Query on applicability of TDS u/s 194A on MSME interest (not actually paid)

[NYAYASETU LEGAL ASSOCIATES LLP]

Hi Folks,

We procure goods from MSME-registered suppliers and, in certain cases, payments are delayed beyond the prescribed 45 days.

As per MSME Act provisions, we recognize interest liability in our books for such delays. Based on this accounting recognition, we are also deducting TDS under Section 194A on the accrued interest.

However, practically, such interest is neither demanded by the supplier nor actually paid.

In this context, I seek expert views on the following:

• Whether TDS u/s 194A is applicable on interest liability recognized under the MSMED Act, even when the same is not actually paid or credited to the supplier's account?
• Does mere book provision for MSME interest trigger TDS liability, especially considering that such interest is often contingent and not contractually enforced?
• Are there any judicial precedents or departmental clarifications on this matter?

Would appreciate insights from professionals who have dealt with similar situations.

AI Summary

TDS on MSME interest provision questions whether book accrual alone triggers withholding on unpaid delayed-payment interest. Applicability of TDS under section 194A to interest liability recognised in the books for delayed payments to MSME-registered suppliers was questioned where the interest has not actually been demanded, paid, or credited to the supplier's account. The issue is whether a mere book provision for interest under the MSME framework, made on account of delayed payment beyond the prescribed period, creates a deduction obligation for tax at source even when the amount remains unremitted and may be treated as contingent in practice. The query also seeks clarity on whether such recognised MSME interest can be subjected to TDS at the stage of accounting entry alone, and whether any judicial precedents or departmental clarifications address the tax withholding treatment of accrued but unpaid interest on delayed supplier payments.