Brief Facts of the Case and Question of Law
♠ The assessee is a private limited company engaged in the business of manufacturing and trading in gold, diamond jewellery and bullion. For the relevant year, return of income was filed on 07.03.2010 declaring an income of Rs.2,79,89,810/-.
♠ The company had availed factoring facility from M/s. Global Trade Finance Limited (hereinafter referred to GTF) for which a payment of Rs.93,68,870/- was made to the former debiting the same to Profit and Loss Account under the head Factoring/Discounting charges.
♠ The Assessing Officer made an addition of Rs.93,68,870/- on account of factoring/discounting charges, treating the same as Interest paid. The AO was of the view that the provisions of section 40(a)(ia) of the Act are invoked as no tax at source was deducted on the same, therefore assessing the total income at Rs.3,73,58,680/-, the same being upheld by CIT(A), New Delhi.
Question of Law:
Whether factoring charges on sale can be termed as “Interest charges” within the purview of Section 2(28A) of the Act and whether TDS is deductible on the same under section 194A of the Act.
Contention of the Revenue:
♠ The AO has elaborated the concept factoring and has established the facts with the help of agreement of Assessee with GTF (a Non Banking Financial Institution). The facts are mentioned below:
♠ As per the agreement, the GTF had issued and treated prepayments of 80% of the invoices as “borrowings”.
♠ If the appellant committed default in “repayment of loan or payment of interest” on the due dates, it would be declared as a defaulter to RBI and CIBIL. This categorical condition further confirmed the fact that financing by GTF was in the nature of loan on which it was charging interest. This loan was given by way of prepayment of 80% of the invoice.
♠ “Interest rates” mentioned in the agreement, were based on the current market conditions and were subject to change at the sole discretion of GTF. It further said that the “interest rates are applicable on the facilities”, provided by GTF.
♠ Also the GTF was charging discount charges @ 13% p.a. on prepayments, which was treated as Interest charges by AO.
♠ Factoring charges were paid in respect of an obligation incurred in relation to the money borrowed through bills, thereby treating the charges as interest and liable for tax deduction at source under Section 194A.
Contention of the Assessee:
♠ The Assessee relied on the judgment of the Hon’ble Calcutta High Court in the case of CIT vs. MKJ Enterprises reported in GA No.1927 of 2014 (Kol.), wherein it is held that interest on unpaid purchase price is not to be treated as interest on loan. Before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred. According to Hon’ble Calcutta High Court, discounting charges of bill of exchange or factoring charges of sale could not be termed as interest.
♠ The Assessee also relied on the judgment of Hon’ble Allahabad High Court in the case of Vector Shipping Services Pvt. Ltd. reported in 357 ITR 642 (All.) for the proposition that amounts are not outstanding as payable at the end of the year and, therefore, no disallowance u/s 40(a)(ia) could be made.
Held by the Tribunal:
♠ The Tribunal upheld the contention of the Assessee and also relied upon the judgment of the Hon’ble Calcutta High Court in the case of CIT vs. MKJ Enterprises which held that factoring charges were not interest and as such, provisions of TDS are not applicable.
♠ Hence the appeal filed by Assessee was allowed.