2014 (3) TMI 892 - AT - Income Tax

Addition u/s 40(a)(ia) of the Act - TDS on interest paid for delayed payment of purchase consideration to raw material suppliers located in Singapore and Malaysia - Details of interest portion contained in purchase invoice not considered Held that - The decision in CIT Vs. Vidyut Corporation 2010 (4) TMI 229 - BOMBAY HIGH COURT followed - the amount paid by the purchaser on account delay in payment of sale price also constitutes a component of sale price and is a part of sale consideration - there was no infirmity in the order of the CIT(A) in deleting the disallowance made by the AO u/s 40(a)(ia) of the Act the order of the CIT(A) sustained - Decided against Revenue. Disallowance of interest u/s 36(1)(iii) on the ground that the assessee failed to establish any commercial expediency and as the assessee diverted the borrowed funds to the related parties as interest free advances - OD account increased - Assessee contended that that own funds were given to sister concerns Held that - The AO was silent on the interest free funds received by the assessee from its sister concerns if the assessee has got surplus funds which do not carry interest and also as other borrowals like bank overdraft etc., the presumption is that the interest free and own funds are advanced to the sister concerns thus, the charging of notional interest does not arise Relying upon Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY - if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of interest free funds generated or available with the company, If the interest free funds were sufficient to meet the investments - Since the orders of the revenue does not contain the fact on the existence of the excess or own and interest free funds of the assessee - AO is required to study the funds position before the making of interest free advances - The AO shall also apply the principle of presumption in correct perspective and in accordance with the law in force thus, the matter is remitted back to the AO for examination of the fund flow statement Decided in favour of Revenue.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of tax at source on interest paid to foreign parties.
2. Disallowance under Section 36(1)(iii) for interest on borrowed funds allegedly diverted to related parties as interest-free advances.

Detailed Analysis:

Issue 1: Disallowance under Section 40(a)(ia) for Non-Deduction of Tax at Source on Interest Paid to Foreign Parties

The assessee company, engaged in manufacturing edible oils and vanaspathy, imported palm oil from Malaysia and Singapore. The Assessing Officer (AO) noticed that the company paid Rs. 2,29,76,459/- as interest on delayed payment for raw materials to suppliers in Singapore and Malaysia without deducting tax at source under Section 195 of the Income Tax Act. The assessee argued that the interest formed part of the purchase price and relied on various case laws, including the Apex Court decision in M/s G.E. India Technology Centre Pvt. Ltd. Vs. CIT, which stated that TDS provisions apply only if the amount is chargeable to tax in India. The AO rejected the assessee's submissions and disallowed the amount under Section 40(a)(ia).

The CIT(A), however, allowed the assessee's appeal, citing that the interest partakes the character of the purchase price and is not subject to TDS. The Tribunal upheld the CIT(A)'s decision, noting that:
- The amount paid forms part of the cost of purchase.
- The transaction was bank-to-bank, making TDS provisions inapplicable.
- The recipient of the amount was not chargeable to tax in India.
- Under the DTAA with Singapore and Indonesia, the amount paid was not liable to tax in India.
- The payer was the issuing bank in India, not the assessee.

Issue 2: Disallowance under Section 36(1)(iii) for Interest on Borrowed Funds Allegedly Diverted to Related Parties as Interest-Free Advances

The AO disallowed Rs. 48,98,500/- under Section 36(1)(iii), claiming that the assessee diverted borrowed funds to related parties as interest-free advances. The assessee argued that it had received substantial interest-free funds from family members and sister concerns, which were advanced interest-free to related parties. The CIT(A) accepted the assessee's argument, noting that the interest-free loans given were covered by the interest-free funds available with the company. The Tribunal supported this view, stating that:
- The assessee had sufficient interest-free funds totaling Rs. 12.52 crores, against which interest-free loans of Rs. 6.80 crores were given.
- The presumption is that interest-free and own funds are advanced to sister concerns.
- The AO did not consider the interest-free funds received from sister concerns and incorrectly presumed the use of borrowed funds.

The Tribunal directed the AO to re-examine the fund flow statement and decide the issue in accordance with the law, considering the principle of presumption that interest-free funds are used for interest-free advances.

Conclusion:

The appeals of the revenue were partly allowed for statistical purposes, and the appeal of the assessee was allowed for statistical purposes. The Tribunal confirmed the CIT(A)'s decision on the disallowance under Section 40(a)(ia) and directed a re-examination of the disallowance under Section 36(1)(iii) by the AO.