Issue of applicability of TDS in Bills Discounting

 

 

Recently, I read about the Income Tax Appellate Tribunal giving ruling regarding issue of applicability of deduction of tax at source (TDS) in bills discounting facility.

 

A ‘Bill’ is a written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods and/or services received. The drawee accepts the bill by signing it, thus converting it into a post-dated cheque and a binding contract.

Under bill discounting facility offered by financiers, the financier takes the bill drawn by Supplier/borrower on his (borrower's) customer and pay him immediately deducting some amount as discount/commission. The financier then presents the bill to the borrower's customer on the due date of the bill and collects the total amount.

In the given case at Income Tax Appellate Tribunal, party ‘X’ appointed ‘Y’ as its agent. Y sells the products manufactured by the X to the customers and also provides guarantee to X for payment from customers. X generates sales bills on customers with a mention that payment is guaranteed by Y. Y gets the bills discounted from financiers. The tax authorities made a case that such discounting charges are interest as per Indian Tax Laws (ITL) and attracts deduction of tax at source. Since, Y did not withheld TDS therefore the discounting charges were not allowed as expenses while calculating the business income of Y.

As per Y, when receivables are sold to financier, the ownership of the same is also passed on to the financier. Therefore there is no advance made by the financier to Y and hence there is no debtor-credit relationship between Y and financier. In case of non payment by customer, the financier will have lien over the goods sold but not on the moneys paid to Y. Y relied on Central Board of Direct Taxes (CBDT) circular which mentions that the amount paid by the banks, after deducting the bill discounting charges from the bill amount, is in the nature of price paid for the bills.

The Appellate Tribunal while taking decision in the case referred to the definition of ‘Interest’ as defined under the Interest Tax Act 1974 and also the ‘Interest’ as defined under the Indian Tax Law.

Under ITL, interest is defined to mean interest payable in any manner in respect of any moneys borrowed or debt incurred and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.

Under the Interest Tax Act, 1974 interest is defined to mean interest on loans and advances made in India and includes commitment charges, discount on promissory notes and bills of exchange made in India.

The Appellate Tribunal noted that while the Interest Tax Act mentions discounting charges as ‘interest’ despite that ITL has consciously not included the same in its definition. Appellate Tribunal ruled in favour of Y to allow it recognizing discounting charges as expense without deduction of tax on the same.