Facts:- The taxpayer, an Indian company gets its sale bills discounted from its Singapore associate companies. Singapore companies charge discounting charges for undertaking these transactions.
Issues before Tribunal:- Whether the discounting charges are to be disallowed under section 40(a)(ia) since they are in the nature of „interest? and tax is not withheld by the Indian taxpayer?
Contentions of the revenue:- Discounting charges are covered by the definition of interest under section 2(28A) of the Income Tax Act (ITA). In absence of withholding of tax by the Indian payer, the said payments are not allowable as a deductible expenditure under the ITA.
Contentions of the taxpayer:- Discounting charges are not in the nature of interest under section 2(28A) of ITA or under the India-Singapore tax treaty. Hence, no tax is deductible in India in the absence of Singapore Company?s permanent establishment (PE) in India.
Observations and ruling of the Tribunal
- Interest means sum payable in any manner in respect of any money borrowed or debt incurred. The bill discounting is a process in which the sale consideration receivable on sale of goods is discounted, which is not a case of debt incurred or money borrowed.
- The Interest Tax Act, 1974 specifically includes discounting charges in the definition of interest, however interest defined under ITA does not include discounting charges. Wherever the legislature was conscious of the fact that even the discount of bills of exchange is to be included within the definition of interest, the same was basically so provided for, hence the omission of these words in the definition provided under the ITA, enumerates the intention of the legislator to keep the same out of the ambit of „interest? under the ITA. The same rationale is also laid down in the Circular no. 652 issued by Central Board of Direct Taxes in relation to section 1 94A of ITA.
- Therefore, discounting charges are not in the nature of interest. Hence in the absence of Singapore company?s permanent establishment in India, the Indian payer is not under obligation to deduct tax at source under the ITA. Accordingly, the same amount cannot be disallowed by invoking section 40(a)(i) of the ITA.
Source: DCIT Vs. Cargill Global Trading (I) (P) Limited (ITA No. 519/Del/2010).