SW India assisted the client in this litigation where in the HC adjudicated in favor of taxpayer by holding that EDC charges are not in nature of rent, hence not subject to withholding tax provisions

Facts of the Case:

• The Assessee is a company incorporated in India and is engaged in the business of developing real estate. The Assessee had applied to Director General, Town & Country Planning (DTCP) for grant of licenses for setting up an IT Park in Gurgaon. As per rule 11 of Haryana Development and Regulation of Urban Areas Rules, 1976 (HDRUA Rules), the Assessee entered into an agreement with the State of Haryana (through DTCP).
• As per the afore-mentioned agreement, the Assessee was required to pay a proportionate development charge (i.e., EDC) as and when required and determined by the DTCP. Since such payment has been made on behalf of a government body (i.e., DTCP) directly to HUDA, the Assessee had not withheld tax on such payments. The Assessing Officer (AO) issued show cause notice asking for reason that why the Assessee should not be treated as ‘assessee in default’ in respect of non-deduction of TDS as per section 194C / 194J of the Act on the amount of EDC paid to HUDA.
• The Assessee submitted that EDC was paid pursuant to the statutory obligations under the HDRUA Act and the rules made thereunder. Further, the payment of EDC is one of the conditions for obtaining license from DTCP for developing land. The Assessee also submitted that these payments (i.e., EDC) were in fact payments of charges to the State Government of Haryana and therefore, the Assessee had no obligation to deduct TDS.
• The AO was not satisfied with the reply of Assessee and passed order without rebutting the contention of the Assessee and simply held that EDC were in nature of ‘rent’ and therefore, TDS was liable to be deducted under Section 194-I of the Act at the rate of 10% thereby raising an erroneous demand against the Assessee.
• The aforementioned matter being highly contentious resulted in multiple writ petitions being filed before the Hon’ble High Court hence, for the purpose of addressing such controversy, the Hon’ble Court clubbed all such writ petitions together.

Question of law before the Hon’ble High Court:

• Whether the Assessee along with other petitioners were required to deduct TDS under Section 194-I of the Act on EDC paid to HUDA?

Decision of the Hon’ble High Court:

• The Hon’ble High Court has clearly mentioned that they do not find any merit in the contention of the counsel for AO that the AO has erroneously mentioned in his order that TDS was required to be deducted under Section 194-I of the Act instead of Section 194C of the Act and merely mentioning an incorrect provision is a curable defect and does not have any effect on the substratum of the impugned order.
• The Hon’ble High Court has held that the substratum of the impugned order (that TDS is required to be deducted on EDC charges) in itself is incorrect.
• The question in connection with nature of EDC payment was one of the issues that was required to be addressed by the AO and in various orders it has been concluded by AO that same was ‘rent’ as it was in nature of an arrangement to use land. It is not open for the AO to now contend that EDC charges are payment made to a contractor under a contract and not rent under an arrangement to use land.
• The Hon’ble High Court has placed their reliance on judgement of BPTP Ltd. v. Principal Commissioner of Income Tax, (Central)-III wherein the Hon’ble High Court has faulted the reasoning of the AO for initiating the reassessment proceedings as the fundamental premise that tax was required to be withheld from EDC payment was found to be unsustainable. Further, during the proceedings of such matter it was also contended by the AO that EDC was in nature of rent however, the Hon’ble Court has found these contentions as unmerited.
• It has been observed by the Hon’ble Court that the counsel for the AO does not seek to support the decision of the AO that EDC are ‘rent’ or in the nature of ‘rent’. Thus, concededly, the reasoning on which the impugned order rests is fundamentally flawed.
• The contention that the AO has merely referred to a wrong section of the Act and therefore, the said reference may be ignored is also without merit. It can be seen that the AO has not only held that TDS was liable to be deducted under Section 194-I of the Act, but he has also proceeded to analyze the said section and held that EDC are in the nature of rent.
• The reasoning of the AO for finding that the petitioner was obliged to deduct TDS is important. The determination of the nature of payment is vital for ascertaining whether there was any obligation on the part of the petitioner to deduct and deposit TDS on EDC. The AO appears to be approaching the issue from quite the reverse direction. He has for an inexplicable reason, concluded that the Assessee ought to have deduct TDS from the payment of EDC and now seeks to find provisions of law to sustain the said conclusion.
• It is apparent from the above, that the approach of the AO is flawed. Hence, the Hon’ble Court has rejected the contention of the counsel of the AO that the findings of the AO regarding the nature of EDC charges as well as the provisions referred by him for determining the petitioner’s liability are not material.
• Consequently, the above captioned petitions have been allowed in favor of the Assessee and the orders passed by the AO raising erroneous demand for non-deduction of TDS under Section 194-I of the Act have been set aside by the Hon’ble Court.

SW Point of View:

Withholding tax implications on the payment of EDC charges to HUDA have always been a contentious issue.  Where the income tax department has repeatedly held taxpayers as liable for non-withholding of tax on payments made.  It was always the understanding of taxpayers that they are making payment to DTCP, which is a Government body, thus covered under Section 196 provisions.  It is DTCP that directs the taxpayer to make payment to HUDA, otherwise there is no privity of contract between the afore mentioned parties, hence no TDS is required to be withheld. 

Virendra Vikram, Tax Associate, SW India