TDS on external development charges was held inapplicable where the agency acted for the State Government, defeating penalty under section 271C.

Payment of external development charges to an executing agency acting on behalf of the State Government did not attract Chapter XVII-B TDS on the facts noted, as the Tribunal accepted the departmental clarification that no tax was required to be deducted. Following its coordinate bench view on identical facts, the Tribunal held that section 271C penalty could not survive in the absence of any underlying TDS default, and the assessee succeeded.

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Issues: Whether penalty under section 271C was leviable for non-deduction of tax at source on payment of external development charges made to the Haryana authority through the prescribed channel, and whether such payment attracted the TDS provisions under Chapter XVII-B.

Analysis: The payment was treated as one made to the State Government machinery for external development works. The clarification issued by the Directorate of Town and Country Planning stated that the authority was only an executing agency for and on behalf of the State Government and that no TDS was required to be deducted on such payment. The Tribunal followed its earlier coordinate bench view that, on identical facts, the provisions of section 194C were not applicable and, in the absence of any underlying TDS default, penalty under section 271C could not survive.

Conclusion: The penalty under section 271C was not justified and the assessee succeeded.

Ratio Decidendi: Where payment is made to an executing agency acting on behalf of the State Government and the underlying transaction does not attract the relevant TDS provision, penalty for failure to deduct tax at source cannot be sustained.

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