By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Ss 40(a)(i), 195(1) – discount allowed by exporter to foreign buyer for pre-payment constitutes ‘credit’ in terms of section 195(1) and since tax was not withheld, the discount was disallowable u/s 40(a)(i).
Facts:
The taxpayer was an exporter of certain products. The products were exported to an overseas buyer on credit. The taxpayer offered discount to the buyer for making payment before the due date. The buyer was required to provide through its bank a guarantee or stand by letter of credit to the bank of the taxpayer for an amount equal to the provisional price and the interest. The contract did not mention pre-payment discount. However, in the invoice, the taxpayer allowed pre-payment discount and asked the buyer to pay the net amount after adjusting the advance payment from the invoice amount. Since the prepayment discount was adjusted in the invoice earlier from the contract price, effectively, the buyer paid the amount after deduction of pre-payment discount.
The AO held that credit of discount in the account of the foreign buyer of the taxpayer in its book of account was a ‘credit’, though not ‘payment’. Therefore, provisions of section 195(1) were attracted. Since the taxpayer had not withheld tax from such ‘credit’, the discount was disallowable in terms of section 40(a)(i) of the Act.
Held:
The Tribunal held as follows.
Whether payment of discount is made to the buyer or lesser amount is collected from the buyer (after adjusting the discount), the buyer receives the benefit. In Havells India Ltd. (ITA No 55/2012 and 57/2012), the Delhi High Court held that income in form of discount or interest is taxable in India and hence, ratio of decision of Supreme Court in GE India Technology Centre Pvt. Ltd. [2010] 327 ITR 456 (SC) was not applicable.
The pre-payment discount given by the taxpayer cannot be equated to quantity discount since quantity discount is reduction in sale price. The pre-payment discount was effectively in the nature of interest because it was in consideration of the taxpayer receiving advance payment and to compensate the buyer for making the payment in advance before the sale of goods. Mere nomenclature will not change its character.
Section 195 of the Act required the taxpayer to deduct tax from any sum paid to a non-resident which was chargeable under the Act.
The pre-payment discount allowed by the taxpayer was a ‘credit of income’ to the account of the buyer. As the taxpayer had not withheld the tax on the credit of such discount, the discount amount was disallowable u/s. 40(a) (i) of the Act.
