2011 (2) TMI 209 - HC - Income Tax

Deduction of tax at source - Discount allowed or interest paid - During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had paid a sum of Rs. 3.97 crores to its associate concern, on account of discounted charges for getting the export sale bills discounted - The Assessing Officer was of the view that the discounting charges were nothing but the interest within the ambit of section 2(28A) of the Income-tax Act - Since the assessee had not deducted tax at source under section 195 of the Act, he invoked the provisions of section 40(a)(i) of the Act and disallowed the sum of Rs. 3.97 crores claimed by the assessee u/s 37(1) of the Act - Held that - before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred. In the present case, on the aforesaid facts appearing on record, in our opinion, the Tribunal rightly held that the discount charges paid were not in respect of any debt incurred or money borrowed. Instead, the assessee had merely discounted the sale consideration respectively on sale of goods. - Decided in favor of assessee.

Summary

Issues:
Assessment of discounting charges as interest under section 2(28A) of the Income-tax Act, disallowance under section 40(a)(i) of the Act, applicability of tax deduction at source under section 195 of the Act.

Analysis:
The case involved two appeals by the revenue against the same assessee for assessment years 2004-05 and 2005-06. The primary issue was the treatment of discounting charges paid by the assessee to its associate concern, CFSA, as interest under section 2(28A) of the Income-tax Act. The Assessing Officer disallowed the claimed amount of Rs. 3.97 crores under section 40(a)(i) for failure to deduct tax at source under section 195 of the Act. However, the CIT(A) and the Tribunal held that the discount charges were not interest, leading to the allowance of the expenditure.

The Tribunal found that the discounting charges were not in the nature of interest but rather a part of the sale consideration on goods sold by the assessee. CFSA, being a company incorporated in Singapore without a permanent establishment in India, was not liable to tax on the discount earned. Therefore, the assessee was not obligated to deduct tax at source under section 195 of the Act. The Tribunal's decision was based on the fact that the discounting charges did not involve any borrowing of money or incurring of debt by the assessee.

The legal aspect of the case was further supported by Circular No. 65 issued by the CBDT, which clarified that immediate discounting of bills does not constitute interest and therefore does not require tax deduction at source. Additionally, Circular No. 674 specified that the difference between the issue price and face value of certain instruments should be treated as discount, not interest, exempting them from tax deduction at source. The Supreme Court's precedent and CBDT's own clarifications further solidified the position that no substantial question of law arose in the case.

In conclusion, the High Court dismissed the appeals, affirming the decisions of the CIT(A) and the Tribunal. The judgment emphasized that the discounting charges paid by the assessee to CFSA were not to be treated as interest under the Income-tax Act, and the assessee was not required to deduct tax at source on those payments.