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TMI Blog2012 (3) TMI 657X X X X Extracts X X X X X X X X Extracts X X X X ..... erial due to non deduction of tax at source. II. Failed to appreciate that as per DTAA between India and country from which raw material are imported, such payment does not amount to interest on loan but it is towards cost of raw material and hence there is no requirement of any TDS hence disallowance u/s.40(a)(i) is not justified. III. Failed to appreciate that assessee has paid the so called interest to Union Bank of India against L.C. due to late payment from due date till the date the bill is finally settled hence the payment to Bank is not required any T.D.S. and not justifies in disallowing u/s. 40(a)(i). The assessee is a company. It is engaged in the business of manufacturing of cables of different types. The assessee purchased raw material from various parties who were all non-residents. As per the terms of supply by the nonresidents, the assessee had furnished irrevocable letter of credit payable 180 days from the date of bill of lading. For the period of 180 days for which the assessee availed credit, the assessee had to pay finance charges or what is known in business parlance as Usance Interest . The assessee had during the previous year paid the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO, the finance charges were in nature of interest and were chargeable to tax in India in the hands of the non-residents because the interest income had accrued or arisen in India. The AO was of the further view that the assessee ought to have deducted tax at source at the time of making payment to the non-residents. Since the assessee had not deducted tax at source as aforesaid, the AO was of the view that the sum of ₹ 18,31,162/- claimed as finance charges by the assessee has to be disallowed in view of the provisions of sec. 40(a)(1) of the Income Tax Act, 1961 (the Act). The AO accordingly disallowed a sum of ₹ 18,31,162/- claimed as finance charges and added the same to the total income of the assessee. 3. Before the CIT(A), the assessee submitted that the finance charges are nothing but payment for delayed payment of purchase of raw material and would partake the character of money paid for purchase price of raw material and, therefore, there was no necessity to deduct tax at source. The assessee further submitted that as per the provisions of DTAA entered into between India and the respective countries where the suppliers of raw material were tax residents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for cost of raw material purchased. The Id. counsel placed reliance on the decision of Hon'ble Andhra Pradesh High Court in the case of Visakhapatnam Port Trust (supra). Reliance was also placed on the decision of the Madras High Court in the case of CIT v. India Pistons Ltd. [2006] 282 ITR 632 (Mad.) wherein it was held that payment for purchase of goods from nonresident by instalments and interest paid on such instalments was to be treated as a payment of purchase price of the goods and not interest. It was held in the aforesaid decision that the outstanding instalments for which the interest was paid cannot be said to be a payment for debt incurred and therefore not in the nature of interest. Further, reliance was placed on the following other decisions of various benches of Tribunals, viz., decision of Hyderabad Bench of ITAT in the case of Vijay Electricals Ltd. (ITA No. 1072/Hyd/2004) dated 22-07-2011, Delhi Development Authority v. ITO [1993] 53 ITD 19 (Delhi), ITO v. Oriental Insurance Co. Ltd [2005] 143 Taxman 12 (Delhi)(Mag.), -CIT v. Cargill Global Trading (P) Ltd [2011] 199 Taxman 320/11 taxmann.com 219 (Delhi). Reliance was also placed on the decision of Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 251 (Bom). 3. A M Agencies v. CIT [1999] 239 ITR 136/[1998] 101 Taxman 655 (Mad). 4. Shree Annapurna Financing Co.(P) Ltd v. C/T[2005] 273 ITR 284/146 Taxman 187 (Cal.) 5. Bhura Exports Ltd v. ITO [2012] Taxman 88/[2011]13 taxmann.com 162 (Cal.) Besides the above, circulars of the CBDT dated 02-09-1971, namely, circular No. 65 and circular No. 647 dated 22-03-1992 were also referred to. Besides the above, the Id. counsel for the assessee referred to the provisions of DTAA and submitted that under the DTAA the payment by the assessee is not chargeable to tax. Lastly, it was submitted that even assuming that the payment in question is chargeable to tax, since there was conflicting views on the issue, the assessee was under the bona fide belief that there was no obligation to deduct tax at source. The Id. counsel relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Kotak Securities Lid [2011 ] 203 Taxman 86/15 taxmann.com 77 and submitted that as laid down in the aforesaid decision, if non-deduction of tax at source is on account of bona fide belief of the assessee that there was no obligation to deduct tax at source, then there cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ship Breaking Corpn. (supra). The tribunal analysed the agreement between the parties and held that the same is for the purchase of a ship. Although the purchase price of the ship and interest for 180 days from the date of notice of readiness (NoR) are separately mentioned in the Agreement, nonetheless, it