2022 (7) TMI 328 - AT - Income Tax

Levy of penalty u/s 271C - TDS u/s 194C - Non deduction of TDS in payments made to authorities like HUDA - HELD THAT - Giving thoughtful consideration to the matter on record, the clarification dated 19.06.2018 available on page no. 1 of the paper book makes it very obvious that receipts on account of EDC are being deposited in the Consolidated Fund of the State, accordingly directions were issued to colonizer like present assessee, to not deduct TDS. The Co-ordinate Benches in M/s. Perfect Constech P. Ltd. case 2020 (12) TMI 1158 - ITAT DELHI and case RPS Infrastructure Ltd. 2019 (9) TMI 39 - ITAT DELHI have held that assessee was not required to deduct tax at source at the time of payment of EDC. Thus levy of penalty u/s 271C of the Act cannot be sustained. The grounds raised in the appeals are allowed

Issues Involved:
1. Applicability of TDS on External Development Charges (EDC) paid to Haryana Urban Development Authority (HUDA).
2. Validity of penalty imposed under section 271C of the Income Tax Act, 1961 for non-deduction of TDS.
3. Interpretation of Circulars and clarifications issued by CBDT and State Government regarding TDS applicability on EDC.
4. Examination of whether HUDA is considered a government entity or a taxable entity under the Income Tax Act.

Issue-wise Detailed Analysis:

1. Applicability of TDS on External Development Charges (EDC) paid to HUDA:
The core issue revolves around whether TDS should be deducted on EDC payments made to HUDA. The Assessing Officer (AO) argued that TDS was applicable under section 194C of the Income Tax Act, 1961, as HUDA, a taxable entity, was rendering services for External Development Work (EDW). The AO noted that EDC payments were made to HUDA for civil works and other related services, and the demand drafts for EDC were issued in the name of the Chief Administrator, HUDA. The AO relied on Circular No. 681 of CBDT dated 08/03/1994, which indicated that TDS was applicable on payments made to entities like HUDA.

2. Validity of penalty imposed under section 271C of the Income Tax Act, 1961 for non-deduction of TDS:
The AO imposed a penalty under section 271C due to the assessee's failure to deduct TDS on EDC payments. The AO referenced various judicial decisions, including the Hon'ble High Court's decision in CIT(TDS) vs. M/s IKEA Trading Hong Kong Ltd., to support the imposition of the penalty. The AO concluded that there was no reasonable cause for non-deduction of TDS, as required under section 273B, and thus, the penalty was justified.

3. Interpretation of Circulars and clarifications issued by CBDT and State Government regarding TDS applicability on EDC:
The assessee contended that EDC payments were made to the Government of Haryana and, therefore, were exempt from TDS under section 196 of the Act. The assessee relied on a clarification dated 19.06.2018 issued by the Town and Country Planning, Government of Haryana, which directed that no TDS should be deducted on EDC payments made to the government. The Tribunal also considered the CBDT's clarification in F.No. 370133/37/2017-TFL dated 23/12/2017, which stated that TDS was not required when EDC was paid to the Government of Haryana but was applicable when paid to HUDA.

4. Examination of whether HUDA is considered a government entity or a taxable entity under the Income Tax Act:
The Tribunal noted that HUDA was a development authority of the State Government of Haryana and a taxable entity under the Income Tax Act. The Tribunal referred to previous judgments, including those in the cases of M/s. Perfect Constech Pvt. Ltd. and RPS Infrastructure Ltd., where it was held that EDC payments made to HUDA were not subject to TDS. The Tribunal observed that payments to HUDA were routed through the Director General, Town and Country Planning, Haryana, a government department, and there was no contractual obligation between the assessee and HUDA for specific work.

Conclusion:
The Tribunal concluded that the assessee was not required to deduct TDS on EDC payments made to HUDA. The Tribunal relied on clarifications from the Town and Country Planning, Government of Haryana, and previous judicial decisions to hold that the payments were made to a government department and not under a contractual obligation with HUDA. Consequently, the penalty imposed under section 271C was deemed unsustainable, and the appeals were allowed, setting aside the impugned orders.

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