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2015 (6) TMI 759 - AT - Income TaxTDS u/s 194A - addition on account of factoring/discounting charges as no tax at source was deducted - assessee submitted that the factoring charges is not to be treated as interest and is not liable to be deducted at source u/s 194A - Held that - In the instant case, the Assessing Officer had listed out the distinction between factoring and bill/invoicing discount. It was further held by the Assessing Officer that as per the terms of agreement entered between the assessee and GTF, the discounting charges mentioned therein is actually interest component on the loan. However, we notice that the Hon ble Calcutta High Court in the case of CIT vs. M/s. MKJ Enterprises Limited (2014 (12) TMI 682 - CALCUTTA HIGH COURT) was specifically considering a case where factoring charges tantamount to interest and whether the tax is to be deducted at source on the same andheld that factoring charges were not interest and as such, provisions of TDS are not applicable. Factoring charges on sale cannot be termed as interest. In view of the Hon ble Calcutta High Court judgment, we hold that the factoring charges will not come within the purview of section 2(28A) of the Income-tax Act, 1961 and as such, the provisions of TDS are not applicable on facts and circumstances of the case. - Decided in favour of assessee.
Issues Involved:
1. Whether the CIT (A) is justified in confirming the addition of Rs. 93,68,870 by invoking the provisions of section 40(a)(ia) of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Confirmation of Addition by CIT (A): The core issue revolves around the addition of Rs. 93,68,870 made by the Assessing Officer (AO) under section 40(a)(ia) of the Income-tax Act, 1961, due to non-deduction of tax at source on factoring/discounting charges. Facts and Arguments: - The assessee, a private limited company engaged in manufacturing and trading in gold, diamond jewelry, and bullion, filed a return declaring an income of Rs. 2,79,89,810 for the assessment year 2009-10. The AO assessed the total income at Rs. 3,73,58,680, adding Rs. 93,68,870 due to non-deduction of tax on factoring/discounting charges paid to Global Trade Finance Limited (GTF). - The AO observed that the factoring charges were essentially interest payments and should have been subjected to TDS under section 194A. The AO's conclusion was based on a detailed analysis of the agreement between the assessee and GTF, highlighting that the prepayments made against invoices were akin to short-term financing, thus falling under the definition of "interest" as per section 2(28A). CIT (A)'s Findings: - The CIT (A) upheld the AO's decision, emphasizing that the factoring charges were indeed interest payments. The CIT (A) noted several key points: - Factoring involves specialized financial services where prepayments against invoices are treated as short-term loans, attracting interest. - The agreement between the assessee and GTF included terms indicative of a loan arrangement, such as personal guarantees, mortgage on property, and specific terms regarding repayment and interest. - The CIT (A) referenced the statutory definition under section 2(28A), which includes any service fees or charges related to money borrowed or debt incurred, thus encompassing the factoring charges. Assessee's Appeal: - The assessee argued that factoring charges should not be treated as interest and cited various judicial precedents, including the Calcutta High Court's decision in CIT vs. MKJ Enterprises and the Delhi High Court's ruling in CIT vs. Cargill Global Trading (P.) Ltd. - The assessee also contended that since the amounts were not outstanding at the end of the year, disallowance under section 40(a)(ia) was not warranted, relying on the Allahabad High Court's decision in Vector Shipping Services Pvt. Ltd. Tribunal's Analysis and Judgment: - The Tribunal considered the distinction between factoring and bill discounting, as outlined by the AO, and the terms of the agreement between the assessee and GTF. - Notably, the Tribunal referred to the Calcutta High Court's judgment in CIT vs. MKJ Enterprises, which held that factoring charges do not constitute interest and are not subject to TDS under section 194A. - Based on the Calcutta High Court's ruling, the Tribunal concluded that factoring charges do not fall within the ambit of section 2(28A) and, therefore, are not subject to TDS provisions. Conclusion: - The Tribunal allowed the assessee's appeal, ruling that the addition of Rs. 93,68,870 under section 40(a)(ia) was not justified, as the factoring charges did not qualify as interest under section 2(28A) and were not liable for TDS. Order Pronouncement: - The appeal filed by the assessee was allowed, and the order was pronounced in open court on June 17, 2015.
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