2011 (2) TMI 209 - HC - Income Tax

Court rules discounting charges not interest, assessee not required to deduct tax at source

Commissioner of Income-tax Versus Cargill Global Trading (P.) Ltd.

Commissioner of Income-tax Versus Cargill Global Trading (P.) Ltd. - [2011] 335 ITR 94 (Del.) Issues:Assessment of discounting charges as interest under section 2(28A) of the Income-tax Act, disallowance under section 40(a)(i) of the Act, applicability of tax deduction at source under section 195 of the Act.Analysis:The case involved two appeals by the revenue against the same assessee for assessment years 2004-05 and 2005-06. The primary issue was the treatment of discounting charges paid by the assessee to its associate concern, CFSA, as interest under section 2(28A) of the Income-tax Act. The Assessing Officer disallowed the claimed amount of Rs. 3.97 crores under section 40(a)(i) for failure to deduct tax at source under section 195 of the Act. However, the CIT(A) and the Tribunal held that the discount charges were not interest, leading to the allowance of the expenditure.The Tribunal found that the discounting charges were not in the nature of interest but rather a part of the sale consideration on goods sold by the assessee. CFSA, being a company incorporated in Singapore without a permanent establishment in India, was not liable to tax on the discount earned. Therefore, the assessee was not obligated to deduct tax at source under section 195 of the Act. The Tribunal's decision was based on the fact that the discounting charges did not involve any borrowing of money or incurring of debt by the assessee.The legal aspect of the case was further supported by Circular No. 65 issued by the CBDT, which clarified that immediate discounting of bills does not constitute interest and therefore does not require tax deduction at source. Additionally, Circular No. 674 specified that the difference between the issue price and face value of certain instruments should be treated as discount, not interest, exempting them from tax deduction at source. The Supreme Court's precedent and CBDT's own clarifications further solidified the position that no substantial question of law arose in the case.In conclusion, the High Court dismissed the appeals, affirming the decisions of the CIT(A) and the Tribunal. The judgment emphasized that the discounting charges paid by the assessee to CFSA were not to be treated as interest under the Income-tax Act, and the assessee was not required to deduct tax at source on those payments.