Applicability of TDS on Bill Discounting Charges

[Mehul Rughani]

Hiello,

I have a query regarding applicability of TDS u/s 194A on the bill discounting charges paid / payable to an NBFC.

Request you to please help in this regard citing the applicable case laws or circular or notification clarifying the position in thie regard.

Thanking you in advance.

Regards,
Mehul Rughani

[pawansingla]

There is direct judgement of Delhi ITAT on the issue. The Hon.ble ITAT as held thatdicounting charges are not in the nature of interest as definition of the section. I will try to find out the citation and will revert back to you in a day or two.

[camanojgupta]

Delhi bench of ITAT in ITO v.
Kanha Vanaspati Ltd 13 SOT 285 has held that tax is deductible under section 194A on payments in the nature of bill discounting charges

CA MANOJ GUPTA
JODHPUR
09828510543

[pawansingla]

[2009] 34 SOT 424 (DELHI)

IN THE ITAT DELHI BENCH 'B'

Assistant Commissioner of Income-tax, Circle 3(1), New Delhi

v.

Cargill Global Trading (I) (P.) Ltd. *

DEEPAK R. SHAH, ACCOUNTANT MEMBER AND GEORGE MATHAN, JUDICIAL MEMBER
IT APPEAL NO. 684 (DELHI) OF 2009
[ASSESSMENT YEAR 2004-05]
OCTOBER 9, 2009


Section 2(28A) of the Income-tax Act, 1961 - Interest - Definition of - Assessment year 2004-05 - Whether 'interest' includes discounting charges on discounting of bills of exchange within its ambit - Held, no

Section 40(a)(i), read with sections 2(28A) and 195, of the Income-tax Act, 1961 - Business disallowance - Interest, etc., payable outside India - Assessment year 2004-05 - During relevant financial year, assessee-company had exported goods to foreign buyers - Once goods were exported out of India to a buyer, it drew a Bill of Exchange (BE) on that buyer and sold same at a discount to a non-resident company 'CFSA' which was, inter alia, engaged in business to subscribe, buy, underwrite or otherwise acquire, own, hold, sell or exchange securities or investments of any kind including negotiable instruments, commercial paper, etc. - In turn, CFSA immediately remitted discounted value of 'BE', i.e., maturity value less discount to assessee - According to assessee, aforesaid discount was not in nature of interest and, hence, was allowable under section 40(a)(i) - Assessing Officer, however, treated said discounting charges as interest under section 2(28A) and held that since assessee had not deducted tax at source on payment of such interest same was not allowable as per section 40(a)(i) - Whether interest means either sum payable in respect of any money borrowed or debt incurred - Held, yes - Whether since assessee had merely discounted sale consideration receivable on sale of goods and had neither borrowed any money nor had incurred any debt, in such circumstances, discounting charges paid by assessee to 'CFSA' could not be treated as interest in terms of section 2(28) - Held, yes - Whether, therefore, assessee was not under an obligation to deduct tax at source as per section 195 and, accordingly, same amount could not be disallowed under section 40(a)(i) - Held, yes

Pawan Singla
Ahmedabad
9825829075

[satyanveshi]

Calcutta High Court also held that bill discounting charges cannot be held as interest  and therefore the provisions of sec 194A are not applicable to bill discounting charges. The decision is available in taxinidiaonline.com. Please refer whether u take help from the same.

[pawansingla]

Kindly give the citation.

[pawansingla]

[2011] 11 taxmann.com 219(Delhi)

HIGH COURT OF DELHI

Commissioner of Income-tax*

v.

Cargill Global Trading (P.) Ltd.

A.K. SIKRI AND M.L. MEHTA, JJ.
IT APPEAL NOS. 204 AND 331 OF 2011
FEBRUARY 17, 2011

Section 2(28A), read with sections 40(a)(i) and 37(1), of the Income-tax Act, 1961 - Interest - Meaning of - Assessment years 2004-05 and 2005-06 - Assessee was engaged in export business - During assessment proceedings, Assessing Officer noticed that assessee had paid a sum of Rs. 3.97 crores to CFSA which was a company incorporated in Singapore on account of discounting charges for getting export sale bills discounted - Assessing Officer was of view that discounting charges were nothing but interest within ambit of section 2(28A) - Since assessee had not deducted tax at source under section 195, he invoked provisions of section 40(a)(i) and disallowed sum of Rs. 3.97 crores claimed by assessee under section 37(1) - Commissioner (Appeals) deleted addition holding that discount paid by assessee to CFSA could not be held to be interest and therefore, provisions of section 40(a)(i) would not apply and, accordingly, he allowed expenditure of Rs. 3.97 crores as claimed by assessee - Whether since discounting charges paid were not in respect of any debt incurred or money borrowed, instead, assessee had merely discounted sale consideration respectively on sale of goods, same could not be construed as interest within meaning of section 2(28A) - Held, yes - Whether therefore assessee's claim was to be allowed - Held, yes

Circular and Instructions: - CBDT Circular No. 65, dated 2-9-1971; CBDT Circular No. 674, dated 22-3-1993

[pawansingla]

IT : Interest under section 2(28A) does not include discounting charges on discounting of bill of exchange


[2011] 12 taxmann.com 235 (Indore - ITAT)

IN THE ITAT INDORE BENCH

Santosh Singh Raghuwanshi

v.

