Ms.premlatabansal,Sr.advocatewithmr.deepakanand, Advocate v. Cargill Globaltrading Pvt. Ltd

*IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No.331 of 2011 withITA No.204 of 2011 o/o DFCISION DFI TVERED ON: FEBRUARY17. 2011 1) TTA No.331 of 2011 COMMISSIONER OF INCOME TAX . . • APPELLANT through: Ms.PremLataBansal,Sr.AdvocatewithMr.DeepakAnand, Advocate. VERSUS CARGILL GLOBALTRADING PVT. LTD. . . .RESPONDENT through:Mr. Salil Kapoor, Advocate. ITA No.204 of 2011 COMMISSIONER OF INCOME TAX . . . APPELLANT through:Ms.PremLataBansal,Sr.AdvocatewithMr.DeepakAnand, Advocate. VERSUS CARGILL GLOBAL TRADING PVT. LTD. . . .RESPONDENT through:Mr. Salil Kapoor, Advocate. CORAMHON'BLEMR. JUSTICE A.K. SIKRIHON'BLEMR. JUSTICEM.L. MEHTA 1.Whether Reporters of Local newspapers may be allowed to see the Judgment? 2.To be referred to the Reporter or not? ITA Nos.331/2011&204 of2011 Signature Not Verified Digitally Signed By:AMULYACertify that the digital file andphysical file have been compared andthe digital data is as per the physical file and no page is missing. A.K. SIKRl. J. rORAU 1.In these two appeals filed by the Revenue against the sameassessee, the issue is identicaland pertains to two assessmentyears, i.e., Assessment Years 2004-05 and 2005-06.TheIncome Tax AppellateTribunal (hereinafter referred to as TheTribunal') vide orders dated 09.10.2009 had decided the issuein favour of the assesseeand order passedin that case hasbeen followed in the subsequentassessmentyear.In thesecircumstances, whiie dealing with the issues, we may take noteof the facts appearing in ITA No.331 of 2001, which pertains tothe AssessmentYear 2004-05. 2.In this AssessmentYear, the respondentassesseefiled theincome tax return declaring the income at 1.14 Crore.Duringtheassessmentproceedings,theAssessingOfficer (AO)noticed that the assesseehad paid a sum of ?3.97 Crores to itsassociateconcern,M/s Kargil Financiai ServicesAsia Pvt.Limited (CFSA) Singapore on account of discounted charges forgetting the export sale bills discounted. The AO was of theview that the discounting charges were nothing but the interestwithin the ambit of Section 2(28A) of the Income Tax Act (forbrevity The Act'). Since the assessee had not deducted tax at ITA Nos.331/2011&204 of2011 4. source under Section 195 of the Act, he Invoked the provisionsof Section 40(a)(i) of the Act and disallowed the sum of ?3.97Crores claimed by the assessee under Section 37(1) of the Act.CIT (A) deleted the addition holding that the discount paid bytheassesseetoCFSA cannotbeheldtobeinterestandtherefore,provisions of Section 40(a)(i) of the Act would notapply.Accordingly, he allowed the expenditureof f3.97 Croresas claimedby the assessee. The Revenuedid not accept the aforesaiddecisionof the CIT(A) and therefore,challenged the same by filing the appealbefore the Tribunal,thoughunsuccessfulas the Tribunalhasaffirmedthe order of the CIT (A).The Tribunalobservedthatdiscountingcharges were not in the nature of interestpaid bythe assessee,rather assesseehad receivednet amount of billof exchange acceptedby the purchaser after deductingamountofdiscount.SinceCFSAwashavingnopermanentestablishmentin India,it was not liable to tax in respectofsuch account earned by it and therefore,the assesseewas notunder an obligation to deduct tax at source under Section 195of theAct.Accordingly,theTribunalheldthatthesaiddiscountingchargescould not be disallowedby theAO byinvoking Section 40(a)(i)of the Act. ITA Nos.331/2011 & 204 of 2011 Page 3 of 9 6. 7. ITA Nos.331/2011 & 204 of 2011 Page 3 of 9 6. 7. We may notice at this stage that the respondent assessee is inthe export business. On the exports made by the assessee toits best buyers outside India, the assessee draws bills ofexchangeon those buyers located outside India. These bills ofexchange are discounted by the assessee from CFSA who ondiscounting the biiis immediately remits the discounted amountto the assessee.Thereafter,it is the obiigations/headachesofCFSA to reieasethe amountsof thosebuyersto whom thegoods are exported and bills are drawn by the assessee.It isthesaiddiscountedchargeswhichwereclaimedby theassesseeas expensesunder Section 37(1) of the Act.Thediscounting facilities offered by the CFSA to the assesseeafterchargingitsaforesaiddiscountedcommissionarenotquestioned by the Revenue.Only objection was that on thisamountremittedby the assesseeto the CFSA, the assesseewas to deduct tax at source (TDS) under Section 195 of the Actand since it was not done,invokingthe provisionsof Section40(a)(i) of the Act, the expenditurewas disallowed.As pointedout above,according to theAO, theaforesaiddiscountedchargesby the assesseeto CFSA were treatedas'interest'within the meaning of Section 2 (28A) of the Act.We may also point out at this stage that CFSA is a companyincorporatedin