Applicability of TDS on the interest for delayed/late payment of consideration towards purchase of goods / services

The TDS applicability on payment of interest would require examination under section 194A of the Act (dealing with the TDS on interest payments, other than interest on securities). The relevant provisions of section 194A of the Act are reproduced as follows:

“Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. “

Basis the above provisions, an income by way of ‘interest’ would be subjected to TDS. It is however necessary to examine the provisions of section 2(28A) of the Act, which provides for the definition of “interest” in order to be covered by the provisions of section 194A of the Act. Section 2(28A) of the Act reads as follows:

“Interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized”

Thus, any amount paid could be treated as interest, if it is in respect of any money borrowed or debt incurred. In other words, in order to fall within the above definition of interest, an amount has to be in respect of moneys borrowed or debt incurred.

As can be seen from the definition of ‘interest’ in section 2(28A) of the Act, the payment is considered as “interest” if it is arising as a result of borrowings, deposit, claim or similar right or obligation or any credit facility. In this case, there is no borrowing of monies in case of purchase of goods. The aspect that requires consideration is whether the penal interest is payable in respect of ‘debt incurred’. For this, following arguments can be taken to state that the payment is not for ‘debt incurred’ and accordingly, not subject to TDS under section 194A.

The meaning cannot be expanded to include interest payment which is contingent on occurrence of a specific event, viz, delay in payment of purchase cost to the vendor. Further, as per the principle of Ejusdem Generis, the meaning of the words ‘debt incurred’ would be interpreted from the word ‘borrowings’, i.e. the word ‘debt incurred’ has to be read with the word ‘borrowings’ and embraces the case where there is borrowing or acceptance of cash deposit and security in the form of money, government securities, bonds and debentures, etc. In other words, ‘debt incurred’ would mean where the transaction is of money lent or advanced. Per the facts, the interest paid/payable does not germinate from any borrowing or credit facility and is not connected with money lending. The claim was for purchase of goods and not towards money being advanced by the other party. Thus, it may be contended that the claim towards unpaid purchase price would not tantamount to be ‘debt incurred’.

The amount paid was in the nature of compensation expenses for the delay in payment of purchase price and would be treated as damages or compensation and not interest as envisioned under section 2(28A) of the Act. The amount paid was towards the trading liability created pursuant to purchase of goods. Further, even if the amount payable is determined on pro rata temporis, it constitutes not so much income from capital as a special form of compensation for the loss suffered by the creditor through the debtor’s delay in meeting its obligation.[1] Thus, the amount paid was purely compensatory in nature towards delayed payment, i.e. would be treated as damages or penalty and not interest on borrowings or debt claim.

Reference may be made to the GST implications (although not binding upon the income tax authorities) on interest or late fee or penalty for delayed payment of any consideration for any supply. As per Section 15(1) of Central Goods and Services Act, 2017 (CGST Act), value of goods and services or both shall be the transaction value which is actually paid or payable for the supply of goods or services. For the purpose of determining the ‘transaction value’, it has been further provided under sub-section (2)(d) that the interest or late fee or penalty for delayed payment of any consideration for any supply would be included. Thus, in the impugned case as well, it can be contended that the interest for delayed payment of purchase price would partake the character of the original transaction value, i.e. purchase price and would not be treated as ‘interest’. Indian entity/ seller have been levying GST, while raising invoice for such late payment charges. Accordingly, it can be contended that such payment would be said to be included as purchase price only.

This analysis can be supported by the decision of the Hon’ble Bombay High Court in the case of Vidyut Corporation[3], which dealt with the nature and characterization of such interest income. It was held in the said case that the payment of interest on account of delay in payment of the sale price of the goods, supplied by the undertaking, partakes of the nature and character of the sale consideration and eligible for deduction under section 80IB of the Act. Similarly, on the same analogy, the interest payable by the purchaser of goods on account of delay in payment of the purchase price thereof, will partake the same nature and character, as purchase consideration. Thus, once the interest paid is not covered by the definition provided under section 2(28A) of the Act, the TDS provisions would not be applicable.

Additionally, reference is also invited to the following direct decisions[4], wherein it was held that interest on delayed payment is compensatory in nature and does not get covered under the definition of interest as provided under section 2(28A) of the Act:

a) ITO v. Parag Mahasukhlal Shah [2011] 46 SOT 302 (Ahmedabad Tribunal)

It was held in the said case that when a payment is compensatory in nature and not related to any deposit/debt/loan, then such a payment is out of ambits of provisions of section 194A.

b) Shree Venkatesh Paper Agencies (Hyd.) (Pvt.) Ltd. v. DCIT [2013] 55 SOT 332 (Hyderabad Tribunal)

It was held in the said case that where a payment has direct link and immediate nexus with the trading liability being connected with the delayed purchase payments, it will not fall within the category of interest as defined in section 2(28A) of the Act.

c) ACIT v. Trimex Industries (P) Ltd. (ITA No. 422 of 2013) (Chennai Tribunal)- rendered on October 29, 2015

It was held in this case, that the amount to be paid is not a question of money borrowed, and interest thereon, but a payment made for purchase and a compensatory charge for the period of credit utilized for payment of the amount due.

Considering the above legal analysis and jurisprudence, it can be contended that interest paid/payable for delay in purchase price partakes the nature of purchase price and not ‘interest’ in the sense defined under section 2(28A) of the Act. Once the payment is not within the meaning as defined in section 2(28A) of the Act, TDS provision under section 194A will have no application on payment of such interest. Having said this, there may be diverse decision[5], but there is no decision of the jurisdictional High Court or the Supreme Court on the subject and therefore, the lower tax authorities may dispute the characterization of the payment.

Conclusion: It can be contended that no TDS is required to be deducted under section 194A on interest payable on delayed payment of unpaid purchase price, which is supported by decisions specifically stated above.

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June 2021