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TMI Blog2011 (2) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... that case has been followed in the subsequent assessment year. In these circumstances, while dealing with the issues, we may take note of the facts appearing in ITA No. 331 of 2001, which pertains to the assessment year 2004-05. 2. In this assessment year, the respondent assessee filed the income-tax return declaring the income at Rs. 1.14 Crore. 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, M/s Kargil Financial Services Asia Pvt. Limited (CFSA), Singapore 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness. On the exports made by the assessee to its best buyers outside India, the assessee draws bills of exchange on those buyers located outside India. These bills of exchange are discounted by the assessee from CFSA who on discounting the bills immediately remits the discounted amount to the assessee. Thereafter, it is the obligations/headaches of CFSA to release the amounts of those buyers to whom the goods are exported and bills are drawn by the assessee. It is the said discounted charges which were claimed by the assessee as expenses under section 37(1) of the Act. The discounting facilities offered by the CFSA to the assessee after charging its aforesaid discounted commission are not questioned by the Revenue. Only objection was that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no right to proceed against the appellant in case of a default by the foreign buyer. Essential activities involved in the aforesaid bills discounting may also be summarized as under : A contract is entered into between the appellant (seller) and buyer (a non-resident) for export of goods, and invoiced accordingly; The appellant drawn BE on the non-resident, buyer which usually has a maturity period of 6 months; Above BE is then sold by the appellant to CFSA at a discount, who immediately thereafter, remit the discounted value of the BE (i.e., maturity value less discount) to the appellant. In fact, this is not a case where payment is made by the resident (i.e., the appellant) to a non-resident (i.e., CFSA). The non-resident buyer wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is differently defined under Interest-tax Act. As per section 2(7) of Interest-tax Act, "interest" means interest on loans and advances made in India and includes - (a) commitment charges on unutilized portion of any credit sanctioned for being availed of in India and (b) discount on promissory notes and bill of exchange drawn or made in India. Thus where the Legislature was conscious of the fact that even the discount of bill of exchange is to be included within the definition of interest, the same was basically so provided for. However, under the scheme of IT Act, the word "interest" defined under section 2(28A) does not include the discounting charges on discounting of bill of exchange. Though the Circular No. 65 was rendered in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 195 of the Act. The discounting charges are not in the nature of interest paid by the assessee. Rather after deducting discount the assessee received net amount of the bill of exchange accepted by the purchaser. CFSA, not having any PE in India, is not liable to tax in respect of such discount earned by it and hence the assessee is not under obligation to deduct tax at source under section 195 of the Act. Accordingly, the same amount cannot be disallowed by invoking section 40(a)(i) of the Act." 11. We are in agreement with the aforesaid discussion on the legal aspect. It may be pointed out that the CBDT has issued one Circular No. 65 way back on 2-9-1971 clarifying the position in respect of income by way of interest under section 194 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is another Circular No. 674, dated 22-3-1993 directly on the point as it relates to TDS on interest other than "interest on securities". In this Circular, the Board has clarified the issue in the following manner : "3. A question has been recently raised as to whether the difference between the issue price and face value of these instruments should be treated as 'interest' in which case it would be liable to deduction of tax at source under section 194A of the Income-tax Act, 1961, or, it should be treated as 'discount' which is not liable to deduction of tax at source. 4. It is clarified for the information of all concerned that the difference between the issue price and the face value of the Commercial Papers and the Certificates of D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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