Delhi HC upholds TDS on external development charges

February 13, 2024

The Delhi High Court on Tuesday upheld Tax Deducted at Source (TDS) on External Development Charges (EDC) in a real estate project. This means that home buyers will have to bear the burden of TDS.

A division Bench of Delhi High Court Comprising Justices Yashwant Varma and Purushaindra Kumar Kaurav upheld that Section 194C is applicable to EDC paid by real estate developers to Haryana Urban Development Authority. “We negative the challenge raised in these writ petitions in so far as the invocation of Section 194C of the Act is concerned and hold that EDC payments would be covered thereunder,” the bench said . Further, it also turned down the challenge to the Clarification issued by the Central Board of Direct Taxes dated December 23, 2017.

The said office memorandum clarified that EDC if paid to the government of Haryana would be exempt from TDS provisions. However, in case the developer has made the payment like EDC not to the government but to HUDA [Haryana Urban Development Authority) which is a development authority of the State government of Haryana and is a taxable entity under the income-tax Act, 1961, it would attract TDS.

Section 194C of the Income Tax Act mandates that deductions can be made under TDS if the total payment credited to a contractor or sub-contractor in a financial year exceeds ₹30,000 in a single payment or amounts to ₹1 lakh in the aggregate. The TDS rate varies between 1-2 per cent, if the contractor has PAN. In case of no PAN, the rate would be 20 per cent.

Infra levy

EDC means the charges paid by real estate builders to the municipal authorities for the creation and maintenance of civic facilities that are included in a real estate project. As per the guidelines set by the Real Estate (Regulation and Development) Act (RERA), 2016, EDC is utilised for the development of essential infrastructure such as roads, water and electricity supply, drainage and sewage systems, waste management, landscaping and other similar projects that benefit the entire project.

Although the civic authorities determine the charges, the ultimate responsibility of payment lies with the homebuyer, as the developer generally transfers the cost to them. EDC is calculated based on the size of the project and can add up to 15-20 per cent of the total project cost for the homebuyers.

Commenting on the ruling, Amit Maheshwari, Tax Partner with AKM Global said that the issue of whether EDC paid by real estate developers are subject to TDS as payment to a contractor or as rental payments has been a matter of contention and has seen various rulings by different courts. External development charges typically refer to fees levied by local authorities on real estate developers for the development of infrastructure around a project, such as roads, sewage systems, parks, etc. The moot question arises whether these charges should be treated as payments to contractors for services rendered or as rent payments.

Some tax officers have treated EDC payments as rent payments, subjecting them to TDS. However, this approach has faced challenges in various high court rulings. “Many courts have held that treating EDC payments as rental payments is ‘fundamentally flawed’ & ‘incurable’. The ruling by Delhi high court stating that 194C is applicable would clear the air around such charges paid by the real estate developers,” he said.

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