Interest – Before any amount paid is construed to be interest, it has to be established that the same is payable in respect of debt incurred – Discounting charges paid for getting the export bill discounted is not interest within the ambit of section 2(28A) – SLP dismissed.

In the assessment year 2004-05, the respondentassessee filed the income tax return declaring the income at 1.14 crore. During the assessment proceedings, the Assessing Office (AO) noticed that the assessee had paid a sum of Rs.3.97 crore to its associate concern, M/s. Cargil Financial Services Asia Pvt. Ltd. (CFSA), Singapore on account of discounting charges for getting the export sale bill discounted. The AO was of the view that the discounting charges were nothing but the interest within the ambit of section 2(28A) of the Income Tax Act (for brevity ‘the Act’). Since the assessee had not deducted tax at source u/s. 195 of the Act, he invoked the provisions of section 40(a)(i) of the Act, and disallowed the sum of Rs.3.97 crore claimed by the assessee u/s. 37(1) of the Act.

CIT(A) deleted the addition holding that the discount paid by the assessee to CFSA cannot be held to be interest and therefore, provisions of section 40(a)(i) of the Act would not apply. Accordingly, he allowed the expenditure of Rs.3.97 crore as claimed by the assessee.

The Revenue did not accept the aforesaid decision of the CIT(A) and therefore, challenged the same by filing the appeal before the Tribunal, which was unsuccessful as the Tribunal affirmed the order of the CIT(A). The Tribunal observed that discounting charges were not in the nature of interest paid by the assessee, rather the assessee had received net amount of bill of exchange accepted by the purchaser after deducting amount of discount. Since CFSA was having no permanent establishment in India, it was not liable to tax in respect of such amount earned by it and therefore, the assessee was not under an obligation to deduct tax at source u/s. 195 of the Act. Accordingly, the Tribunal held that the said discounting charges could not be disallowed by the AO by invoking section 40(a)(i) of the Act.

On an appeal by the Revenue, the Delhi High Court [ITXA No.331 of 2011 dated 17-2-2011] observed that before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred. According to the High Court, on the facts appearing on record, the Tribunal had rightly held that the discounting charges paid were not in respect of any debt incurred or money borrowed. Instead, the assessee had merely discounted the sale consideration received on sale of goods.

The High Court held that no substantial question of law arose, as the matter was already settled by the dicta of the Supreme Court in Vijay Ship Breaking Corporation v. CIT [(2008) 219 CTR 639 (sc)] as well as clarification of CBDT in Circular No. 674 dated 22-3-1993 itself.

The Supreme Court dismissed the Special Leave Petition filed by the revenue against the aforesaid order of the Delhi High Court.