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  • PCIT v. M Sons Gems N Jewellery-Delhi HC

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    Saksham Shrivastav
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    The Delhi High Court upheld a tribunal order that factoring charges paid by an assessee jewelry company could not be treated as interest for the purposes of tax deduction at source under section 194A of the Income Tax Act of 1961. The assessee had availed a factoring facility and deducted factoring/discounting charges in its accounts, which the assessing officer disallowed by treating the charges as interest without proper basis. The High Court found that factoring charges and interest rates were separate under the agreement and the charges were correctly classified, so no tax deduction was required.

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    The Delhi High Court upheld a tribunal order that factoring charges paid by an assessee jewelry company could not be treated as interest for the purposes of tax deduction at source under section 194A of the Income Tax Act of 1961. The assessee had availed a factoring facility and deducted factoring/discounting charges in its accounts, which the assessing officer disallowed by treating the charges as interest without proper basis. The High Court found that factoring charges and interest rates were separate under the agreement and the charges were correctly classified, so no tax deduction was required.

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    49 views3 pages

    PCIT v. M Sons Gems N Jewellery-Delhi HC

    Uploaded by

    Saksham Shrivastav
    The Delhi High Court upheld a tribunal order that factoring charges paid by an assessee jewelry company could not be treated as interest for the purposes of tax deduction at source under section 194A of the Income Tax Act of 1961. The assessee had availed a factoring facility and deducted factoring/discounting charges in its accounts, which the assessing officer disallowed by treating the charges as interest without proper basis. The High Court found that factoring charges and interest rates were separate under the agreement and the charges were correctly classified, so no tax deduction was required.

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    of 3

    26/07/2021

    [2016] 69 taxmann.com 373 (Delhi)/[2016] 239 Taxman 530 (Delhi)[25-04-2016]

    IT: Factoring charges could not be treated as interest to attract TDS under section 194A

    ■■■
    [2016] 69 taxmann.com 373 (Delhi)
    HIGH COURT OF DELHI
    Principal Commissioner of Income-tax-06
    v.
    M Sons Gems N Jewellery (P.) Ltd.*
    S. MURALIDHAR AND VIBHU BAKHRU, JJ.
    IT APPEAL NO. 9 OF 2016†
    APRIL 25, 2016

    Section 194A, read with section 40(a)(ia), of the Income-tax Act, 1961 - Deduction of tax at
    source - Interest other than interest on securities (Factoring/discounting charges) - Assessment
    year 2009-10 - Assessee had availed factoring facility from one 'G' - In profit and loss account, it
    had debited a certain amount under head factoring/discounting charges and claimed deduction
    of same - Assessing Officer disbelieved assessee's contention that above amount constituted
    factoring charges and treated same as interest payable by assessee to 'G' - He further having
    noticed that assessee had not deducted tax at source under section 194A from said amount
    disallowed same in terms of section 40(a)(ia) - Whether since there was no basis for Assessing
    Officer to have disbelieved assessee's explanation and treat above amount as interest,
    question of disallowing same under section 40(a)(ia) did not arise - Held, yes [Para 8] [In favour
    of assessee]
    FACTS

    ■ The assessee had availed factoring facility from one 'G'.


    ■ In the profit and loss account for the year 2009-10, it had debited a certain amount under the head
    factoring/discounting charges and claimed deduction of the same.
    ■ The Assessing Officer disbelieved the assessee's contention that the above amount constituted factoring
    charges and treated the same as interest payable by the assessee to 'G'. He further having noticed that the
    assessee had not deducted tax at source under section 194A from the said amount disallowed the same in
    terms of section 40(a)(ia).
    ■ The Commissioner (Appeals) upheld the order of the Assessing Officer.
    ■ The Tribunal relying on the judgment of the Calcutta High Court rendered in the case of CIT v. MKJ
    Enterprises Ltd. [2015] 228 Taxman 61/[2014] 50 taxmann.com 441 (Mag.) held that the aforesaid amount
    debited to the profit and loss account towards factoring/discounting charges ought not have been disallowed
    by the Assessing Officer under section 40(a)(ia).
    ■ On appeal to High Court by revenue:

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    26/07/2021

    HELD

    ■ Under section 194A the obligation to deduct tax at source is on the 'payer' of interest. In the instant case, the
    assessee has permitted factoring and discounting charges to be deducted upfront by 'G'. [Para 7]
    ■ Further the Court finds that the term sheet issued by 'G' showed that the interest at 13 per cent per annum will
    be charged in the event of repayment of any borrowings. This is different from the factoring charges at the
    rate of 0.10 per cent payable to 'G'. As a matter of fact, the assessee has debited the above sum to its profit
    and loss account towards factoring/discounting charges. In the light of the above factors, there was no factual
    basis for the Assessing Officer to have disbelieved the assessee's explanation and simply treat the amount as
    interest for purpose of section 194A. The question of disallowing the above amount under section 40(a)(ia)
    on the ground that the TDS was not deducted in terms of section 194A did not arise. [Para 8]
    ■ In view of the aforesaid, the order of the Tribunal deserved to be upheld. [Para 9]
    CASES REFERRED TO

