Andtax Appeal v. The Commissioner Of Income Tax,Aaykar Bhavan, Patto,Panaji, Goa

1 TXA NO.45, 46 & 51-2015 IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEAL NO. 45 OF 2015 ANDTAX APPEAL NO. 46 OF 2015ANDTAX APPEAL NO. 51 OF 2015 India Furniture Products Limited,a public limited Company,having registered office atJaikissan Bhawan, Zuarinagar,Goa 403726, at present havingthe following address atG-106, SIDCO, Industrial Estate,Kakkalur, Tiruvallur-602003,represented herein by itsWhole Time DirectorShri Pervesh Kumar Gandhi,PAN Card No.AAAC21715A Versus The Commissioner of Income Tax,Aaykar Bhavan, Patto,Panaji, Goa. ... Appellant ... Respondent Mr. Chetan Kumar Gouda, Advocate for the Appellant. Ms. Amira Razaq, Standing Counsel for the Respondent. Coram:-M. S. SONAK & DAMA SESHADRI NAIDU, JJ. 2 TXA NO.45, 46 & 51-2015 Pronounced on:-2 nd Novem ber, 2020 JUDGMENT (Per M. S. Sonak, J.): Heard Mr. Chetan Kumar Gouda along with Mr. Menino Pereira for the Appellants and Ms. Amira Razaq, learned StandingCounsel for the Respondent. 2. The learned counsel state that these appeals may be disposed of by a common judgment and order since, the issues involved in all theseappeals are virtually identical and also the substantial questions of lawas framed, are identical. 3.For convenience, Tax Appeal No.45 of 2015 is taken as the leadmatter. 4.These Tax Appeals were admitted on 05.10.2015 on thefollowing substantial question of law:- (A) Whether the ITAT failed to realise that since the appellantpaid LC Charges/commission charges which are in the nature ofbank charges to their own Nationalized Banks based in Indiatowards opening of the Letter of Credit it could not beconstrued under the 195(1) that such Usance charges were paidor were payable to a non resident supplier and, consequently,was liable to pay TDS? 3 TXA NO.45, 46 & 51-2015 5. The assesses filed return of income for the Assessment Year2009-10 returning nil income claiming inter alia expenditure of`17,14,806/- as LC Charges and commission paid to the assesses'bankers in India in Indian currency. 6. The assessment officer made order dated 13.12.2011 underSection 143(3) of the Income Tax Act, 1961 (IT Act) disallowingexpenditure of `17,14,806/- pertaining to LC Charges andcommission paid to the assesses' bankers and added the same to theincome of the appellants inter alia on the ground that the appellantshad failed to deduct tax at source on this expenditure. 7. The appellants-assesses appealed to the CIT (Appeals), whichallowed this appeal by order dated 04.03.2014 and deleted thisaddition of `17,14,806/-. The appellants-assesses appealed to the CIT (Appeals), which 8. The respondent appealed to the ITAT, which has, by theimpugned order dated 07.01.2015, allowed the respondent's appealand restored the assessment order dated 13.12.2011. Hence thisappeal by the assesses on the aforesaid substantial question of law. 9. Mr. Chetan Kumar Gouda, learned counsel for the appellantssubmitted that the amount of `17,14,806/- expended by the assessesdoes not constitute “interest” and consequently, there was no questionof making any deduction of tax at source on this amount. In the 4 TXA NO.45, 46 & 51-2015 alternate, he submits that such payment was made to the bankers inIndia and in Indian currency. Therefore, he submits that theprovisions of Section 195 of the IT Act were not at all attracted andthere was no legal obligation to deduct any tax at source on suchamount. 10. Mr. Gouda submits that the CIT (Appeals) had quite correctlyappreciated this matter and the ITAT was not justified in interferingwith the well-reasoned order of CIT (Appeals). 9. Mr. Chetan Kumar Gouda, learned counsel for the appellantssubmitted that the amount of `17,14,806/- expended by the assessesdoes not constitute “interest” and consequently, there was no questionof making any deduction of tax at source on this amount. In the 4 TXA NO.45, 46 & 51-2015 alternate, he submits that such payment was made to the bankers inIndia and in Indian currency. Therefore, he submits that theprovisions of Section 195 of the IT Act were not at all attracted andthere was no legal obligation to deduct any tax at source on suchamount. 10. Mr. Gouda submits that the CIT (Appeals) had quite correctlyappreciated this matter and the ITAT was not justified in interferingwith the well-reasoned order of CIT (Appeals). 