TDS on Compensation paid for delay under Joint Development agreement

[sujittalukder]

Facts:

A Ltd is the owner of Land and has entered into Joint Development agreement with B Ltd.  B Ltd will the construct the property on the land and 40% of the constructed property will be allocated to the A Ltd and remaining 60% will be allocated to B Ltd.

One of the terms of the agreement provides that if B Ltd fails to complete  the construction within 26 months, B Ltd will pay compensation Rs 5,00,000/- for each month of delay to A Ltd.

B Ltd fails to complete the construction with in the time and now paying Rs 5,00,000/- to A Ltd.

My query is:
Whether the compensation so paid by B Ltd is subject to deduction of tax (TDS) and if yes, under which section?

My view:
I am of the opinion that the same is subject to TDS under section 194A – Interest other than interest on securities.

Sec 2 (28A) defines  "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.

The importance is going to the last line of the definition which says "in respect of any credit facility which has not been utilized". Whether the said 26 months amounts to credit facility or not that's the confusion to me. Credit facility normally means the period within which the service has to be delivered after which the payer has to compensate for the monetary loss due to loss suffered by the other party.
But I am getting any sufficient case laws or other grounds to support my views. Whether the "credit facility" is applicable only where monetary issue is involved or it is applicable to construction also where no direct monetary issue is there as given in the situation cited above.

That's why I am seeking esteemed members opinion in the matter.

Reasonable reply with proper grounds and explanation is solicited.

[npmajithia1]

Dear Sir,

I am presently faced with the situation involving compensation paid by a developer to tenants for not delivering as per terms agreed. Although the facts of the case differ, the situation and concept remains the same and hence I am giving my PERSONAL VIEW in this regard, not to be quoted

There are ITAT decisions in case of Enam Securities and Bank of Saurashtra that can come to your aid and you can adopt the thoughts and logic put in by the learned tribunal as regards allowability of compensation. However, at no place in both these judgments has there been an issue or matter about TDS. I have tried searching for judgments on treatment of compensation as interest, but i have not come across any judicial precedents in this regard.

However I believe that for it to be regarded as interest, the precondition is that there should be a loan. If there is no loan or advance there cannot be any situs of interest. In your present situation, I believe that under no condition can there be a situation of creation of a loan of any nature what so ever and hence there cannot be any question of interest.

I am personally taking the same stand going forward giving my client a disclaimer about absence of judicial decisions directly relatable to the matter.

Hope this can be of some help to you.

[sujittalukder]

Thanks dear for such elaborative reply.
As you said, for interest , Loan is a pre-condition. I also agreed but the confusion is the last line of the definition as quoted earlier "in respect of any credit facility which has not been utilized" which is creating confusion.
Let me check the case you mentioned.

[npmajithia1]

Hi,

I have just come across some decisions that have enhanced my concept on the issue at hand. I draw your attention to Section 2(28A) that defines "Interest". The definition is wide enough to cover the type of payment proposed by you and me. I have also referred to the following decisions on 2(28A) that have further cleared my doubts on the same and accordingly i now believe that the same is liable to TDS. The decisions referred are:

1. Viswapriya Financial Services & Securities Limited V.s CIT - Madras HC - 179 CTR (Mad) 334
2. A&M Agencits V.s CIT & Ors - Madras HC - 153 CTR (Mad) 497
3. Bikram Singh & Ors. V.s Land Acquisition Collector & Ors.- Supreme Court - 139 CTR (SC) 475

I guess this may bring some bother to you now, but better getting to know on this now than later. :-)

Regards,

[preetyparik]

Refer  to the decision passed by Ahmd ITAT, (2011) 12 Taxmann 37 (Ahd) { Full judgement is appearing on this forum)
wherein held that payment having no nexus with loan, deposit or borrowing, is outside the purview of Interest, hence no liability of TDS. This case may probably help you.

[npmajithia1]

I have gone through the decision of the learned Ahmedabad Tribunal. In my personal opinion it seems bad in law and the learned members have taken a very restricted meaning of the words "debt incurred" and focused mainly on the word "deposit". There is no justification for the same. There is also no reference to the judgments of the Hon'ble Madras HC judgments in this decision, which makes it seem to me that there is a good case for revisit and referral to HC where the claim of the tribunal may not stand.

In many cases of real estate developers I have been informed that TDS is being deducted by them on compensation payments.

I believe the view of the Hon'ble Madras HC is correct. As a last resort, once can write to the AO and take his approval on the same if it is felt that this can create issues later on.

[sujittalukder]

Dear npmajithia1,

I am really thankful to you for the hard work that you are putting to solve the case.
Due to some work and time constraint adn busy in Tax audit and ITR filing work I could not work on the subject more but will post my findings here later on if found anything.
Once again, thank for putting the hard work.

Aslo thanks to preetyparik for the reply.

Regards
Sujit Talukder