TaxTMI 
TaxTMI 
2002 (4) TMI 252
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....d that as per MoA, assessee was making interest payments to non-resident parties on account of credit facility availed by it for the purchase of ships. Therefore the assessee was querried as follows:-- (a) Whether any tax at source has been deducted on interest payments; and (b) If not, why the provisions of section 40(a)(i) should not be invoked and why the entire interest paid outside India should not be disallowed. Detailed submissions were made on behalf of the assessee, the gist of which is as follows: (1) No interest has been paid to any party; (2) Where interest paid is part of purchase price, the same cannot be regarded as interest; (3) Reliance on the decisions in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146, CIT v. Saurashtra Cement & Chemical Industries Ltd. [1975] 101 ITR 502 (Guj.), CIT v. Orient Trading Co. [1994] 208 ITR 216 was placed; (4) For an item to fall within the definition of interest, it has to be interest payable in any manner in respect of any moneys borrowed or debt incurred; (5) There should be a borrower-lender relationship for a payment to assume the character of interest; (6) The seller, a non-resident, ha....
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.... the instant case, he observed, there is no limitation that interest should arise only from borrowed capital. 3.3 (4) With regard to the fourth contention, AO referred to the definition of the term "interest" given in section 2(28A) of the Act. He also referred to the terms of the MoA and held that the amount fell within the four corners of the definition of the term "interest" and that it could not be considered as any other payment. 3.4 (5) With regard to the fifth contention of the assessee, AO observed that borrower--lender relationship was not a necessary condition for the accrual of interest. According to the definition even a debtor--creditor relationship was sufficient. In the instant case, there was such relationship and the assessee had an obligation to pay interest. 3.5 (6) The sixth contention that the non-resident seller had not earned any income in India was also rejected for the reasons that (a) credit facility was made available to the assessee as per the MoA which had been signed in India by the agent of the seller, (b) the delivery of the vessel was made in India and the credit facility made available to the assessee was being utilised in India. 3.6 (7....
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....v) was applicable; (9) Assessee had taken a plea that the sellers had shown both the amounts, i.e. sales consideration and interest as sales consideration in their books of account. To this, the CIT(A) observed that accounting entries do not make a difference to the nature of receipt; (10) CIT(A) also rejected the plea of the assessee that after discounting the bill, interest was payable to a resident, i.e. a branch of SBI in Singapore, as having no merits. In view of the above findings, CIT(A) confirmed the disallowance of Rs. 42,54,767. 6. Mr. Saurabh Soparkar, the ld. Counsel for the assessee, at the outset, apprised us of the entire modus operandi of the transaction of buying the ship. First, a Memorandum of Agreement (MoA) is entered into between the identified seller and identified buyer (the assessee). The MoA specifies the ship as well as the price at which it is to be bought. Mode of payment is prescribed which is by means of 100% confirmed irrevocable 180 days usance Letter of Credit (L.C.) acceptable to sellers through any nationalised Indian Bank (referred to as the opening bank for short) to be established in favour of the seller for net amount. The L.C. is to....
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....e opening banker and opening banker was independently obliged to make payment to the beneficiary of the L.C. section 195 was not applicable, it was stated, because there was no obligation on the part of the assessee when credit was released as no sale had yet taken place, and moreover, no payment, either made or credited, was entered in the books of the assessee. For the contention that payment by opening banker to negotiating banker was on principal to principal basis and that the assessee was in no way liable to make payment to the non-resident seller, Mr. Soparkar relied on the decisions of the Supreme Court in the case of (a) Federal Bank Ltd. v. VM. Jog Engg. Ltd. [2001] 1 SCC 663, (b) U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers (P.) Ltd. [1988] 1 SCC 174, (c) United Commercial Bank v. Bank of India AIR 1981 SC 1426, and (d) Tarapore & Co v. V.O. Tractors Export [1969] 1 SCC 233(sic). It was submitted that since assessee's liability was towards the opening banker which was an Indian bank, payment of interest to it clearly fell within the exception specified in sub-clause (a) of clause (iii) of sub-section (3) of section 194A of the Act. 9. Mr. Soparkar....
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.... K.C. Patel have also advanced certain arguments which are common to all the eight appeals. Unless there are distinguishing features depending upon the facts in each appeal, they shall not be repeated in our orders for other appeals. 11. The first contention of Mr. Sarda was that section 195 was not applicable because of the operation of Double Taxation Avoidance Agreements (DTAA) entered into by India with the countries which were concerned in the present transactions. The countries with which we are concerned in all the eight appeals are United Kingdom (UK), Singapore, Belgium, United Arab Emerates (U.A.E.), United States of America (U.S.A.), Cyprus and Germany. It was submitted that wherever DTAA was in operation, it would override the provisions of the Act. For this, reference was made to the decision in the case of Visakhapatnam Port Trust. It was pointed out that department's special leave petition (SLP) against this judgment of the Andhra Pradesh High Court was dismissed by the Supreme Court. It was submitted that the facts in the case of Visakhapatnam Port-Trust were identical to the facts in the assessee's case where the question of deferred payment of purchase price wa....