    M Sons Gems N Jewellery (P.) Ltd. v. Addl. CIT [IT Appeal No. 5419 (Delhi) of 2012, dated 17-6-2015] (para 1),
    CIT v. MKJ Enterprises Ltd. [2015] 228 Taxman 61 (Mag.)/[2014] 50 taxmann.com 441 (Cal.) (para 4) and CIT
    v. Cargill Global Trading (P.) Ltd. [2011] 335 ITR 94/199 Taxman 320/11 taxmann.com 219 (Delhi) (para 5).
    Rahul Chaudhary, Sr. Standing Counsel for the Appellant. Kapil Goel, Adv. for the Respondent.
    JUDGMENT

    1. This appeal by the Revenue is against the order dated 17th June 2015 in M. Sons Gems N Jewellery (P.) Ltd. v.
    Addl. CIT passed by the Income Tax Appellate Tribunal ('ITAT') in IT Appeal No. 5419/Del/2012 for the
    Assessment Year ('AY') 2009-10.
    2. The question sought to be urged by the Revenue is whether the ITAT was justified in holding that the sum of
    Rs. 93,68,870 debited to the Profit & Loss ('P&L') account towards factoring/discounting charges ought not have
    been disallowed by the Assessing Officer ('AO') under Section 40(a)(ia) of the Income Tax Act, 1961 ('Act').
    3. The Assessee is a private limited company engaged in the business of manufacturing and trading in gold,
    diamond jewellery and bullion. In its return of income for AY 2009-10 it declared an income of Rs. 2,79,89,810.
    The return was picked up for scrutiny. It was noticed from the notes to the accounts that the Assessee company
    had availed factoring facility from Global Trade Finance Ltd. ('GTFL'). It was further noticed that in the P&L
    account, an amount of Rs. 93,68,870 was debited under the head "factoring/discounting charges". It was clarified
    that the Assessee had not deducted TDS on the factoring charges as it was not an interest amount.
    4. In the assessment proceedings, the AO examined the agreement entered into between the GTFL and the
    Assessee. The AO disbelieved the Assessee's contention that the aforementioned amount constituted factoring
    charges. According to the AO as per the agreement, GTFL would advance a loan to the Assessee on which the
    Assessee was liable to pay interest @13%. This was separate from the factoring charges. The AO proceeded to
    treat the entire amount of Rs. 93,68,870 as interest payable by the Assessee to GTFL under Section 194A of the
    Act. The AO, therefore, disallowed the said sum since TDS was not deducted therefrom in terms of Section 40(a)
    (ia) of the Act.
    5. After the Commissioner of Income Tax (Appeals) [CIT (A)] upheld the above order by disposing of the
    Assessee's appeal by order dated 27th July 2012, the Assessee went in appeal before the ITAT. In the impugned
    order, the ITAT relied on the order dated CIT v. MKJ Enterprises Ltd. [2015] 228 Taxman 61 (Mag.)/[2014] 50
    taxmann.com 441 (Cal.) to the effect that the factoring charges on sales cannot be termed as interest. The ITAT
    also noted the submission of the Assessee that this Court in CIT v. Cargill Global Trading (P.) Ltd. [2011] 335
    ITR 94/199 Taxman 320/11 taxmann.com 219 (Delhi) also held likewise.
    6. Mr. Kapil Goel, learned counsel for the Assessee, points out that the Revenue's Special Leave Petition against
    the judgment of this Court in Cargill Global Trading (supra) was dismissed by the Supreme Court on 10th May
    2/3
    26/07/2021

    2012 in CC No. 19572/2011.


    7. The Court first notes that under Section 194A of the Act, the obligation to deduct tax at source is on the 'payer'
    of interest. In the instant case, the Assessee has permitted factoring and discounting charges to be deducted
    upfront by GTFL. In response to a query raised by the AO during assessment proceedings, the Assessee by its
    letter dated 12th September 2011 clarified as under:
    "The assessee company had paid discount to M/s. Global Trade Finance Ltd. (GTF) for availment of
    Factoring facility and not interest. This fact is very clear as per the sanction letter given by the GTF which
    was filed before your goodself vide our letter dated 02.09.2011. The assessee company had discounted its
    sales invoices from GTF on a discount and it had not taken any amount in the nature of loan or debt. The
    factoring facility is known as synonymous for bill discounting facility. As per section 2(28A) of the Income
    Tax Act, 1961, discounting charges are not covered under the definition of interest."
    8. Further the Court finds that the term sheet issued by the GTFL showed that the interest at 13% pa will be
    charged in the event of repayment of any borrowings. This is different from the factoring charges @0.10%
    payable to GTFL. As a matter of fact, the Assessee has debited the above sum to its P&L account towards
    ''factoring/discounting charges". In light of the above factors, there was no factual basis for the AO to have
    disbelieved the Assessee's explanation and simply treat the entire amount as interest. The question of disallowing
    the entire amount under Section 40(a)(ia) on the ground that the TDS was not deducted in terms of Section 194A
    of the Act did not arise.
    9. In the facts and circumstances of the case, the Court is unable to find any legal infirmity in the view expressed
    by the ITAT that the factoring/discounting charges in the present case cannot be treated as interest for the purpose
    of section 194A. No substantial question of law arises.
    10. The appeal is dismissed.
    S.K.J.

    *In favour of assessee.


    †Appeal arising out of order of Tribunal in IT Appeal No. 5419 (Delhi) of 2012, dated 17-6-2015.

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