11. Ms. Amira Razak, learned counsel for the respondent defendsthe impugned order made by the ITAT based on the reasoningreflected therein. She points out to the definition of “interest” inSection 2(28A) of the IT Act and submits that the charges paid by thebankers for obtaining letters of credit in order to import raw materialfrom abroad also amount to interest. She submits that before thepayment of such amount therefore, the assesses were duty bound todeduct tax at source. Since this was admittedly not done, the ITATquite correctly disallowed this expenditure. Ms. Razak relies on thefollowing decisions in support of her contentions: (i)British Bank of Middle East v. Commissioner of Income Tax– (1998) 233 ITR 251 (Bombay);– (1998) 233 ITR 251 (Bombay); (ii)M/s. Uniflex Cables Ltd. v. Dy. Commissioner ofIncome Tax – (2012) 19 Taxmann.com 315 (Mumbai); and 5 TXA NO.45, 46 & 51-2015 (iii)Commissioner of Income Tax v. Vijay ShipbreakingCorporation & Others – (2003) 129 Taxman 120 (Guj.) 12. The rival contentions now fall for our determination. 13. In this case, there is no dispute that the assesses were importingraw material from the sellers in Japan, Belgium, Germany, U.S.A., etc.Towards such purchase/import transactions, the assesses were requiredto provide Letters of Credit. Accordingly, the assesses, would provideLetters of Credit from the Indian bankers in order to secure thepayments to the purchasers abroad. In order to provide such Letters ofCredit the assesses, had to pay service fees and other charges to theIndian bankers. For this purpose, the assesses, during the relevantassessment year, incurred expenditure of `17,14,806/-. This includesLC Charges and commissions paid to the Indian banks. Theseexpenses are referred to as Usance charges in trade parlance. 14. Mr. Gouda contends that the aforesaid expenses do notconstitute “interest” and consequently, the provisions of Section 195 ofthe IT Act were not at all attracted to the present case. In the alternatehe submits that even if the aforesaid Usance charges are to be held as“interest”, Section 195 of the IT Act is not attracted if such Usancecharges were paid to the Indian bankers and not to the purchasersabroad. 6 TXA NO.45, 46 & 51-2015 15. Now Section 2(28A) of the IT Act defines “interest” in thefollowing terms: “2(28A) - “interest” means interest payable in any manner inrespect of any moneys borrowed or debt incurred (including adeposit, claim or other similar right or obligation) and includesany service fee or other charge in respect of the moneysborrowed or debt incurred or in respect of any credit facilitywhich has not been utilised.” 16. Perusal of the aforesaid definition makes it clear that theexpression “interest” for the purpose of the IT Act includes any servicefee or other charge in respect of any credit facility which is not beenutilized. Therefore, on a plain reading of the said clause, the chargespaid by the assesses in respect of the credit facility amount to, interest.Therefore, it is not possible to accept Mr. Gouda's first contention inthese appeals. “2(28A) - “interest” means interest payable in any manner inrespect of any moneys borrowed or debt incurred (including adeposit, claim or other similar right or obligation) and includesany service fee or other charge in respect of the moneysborrowed or debt incurred or in respect of any credit facilitywhich has not been utilised.” 16. Perusal of the aforesaid definition makes it clear that theexpression “interest” for the purpose of the IT Act includes any servicefee or other charge in respect of any credit facility which is not beenutilized. Therefore, on a plain reading of the said clause, the chargespaid by the assesses in respect of the credit facility amount to, interest.Therefore, it is not possible to accept Mr. Gouda's first contention inthese appeals. 17. In order to appreciate Mr. Gouda's second contention referenceis necessary to the provisions of Section 195(1) of the IT Act whichreads as follows: “195. (1) -Any person responsible for paying to a non-resident, not being a company, or to a foreign company, anyinterest (not being interest referred to in section 194LB orsection 194LC) (or section 194LD) or any other sum chargeableunder the provisions of this Act (not being income chargeableunder the head "Salaries") shall, at the time of credit of suchincome to the account of the payee or at the time of paymentthereof in cash or by the issue of a cheque or draft or by anyother mode, whichever is earlier, deduct income-tax thereon atthe rates in force: 7 TXA NO.45, 46 & 51-2015 [Provided that in the case of interest payable by theGovernment or a public sector bank within the meaning ofclause (23D) of section 10 or a public financial institutionwithin the meaning of that clause, deduction of tax shall bemade only at the time of payment thereof in cash or by the issueof a cheque or draft or by any other mode.] [Explanation 1.