Clarification regarding applicability of provisions of section 194A to commercial papers and certificates of deposits

1. The Certificates of Deposits (CDs) and the Commercial Papers (CPs) are money-market related instruments which are traded in the secondary market. These are negotiable instruments in the nature of usance promissory notes which are issued and regulated in accordance with the instructions/guidelines issued by the Reserve Bank of India from time to time.

2. While, in terms of the Reserve Bank’s instructions pertaining to Certificates of Deposits and Commercial Papers, the conditions regarding their minimum face value, period of transferability/maturity, ceiling on the amount of issue, etc., differ, one aspect is common to both these instruments, namely, that they are issued at a discount to their face value and are freely transferable by endorsement and delivery. Thus, the issue price of these instruments is less than their face value.

3. A question has been recently raised as to whether the differ­ence between the issue price and face value of these instruments should be treated as ‘interest’ in which case it would be liable to deduction of tax at source under section 194A of the Income-tax Act, 1961, or, it should be treated as ‘discount’ which is not liable to deduction of tax at source.

4. It is clarified for the information of all concerned that the difference between the issue price and the face value of the Commercial Papers and the Certificates of Deposits is to be treated as ‘discount allowed’ and not as ‘interest paid’. Hence, the provisions of the Income-tax Act relating to deduction to tax at source are not applicable in the case of transactions in these two instruments.

Circular : No. 647, dated 22-3-1993.

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