Singaporeanda taxresidentof Singapore. ITA Nos.331/2011 &204 of 2011 CFSA, inter alia, underwrite or otherwise acquire, own, hold,sell or exchange securities or investments of any kind includingnegotiable instruments, commercialpaper etc. Accordingly,asa part of its aforesaid business, it draws, makes, accepts,endorses, discounts, executes and issues promissory notes, BEetc.FurtherCFSA does not have a permanentestablishment(PE) in terms of Articles 5 of the India Singapore Treaty (TheTreaty' or the 'DTAA'). We may also record the following natureof the transactionundertakenbetweenthe assesseeand CFSA, as foundby theTribunalin the followingterms: "The purchase of BE's on a 'without recourse' basis impliesthat: The appellantsells the BE's to CFSA, typically, on'withoutrecourse'basis i.e. CFSA purchasesthe Beson its own behalf. CFSA collects the payment from the sale/settlementfthe BE on its own behalf,and not on behalf of theIndian Companies. CFSA has no right to proceed against the appellantincase of a default by the foreignbuyer. Essentialactivitiesinvolvedintheaforesaidbillsdiscountingmay also be summarizedas under: A contractisenteredintobetweentheappellant(seller)andbuyer(anon-resident)for exportofgoods, and invoiced accordingly; The appellantdrawnBE on the non-resident,buyerwhich usually has a maturityperiod of 6 months; Above BE is then sold by the appellantto CFSA at adiscount,whoimmediatelythereafter,remitthediscountedvalue of the BE (i.e.maturityvaluelesdiscount)to the appellant. In fact, this is not a case where payment is made bythe resident(i.e. the appellant)to a non-resident(i.e. CFSA). Thenon-residentbuyerwouldmakethepaymenttowardsthe settlementof the bills to CFSA outsideIndia.In the alternative,CFSA may furthersell theBE toanotherparty(the"Newowner")attheprevailingmarketprice;in sucha casepaymentwould be made by the non-residentbuyer of the newowner of the BE." 9.On the aforesaidfacts, it was concludedby the CIT (A) as wellastheTribunalthatthediscountingchargespaidby theassesseeis not an interestas neitherany money is borrowednor any debt is incurred.The expression'interest'is definedunder Section 2(28A) of the Act, which reads as under: "Interest"means interestpayable in any manner in respectof anymoneysborrowedor debtincurred(includingadeposit,claimor othersimilarrightor obligation)andincludesany servicefee or other charge in respectof themoneysborrowedor debitincurredor in respectof anycredit facility which has not been utilised." 9.On the aforesaidfacts, it was concludedby the CIT (A) as wellastheTribunalthatthediscountingchargespaidby theassesseeis not an interestas neitherany money is borrowednor any debt is incurred.The expression'interest'is definedunder Section 2(28A) of the Act, which reads as under: "Interest"means interestpayable in any manner in respectof anymoneysborrowedor debtincurred(includingadeposit,claimor othersimilarrightor obligation)andincludesany servicefee or other charge in respectof themoneysborrowedor debitincurredor in respectof anycredit facility which has not been utilised." 10.It is clearfromtheabovethatbeforeanyamountpaidisconstruedas interest,it has to be establishedthat the same ispayable in respect of any money borrowed or debt incurred.Inthe present case, on the aforesaidfacts appearingon record, inour opinion, the Tribunalrightly held that the discount chargespaidwerenotin respectof anydebtincurredormoneyborrowed.Instead,the assesseehad merelydiscountedthe ITA Nos.331/2011& 204 of 2011 sale consideration respectively on sale of goods.discussionof the Tribunalin this behalf is relevant: "9.Theword"interest"isdifferentlydefinedunderInterest-taxAct. As per Section2(7) of Interest-taxAct,"interest"meansintereston loans and advancesmade inIndia and includes-(a)commitmentchargeson unutilizedportion of any credit sanctioned for being availed of in Indiaand (b) discount on promissory notes and bill of exchangedrawnor madein India.Thuswherethelegislaturewasconsciousof thefactthateventhediscountofbill ofexchangeis to be included within the definition of interest,the same was basically so provided for. However,under thescheme of IT Act, the word "interest"defined under Section2(28A)doesnotincludethediscountingchargesondiscountingof bill of exchange.Though the Circular No. 65was renderedin relationto deductionof tax under Section194A, in respect of payment to a resident,the same will berelevanteven for the purposeof consideringwhether thediscount should be treated as interest or not. The CBDT hasopined that where the supplier of goods makes over theusance bill/hundi to his bank which discounts the same andcreditsthenetamounttothesupplier'saccountstraightawaywithout waiting for realizationof the bill ondue date, the propertyin the usance bill/hundi passes on tothebankandtheeventualcollectiononduedateisareceipt