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TMI Blog2012 (4) TMI 190X X X X Extracts X X X X X X X X Extracts X X X X ..... aw material 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.49(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 non-residents, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 18,31,162/- claimed as finance charges and added the same to the total income of the assessee. 4. 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, the amount in question is not chargeable to tax in India in the hands of the suppliers of raw materials and, therefore, there no obligation on the part of the assessee to deduct tax at source while making payment. The assessee in this regard relied on the decision of the Hon'ble Andhra Pradesh High Court in the case of Visakhapatnam Port Trust 144 ITR 146 (AP). 5. The CIT(A), however, did not accept the plea of the assessee and he held as follows : "I have considered the submissions as well as perused the decision and the Double Taxation Avoidance Agreement. The AO is justified in disallowing the interest/finance charges paid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 52 TTJ 107 (Del), Oriental Insurance Company 96 TTJ 589), Cargill Global Trading (I) (P) Ltd. 56 DTR 188 (Del). Reliance was also placed on the decision of Hon'ble Supreme Court in the case of Govinda Choudhury & Sons (203 ITR 881 (SC) and AAR in the case of ABC International Inc. (2011) 55 DTR 393. Further, reliance was placed also placed on the following decisions : 1. Islamic Investment Co. v. Union of India & Anr. 265 ITR 254 (Bom). 2. Bombay Steam Navigation Co. [1953] Pvt. Ltd. v. CIT 56 ITR 52 (SC). 3. Vijay Ship Breaking Corporation v. DCIT 86 ITD 497 (Rajkot). All the aforesaid decisions were referred to in the context of when a payment can be said to be a payment for a debt incurred or amount borrowed. 8. The ld. DR submitted that the question whether payment made towards usance interest could be treated as part of the purchase price or has to be treated as interest was consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der dated 21.10.2012 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 disallowance u/s.40(a)(i) of the Act. 10. We have considered the rival submissions. The following three issues arise for consideration: 1. Whether the payment in question, namely, usance interest, can be said to be interest within the meaning of sec. 2(28A) of the Act ? If the answer to this question is in the affirmative, then the same would be deemed to have accrued and arisen in India in view of the provisions of sec. 9(1)(v)(b) of the Act. 2. If the sum in question is treated as interest under the Act, whether the same is liable to tax in India in view of the DTAA between India and the countries of which the persons who supplied raw material to the assessee were tax residents? 3. Whether the disallowance u/s.40(a)(i) cannot be made in view of the decision of the Hon'ble Bombay High Court in the case of Kotak Mahindra Securities (supra)? 11. We will take up for consideration the first issue as to wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 indebted to the seller. On appeal by the Revenue, the Hon'ble High Court reversed the decision of the Tribunal in CIT v. Vijay Ship Breaking Corpn. 261 ITR 113 (Guj). The Hon'ble Court held that the intention of the parties to the contract was clear and the price of the ship was considered to be separate as certified in the invoice, which reflected its price agreed in the memorandum of agreement, and the buyer in lieu of the credit facility of 180 days from the date of the notice of readiness was required to pay interest at the rate stipulated in the memorandum of agreement and worked out thereunder for which a separate invoice was prepared. There was no nexus between the interest amount and fixation of the price of the ship which was on tonnage basis. The nexus of interest was only with the period from which the purchase price of the ship became due on notice of readiness or delivery. The stipulation in the memor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in a foreign country in respect of the purchase outside India. 14. 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 the character of purchase price and, therefore, not liable to deduction at source under section 195(1) of the Income-tax Act, 1961 ? The Hon'ble Supreme Court on the above question held as follows: "As regards the second question, we may state that in this case, the controversy which arose for determination was whether the assessee was bound to deduct TDS under section 195(1) of the 1961 Act in respect of usance interest paid for purchase of the vessel for ship breaking ? According to the Department, TDS was deductible under section 195(1) whereas, according to the assessee, such interest partook of the character of the purchase price and, therefore, TDS was not deductible. Therefore, the key question which arose for determination was whether the assessee was in default for not deducting TDS under section 195(1) of the 1961 Act. It may be mentioned that we are not required to examine this question in the light of the impugned judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial 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 prepared. There was no nexus between the interest amount and fixation of the price of the raw materials purchased. The nexus of interest was only with the period from which the purchase price of the raw material became due viz., the date of bill of lading. Thus, there was no scope for contending that the outstanding price was not a "debt incurred" within the meaning of section 2(28A) of the Act. 17. Having reached the above conclusion, we will now deal with the various cases cited by the parties before us, on the issue. The learned counsel for the Assessee placed reliance on the decision of the Hon'ble A.P.High Court in the case of Visakhapatnam Port Trust (supra). The assessee in that case viz., Visakhapatnam Port Trust, exported a large amount of iron ore. In order to speed up export operations it decided to install a plant known as "bucket wheel reclaimer". A German company tendered the contract for the supply of the equipment. An agreement was entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce 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 depending on the wordings of the relevant clauses of DTAA . 