2016 (4) TMI 1132 - HC - Income Tax

TDS u/s 194A - Non deduction of tds - factoring/discounting charges - disallowance under Section 40(a) (ia) - Held that - No factual basis for the AO to have disbelieved the Assessee s explanation and simply treat the entire amount as interest. The question of disallowing the entire amount under Section 40(a) (ia) on the ground that the TDS was not deducted in terms of Section 194A of the Act did not arise. The Court is unable to find any legal infirmity in the view expressed by the ITAT that the factoring/discounting charges in the present case cannot be treated as interest for the purpose of 194A. - Decided in favour of assessee

Summary

Issues:
1. Whether the ITAT was justified in holding that the sum debited to the Profit & Loss account towards factoring/discounting charges should not have been disallowed under Section 40(a)(ia) of the Income Tax Act, 1961.

Analysis:
The case involved an appeal by the Revenue against an order passed by the Income Tax Appellate Tribunal (ITAT) concerning the disallowance of a sum debited to the Profit & Loss account for factoring/discounting charges. The Assessee, a private limited company in the business of manufacturing and trading in gold, diamond jewellery, and bullion, declared an income for the Assessment Year 2009-10. The issue revolved around whether the amount debited towards factoring charges should be treated as interest subject to TDS deduction under Section 40(a)(ia) of the Act.

The Assessing Officer (AO) disallowed the amount as interest payable by the Assessee to Global Trade Finance Ltd. (GTFL) under Section 194A of the Act, as per the agreement terms. However, the ITAT referenced a judgment from the Calcutta High Court and a decision of the Delhi High Court, indicating that factoring charges on sales cannot be equated to interest. The Assessee clarified that the factoring charges were not interest but fees paid for availing factoring facility.

The Court noted that the obligation to deduct tax at source under Section 194A lies with the payer of interest, whereas in this case, the factoring and discounting charges were deducted upfront by GTFL. The Court found that the terms of the agreement and the nature of the charges supported the Assessee's explanation that the amount was for factoring/discounting and not interest. Therefore, there was no legal basis for the AO to treat the entire sum as interest and disallow it under Section 40(a)(ia).

Consequently, the Court upheld the ITAT's view that the factoring/discounting charges in this case did not qualify as interest under Section 194A, dismissing the appeal by the Revenue. The judgment emphasized that no substantial question of law arose in the matter, leading to the dismissal of the appeal.