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....same is binding and should be followed. 14. Mr. K.C. Patel took us through the various terms of L.C. and the invoices to emphasise the fact that payment made by the assessee was to a resident bankers only and that interest, though separately mentioned in the MoA and separately invoiced, was part of purchase price only. He also referred to various opinions placed on record to show that tax was not deductible at source on usance interest. He also referred to various judicial pronouncements placed in the paper book, most of which have been referred to by us earlier, and hence are not repeated. 15. The ld. D/R, firstly laid stress on the definition of the term "interest" given in section 2(28A) of the Act. This, it was submitted, had to be read with section 9(1)(v) of the Act. Since usance interest fell within the definition of the term "interest" and since it was deemed to accrue in India, as per section 195 the assessee was liable to deduct tax at source from such payment. Not having done so, section 40(a)(i) came into play and hence the disallowance was rightly made. 16. The ld. D/R then strongly attempted to refute the contention made on behalf of the assessee that impugne....
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....s placed by the assessee, it was submitted that, in fact, the said decision supports the case of the revenue. According to the ld. D/R, in that case the Supreme Court held that interest on unpaid consideration of assets are separate from capital part as well as loan part of assets consideration. Similarly, in the present case usance interest is separate from deferred purchase consideration. As regards UCPDC, it was submitted that its relevance was only for resolving disputes between opening bank and negotiating bank. Finally, the ld. D/R concluded his arguments by submitting that all the decisions relied upon by the assessees were distinguishable on facts. 18. In his rejoinder, referring to the decision in the case of Visakhapatnam Port Trust, Mr. Soparkar submitted that the said decision recognises that DTAA prevails over the Act and it is not interest within the meaning of DTAA. The expanded definition in section 2(28A) and the provisions of section 9(1)(v) governs only the Act. But if the assessee's case falls within DTAA, then those expanded provisions are not material. It was also submitted that interest cannot be divorced from its main source. Thus, it is a part of purchas....
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.... means of 100% confirmed irrevocable 180 days usance letter of credit. This clearly indicates that interest, though separately mentioned in the MoA, is part of the same transaction and cannot be meted out a separate treatment altogether from the main component i.e. the purchase price. In other words, the point we are trying to drive home is that what governs a purchase transaction, will also govern the component thereof. It also needs to be appreciated that there is no right of pre-payment by the buyer to the seller, that is to say, irrespective of the point of time when the buyer makes payment within 180 days, the buyer shall have to pay the interest component as specified in the MoA. This proposition also leads us to the conclusion that by entering into the MoA, buyer did not incur any debt in the sense that any loan or advance had been raised to be indebted to the seller. This is a pure and simple purchase transaction entered into by the buyer where, in terms of the L.C., he has to make the total payment which is inclusive of interest. It is well established that nomenclature cannot decide the true nature of the payment. It is the essential characteristic of the transaction whic....
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....'s profit." The fact that the term "debt claims" is qualified by the expression whether or not secured by mortgage", is indicative of the fact that the "debt claims" referred to in the definition of the term "interest" means a loan, "secured or unsecured". If the term "debt claims" was to include all sorts of debts, as is the stand of the department, then, in our opinion, there was no need to qualify the said term by the expression "whether or not secured by mortgage". If we turn to the facts of the present case, undoubtedly, when the NoR is presented to the buyer under the MoA, the buyer incurs an obligation to make payment to the seller. In broad terms such an obligation to make payment can be described as a debt. But each and every debt is not envisaged to be included in the term "debt claims" as referred to in the definition of the term "interest" under the DTAA. The view gains further strength when the definition proceeds further and mentions and in particular, income from government securities and income from bonds and debentures, including premiums and prices attaching to such securities, bonds and debentures". Applying the principle of ejusdem generis, the term "debt cla....
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....hheld from him by the debtor after the time when payment is to have been made, in breach of his legal rights, it is a compensation whether it is liquidated under agreement or statute. The compensation is properly described as interest: (Westminster Bank Ltd. v. Riches [1947] 28 TC 159, 189; 15 ITR 86 (HL). Therefore, when interest is paid not as part of the compensation but is given for the deprivation Of the use of the money, it is an independent source of income and is taxable. Dr. Shamlal Narula v. CIT [1964] 53 ITR 151 (SC), and similarly if the right to interest arises because the person is kept out of his money, the interest received is chargeable to tax as income. The same principle would apply if interest is payable under the terms of an agreement and the court or the arbitrator gives effect to the terms of the agreement and awards interest: T.N.K. Govindaraju Chetty v. CIT [1976] 66 ITR 465 (SC). But where the interest is merely in name but constitutes part of the compensation or part of the damages, it is not "interest" chargeable to income-tax. As an integral part of such compensation it may be either slumped-up with the other elements in the gross sum or may be separ....
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.... 502 (Guj.), the mere nomenclature employed by the parties notwithstanding. When the payment of interest is as part and parcel of the agreement to pay the unpaid purchase money on a deferred payment basis, there is no indebtedness (Chittele Venkata Subba Reddi v. Jayanthi Audinarayana--A.S. No. 446 of 1964, dated 2-8-1968) per Kondaiah J., as he then was, affirmed in L.P.A. No. 267 of 1968, dated 14-3-1969. Bearing these well-settled principles in mind, it has to be seen whether interest payable on the agreed instalments of unpaid purchase money can be treated as a separate "source" being interest on any form of "indebtedness" contemplated in article VIII of the Agreement. We are of the opinion that the interest agreed to be paid along with each of the instalments of unpaid purchase money was agreed to be part of the sale consideration itself and cannot be treated as an independent "source" of income. The words "any other form of indebtedness from sources' in the other territory can only mean interest arising or accruing as a separate "source" of income. It cannot include interest payable on the unpaid purchase money agreed to be part of the sale consideration. There is nothi....