by the bank on its own behalf and not on behalf ofthe supplier.For such cases of immediatediscountingthenet paymentmade by the bank to the supplieris in thenatureof a pricepaid for the bill. Suchpaymentcannottechnicallybe held as including any interestand therefore,no tax need be deductedat source from such paymentbythe bank. The decisionrelied by the AO in the case of VijayShip Breaking Corpn. (supra)has beenreversedby theHon'bleSupremeCourt as reportedin the caseof VijayShip Breaking Corpn. v. CIT (2008)219 CTR 639 (SC):(2008)14 DTR (SC) 74. The Hon'ble SupremeCourt heldthatusanceinterestpayableoutsideIndiabyanundertakingengagedin the businessof shipbreakingisexempt from paymentof income-taxby virtueof Expln. 2addedtoSection10(15)(iv)(c)withretrospectiveeffectfrom 1st April, 1962 and hence the assesseewas not liableto deduct tax at sourceunder Section195 of the Act, Thediscountingchargesare not in the natureof interestpaidbytheassessee.Ratherafterdeductingdiscounttheassesseereceivednetamountof thebillofexchange accepted by the purchaser. CFSA, not having any PE inIndia, is not liable to tax in respect of such discount earnedby it and hence the assessee is not under obligation todeducttaxatsourceunderSection195oftheAct.Accordingly, the same amount cannot be disallowed byinvoking Section 40(a)(i) of the Act." 11.We are in agreement with the aforesaid discussion on the legalaspect.It may be pointed out that the CBDT has issued oneCircular No.65 way back on 02.09.1971clarifying the positionin respect of income by way of interest under Section 194 readwith Section 197(1) and (2) of the Act as under: accepted by the purchaser. CFSA, not having any PE inIndia, is not liable to tax in respect of such discount earnedby it and hence the assessee is not under obligation todeducttaxatsourceunderSection195oftheAct.Accordingly, the same amount cannot be disallowed byinvoking Section 40(a)(i) of the Act." 11.We are in agreement with the aforesaid discussion on the legalaspect.It may be pointed out that the CBDT has issued oneCircular No.65 way back on 02.09.1971clarifying the positionin respect of income by way of interest under Section 194 readwith Section 197(1) and (2) of the Act as under: "1Where the supplier of goods makes over the usancebill/hundi to his bank which discounts the same and creditsthenetamounttothesupplier'saccountstraightawaywithout waiting for realization of the bill on due date, theproperty in the usance bill/hundi passes on to the bank andthe eventualcollectionon due date is a receiptby the bankon its own behalf and not on behalf of the supplier.Forsuchcasesofimmediatediscountingthenetpaymentmade by the bank to the supplier is in the nature of a pricepaid for the bill.Such a payment cannot technically beheld as includinginterestand thereforeno taxneedbedeductedatsourcefromsuchpaymentsbythebank.Further,thebuyer neednot deductany tax from thepaymentmade by him on due date to the bank in respectof such discountedbill inasmuchas thesepaymentsare toa bank or a banking co-operativesociety, conformingto theexemptiongrantedbysection194A(3)(iii)(a)oftheIncome-taxAct, 1961. 2.Ontheotherhandwherethereisnoimmediatediscountingand the bank merely acting as agent receiveson the expiry of the period the payment for the bill fromthe buyer on behalf of the supplier and creditsit to himaccordingly,thebankreceivesinterestonbehalfof thesupplierand the instructionscontained,in Board's above-mentionedCircular7"^ November,1970, would apply andthe buyer will have to deduct the tax from the interest." 12.There is another Circular No.674 dated 22.03.1993directlyonthe point as it relates to TDS on interest other than "interest onsecurities".In this Circular, the Board has clarified the issue in the followingmanner: "3.A questionhas been recently raised as to whetherthe differencebetweenthe issueprice and facevalueoftheseinstrumentsshouldbe treatedas 'interest'in whichcase it wouldbe liable to deductionof tax at source undersection194A of the Income-taxAct, 1961, or, it shouldbetreatedas 'discount'whichis not liable to deductionof taxat source. 4.It is clarifiedfor the informationof all concernedthatthe differencebetween the issue price and the face value ofthe CommercialPapersand the Certificatesof Depositsistobe treatedas 'discountallowed'andnotas 'interestpaid'.Hence, the provisions of the Income-taxAct relatingto deductionof tax at source are not applicablein the caseof transactionsin these two instruments." 13.Having regard to the aforesaid,we are of the opinion that nosubstantialquestionof law arises, as the matter stands settledby the dictaof the SupremeCourt as well as clarificationofCBDT itself. 14.These appeals are accordingly dismissed. JUDGE FEBRUARY 17, 2011pmc (M.L. MEHTA)JUDGE ITA Nos.331/2011& 204 of 2011 Page 9 of 9