Commissioner of Income Tax Delhi Vs Cargill Global Trading Private Limited [Special Leave Petition ………. / 2012) Supreme Court Dated 10th May 2012]
Whether the discounted charges for getting the export sale bills discounted can be treated as interest. Whether interest is deductible on such sums and in absence of which could result in dis-allowance of expenditure under section 40A(ia)
Facts of the Case
The respondent assessee is in the export business. On the exports made by the assessee to its 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 realize 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 AO 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. 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 `3.97 Crores claimed by the assessee under Section 37(1) of the Act. discounted charges for getting the export sale bills discounted.
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 les 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 would make the payment towards the settlement of the bills to CFSA outside India. In the alternative, CFSA may further sell the BE to another party (the “New owner”) at the prevailing market price; in such a case payment would be made by the non-resident buyer of the new owner of the BE.”
The purchase of Bills of Exchange’s on a without recourse basis implies that:
· The appellant sells the Bills of Exchange’s to CFSA, typically, on “without recourse” basis i.e. CFSA purchases the Bills of Exchange’s on its own behalf.
· CFSA collects the payment from the sale/settlement of the BE on its own behalf, and not on behalf of the Indian Companies.
· CFSA has no right to proceed against the appellant in case of a default by the foreign buyer.
As per section 2(28A) “Interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debit incurred or in respect of any credit facility which has not been utilised.”
The word "interest" 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.
Circular No.65 way back on 02.09.1971 clarifying the position in respect of income by way of interest under Section 194 read with Section 197(1) and (2) of the Act as under:
“1……….Where the supplier of goods makes over the usance bill/ hundi to his bank which discounts the same and credits the net amount to the supplier’s account straightaway without waiting for realization of the bill on due date, the property in the usance bill/ hundi passes on to the bank and the eventual collection on due date is a receipt by the bank on its own behalf and not on behalf of the supplier. For such cases of immediate discounting the net payment made by the bank to the supplier is in the nature of a price paid for the bill. Such a payment cannot technically be held as including interest and therefore no tax need be deducted at source
Others in Judiciary in respect of similar matter
Vijay Ship Breaking Corpn. v. CIT (2008) 219 CTR 639 (SC): (2008) 14 DTR (SC) 74.
Held that usance interest payable outside India by an undertaking engaged in the business of ship breaking is exempt from payment of income-tax by virtue of Expln. 2 added to Section 10(15)(iv)(c) with retrospective effect from 1st April, 1962 and hence the assessee was not liable to deduct tax at source under Section 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.
With Warm Regards
CA Swadesh Gupta
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