18. The next decision relied upon by the learned counsel for the Assessee was the decision of the Hon'ble Madras High Court in the case of India Pistons Ltd. (supra). The Assessing Officer disallowed the interest on foreign bills under section 40(a)(i) as no tax was deducted at source. The Hon'ble High Court held that the interest pertained to foreign bills and cannot be considered as interest paid on loan. The Hon'ble Court found that the conditions for supply of goods by the nonresident to the assessee were that the payment of purchase price in installments was to be made with the condition that the assessee will compensate the supplier by means of interest on the unpaid installments. The unpaid installment was not the same as loan and therefore, interest paid could not be treated as paid on the loan and hence, deduction of tax at source was not attracted. The Hon'ble Court therefore held that it was not the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Delhi Development Authority v. ITO (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 delay in delivering possession and cannot be regarded as interest paid on debt incurred or amounts borrowed within the meaning of Sec.2(28A) of the Act. This decision is not relevant as it was case of payment of compensation for delay with no borrowing or incurring of debt. The next decision relied upon by the learned counsel for the Assessee is the case of Oriental Insurance Co.Ltd. (supra), where the question arose as to when the insurance company makes payment of decretal amount comprising of interest on compensation awarded by Motor Accidents claims Tribunal, it was akin to payment of interest by the insurance company necessitating tax deduction at source u/s.194A of the Act. The ITAT Delhi held that the amount paid by the insurance company was decretal amount awarded by the Tribunal and not interest. This decision is therefore rendered on the basis that as far as the insurance company is concerned the payment is of a decretal amount and not interest. The same is therefore not relevant or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on u/s.80-IA has to be allowed. 23. The last decision referred to by the learned Counsel for the Assessee is the decision of Hon'ble Supreme Court in the case of Bombay Steam Navigation Co. (1953) (P) Ltd. (supra). The question that arose for consideration in the aforesaid case was as to whether interest paid on unpaid purchase price was interest paid on monies borrowed which could be allowed as deduction u/s.10(2)(iii) of the Income Tax Act, 1922 equivalent to Sec.36(1)(iii) of the Act. The Hon'ble Court held that unpaid purchase price cannot be said to be monies borrowed for the purpose of business and therefore deduction claimed cannot be allowed u/s.10(2)(iii) of the Income Tax Act, 1922. The decision was rendered on totally different facts and the Hon'ble Court never had any occasion to examine whether provisions of Sec. 2(28A) of the Act, which were never part of the Act till 1-4-1976. 24. The learned DR placed reliance on the decision of the Hon'ble Bombay High Court in the case of British Bank of Middle East (supra) where it was held that the definition of interest u/s.2(28A) of the Act is a word of wide import. It means "interest payable in any manner" in respect of mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of excise duty should be allowed u/s.43B of Income-tax Act as the Closing Stock were cleared and said excise duty were paid before the due date of filing of returns. 28. The AO noticed that there was unutilized Modvat credit of Rs. 2,51,713/- as on 31-3-2002. In view of the provisions of sec. 145A of the Act, the AO was of the view that the unutilized Modvat credit should be added to the value of the closing stock and the closing stock should be valued accordingly. The AO accordingly added the unutilized Modvat credit to the total income of the assessee. On appeal by the assessee, the CIT(A) held as follows : "I have considered the submissions as well as the amended provisions of sec. 145A. The action of the AO in making addition of Rs. 2,51,713/- being unutilized modvat credit to the income is justified. However, the Assessing Officer may consider the alternate submission of the Assessee that if the modvat credit has been subsequently utilized in next year upto-the due date of filing of return, the same may be allowed u/s.43B after verification. Subject to the above, this ground is partly allowed." 29. Aggrieved by the order of the CIT(A), the Assessee has raised Gr.No.IV and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01-02 if the Assessee is able to establish that these expenses relate to that year. Regarding the allowability of the expenditure of Rs. 953,064/-treated as prior period in AY 2003-04, it will be adjudicated while deciding the appeal for AY 2003-04." 33. It is not in dispute before us that identical issue had come up for consideration in the assessee's own case and this Tribunal had upheld similar direction given by the CIT(A) in assessment year 1999-2000 and 2003-04. In ITA No.6407/Mum/2003 for assessment year 1999-2000, this Tribunal in assessee's own case held as follows : "2.2.2 We have heard both the parties perused the records and considered the matter carefully. The Learned AR for the assessee submitted that in case the assessee was allowed relief as granted by the CIT(A) amounting to Rs. 37,53,810/-, the assessee will not press the addition of Rs. 44,19,279/-. The Learned DR on the other hand placed reliance on the order of Assessing Officer. We have considered the matter carefully. There is no dispute that the assessee is following mercantile system of accounting. Therefore expenditure incurred in the earlier year cannot be allowed as deduction in this year. The order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the AO has himself allowed the deduction in relevant prior period as deduction. Therefore, no adverse inference can be drawn for imposing penalty on the assessee on account of this addition. In respect of disallowance of Rs. 69,493/- on account of write off of leasehold premium, the addition has been confirmed in the quantum proceedings. However, it is seen that the stand taken by the assessee in claiming the write off of leasehold premium as a deductible revenue expenditure was based on the decision of the Hon'ble Karnataka High Court in the case of HMT Ltd. (203 ITR 820) wherein a view was taken that the lease premium paid in lump-sum was equivalent to rent paid in advance and should be treated as revenue expenditure. It is also not in dispute before us that the issue as to whether the write off of leasehold premium is revenue expenditure or capital expenditure was subject matter of debate and was ultimately settled by a decision of the Special Bench of ITAT in the case of Mukand Ltd. [109 TTJ 172 (Bom)] wherein it was held that the same was capital expenditure as it gives enduring benefit to an assessee. It is not in dispute before us that when the assessee filed the return ..... X X X X Extracts X X X X X X X X Extracts X X X X
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