2024 (3) TMI 1452 - HC - Income Tax

TDS u/s 194C - liability to deduct tax - External Development Charges (EDC) - payments made to the Haryana Shahari Vikas Pradhikaran HSVP (earlier known as the Haryana Urban Development Authority - HUDA ) - HELD THAT - We note that the issue would be governed by the judgment rendered by us in Puri Constructions Private Limited. 2024 (2) TMI 756 - DELHI HIGH COURT we find ourselves unable to concur with the view taken by the Tribunal in Santur Satya Perfect Constech and Spaze Tower. Those decisions have proceeded on the basis of a contractual obligation between the petitioner and HSVP being a prerequisite. They have additionally based their decision on the fact that HSVP was undertaking external development work on the directives of the DTCP. These for reasons recorded hereinabove were factors wholly irrelevant for the purposes of considering the applicability of Section 194C.

Summary

The core legal questions considered by the Court were:

1. Whether the payment of External Development Charges (EDC) made to the Haryana State Industrial and Infrastructure Development Corporation (HSIIDC), a statutory corporation funded by the State Government, falls within the ambit of Section 196 of the Income Tax Act, thereby exempting it from tax deduction at source (TDS).

2. Whether the directive of the Director Town and Country Planning (DTCP) to make payments to HSIIDC affects the applicability of Section 196.

3. The applicability of Section 194C of the Income Tax Act, which mandates deduction of tax at source on payments made to contractors, to payments made to HSIIDC for development works.

4. The validity of prior decisions by the Tribunal and other courts that had exempted such payments from TDS on the basis of contractual obligations and directives from DTCP.

5. Procedural questions related to the issuance of Show Cause Notices and the specific provisions under which the petitioners were held liable to deduct tax.

Issue 1: Applicability of Section 196 to Payments Made to HSIIDC

The legal framework revolves around Section 196 of the Income Tax Act, which exempts payments made to the Government or specified authorities from TDS. The Court relied heavily on the precedent set in Puri Constructions Private Limited v. Additional Commissioner of Income Tax, where it was held that a statutory corporation like HSIIDC has a distinct legal personality separate from the State Government, despite being funded by it. The Supreme Court's decision in A.P. SRTC was cited to affirm that statutory corporations are separate legal entities and not merely extensions of the State.

The Court reasoned that the fact that payments were made on the directives of the DTCP does not bring them within the scope of Section 196. Section 196's applicability depends solely on whether the payment is made to the Government or an authority specified therein, not on whether the payment is made under a directive or has statutory backing.

Key evidence included the undisputed fact that until 31 March 2017, EDC payments were made directly to HSIIDC, and only thereafter were they deposited with the DTCP. This demonstrated that the payments were not to the Government per se, but to a distinct legal entity. The Court concluded that EDC payments to HSIIDC do not qualify for exemption under Section 196.

Competing arguments that the payment should be treated as government revenue because arrears of EDC could be recovered as land revenue were rejected as immaterial to the applicability of Section 196.

Issue 2: Applicability of Section 194C on Payments to HSIIDC

Section 194C imposes a mandatory obligation on the payer to deduct tax at source on payments made to contractors. The Court emphasized that this provision confers no discretion on the payer to assess the taxability of the payment or the income of the payee. The Supreme Court's ruling in Associated Cement Co. Ltd. was cited, which clarified that the payer must deduct tax on the entire sum paid or credited to the contractor, without attempting to segregate the income component.

The Court interpreted that the obligation under Section 194C is "unshirkable" and does not depend on the payer's assessment of the payee's income or the nature of the payment. The reasoning was that Parliament could not have intended to impose an impossible burden on the payer to determine the income portion of the payment. Hence, payments made to HSIIDC for development work fall within the scope of Section 194C, mandating TDS deduction.

The Court rejected the argument that payments made on behalf of the organization to contractors, or payments made under directives, should be excluded from TDS under Section 194C.

Issue 3: Validity of Prior Tribunal Decisions

The Court expressly disagreed with prior Tribunal decisions in Santur, Satya, Perfect Constech, and Spaze Tower, which had exempted the petitioners from deducting tax on payments made to HSIIDC. Those decisions were based on the existence of a contractual obligation between the petitioner and HSIIDC and the fact that HSIIDC was undertaking external development work on DTCP's directives.

The Court held that these factors were irrelevant for the applicability of Section 194C. The legal obligation to deduct tax at source is independent of the contractual relationship or the source of directive for the work. The Court's analysis underscored that the statutory mandate under Section 194C is clear and cannot be circumvented by such considerations.

Issue 4: Procedural Validity of Show Cause Notices

The Court briefly touched upon the procedural issue regarding Show Cause Notices, which did not specifically cite the provisions under Chapter XVIIB of the Income Tax Act. The Court noted that the respondents had previously attempted to hold the petitioners liable under different provisions (Section 194 and Section 194I), as seen in earlier litigation.

Although the Court did not elaborate extensively on this point, it left open the possibility for the respondents to proceed further in accordance with law and the principles laid down in Puri Constructions Private Limited.

Significant Holdings

"A statutory corporation has a personality distinct and separate from that of the State or its shareholders."

"Section 196 is not dependent upon a directive to pay. It is concerned solely with whether the payment is made to a Government or an authority specified therein."

"Section 194C of the Act vests no discretion in the payer to examine or contemplate chargeability of that payment to tax."

"It is neither possible nor permissible to the payer to determine what part of the amount paid by him to the contractor constitutes the income of the latter."

"The amount equal to two per cent of the sum required to be deducted by the payer out of the sum credited to the account of or paid to the contractor has to be deducted at source without exclusion."

"The contractual obligation between the petitioner and HSIIDC and the fact that HSIIDC was undertaking external development work on the directives of the DTCP are factors wholly irrelevant for the purposes of considering the applicability of Section 194C."

In conclusion, the Court set aside the impugned orders that had absolved the petitioners from deducting tax at source on payments made to HSIIDC. The Court reaffirmed the legal position that payments to statutory corporations like HSIIDC do not attract exemption under Section 196, and that Section 194C mandates deduction of tax at source on payments to contractors, without exception based on directives or contractual nuances. The respondents were permitted to proceed further in accordance with the law and the principles enunciated in the Puri Constructions Private Limited judgment.