Usance interest which is directly related to the period for which purchase price was due, is ‘interest’ in terms of section 2(28A) and consequently, it is deemed to accrue or arise in India u/s.9(1)(v) of ITA.

Usance interest which is directly related to the period for which purchase price was due, is ‘interest’ in terms of section 2(28A) and consequently, it is deemed to accrue or arise in India u/s.9(1)(v) of ITA.

The taxpayer, an Indian company (ICO), purchased raw material from several non-resident suppliers under irrevocable LCs payable within 180 days from the date of bill of loading. ICO was required to pay usance interest for the period of credit and the supplier raised a separate invoice in respect of such usance interest. During the years under consideration, on the ground that the usance interest was in the nature of interest and it had accrued and arisen in India, the Tax Department held it to be chargeable to tax in India. Further, as ICO had not deducted tax on such usance interest, the claim for deduction of such interest was disallowed u/s.40(a)(i) of the Income-tax Act. The disallowance was upheld by the CIT(A). Before ITAT, ICO contended that:

• Interest within meaning of section 2(28A) of the Income-tax Act means interest payable in respect of moneys borrowed or debt incurred. Payment of interest for the time granted by non-resident supplier of raw material cannot be considered as payment in respect of money borrowed or debt incurred. Hence, such payment would not partake the character of interest as per section 2(28A) of the Income-tax Act.
• The finance charges were for delayed payment of raw material purchases and hence would partake the character of money paid for purchase price of raw material. Therefore, no tax is required to be deducted. In support, ICO relied on various decisions3.
• Reliance placed by the Tax Department on the Gujarat HC in the case of CIT v. Vijay Ship Breaking Corporation, (2003)4, where it was held that usance interest was not part of the purchase price, but was interest and the payer was required to deduct tax.

Held:

The ITAT rejected ICO’s contentions and held: Unlike certain cases cited by ICO, in ICO’s case, usance interest had no relation with the price of raw material purchased, but had direct relationship with the time when the payment became due. Hence, on facts, usance interest was in the nature of interest within the meaning of section 2(28A) of the Incometax Act. Consequently such interest would be deemed to have accrued or arisen in India u/s.9(1) (v)(b) of the Income-tax Act.