2015 (1) TMI 356 - AT - Income Tax

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

Dy. CIT., Central Circle-2, Kanpur Versus M/s. Kothari Food & Fragrances

The Tribunal allowed the Revenue's appeal, reversing the CIT(A) decision and upholding the Assessing Officer's addition for disallowance of discount on ... TDS u/s 195 - Discount allowed on sales in the nature of payment of interest or not – Invocation of section 195 r.w section 40(a)(ia) or not – payment to non-residents towards advance payment – Held that:- As per purchase contract dated 16th May, 2006, it has been specified that the seller shall cause the issuance of a banker's guarantee or SBLC by Punjab National Bank, Kanpur (seller's bank) for an amount equal to the provisional price plus interest in the form acceptable to buyer that will be informed in separate message - within two business days from the date buyer's bank receives the guarantee in format acceptable to buyer's bank, buyer shall pay to seller the prepayment amount - The provisional price as per this contract has been fixed at (JPY)24,200 lac - there is no mention in the agreement i.e. the purchase contract that any prepayment discount will be allowed by the assessee. The payment was to be made by the buyer to the tune of provisional price as per the agreement after furnishing of bank guarantee by the assessee seller but as per the invoice, it is seen that in all these invoices, pre-payment discount were allowed by the assessee and these invoices are of the current year i.e. April, 2007 and the assessee asked the buyer to make payment of the balance amount against the invoiced price after adjusting the advance received by the assessee and pre-payment discount - Asking the buyer to pay lesser amount after adjusting discount or making payment of discount to the buyer is equivalent because in both the cases, the buyer receives the benefit - the benefit allowed by the assessee to its buyers under the name of discount is in fact in the nature of interest because the same is in consideration of receiving advance payment - on receiving advance payment, one may compensate the maker of advance payment by way of allowing interest or the same benefit can be given the name of discount but merely because a different nomenclature has been given, it does not change its character - TDS was deductible u/s 195 of the Act and therefore, the disallowance made by the AO is justified – thus, the order of the CIT(A) is set aside – Decided in favour of revenue. 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.