Assistant Commissioner of Income-tax, 3(1), Bhopal*

JOGINDER SINGH, JUDICIAL MEMBER
AND R.C. SHARMA, ACCOUNTANT MEMBER
IT APPEAL NO. 398 (INDORE) OF 2009
[ASSESSMENT YEAR 2006-07]
JUNE 13, 2011

Section 2(28A), read with section 40(a)(ia), of the Income-tax Act 1961 - Interest - Whether interest as defined under section 2(28A) includes discounting charges on discounting of bill of exchange - Held, no - HHML was supplying vehicles to assessee and was raising bill of exchange, which was discounted by HHFL after charging discounting charges thereon - Assessee was reimbursing discounting charges to HHML and claimed same as expenses - Assessing Officer disallowed deduction of such discounting charges holding that discounting charges so reimbursed by assessee was in nature of interest and since assessee had not deducted tax thereon while making payment, same could not be allowed as a deduction in view of the provisions of section 40(a)(ai) - Whether such discounting charge was paid by assessee to HHML as a part of price paid for vehicles purchased from it, and, therefore, Assessing Officer was not justified in treating such discounting charges as interest for disallowing same by invoking provisions of section 40(a)(ai) - Held, yes

Circulars & Notification : CBDT Circular No. 65, dated 2-9-1971

FACTS

The assessee was a dealer in Hero Honda two wheeler and its spare parts, which were supplied by HHML. HHFL was providing bill discounting facility drawn by HHML. Whenever, vehicles were supplied to the assessee, HHML raised invoice and bill of exchange was discounted by HHFL and payment was made by HHFL to HHML after deducting discounting charges. The assessee was reimbursing those discounting charges to its supplier HHML. The discounting charges so reimbursed was debited by the assessee in its books of account and claimed as expenses. The Assessing Officer disallowed the same by observing that discounting charges was in the nature of interest, which is liable to deduction of tax at source and since the assessee was not deducting tax on such discounting charges, the Assessing Officer declined claim of deduction of such discounting charges by invoking the provisions of section 40(a)(ai). By the impugned order, the Commissioner (Appeals) confirmed the disallowance.

On appeal :

HELD

HHML was raising bill of exchange, which was discounted by HHFL after charging discounting charges thereon. Such bills were raised in respect of vehicles supplies to the assessee. Therefore, the assessee was reimbursing discounting charges to HHML. The contention of the Assessing Officer was that discounting charges so reimbursed by assessee was in the nature of interest and since the assessee had not deducted tax thereon while making payment, the same could not be allowed as a deduction in view of the provisions of section 40(a)(ai). The issue with regard to nature of discounting charges had been elaborately discussed by the Tribunal Delhi Bench in the case of Asstt. CIT v. Cargill Global Trading (I) (P.) Ltd. [2009] 34 SOT 424, wherein after relying on the decision of Gujarat High Court in the case of CIT v. Vijay Ship Breaking Corpn. [2003] 129 Taxman 120, it was held that discounting charges on the bill of exchange is not in the nature of interest. It was also observed that the word 'Interest' is differently defined under the Act, as compared to definition of such interest under the Interest Tax Act, 1974. As per section 2(7) of Interest Tax Act, 'Interest' means interest on loans and advances made in India and includes - (a) commitment charges on unutilized portion of any credit sanctioned for being availed and (b) discount on promissory note and bill of exchange drawn. Thus, where the Legislature was conscious of the fact that if the discount of bill of exchange was to be included within the definition of interest, the same was basically so provided for. However, under the scheme of the Act, the word 'Interest' as defined under section 2(28A), does not include discounting charges on discounting of bill of exchange. Circular No. 65 issued on 2-9-1971 by the CBDT clarifies and explains the transaction for usage of bills and its discounting according to which such payment cannot technically be held as including interest and, therefore, no tax need to be deducted at source. Thus, it was clear from the circular that for such cases of immediate discounting the net payment made to the supplier is in the nature of price paid for the bill. In the case of Vijay Ship Breaking Corpn. (supra) it was held that discounting charges was not in the nature of interest paid by the assessee. [Para 4]

Applying the proposition of law as laid down in judicial pronouncement and circular of CBDT to the facts of the instant case, where discounting charges was paid by HHML to HHFL on the bill of exchange and which was reimbursed by the assessee to HHML was not covered by the provisions of Chapter XVIIB of the Act. The assessee also placed on record order of the Tribunal in his own case dated 30-6-2009, wherein such discounting charges was held to be allowable as business expenditure. Such discounting charges was paid by the assessee to HHML as a part of the price paid for the vehicles purchases from it. Accordingly, the assessee was to be agreed with that the Assessing Officer was not justified in treating such discounting charges as interest for disallowing the same by invoking the provisions of section 40(a)(ai). [Para 5]

In the result, the appeal of the assessee was to be allowed. [Para 6]

CASE REVIEW

Asstt. CIT v. Cargill Global Trading (I) (P.) Ltd. [2009] 34 SOT 424 (Delhi) and CIT v. Vijay Ship Breaking Corpn. [2003] 129 Taxman 120 (Guj.) (para 5) followed.

CASES REFERRED TO

Asstt. CIT v. Cargill Global Trading (I) (P.) Ltd. [2009] 34 SOT 424 (Delhi) (para 4) and CIT v. Vijay Ship Breaking Corpn. [2003] 129 Taxman 120 (Guj.) (para 4).