2015 (1) TMI 356 - AT - Income Tax

Tribunal upholds Revenue's appeal, disallowing discount on sales under Income Tax Act

The Tribunal allowed the Revenue's appeal, reversing the CIT(A) decision and upholding the Assessing Officer's addition for disallowance of discount on ... Deductibility of tax at source under section 195 read with section 40(a)(i) - Characterisation of discounts as interest or taxable receipt - Source of income in export transactions - income taxable in India where export and adjustments made in India - Inapplicability of precedents on section 194H/194C where liability invoked under section 195Deductibility of tax at source under section 195 read with section 40(a)(i) - Characterisation of discounts as interest or taxable receipt - Source of income in export transactions - income taxable in India where export and adjustments made in India - Whether the discount allowed to foreign buyers against advance payments constituted a payment chargeable to tax in India attracting deduction of tax at source under section 195 and, in absence of such deduction, whether the expenditure was to be disallowed under section 40(a)(i). - HELD THAT: - The Tribunal examined the contract and invoices and found no contractual stipulation obliging the assessee to grant pre payment discount, but observed that the assessee nonetheless allowed such discounts by adjusting invoices in India after receiving advances against bank guarantee. The Tribunal held that the benefit given to the buyer in respect of advance payment is, in substance, compensatory and akin to interest, not merely a reduction in price, and that mere nomenclature as 'discount' does not alter its character. Relying on the principle that income arising from export transactions and adjustments effected in India has its source in India, the Tribunal rejected reliance on authorities concerning section 194H/194C which were factually distinguishable and inapplicable to deductions under section 195. Applying these conclusions, the Tribunal held the amounts were chargeable to tax in India and the assessee was obliged to deduct tax at source under section 195; consequently the assessing officer's disallowance under section 40(a)(i) was justified. [Paras 6, 7]The Tribunal allowed the Revenue's appeal, reversed the CIT(A)'s order, held that the pre payment discounts were in substance interest/chargeable receipts taxable in India, and that TDS was deductible under section 195, thereby justifying the disallowance under section 40(a)(i).Final Conclusion: Appeal allowed; the Tribunal restored the assessing officer's disallowance, holding that discounts allowed against advance payments were tantamount to taxable receipts/interest arising in India and required deduction of tax at source under section 195, with consequences under section 40(a)(i). Issues: Appeal against deletion of addition for disallowance of discount on sales under sections 195 and 40(a)(i) of the Income Tax Act, 1961 for the assessment year 2008-2009.Analysis:Issue 1: The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 59,36,606 made by the AO for disallowance of discount on sales under sections 195 and 40(a)(i) of the Income Tax Act. The Revenue argued that TDS was deductible under section 195(1) as the discount was considered interest. The AR of the assessee supported the CIT(A) order, stating that no TDS was required as there was no payment of interest or commission. The Tribunal found that the contract did not mention any obligation for the assessee to provide a discount to buyers. The Tribunal observed that the discount allowed was in consideration of receiving advance payment, akin to interest, and hence, TDS was deductible under section 195. The Tribunal reversed the CIT(A) order and upheld the Assessing Officer's decision.Issue 2: The AR of the assessee cited various judgments to support their case, including Addl. CIT vs. Pearl Bottling (P) Ltd., G.E. India Technology Centre (P) Ltd. vs. CIT, Foster's India (P) Ltd. vs. Income Tax Officer, CIT vs. Singapore Airlines Ltd., Income Tax Officer vs. Mother Dairy Food Processing Ltd., NMDC Ltd. vs. ACIT (TDS), and a decision of I.T.A.T. Allahabad Bench in the case of Ankur Ydyog Ltd. The Tribunal analyzed each judgment and concluded that none of them were applicable to the present case. It was noted that the benefit allowed by the assessee to buyers in the form of discount was akin to interest due to advance payment, making TDS deductible under section 195.Conclusion: The Tribunal allowed the Revenue's appeal, stating that the disallowance made by the Assessing Officer was justified as TDS was deductible under section 195 of the Income Tax Act. The Tribunal reversed the CIT(A) order and restored that of the Assessing Officer.