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

[Piyush Choudhary]

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 provisions may not arise where liability remains notional and uncredited to the supplier
Deduction of tax at source under section 194A was considered for interest on delayed payments to MSME-registered suppliers where the interest was only recognised as a book provision and not actually demanded, credited, or paid. The discussion noted that TDS liability generally depends on an ascertained enforceable liability credited to an identifiable payee rather than a merely notional or contingent provision. Where no demand is raised, no final liability is determined, no credit is made to the supplier's account, and the amount is carried only as an accounting provision, section 194A may not be mandatorily triggered.