remains a single transaction of purchase and sale of ship. The tribunal held that the agreement categorically provided that the total amount shall be payable by means of 100% confirmed irrevocable 180 days usance letter of credit. This according to the tribunal clearly indicated that interest, though separately mentioned in the MoA, is part of the same transaction and cannot be meted out a separate treatment altogether from the main component i.e. the purchase price. The Tribunal also found that there was no right of prepayment by the buyer to the seller, that is to say, irrespective of the point of time when the buyer makes payment within 180 days, the buyer shall have to pay the interest component as specified in the MoA. The Tribunal therefore concluded that by entering into the MoA, buyer did not incur any debt in the sense that any loan or advance had been raised to be inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under Sec. 10(15)(iv)(c) interest payable by an industrial undertaking in India on any moneys borrowed or debt incurred by it before the 1st day of June 2001 in a foreign country in respect of the purchase out-side India of raw materials or components or capital plant and machinery, to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan or debt and its repayment was held not to form part of the total income under the Act, will not form part of the total income under the Act. Expln. 2 inserted in the Act as above, provided that for the removal of doubts, it is being declared that the usance interest payable outside India by an undertaking engaged in the business of ship-breaking in respect of purchase of a ship from outside India shall be deemed to be the interest payable on a debt incurred in a foreign country in respect of the purchase outside India. 13. One of the question for consideration before the Hon'ble Supreme Court when the above statutory amendment to the law came into force was as to whether 'usance interest' partakes of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis supplied) 14. It can be seen from the above observations of the Hon'ble Supreme Court that the Hon'ble Court did not express any opinion on the correctness or otherwise of the view of the Hon'ble Gujarat High Court on the question whether usance interest has to be considered as part of the purchase price but decided the issue on the basis of the amended provisions of law that were applicable only to companies engaged in the business of ship breaking. We are therefore of the view that as a precedent, the decision of the Hon'ble Gujarat High Court has force. Though the said decision might have lost its absolute binding force it might otherwise have had, but it remains an authority which may be followed by a court that thinks the particular point to have been rightly decided. 15. As we have already noticed the facts of the present case go to show that the intention of the parties to the contract was clear and the price of the material to be supplied was reflected in a separate invoice and the buyer in lieu of the credit facility of 180 days from the date of bill of lading was required to pay interest at stipulated rate for which a separate invoice was prepare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rritories from sources in the other territory may be taxed in both countries. Interest would be taxable if it arose out of indebtedness. The Hon'ble Court held that the words any other form of indebtedness from sources in the other territory could only mean interest arising or accruing as a separate source of income. It would not include interest payable on the unpaid purchase money agreed to be part of the sale consideration. There was nothing in the initial contract by way of novation converting the balance of consideration into a loan. Hence, the interest received by the seller cannot be regarded as interest on money lent notwithstanding the nomenclature adopted, by the parties. The aforesaid decision cannot help the case of the Assessee. The decision was rendered in the context of the definition of interest under the DTAA. The definition of interest u/s. 2(28A) of the Act and the DTAA are materially different. The DTAA refers to existence of a separate source from which interest income was earned. The decision in the case of Visakapatnam Port Trust (supra) would be relevant when examining whether the sum in question can be regarded as interest under relevant DTAA depend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Supreme Court rendered in the case Vijay Ship Breaking Corpn. (supra) and held that the interest was part of the purchase price and therefore was not a payment of interest on debt incurred . We have already seen that the Hon'ble Supreme Court did not express any opinion on the above issue and decided the case applying the amended provisions of law which was applicable only to Assessee's making payment of usance interest for purchase of ships to non-residents. The Tribunal has further relied on the decision in the case of the Hon'ble A.P. High Court in the case of Visakhapatnam Port Trust (supra) but has not considered any DTAA between India and the Foreign suppliers and the definition of interest under such DTAA. We are therefore of the view that the decision of the ITAT Hyderbad Bench has been