TMI Blog2009 (10) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... interest and since the assessee has not deducted tax at source on payment of such interest, the same is not allowable in view of the provision contained in s. 40(a)(i) of the Act. 3. The AO was of the view that the discounting charges on sales bills discounted from the assessee's Singapore AE for receiving money is interest within the meaning of s. 2(28A). Therefore, for payment of such interest to a non-resident the assessee was under obligation to deduct tax at source. Since the assessee failed to deduct tax at source, the amount is not allowable as provided in s. 40(a)(i) of the Act. While so holding the AO relied upon the decision of Hon'ble Gujarat High Court in the case of CIT vs. Vijay Ship Breaking Corpn. (2003) 181 CTR (Guj) 134 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goods are exported out of India to a buyer outside India, the appellant draws bill of exchange on the buyer and sells the bills to CFSA at a discount, which, immediately thereafter, remits the discounted value of the bill of exchange [i.e., maturity value (viz., the price of the goods) less discount] to the appellant. Such purchases of bill of exchange at a discount by CFSA is typically without recourse and the appellant extinguish the export receivable in their books, without any link to the maturity date of the bill. The purchase of bills of exchange on a "without recourse' basis implies that: - The appellant sells the bills of exchange to CFSA, typically, on 'without recourse' basis i.e., CFSA purchases the bills of exchange on its o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t tax at source unless the sum is chargeable under the Act. 5. The learned CIT(A) held that the discounting charges paid by the assessee is not an interest as neither any money is borrowed nor any debt is incurred. Circular No. 65 issued by CBDT provides that where the supplier of goods makes over "the usance bill to his bank which discounts the same and credits the net amount to the supplier's account without waiting for realization of the bill on the due date, the property in usance bill passes on to the bank and the eventual collection on due date is receipt by the bank on its own behalf. Such payment cannot technically be held as including any interest and therefore, no tax need to be deducted at source from such payment. He according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange, the bill of exchange is discounted so that instead of receiving the payment at a later date, the assessee receives the sum much before the due date. In such circumstances, the assessee neither borrows any sum nor incurs any debt. The debt is incurred by the party who accepts the bill of exchange in favour of the person who discounts the bill. Therefore, the assessee cannot be said to have incurred any expenses by way of interest. The word "interest" defined under Interest-tax Act, 1974 also includes discount on promissory notes and bills of exchange drawn or made inIndia. Such inclusive definition in the Interest-tax Act is absent in IT Act. Therefore, the definition of Interest-tax Act cannot be applied while interpreting IT Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the assessee, the aforesaid discount is not in the nature of interest and hence is not disallowable under s. 40(a)(i) of the Act whereas the AO has held that this sum is in the nature of interest under s. 2(28A) of the Act. Sec. 2(28A) of the Act provides as under: "'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 debt incurred or in respect of any credit facility which has not been utilized." It will be evident from the above that interest payable in any manner in respect of any moneys borrowed or debt incurred and includes any servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65 was rendered in relation to deduction of tax under s. 194A, in respect of payment to a resident, the same will be relevant even for the purpose of considering whether the discount should be treated as interest or not. The CBDT has opined that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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