a bona fide belief that no TDS was required on EDC payments, supported by DTCP's clarification. There was no contumacious conduct by the assessee, and thus, the penalty under section 271C was not warranted. The appeals were allowed, and the penalties were directed to be deleted.

Order Pronounced:
The appeals of the assessee were allowed, and the order was pronounced in the open court on 13th September, 2019.

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