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TMI Blog2015 (3) TMI 545X X X X Extracts X X X X X X X X Extracts X X X X ..... e etc. and trading in timber. The Assessee has paid usance charges of Rs. 14,29,953/- on import purchase. The AO was of the view that the usance charges paid to the non-resident is the income arising to the non-resident reckoning within the meaning of provisions of Sec. 5(2)(b) r.w.s. 9(1)(v)(b) and therefore the Assessee was liable to deduct TDS in accordance with the provisions of Sec. 195. Since the Assessee has not deducted the TDS, therefore, AO disallowed the sum u/s 40(a)(i). The Assessee went in appeal before the CIT(A). CIT(A) deleted the addition relying on the explanation to Sec. 10(15)(iv)(c) of the Income Tax Act by observing as under: "7. I have gone through the assessment order, facts of the case and detailed submission of the appellant alongwith various judicial pronouncements relied upon by the appellant. It is absolutely clear from the facts in this case, that the usance charges paid by the appellant is nothing but increased purchase price paid to the foreign sellers. It is also clear that A.O.'s reliance on explanation 2 to section 10(15)(iv)(c) is misplaced because of the facts of the instant case. In view of the detailed submission of the appellant, I hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation 2 to section 10(15)(iv)(c) stood inserted as TDS arises only if the tax is assessable in India. Since tax was not assessable in India, there was no question of TDS being deducted by the assessee. Therefore, question No. 2 is answered in favour of the assessee and against the Department. Accordingly, the civil appeals filed by the assessee(s) are allowed and the civil appeal filed by the Department is dismissed, with no order as to costs.' From this judgement it is apparent that the Hon'ble Supreme Court has not reversed the decision in the case of Vijay Ship Breaking Corpn.[2003] 261 ITR 113 on merit but this decision has been reversed as the Assessee was engaged in ship breaking business and the Assessee had imported the ship for breaking in respect of which the Assessee had to incur the usance charges. The Hon'ble Gujarat High Court has taken the view that the usance charges are interest within the provisions of Sec. 2(28A) of the Income Tax Act and has accrued in India, therefore Sec. 195 was clearly applicable and Assessee has committed default by not deducting TDS. When the matter went before the Hon'ble Supreme Court, Explanation (2) was inserted u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head 'profit and gains of business or profession'. The Tribunal was, therefore, wrong in deleting the disallowance u/s 40(a)(i). The relevant findings of the Hon'ble Gujarat High Court are reproduced as under: 'The definition of "interest" in section 2(28A) of the Income-tax Act, 1961, was inserted with effect from June 1, 1976, by the Finance Act, 1976. "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 utilised. The meaning of the word "interest" is thus very wide and would include interest on unpaid purchase price payable in any manner which would include by means of irrevocable letter of credit. The word "debt" is defined in section 2(c) of the Interest Act, 1978, inter alia, to mean any liability for an ascertained sum of money. According to the accounting standards, revenue from sale of goods is recognised when the seller transfers the goods to the buyer for consideration. Interest revenue is recog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of credit. The seller, in the absence of any contrary stipulations, accepts payment by the mode of a letter of credit on an understanding that the drafts drawn by him on the letter of credit will be honoured. Issuance of a confirmed irrevocable letter of credit is an assurance to him that he will get the payment for the goods sold by drawing on the letter of credit, but it would be only a conditional payment, the condition of its acceptance being that the amount will be realised on the basis of the credit released in his favour. The Double Taxation Avoidance Agreements follow the pattern of the Organisation of Economic Co-operation and Development (OECD) Model Convention. The Model Convention has been used by the covenanting States as a basic document of reference while entering into such bilateral treaties. Such double taxation avoidance treaties are international agreements. Section 90 of the Act enables the Central Government to enter into such an agreement with the Government of another country, inter alia, for relief where income-tax is paid in both countries or for avoidance of double taxation. A formula reserving the exclusive taxation of interest to one State, whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ackward areas when such industrial undertaking "has begun or begins to manufacture or produce articles" and in the context of the fact that section 80-I is designed to encourage industrial undertakings to manufacture or produce "any article or thing". The provisions of sections 80HH and 80-I are meant for the benefit of industrial undertakings that carry out the activity of manufacture or production of articles or things and not for scrap merchants who trade in buying old articles or things and take out their parts to sell them separately. Merely because ship breaking is considered as an industry, it would not be an industry engaged in manufacture or production of any article or thing. The benefit of the provisions of sections 80HH and 80-I is clearly not intended for such ship breaking activities which do not result in bringing into existence any new article or thing. The word "manufacture" in the context of sections 80HH and 80-I of the Act would mean making articles or things. While dismantling the ship, steel plates are not made but only removed which is not the same thing as making steel plates. The word "production" in the context of these provisions would mean the action of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see was an industrial undertaking engaged in the activity of manufacture. The Assessing Officer held that ship breaking would not constitute any manufacturing activity. The Tribunal held that the purchase of a ship was a single transaction for which the agreement was entered into and although the purchase price of the ship and usance interest for 180 days from the date of the delivery/notice of readiness were separately mentioned in the memorandum of agreement, none the less it remained a single transaction of purchase and sale of the ship. The Tribunal concluded that the interest amount though separately mentioned in the memorandum of agreement and described as "interest" therein, partook of the character of the purchase price for the buyer and should be treated as purchase price. It held that the assessee was not liable to deduct tax at source from the payment of interest to the non-resident and hence, the disallowance of interest made under section 40(a)(i) was not warranted. It also held that ship breaking resulted in production of articles and amounted to manufacture, and that deduction should be allowed to the assessee under sections 80HH and 80-I. On further appeal to the Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act on the usance interest payable outside India and on which tax had not been paid, was not entitled to deduct the amounts of such usance interest in computing its income chargeable under the head "Profits and gains of business or profession". The Tribunal was, therefore, wrong in deleting the disallowance under section 40(a)(i).' From reading the decisions of the Hon'ble Supreme Court and the Hon'ble Gujarat High Court it is apparent that the Hon'ble Supreme Court has not reversed the decision in the case of Vijay Ship Breaking Corpn. (supra) on the finding that the usance charges are not interest u/s 2(28A) except where an undertaking is engaged in the business of ship breaking in view of explanation (2) to Sec. 10(15)(iv)(c) inserted by the Taxation Laws (Amendment) Act, 2003 with retrospective effect. In our view, the decision of the Hon'ble Gujarat High Court has impliedly been approved by the Hon'ble Supreme Court in respect of Assessees who are engaged in the business of ship breaking. We, therefore, set aside the order of CIT(A) and allow the appeal of the Revenue. 4. In the result, the appeal filed by the Revenue stands allowed. 5. Order pronoun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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