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TMI Blog2012 (3) TMI 657X X X X Extracts X X X X X X X X Extracts X X X X ..... ign supplier for imported new raw 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.40(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 nonresidents, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,162/- claimed as finance charges and added the same to the total income of the assessee. 3. 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 CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 (AP). 4. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt incurred and therefore not in the nature 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 v. ITO [1993] 53 ITD 19 (Delhi), ITO v. Oriental Insurance Co. Ltd [2005] 143 Taxman 12 (Delhi)(Mag.), -CIT v. Cargill Global Trading (P) Ltd [2011] 199 Taxman 320/11 taxmann.com 219 (Delhi). Reliance was also placed on the decision of Hon'ble Supreme Court in the case of CIT v. Govinda Choudhury & Sons [1993] 203 ITR 881/[1994]74 Taxman 331(SC) and AAR in the case of ABC International Inc. USA, In re [2011] Taxman 211/11 taxmann.com 146 (AAR - N. Delhi). Further, reliance was placed also placed on the following decisions: 1. Islamic Investment Co. v. Union of India [2004] 265 ITR 254/[2002] 122 Taxman 719 (Bom). 2. Bombay Steam Navigation Co. [1953](P.) Ltd v. CIT [ 1965] 56 ITR 52 (SC). 3. Vijay Ship Breaking Corpn. v. Dy. CIT [2003] 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax, since there was conflicting views on the issue, the assessee was under the bona fide belief that there was no obligation to deduct tax at source. The Id. counsel relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Kotak Securities Lid [2011 ] 203 Taxman 86/15 taxmann.com 77 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. 9. 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the same transaction and cannot be meted out a separate treatment altogether from the main component i.e. the purchase price. The Tribunal also found that there was no right of prepayment by the buyer to the seller, that is to say, irrespective of the point of time when 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 Vijay Ship Breaking Corpn. (supra). 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 there under for which a separate invoice was prepared. There was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inserted in the Act as above, provided that for the removal of doubts, it is being declared that the usance interest payable outside India by an undertaking engaged in the business of ship-breaking in respect of purchase of a ship from outside India shall be deemed to be the interest payable on a debt incurred in a foreign country in respect of the purchase outside India. 13. 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 characte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lute binding force it might otherwise have had, but it remains an authority which may be followed by a court that thinks the particular point to have been rightly decided. 15. As we have already noticed the facts of the present case go to show that the intention of the parties to the contract was clear and the price of the material 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. 16. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seller cannot be regarded as interest on money lent notwithstanding the nomenclature adopted, by the parties. The aforesaid decision cannot help the case of the Assessee. The decision was rendered in the context of the definition of interest under the DTAA. The definition of interest u/s. 2(28A) of the Act and the DTAA are materially different. The DTAA refers to existence of a separate source 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. 17. 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 non-resident to the assessee were that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .P. High Court in the case of Visakhapatnam Port Trust (supra) but has not considered any DTAA between India and the Foreign suppliers and the definition of interest under such DTAA. We are therefore of the view that the decision of the ITAT Hyderbad Bench has been decided on the facts of the case and agreement between the parties and not applicable to the facts of the present case. 19. The next decision is that of the Delhi Bench of the ITAT in the case of Delhi Development Authority (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 Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s "Business Income" and not "Income from other sources". The said decision is not relevant for the present case where the dispute is as to whether payment in question is interest or part of purchase price. The decision of the Ahmedabad Bench of ITAT in the case of Mayank Electro Ltd. v. ITO [2001] 71 TTJ 612 (And.) is also not relevant as the dispute in that case was as to whether interest for delayed payment of goods can be considered as business income on which deduction u/s. 80IA has to be allowed. 22. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertificate u/s. 195 of the Act. He cannot plead bonafide belief and on that basis seek to stand out of the provisions of Sec. 40(a)(ia) of the Act. We therefore reject the plea of the Assessee in this regard. Thus ground No. I to III are treated as allowed for statistical purposes. 26. Ground nos. IV & V raised by the assessee read as follows : IV. Erred in confirming he un-utilized Modvat Credit in value of Closing Stock without appreciating the method of accounting followed by the appellant. V. Failed to appreciate that payment 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. 27. The AO noticed that there was unutilized Modvat credit of ₹ 2,51,713/- as on 31-3-2002. In view of the provisions of sec. 145 Aof 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince the Assessee is following the Mercantile System of Accounting, the expenditure classified as prior period expenses of ₹ 32,00,939/- cannot be allowed as expenditure of the year. Similar view was taken in the Assessee's own case by my predecessor. Respectfully following the same, I uphold the action of the AO in disallowance of the expenses under the head "prior period expenses". However, I agree with the alternate submissions made by the Assessee's Counsel. As has been held in earlier years, I direct the AO to allow the expenditure of ₹ 32,00,939/- in the year A.Y. 2001-02 if the Assessee is able to establish that these expenses relate to that year. Regarding the allowability of the expenditure of ₹ 953,064/-treated as prior period in AY 2003-04, it will be adjudicated while deciding the appeal for AY 2003-04. 32. 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 follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision for gratuity. Disallowance of ₹ 26,00,000/- on account of unexplained expenses under section 69C of the Act. 37. It is not in dispute before us that the disallowance on account of unexplained expenses u/s. 69C has already been deleted by the Hon'ble FT AT in the appeal filed by the assessee in the quantum proceedings. It is also further seen that in respect of disallowance of ₹ 44,19,270/- on account of prior period expenses, the ITAT in the quantum proceedings had set aside the order of CIT(A) and remanded the issue to the AO to allow deduction in the year to which the prior period expenses pertained to. It has been brought to our notice 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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