2018 (12) TMI 1462 - HC - Income Tax

Reopening of assessment - TDS u/s 194A - addition on account of Letter of Credit (LC) discount charges u/s 40(a)(ia) - Held that - The assessee had opened LC in favour of its suppliers who had discounted the same with the bank. On account of early payment the bank had deducted some amount which the assessee was liable to reimburse to its suppliers. Accordingly the assessee had credited the suppliers account with the amount of bill discount charges and had debited the LC discount charge account. The amount credited to the suppliers account was in the nature of reimbursement of cost incurred by the supplier towards early discounting of the LC resulting into additional cost towards purchase of goods. Thus the assessee has not made payment of interest to the bank or to the supplier and the amount credited to the suppliers account is towards reimbursement of expenses incurred by the suppliers. Commissioner (Appeals) therefore was wholly justified in holding that the provisions of section 194A would not be attracted and consequently the question of making any disallowance under section 40(a)(ia) would not arise and in deleting the disallowance. The Appellate Tribunal has not committed any infirmity in affirming the view adopted by the Commissioner (Appeals). No substantial question of law

Summary

Issues:
Challenge to the order of the Income Tax Appellate Tribunal regarding the addition of Letter of Credit (LC) discount charges under section 40(a)(ia) of the Income Tax Act.

Analysis:
The appellant contested the order of the Income Tax Appellate Tribunal, challenging the deletion of the addition of &8377; 1,96,33,029/- made on account of Letter of Credit (LC) discount charges under section 40(a)(ia) of the Income Tax Act for the assessment year 2008-09. The Assessing Officer contended that the finance charges debited to the profit and loss account were in the nature of interest under section 2(28A) of the Act, necessitating tax deduction at source under section 195 of the Act. The appellant argued that the LC discount charge was a reimbursement of expenses to the suppliers and not interest payment, hence section 194A of the Act was not applicable.

The Commissioner of Income Tax (Appeals) allowed the appeal, stating that the LC discount charges were reimbursement of costs incurred by the suppliers and an additional cost for the appellant in purchasing goods. No interest payments were made to the supplier. The Tribunal upheld this decision, emphasizing that the appellant did not pay interest to the bank or the supplier, and the amount credited to the suppliers' account was reimbursement of their expenses. Consequently, the provisions of section 194A were not applicable, and the disallowance under section 40(a)(ia) was unwarranted.

The Tribunal found that the appellant had opened LC in favor of suppliers who discounted it with the bank, leading to deductions for early payment. The appellant reimbursed the suppliers for these deductions, which were credited to the suppliers' account as a reimbursement of expenses. As no interest payment was made, the provisions of section 194A did not apply. The Tribunal affirmed the Commissioner's decision, stating that no substantial question of law arose for consideration. Consequently, the appeal was dismissed.

In conclusion, the Tribunal's decision was based on the understanding that the LC discount charges were not interest payments but reimbursements to suppliers for expenses, exempting the appellant from TDS obligations under section 194A and justifying the deletion of the disallowance under section 40(a)(ia) of the Act.