2020 (11) TMI 103 - HC - Income Tax

TDS u/s 195 - Usance charges were paid or were payable to a non resident supplier - as argued appellant paid LC Charges/commission charges which are in the nature of bank charges to their own Nationalized Banks based in India towards opening of the Letter of Credit it could not be construed under the 195(1) - HELD THAT - In this case, though Usance charges may have been paid to the Indian bankers by way of LC Charges and commission, nevertheless, such payment, is a part of the transaction involving purchase/import of raw material from non-residents. According to us, issuing bank of the assesses, merely acts as an agent of the assesses. The Usance charges is the income of the non-resident as envisaged in the provisions of Section 9(1)(v)(b) read with Section 5(2) of the IT Act. Therefore, the provisions of Section 195(1) were attracted and the assesses were obliged to deduct tax at source before making such payment. In similar circumstances in the case of Vijay Shipbreaking Corporation Others 2003 (3) TMI 91 - GUJARAT HIGH COURT as held that the assesses was duty bound to deduct tax at source even in respect of bank charges incurred for providing Letters of Credit to foreign sellers. Since in the present case, the assesses imported the raw material for its consumption based on a letter of credit and paid the Usance charges, the beneficiary of such charges is the foreign seller. The issuing bank of the assesses has merely acted as an agent of the assesses. The Usance charges therefore constitute income of a non-resident as envisaged in the provisions of Section 9(1)(v)(b) read with Section 5(2) of the IT Act. Therefore, the provisions of Section 195(1) of the IT Act were attracted and the assesses were obliged to deduct tax at source failing which, such expenditure, could not be exempted under Section 40(a)(i) - Decided in favour of the Revenue.

Summary

Issues Involved:
Interpretation of Section 195 of the Income Tax Act regarding the deduction of tax at source on Usance charges paid to Indian banks for opening Letters of Credit.

Detailed Analysis:

Issue 1: Interpretation of "interest" under Section 2(28A) of the IT Act
The assesses claimed that the charges paid to Indian banks for Letters of Credit were not "interest" and thus not subject to TDS. However, the definition of "interest" under Section 2(28A) includes service fees or charges related to credit facilities. The court held that the charges paid by the assesses did fall under the definition of "interest," making TDS applicable.

Issue 2: Applicability of Section 195(1) of the IT Act
The court analyzed Section 195(1) which mandates TDS on payments to non-residents. Even though the charges were paid to Indian banks, as part of transactions with non-resident sellers, the assesses were obligated to deduct tax at source. The court emphasized that the ultimate beneficiary of the charges was the foreign seller, making TDS necessary.

Issue 3: Comparison with Previous Judgments
The court referred to past judgments, including the case of Vijay Shipbreaking Corporation, to support its decision. Although the Gujarat High Court's decision was reversed by the Supreme Court due to subsequent amendments, the core principle remained that Usance charges were subject to TDS if paid to facilitate transactions with non-residents.

Issue 4: Obligation to Deduct Tax at Source
The court highlighted that the assesses were required to deduct tax at source on Usance charges, as per Section 195(1) of the IT Act. The assesses' failure to do so meant that the expenditure could not be exempted under the IT Act, reinforcing the obligation to deduct TDS on such payments.

Conclusion:
The court dismissed the appeals, ruling in favor of the Revenue, as the assesses were obligated to deduct tax at source on Usance charges paid to Indian banks for Letters of Credit used in transactions with non-resident sellers. The judgment emphasized the applicability of Section 195 of the IT Act and the necessity of complying with TDS obligations in such cases.