Background and facts
The Taxpayer is in the export business. On exports made by the Taxpayer on credit terms, the Taxpayer draws Bill of Exchange (BEs) on the buyers for the sale value, with a maturity period of about six months. The Taxpayer discounts the BEs with its non-resident associate concern, a company that is a tax resident of Singapore (SingCo), on ‘without recourse’ basis. SingCo is engaged in the business of underwriting, acquiring, owning, selling etc., of securities, negotiable instruments, commercial papers etc., and has no presence in India.
On account of discounting on ‘without recourse’, SingCo purchases BEs on its own behalf and collects payment for itself on the due date and has no right to proceed against the Taxpayer even if there is default by the foreign buyer.
The difference between par value of BEs and the amount at which BEs are sold to SingCo represents discounting charges. Such discounting charges were claimed as tax deductible expenditure by the Taxpayer.
The term ‘interest’ is defined in the Indian Tax Laws (ITL), in a broad manner, to include interest payable in any manner in respect of any moneys borrowed or debt incurred. Under the ITL, ‘interest’ also includes any service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.
The characterization of payment as ‘interest’ attracts withholding obligation for the Taxpayer in terms of the provision of the ITL as also the provisions of the India-Singapore Double Taxation Avoidance Agreement (DTAA). Failure to withhold tax attracts disallowance in computation of business income.
The Taxpayer did not withhold tax on discounting charges on the basis that it did not represent ‘interest’, either under the ITL or under the DTAA.
However, the Tax Authority held that the discounting charges were in the nature of ‘interest’ and disallowed the claim by holding that the Taxpayer failed to withhold tax.
On appeal by the Taxpayer, the first appellate authority and the Income Tax Appellate Tribunal (ITAT) accepted the Taxpayer’s contentions and deleted the disallowance. Aggrieved by the ITAT’s ruling, the Tax Authority preferred an appeal before the HC. On Appeal HC has held that as follows:-
