2015 (3) TMI 545 - AT - Income Tax

Assessee required to deduct TDS on usance charges paid on import purchases as interest

Assistant Commissioner of Income-tax, Circle-1, Margao Versus Bhavani Enterprises

The Tribunal allowed the Revenue's appeal, holding that the Assessee was obligated to deduct TDS on usance charges paid on import purchases as they were ... Non deduction of TDS on usance charges paid on import - disallowance u/s 40(a)(i) - CIT(A) deleted addition - whether usance charges are in the nature of interest as defined in section 2(28A)? - Held that:- Hon'ble Supreme Court in Vijay Ship Breaking Corpn. & Ors. Versus Commnr. of Income Tax, Ahmedabad [2008 (10) TMI 6 - SUPREME COURT ]has reversed the decision of Hon'ble Gujarat High Court [2003 (3) TMI 91 - GUJARAT High Court] not on on merit but this decision has been reversed as the Assessee was engaged in ship breaking business and the Assessee had imported the ship for breaking in respect of which the Assessee had to incur the usance charges. The Hon'ble Gujarat High Court has taken the view that the usance charges are interest within the provisions of Sec. 2(28A) of the Income Tax Act and has accrued in India, therefore Sec. 195 was clearly applicable and Assessee has committed default by not deducting TDS. When the matter went before the Hon'ble Supreme Court, Explanation (2) was inserted u/s 10(15)(iv)(c) by the Taxation Laws (Amendment) Act, 2003 with retrospective effect from 1.4.1962 explaining that it is apparent that this Explanation is applicable only in a case where an undertaking is engaged in business of ship breaking and usance charges are payable outside India by that undertaking in respect of purchase of a ship from outside India. The decision of the Hon'ble Gujarat High Court has impliedly been approved by the Hon'ble Supreme Court in respect of Assessees who are engaged in the business of ship breaking. We, therefore, set aside the order of CIT(A) and allow the appeal of the Revenue. - Decided in favour of revenue. Issues Involved:1. Whether the Assessee was bound to deduct TDS under section 195(1) in respect of usance charges paid on import.2. Whether the usance charges paid by the Assessee are in the nature of interest as defined in section 2(28A).Issue-wise Detailed Analysis:1. Obligation to Deduct TDS under Section 195(1) on Usance Charges:The Revenue contended that the Assessee, engaged in the manufacture of wooden doors, frames, furniture, and trading in timber, paid usance charges of Rs. 14,29,953/- on import purchases without deducting TDS as mandated under Section 195(1). The Assessing Officer (AO) disallowed the sum under Section 40(a)(i) due to non-deduction of TDS, asserting that the usance charges paid to the non-resident constituted income arising to the non-resident within the meaning of Section 5(2)(b) read with Section 9(1)(v)(b). The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, holding that TDS was not deductible on usance charges as they were not in the nature of interest and the recipient's income was not taxable in India.2. Nature of Usance Charges as Interest under Section 2(28A):The CIT(A) concluded that the usance charges were merely an increased purchase price paid to foreign sellers, not interest. This conclusion was challenged by the Revenue, which relied on the Supreme Court's decision in Vijay Ship Breaking Corpn. v. CIT [2009] 314 ITR 309. The Supreme Court had determined that usance interest paid for the purchase of a vessel for ship breaking was not subject to TDS under Section 195(1) due to the insertion of Explanation 2 to Section 10(15)(iv)(c), which exempted such interest from income tax if paid in respect of ship breaking activity.However, the Tribunal noted that the nature of the Assessee's business was not ship breaking, making Explanation 2 to Section 10(15)(iv)(c) inapplicable. The Tribunal referred to the Gujarat High Court's decision in Vijay Ship Breaking Corpn. [2003] 261 ITR 113, which held that usance interest was indeed interest within the meaning of Section 2(28A) and was chargeable to tax, thus requiring TDS deduction under Section 195(1). The High Court had clarified that usance interest was not part of the purchase price but constituted interest on a debt incurred, making the Assessee liable to deduct tax at source.The Tribunal emphasized that the Supreme Court's decision did not reverse the Gujarat High Court's findings on the nature of usance charges as interest, except for cases involving ship breaking due to the specific exemption provided by Explanation 2 to Section 10(15)(iv)(c). Consequently, the Tribunal concluded that the Assessee, not being engaged in ship breaking, was liable to deduct TDS on usance charges as they were considered interest under Section 2(28A).Conclusion:The Tribunal set aside the CIT(A)'s order and allowed the Revenue's appeal, holding that the Assessee was liable to deduct TDS on usance charges paid on import purchases, as these charges were in the nature of interest under Section 2(28A). The appeal filed by the Revenue was allowed, reaffirming the obligation to deduct TDS under Section 195(1).Order Pronounced:The order was pronounced in the open court on 28.08.2014.