Is Tax required to be deducted at source u/s 194A for Bill Discounting Charges
Section 194A states that any person not being an individual or a HUF, who is responsible for paying to a resident any income by way of interest other than interest income on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon.
Following are the rates of TDS:
- 10% when the PAN is furnished (7.5% from 14 May 2020)
- 20% if the PAN is not provided
So it is apparent from a plain reading of Section 194 A that a person who is paying interest has to deduct tax at source (10% or 20% as the case may be). However is such tax required to be deducted when the factoring/discounting charges are paid? A similar situation was resolved in the case of M.K.J. Enterprises Ltd., Kolkata vs Department Of Income Tax on 10 January, 2014
Let us look into what interest means under the Income Tax Act before we proceed with the details of this case.
Section 2(28A) of The Income Tax Act, 1995 states that interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.
Facts of the Case
- Assessee is a agent of M/s. Mukand Ltd. and the steel products of this company are sold through the assessee.
- The sale bills are issued by Mukand Ltd. in the name of the customers but on them it is mentioned that the payment for the bills is guaranteed and underwritten by the assessee M/s. MKJ Enterprises Ltd. under an arrangement.
- As per this arrangement the payment to Mukund Ltd. is to be made by the assessee and the assessee collects the payment from the clients who have purchased the goods from M/s. MKJ Enterprises Ltd through the assessee.
- The bills of purchase for which payment is to be received by the assessee are discounted with a financing firm named M/s. Lalji Financials.
- When the bills are discounted, M/s. Lalji Financials pays to the assessee the bill amount after deducting its discounting or factoring charges. These discounting / factoring charges are claimed by the assessee as expenditure.
- During the relevant FY the assessee paid a sum to M/s. Lalji Financial on account of discounting/factoring charges without deducting TDS.
- According to AO, these factoring /discounting charges are interest expenses as per the provisions of section 2(28A) of the Act and assessee is liable to deduct TDS u/s. 194A.
- According to AO, as the assessee failed to deduct TDS, these expenses cannot be allowed in term of section 40(a)(ia) of the Act.
Aggrieved, assessee preferred appeal before CIT(A), who allowed the claim of the assessee
- In this process of bill discounting the responsibility to collect the bill amount from the customers passes on to bill discounting agency. Whether the payment of the bill amount is received or not received or received late or a less amount is received by such agency it is not a concern of the assessee.
- This shows that in this transaction actually the assessee has sold its assets to the bill discounting agency and the ownership of the assets, in the form of debtors, has now passed on to such agency.
- In this kind of transactions it cannot be said that the bill discounting agency has advanced any loan to the assessee or the assessee has incurred any debt.
- The amount paid by such agency to the assessee in view of the bill discounted by it is in the nature of sale proceeds of the debt purchased from the assessee. Therefore, it cannot be said that the discounting/factoring charges paid are in the nature of interest as defined in section 2(28A).
- From section 2(28A) it can be seen that one important requirement of this section is that there should be any money borrowed or debt incurred or any credit facility utilized by the assessee.
- Here, the assessee has not done any of these three things because the money paid by the bill discounting agency in view of the bill discounted by it, is not to be repaid by the assessee.
- Therefore, any charges paìd by the assessee in respect of such money received after bill discounting cannot be termed as interest u/s. 2(28A) and the assessee was not required to deduct TDS on them u/s. 194A.
Aggrieved, revenue came in appeal before Tribunal.
Proceedings of ITAT
1.It can be seen from section 2(28A) that interest either means sum payable in respect of any money borrowed or debt incurred. In the instant case, it was not a case of debt incurred or moneys borrowed. In fact, it was a case where the assessee had merely discounted sale consideration receivable on sale of goods.
2. It was not a case where any money had been borrowed or debt had been incurred. It was also not a case where any service, fee or either charge had been paid in respect of money borrowed or debt incurred or in respect of any credit facility which had not been utilized. It was not a case where section 2(28A) could be invoked.
3. Further, we can deal with this issue from another angle i.e. the Interest Tax Act, 1974. As per section 2(7) of the Interest Tax Act, interest means interest on loans and advances made in India and includes:-
i. commitment charges on unutilized portion of any credit sanctioned for being availed of in India;
ii. discount on promissory notes and bills of exchanges drawn or made in India.
4. Thus, where the Legislature was conscious of the fact that even the discount of bills of exchange was to be included within the definition of interest, the same was basically so provided for.
5. However, under the scheme of the Act, the word interest defined under section 2(28A) does not include the discounting charges on discounting of bills of exchanges.
6. The CBDT is of the opinion that where the supplier of goods makes over the usance of bill/hundi to his bank which discounts the same and credits the net amount to the suppliers account straightaway without waiting for realization of the bill on due date, the property in the usance of 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.
7. 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 payment cannot technically be held as including any interest and, therefore, no tax need to be deducted at source from such payment by the bank.
8. From the explanation of the assessee it is clear that interest is a term relating to a pre- existing debt, which implies a debtor creditor relationship.
9. According to us, unpaid consideration gives rise to a lien over goods sold and not for money lent.
10. Any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred.
11. According to us, discounting charges of Bills of Exchange or factoring charges of sale cannot be termed as interest.
12. The assessee in the present case is acting as an agent. His position is that of a surety who is liable to his principal should the vendee make default. The agreement between him and his principal need not be reduced to or evidenced by writing, for his undertaking is a guarantee.
13. A Del Credere Agent is an agent who not only establishes a privity of contract between his principal and the third party, but who also guarantees to his principal the due performance of the contract by the third party.
14. He is liable, however, only when the third party fails to carry out his contract, e.g., by insolvency. He is not liable to his principal if the third party refuses to carry out his contract, for example, if the buyer refuses to take delivery.
15. In the present case before us the assessee has assessed the income as Del Credere being trading in goods and merchandise and also dealing in securities and which is assessed as income from business and not income from other sources.
16. The expenditure incurred is also on account of business expenditure and not interest expenditure in the nature of interest falling u/s. 194A of the Act.
Accordingly, as these discount/factoring charges do not come within the purview of section 194A and assessee is not liable to TDS on these charges. Hence, disallowance was deleted and the appeal of revenue was dismissed.
Similar case :-
This interpretation of ours is supported by the decision of Supreme Court in the case of Bombay Steam Navigation Co. Pvt. Ltd. Vs. CIT (1963) 56 ITR 52 (SC), wherein it was held that, where interest on unpaid purchase price was not treated as interest on loan.