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2015 (6) TMI 759 - ITAT DELHI

2015 (6) TMI 759 - ITAT DELHI - TMI - TDS u/s 194A - addition on account of factoring/discounting charges as no tax at source was deducted - assessee submitted that the factoring charges is not to be treated as interest and is not liable to be deducted at source u/s 194A - Held that:- In the instant case, the Assessing Officer had listed out the distinction between factoring and bill/invoicing discount. It was further held by the Assessing Officer that as per the terms of agreement entered betwe .....

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able.

Factoring charges on sale cannot be termed as interest. In view of the Hon’ble Calcutta High Court judgment, we hold that the factoring charges will not come within the purview of section 2(28A) of the Income-tax Act, 1961 and as such, the provisions of TDS are not applicable on facts and circumstances of the case. - Decided in favour of assessee. - ITA No.5419/Del./2012 - Dated:- 17-6-2015 - Shri S.V. Mehrotra and Shri George George K., JJ. For the Petitioner: Shri Sachin Jain .....

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ns of section 40(a)(ia) of the Income-tax Act, 1961. 3. The assessee is a private limited company engaged in the business of manufacturing and trading in gold, diamond jewellery and bullion. For the relevant year, return of income was filed on 07.03.2010 declaring an income of ₹ 2,79,89,810/-. The assessment was taken up for scrutiny by issuance of notice u/s 143 (2) of the Act and scrutiny assessment u/s 143(3) was completed vide order dated 16.12.2011 assessing total income at ₹ 3, .....

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al Trade Finance Limited on which the same has been charging discount. The company has not deducted TDS as it is not an interest. The AO further noticed that in the P&L account, an amount of ₹ 93,68,870/- was debited under the head factoring / discounting charges. The said payment was made by the assessee to M/s. Global Trade Finance Limited (hereinafter referred to GTF). The assessee was show-caused to submit the details in respect of expenses incurred under the head factoring/discoun .....

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provisions of section 40(a)(ia) of the Act, since the tax was not deducted at source while making these payments. 5. Aggrieved, the assessee preferred an appeal to the first appellate authority. The CIT (A) confirmed the disallowance made by the assessee. The relevant finding of the CIT (A) reads as under :- 6. I have considered the findings recorded by the ld. AO as per the assessment order, the submissions made by the ld. AR and the facts of the case on record. The ld. AO has elaborately discu .....

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ment order : (i) The whole concept of factoring charges shows that they are in the nature of specialized services rendered by the financial institutions. The concept of factoring also shows that the prepayments made, against the invoices, is nothing but a shortterm financing facility provided by the financial Institution (factor), on which the client is under a legal obligation to pay interest at a fixed rate along with the factoring charges. (ii) The finance so provided is to be recovered by th .....

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vices. The services provided by GTF were "recourse factoring services" where the risk of bad debts was not borne by the former and was passed on to the appellant after a specific period of time. (iv) "GTF had secured personal guarantee of the Directors of the appellant company before granting the factoring facility. (v) GTF had also secured English mortgage on the residential bungalow located at 0-926, New Friends Colony, New Delhi prior to granting the funding. This clearly indic .....

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11 of the agreement specifies that GTF treats prepayments of 80% of invoices as "borrowings". (viii) As per the General Term No.12, it has been categorically stated that if the appellant commits default in "repayment of loan or payment of interest" on the due dates, it will be declared as a defaulter to RBI and CIBIL. This categorical condition further confirms the fact that financing by GTF is in the nature of loan on which it is charging interest. This loan is given by way .....

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g contrary to that. (x) An examination of the Term Sheet issued by GTF shows that the prepayment (loan or borrowing) is fixed at 80% of all invoices, and discount charges (interest) @ 13% per annum was charged on this prepayment. Along with this interest, GTF is also charged factoring charges @ 0.10% on the gross invoice amount. Hence, GTF was charging "interest" on the finances and the "factoring charges" on the factoring services provided by it. The "factoring charges& .....

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and 'Sill/Invoice discounting' are two different concepts having distinctive features as elaborately brought out by the ld. AO in the assessment order. 6.2 It is clear from the plain reading of Section 2(28A) that money paid in respect of amount borrowed or debt incurred, is interest payable in any manner. The definition of interest in Section 2(28A) after referring to the interest payable in any manner in respect of any moneys borrowed or debt incurred proceeds to include in the terms .....

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tatute. Undisputedly, in the instant case, the factoring charges were paid in respect of an obligation incurred in relation to the money borrowed through bills, therefore, no fault can be found on the part of the AO for treating these charges as interest and liable for tax deduction at source under Section 194A. The mere fact that the appellant did not characterize such payment as interest, will not take the same out of the ambit of the definition of "interest", insofar as payment made .....

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ssee liable for deduction of tax at source under Section 194A . 6.3 I further find that the case laws relied upon by the appellant are all on the issue of discounting charges in respect of bill discounting and none on the factoring facility. Even the CSOT Circular No. 65 dated to 02.09.1971 which has been relied upon by the Hon'ble Courts in these judgements does not deal with the factoring charges. The said circular deals with the discounting charges on the discounting of bills. Hence, the .....

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mentioned earlier, GTF is an NBFC and not a banking company governed by the Banking Regulation Act 1949. The appellant's contention is, therefore, found to be baseless and devoid of any merits and accordingly liable to be rejected. 6.5 Although, the Id. AR vehemently argued that there is no difference between factoring and bill discounting and if there are any differences at all, the same prove that both are nothing but the same type of facility, but it could not meaningfully counter the dif .....

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nos. 2 and 4 are rejected. 6. The assessee, being aggrieved, is in second appeal before us. 7. The ld. Counsel for the assessee submitted that the factoring charges is not to be treated as interest and is not liable to be deducted at source u/s 194A of the Act. For the above proposition, ld. AR relied on the judgment of the Hon ble Calcutta High Court in the case of CIT vs. MKJ Enterprises reported in GA No.1927 of 2014 (Kol.). It was further submitted that Hon ble jurisdictional High Court in t .....

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at the end of the year and, therefore, no disallowance u/s 40(a)(ia) can be made. 8. Ld. DR supported the orders of the authorities below. 9. We have heard the rival submissions and perused the material on record. In the instant case, the Assessing Officer, at page 13 of the assessment order, had listed out the distinction between factoring and bill/invoicing discount. It was further held by the Assessing Officer that as per the terms of agreement entered between the assessee and GTF, the discou .....

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