2015 (1) TMI 553 - AT - Income Tax

Disallowances u/s 40(a)(ia) - non deduction of tax at source u/s 195(1) on usance charges paid to a non resident through an intermediatory bank - whether the Assessee was bound to deduct TDS u/s 195(1) in respect of usance charges paid by the Assessee on import of raw material from countries outside India like Japan, Belgium, Germany, USA etc.? - Held that - It is apparent that the Hon ble Supreme Court has not reversed the decision in the case of CIT vs. Vijay Ship Breaking Corporation, (2003 (3) TMI 91 - GUJARAT High Court ) on the finding that the usance charges are not interest u/s 2(28A) except where an undertaking is engaged in the business of ship breaking in view of explanation (2) to Sec. 10(15)(iv)(c) inserted by the Taxation Laws (Amendment) Act, 2003 with retrospective effect. In our view, the decision of the Hon ble Gujarat High Court has impliedly been approved by the Hon ble Supreme Court in respect of Assessees who are engaged in the business of ship breaking. We, therefore, set aside the order of CIT(A) and allow the appeal of the Revenue. - Decided in favour of revenue.

Issues Involved:
1. Whether the Assessee was bound to deduct TDS under Section 195(1) of the Income Tax Act in respect of usance charges paid on the import of raw materials.

Detailed Analysis:

1. Applicability of TDS under Section 195(1) on Usance Charges:

The primary issue in all three appeals is whether the Assessee was required to deduct TDS under Section 195(1) for usance charges paid on the import of raw materials from countries like Japan, Belgium, Germany, and the USA. The Revenue contended that the usance charges paid by the Assessee constituted income arising to a non-resident within the meaning of Section 5(2)(b) read with Section 9(1)(v)(b), thus necessitating TDS deduction under Section 195. The Assessing Officer (AO) disallowed the usance charges under Section 40(a)(i) due to non-deduction of TDS.

The Assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who deleted the addition by relying on the explanation to Section 10(15)(iv)(c) of the Income Tax Act. The CIT(A) observed that the usance charges were paid to nationalized banks operating in India, and no payments were made directly to non-resident suppliers.

2. CIT vs. Vijay Ship Breaking Corporation Case Reference:

The Revenue argued that the CIT(A) failed to appreciate the applicability of the Gujarat High Court's decision in CIT vs. Vijay Ship Breaking Corporation, which held that usance charges are considered interest under Section 2(28A) and are taxable in India, thereby requiring TDS deduction under Section 195.

3. Supreme Court's Reversal and Explanation 2 to Section 10(15)(iv)(c):

The Tribunal noted that the Supreme Court had reversed the Gujarat High Court's decision in CIT vs. Vijay Ship Breaking Corporation (314 ITR 309) due to the insertion of Explanation 2 to Section 10(15)(iv)(c) by the Taxation Laws (Amendment) Act, 2003, with retrospective effect. This explanation clarified that usance interest payable outside India by an undertaking engaged in ship-breaking is deemed to be interest payable on a debt incurred in a foreign country.

However, the Tribunal clarified that this explanation applies specifically to ship-breaking activities and not to other businesses. Since the Assessee was not engaged in ship-breaking, the explanation did not apply, and the Gujarat High Court's decision in CIT vs. Vijay Ship Breaking Corporation (261 ITR 113) remained relevant.

4. Nature of Usance Charges:

The Tribunal emphasized that the Gujarat High Court had determined that usance charges are interest within the meaning of Section 2(28A) and are taxable in India. The Assessee's failure to deduct TDS on such payments to non-residents constituted a default under Section 195(1). Consequently, the disallowance under Section 40(a)(i) was justified.

5. Tribunal's Conclusion:

The Tribunal concluded that the CIT(A)'s reliance on Explanation 2 to Section 10(15)(iv)(c) was misplaced as it only applied to ship-breaking activities. The Tribunal set aside the CIT(A)'s order and allowed the Revenue's appeal, confirming that the Assessee was required to deduct TDS on usance charges paid to non-residents.

Final Judgment:
All appeals filed by the Revenue were allowed. The Tribunal reversed the CIT(A)'s orders and upheld the AO's disallowance of usance charges under Section 40(a)(i) due to the Assessee's failure to deduct TDS under Section 195(1).

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