- For the purposes of this section, where anyinterest or other sum as aforesaid is credited to any account,whether called "Interest Payable Account" or “SuspenseAccount" or by any other name, in the books of account of theperson liable to pay such income, such crediting shall be deemedto be credit of such income to the account of the payee and theprovisions of this section shall apply accordingly.] [Explanation 2.—For the removal of doubts, it is hereby clarifiedthat the obligation to comply with sub-section (1) and to makededuction thereunder applies and shall be deemed to havealways applied and extends and shall be deemed to have alwaysextended to all persons, resident or non-resident, whether or notthe non-resident person has— (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever inIndia.]” 18. Now in this case, though Usance charges may have been paid to the Indian bankers by way of LC Charges and commission,nevertheless, such payment, is a part of the transaction involvingpurchase/import of raw material from non-residents. 19. According to us, issuing bank of the assesses, merely acts as anagent of the assesses. The Usance charges is the income of the non- 8 TXA NO.45, 46 & 51-2015 resident as envisaged in the provisions of Section 9(1)(v)(b) read withSection 5(2) of the IT Act. Therefore, the provisions of Section 195(1)were attracted and the assesses were obliged to deduct tax at sourcebefore making such payment. 20. In similar circumstances, the Gujarat High Court, in the caseof Vijay Shipbreaking Corporation & Others (supra), has held thatthe assesses was duty bound to deduct tax at source even in respectof bank charges incurred for providing Letters of Credit to foreignsellers. 19. According to us, issuing bank of the assesses, merely acts as anagent of the assesses. The Usance charges is the income of the non- 8 TXA NO.45, 46 & 51-2015 resident as envisaged in the provisions of Section 9(1)(v)(b) read withSection 5(2) of the IT Act. Therefore, the provisions of Section 195(1)were attracted and the assesses were obliged to deduct tax at sourcebefore making such payment. 20. In similar circumstances, the Gujarat High Court, in the caseof Vijay Shipbreaking Corporation & Others (supra), has held thatthe assesses was duty bound to deduct tax at source even in respectof bank charges incurred for providing Letters of Credit to foreignsellers. 21.No doubt, the decision of the Gujarat High Court was reversedby the Hon'ble Supreme Court in Vijay Ship Breaking Corporationv. CIT - 314 ITR 309 (SC). However, the Hon'ble Supreme Court,made it clear that such reversal was only because of the amendmentwhich entered force on September 18, 2003, but w.e.f. 01.04.1983.By reason of the said amendment, an explanation was added to Section10(15)(iv)(c) of the IT Act which provided that Usance interestpayable outside India by an undertaking engaged in business of ship-breaking in respect of purchase of a ship from outside India shall bedeemed to be the interest payable on a debt incurred in a foreigncountry in respect of the purchase outside India. 22. The explanation made it clear that Usance interest is exemptedfrom payment of income tax in respect of ship-breaking activity. It is 9 TXA NO.45, 46 & 51-2015 only on account of this amendment which came into force after thedecision of the Gujarat High Court, that, the issue was answered infavour of the assesses and against the Revenue. The Hon'ble SupremeCourt ruled that on account of this exemption which was given theretrospective effect, since tax was not assessable in India, there was noquestion of TDS being deducted by the assesses. 23. This means that the decision of the Gujarat High Court was notreally interfered on its intrinsic merit. The interference was only onaccount of the subsequent amendment which entered force with theretrospective effect. The Gujarat High Court, had taken the view thatUsance interest is payable in terms of Section 2(28A) of the IT Act andtherefore, the provisions of Section 195 were clearly applicable to suchassesses. If the assesses, failed to deduct tax at source, then, theexpenditure so incurred was not entitled to be exempted from the totalincome of such assesses. 