decided on the facts of the case and agreement between the parties and not applicable to the facts of the present case. 19. The next decision is that of the Delhi Bench of the ITAT in the case of Delhi Development Authority (supra). It was a case where the DDA paid interest on delay in carrying out constructions. It was held that the payment was a compensation for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned counsel for the Assessee is the decision of the Hon'ble Supreme Court in the case of Govinda Choudhury Sons (supra). It was a case where the dispute was as to whether the interest awarded by the arbitrators to a contractor executing government contracts has to be assessed as business income or income from other sources. The Hon'ble Supreme Court held that interest paid was for delay in making payment and would go to increase the receipts from the contract and would partake the same character as the contract receipts and was therefore assessable as Business Income and not Income from other sources . The said decision is not relevant for the present case where the dispute is as to whether payment in question is interest or part of purchase price. The decision of the Ahmedabad Bench of ITAT in the case of Mayank Electro Ltd. v. ITO [2001] 71 TTJ 612 (And.) is also not relevant as the dispute in that case was as to whether interest for delayed payment of goods can be considered as business income on which deduction u/s. 80IA has to be allowed. 22. The last decision referred to by the learned Counsel for the Assessee is the decision of Hon'ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntext of payment to a resident where there was an amendment to the law clarifying obligation to deduct tax at source on transaction charges collected by Stock Exchange from brokers. There was no disallowance for non-deduction of tax at source on similar payments in the past. It was in those circumstances that the Assessee pleaded bonafide belief which was accepted by the Hon'ble Court. The payment in dispute in this appeal is payment to non-residents and in the event of doubt the Assessee ought to have approached the AO for appropriate certificate u/s. 195 of the Act. He cannot plead bonafide belief and on that basis seek to stand out of the provisions of Sec. 40(a)(ia) of the Act. We therefore reject the plea of the Assessee in this regard. Thus ground No. I to III are treated as allowed for statistical purposes. 26. Ground nos. IV V raised by the assessee read as follows : IV. Erred in confirming he un-utilized Modvat Credit in value of Closing Stock without appreciating the method of accounting followed by the appellant. V. Failed to appreciate that payment of excise duty should be allowed u/s. 43B of Income-tax Act as the Closing Stock were cleared and said excis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses cannot be allowed as deduction while computing the total income. Accordingly, the prior period expenses were added to the total income of the assessee. 31. On appeal by the assessee, the CIT(A) held as follows : I have gone through the findings of the AO and also the submissions made by the assessee's Counsel and have also perused the appellate orders for A.Y. 1998-99 (vide appeal No. CIT(A)C-VII/C9/ROT. 290 dated 29.4.2004) and A.Y. 1999-00 (vide appeal No. CIT(A)C-VII/C9/IT. 36 dated 30.6.2003). I am in agreement with the action of the AO that since the Assessee is following the Mercantile System of Accounting, the expenditure classified as prior period expenses of ₹ 32,00,939/- cannot be allowed as expenditure of the year. Similar view was taken in the Assessee's own case by my predecessor. Respectfully following the same, I uphold the action of the AO in disallowance of the expenses under the head prior period expenses . However, I agree with the alternate submissions made by the Assessee's Counsel. As has been held in earlier years, I direct the AO to allow the expenditure of ₹ 32,00,939/- in the year A.Y. 2001-02 if the Assessee is able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hallenged the order of CIT(A) whereby the CIT(A) cancelled the order of the AO imposing penalty on the assessee. 36. The facts and circumstances under which penalty was imposed on the assessee by the AO are as follows. While completing the assessment u/s. 143(3) of the Act, the AO made the following additions to the total income declared by the assessee: Disallowance of ₹ 69,493/- on account of write off of leasehold premium. Disallowance of ₹ 44,19,270/- on account of prior period expenses. Disallowance of ₹ 51,000/- on account of provision for gratuity. Disallowance of ₹ 26,00,000/- on account of unexplained expenses under section 69C of the Act. 37. It is not in dispute before us that the disallowance on account of unexplained expenses u/s. 69C has already been deleted by the Hon'ble FT AT in the appeal filed by the assessee in the quantum proceedings. It is also further seen that in respect of disallowance of ₹ 44,19,270/- on account of prior period expenses, the ITAT in the quantum proceedings had set aside the order of CIT(A) and remanded the issue to the AO to allow deduction in the year to which the prior period expenses p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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