Whether usance charges paid by the Assessee on import of raw material from foreign countries attracts tax in India u/s 5(2)(b) r.w.s. 9(1)(v)(b)?

IN THE INCOME TAX APPELLATE TRIBUNAL

PANAJI BENCH, PANAJI

BEFORE SHRI P.K.BANSAL, HON’BLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HON’BLE JUDICIAL MEMBER

ITA NOS.194,195& 287/PNJ/2014

ASST. YEARS : 2008-09, 2009-10 & 2010-11

Asst. Commissioner of Income Tax,

 Circle-2,Margo, Goa

(Appellant)

Versus.

M/s. Indian Furniture Products Limited.

Jai KissanBhawan, Zuarinagar, Goa

PAN: AAACZ1715A

(Respondent)

Appellant by: ShriVinay Singh Rawat, Ld. D.R.

Respondent by: Shri Elson Sequeira, C.A.

Date of Hearing :06/01/2015

Date of Pronouncement :07/01/2015

O R D E R

PER P.K. BANSAL

All these three appeals are filed by the Revenue against the orders of CIT(A) dt. 03.03.2014, 04.03.2014 and 15.05.2014 for assessment years 2008-09, 2009-10 and 2010-11 by taking the following effective grounds of appeal:-

“1. The order of the learned Commissioner of Income-Tax (Appeals) is opposed to law and facts of the case.

2. The Ld. CIT(A) has erred in allowing relief to the assesse in respect of disallowances made by the Assessing Officer u/s 40(a)(ia) of the IT Act on account of non deduction of tax at source u/s 195(1) of the IT Act on usance charges paid of Rs.18,99,772/- to a non resident through an intermediatory bank.

3. The Ld. CIT(A) failed to appreciate that as per section 10(15)(iv)(c) interest payable outside India on the purchase of raw material / capital goods on delayed period from 01.06.2001 is taxable in the hands of purchaser and liable to tax.

4. The Ld. CIT(A) failed to appreciate that the case law of CIT vs. Vijay Ship Breaking Corporation & Others (2003) 181 CTR 134 (Gujarat High Court) is very much applicable in the present case.”

2. The only issue involved in all these appeals filed by the revenue relate to whether the Assessee was bound to deduct TDS u/s 195(1) in respect of usance charges paid by the Assessee on import of raw material from countries outside India like Japan, Belgium, Germany, USA etc. Both the parties agreed since the issue involved in all the three years is common. All these appeals be decided on the facts for the assessment year 2008-09. The brief facts for the assessment year 2008-09 are that the AO noted that the Assessee is engaged in manufacture of wooden doors, frames, furniture etc. The Assessee has paid usance charges of Rs.18,99,772/- on import purchase. The AO was of the view that the usance charges incurred by the assessee 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 and the submission of the appellant. The A.O disallowed the usance charges paid to banks for non-deduction of TDS. The reason, why the A.O thought that the provisions of TDS are applicable is as under :

In the present case, the assessee has imported raw material for its consumption based on a letter of credit and has paid usance charges. The issuing bank of the assessee merely acts as an agent of the assessee. Usance charges in the present case is an income of a non-resident as envisaged in provisions u/s 9(1)(v)(b) r.w.s. 5(2) of the Act. Therefore, the assessee while paying usance charges should have deducted TDS as provided in Sec.195(1) of the Act.

On the other hand, the appellant contended that the A.O has not appreciated the facts in right perspective. The appellant argued that the usance charges have been taken by the banks which are all nationalized banks and which operate in India. The appellants have not paid any amount to the non-resident suppliers either directly or through the bankers.

The learned A.R. of the appellant also contended that since no payments have not been made to non-resident suppliers in the form of usance charges or interest / commission, the ration of judgement, relied upon by the A.O in the case of CIT vs Vijay Ship Breaking Corporation and others (2003) 181 CTR B4, does not apply in the case of appellant as the facts are entirely different. Also, in this case, the payment has been made to suppliers, no parts of whose income are assessable in India. In view of the above facts, in my opinion, the A.O was not justified in making the disallowance u/s 40a (i) amounting to Rs.18,99,772/- on account of usance charges / commission. The A.O is directed to delete the addition accordingly.”

3. We heard the rival submissions and carefully considered the same. We noted that the Hon'ble Supreme Court has reversed the decision of Hon'ble Gujarat High Court in CIT vs. Vijay Ship Breaking Corporation as reported in 314 ITR 309 (SC) by observing as under :

“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 judgment because after the impugned judgment which was delivered on March 20, 2003, the Income-tax Act was amended on September 18, 2003, with effect from April 1, 1983. By reason of the said amendment, Explanation 2 was added to section 10(15)(iv)(c), which reads as under :

" Explanation 2.- For the removal of doubts, it is hereby 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."

On reading that Explanation 2, it is clear that usance interest is exempt from payment of income-tax if paid in respect of ship breaking activity. This amendment came into force only after the impugned judgment. It was not there when the impugned judgment was delivered.

For the aforestated reasons, question No. 2 as to whether the assessee was bound to deduct TDS under section 195(1) is answered in favour of the assessee and against the Department. The assessee was not bound to deduct tax at source once Explanation 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.”

To read the full judgment, please find the attached file :

Attached file:

http://www.itatonline.in:8080/itat/upload/-248690963766534969913$5%5E1REFNOITA_NOS.194,195_&_287__PNJ_2014_Ms_Indian_Furniture_Products_Ltd.pdf