24. In this case, the assessment officer, has quite correctly held thatUsance means the allowable period of time permitted by the customsbetween the date of bill and its payment. The Usance of a bill variesbetween countries. The charges paid for Usance period are calledUsance charges. Usance charges in import purchases are paid on aletter of credit. Usance letter of credit is a letter of credit that requiresbeneficiary to present as a necessary document. Therefore, the 10 TXA NO.45, 46 & 51-2015ultimate beneficiary of the Usance charges is the supplier ofgoods/services. 25. Since in the present case, the assesses imported the raw materialfor its consumption based on a letter of credit and paid the Usancecharges, the beneficiary of such charges is the foreign seller. Theissuing bank of the assesses has merely acted as an agent of the assesses.The Usance charges therefore constitute income of a non-resident asenvisaged in the provisions of Section 9(1)(v)(b) read with Section 5(2)of the IT Act. Therefore, the provisions of Section 195(1) of the ITAct were attracted and the assesses were obliged to deduct tax at sourcefailing which, such expenditure, could not be exempted under Section40(a)(i) of the IT Act. 10 TXA NO.45, 46 & 51-2015ultimate beneficiary of the Usance charges is the supplier ofgoods/services. 25. Since in the present case, the assesses imported the raw materialfor its consumption based on a letter of credit and paid the Usancecharges, the beneficiary of such charges is the foreign seller. Theissuing bank of the assesses has merely acted as an agent of the assesses.The Usance charges therefore constitute income of a non-resident asenvisaged in the provisions of Section 9(1)(v)(b) read with Section 5(2)of the IT Act. Therefore, the provisions of Section 195(1) of the ITAct were attracted and the assesses were obliged to deduct tax at sourcefailing which, such expenditure, could not be exempted under Section40(a)(i) of the IT Act. 26. The assessment officer notes and there is no serious challengethat the foreign sellers were located in countries with whom theassesses have transacted are covered by DTAA but the provisions ofDTAA state that interest is chargeable to tax in both the contractingstates. Since, Usance charges are covered in the definition of interestunder Section 2(28A) of the IT Act, the assesses were obliged to deducttax at source in terms of Section 195(1) of the IT Act. 27.The ruling in Gnanasigamani Nadar v. Canara Bank – (1990)1 MLJ 401 is of no assistance to the case of the assesses because thisdecision refers to the principles governing a letter of credit. There is 11 TXA NO.45, 46 & 51-2015absolutely no dispute in regard to these principles. However, in thefacts of the present case, it is apparent that the assesses have paidUsance charges basically to facilitate imports from the foreign sellers.Therefore, there was obligation to deduct tax at source in terms ofSection 195(1) of the IT Act. 28. The ruling in Dhakeshwari Cotton Mills Ltd. v. CIT –(1954) 26 ITR 775 (SC) is again not at all relevant to the issue whicharises in the present appeals. This is not a case where the Income TaxOfficer has ignored any material evidence on record or his assessmentis based on pure guesswork or suspicion. In this case, the assessmentofficer, has evaluated the entire evidence on record and applied theprovisions of Section 2(28A) and Section 195(1) of the IT Act to suchfacts. 29.Similarly, the ruling in Esthuri Aswathiah v. CIT – (1967) 66ITR 478 (SC) is also not attracted in the facts of the present case.The case before the Hon'ble Supreme Court, the Tribunal, withoutrecording any reasons disbelieved the explanation of the assesses anditself made an estimate of the unaccounted income. The Tribunal, inthe present case, has not indulged into any such exercise. 30. Accordingly, for all the aforesaid reasons we are satisfied thatthere is no error in the impugned judgment and order of the ITAT.Accordingly, the substantial question of law is required to be decided 12 TXA NO.45, 46 & 51-2015 against the assesses and in favour of the Revenue. All these appeals aretherefore liable to be dismissed and are hereby dismissed by answeringthe substantial question of law against the assesses and in favour of theRevenue. 31. There shall be no order as to costs. DAMA SESHADRI NAIDU, J. M. S. SONAK, J. ss