Friday, October 31, 2014

Discount to foreign buyer in lieu of advance payments was in nature of interest; liable to TDS

Pre-payment discount given by assessee to foreign buyers in absence of any mention in purchase contract that obliged assessee to give said discount, was in nature of interest and tax was deductible on it at source under section 195


a)The assessee-seller gave some discount to foreign buyers on sale in consideration of receiving advance payment for the same.

b)The Assessing Officer (AO) opined that assessee was not obliged to give said discount as per the purchase contract entered into between assessee and foreign buyer and, therefore, benefit allowed by assessee to its buyers as pre-payment discount was, in fact, in nature of interest on which TDS was deductible under section 195.

c)The Commissioner (Appeals) (‘CIT(A)’) deleted the addition made by the AO.

d)Aggrieved by the order of CIT(A), revenue filed the instant appeal before the tribunal.

The tribunal held in favour of revenue as under-

1)It was mentioned in the purchase contract that the seller would cause the issuance of a banker's guarantee for an amount equal to the provisional price plus interest in the form acceptable to buyer.

2)It was also specified in the contract that within two business days from the date buyer's bank received the guarantee in the acceptable format, buyer would pay to seller the pre-payment amount. Hence, assessee was not obliged to offer discount to the buyer as per the purchase contract.

3)As per the invoice, it was seen that pre-payment discount was allowed and buyer was asked to make payment of the balance amount against the invoiced price after adjusting the advance received by the assessee and pre-payment discount.

4)So, asking the buyer to pay lesser amount after adjusting discount or making payment of discount to the buyer was same thing because in both the cases, the buyer received the benefit.

5)Thus, the benefit allowed by the assessee to its buyers as discount was, in fact, in the nature of interest because the same was in consideration of receiving advance payment, and, therefore, TDS was deductible under section 195 and disallowance made by AO was held as justified-DEPUTY CIT V. KOTHARI FOOD & FRAGRANCES [2014] 50 TAXMANN.COM 213 (LUCKNOW - TRIB.)