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Discount allowed to foreign buyers towards advance payment on sales is treated as interest, and therefore liable for withholding of tax under Section 195 of the Act 10 September 2014

Background

Recently, the Lucknow Bench of the Income-tax

Appellate Tribunal (the Tribunal) in the case of Kothari

Food & Fragrances1 (the taxpayer) held that discount

allowed to foreign buyers for making advance

payment on sales proceeds is in the nature of interest,

and it is liable for withholding of tax under Section 195

of the Income-tax Act, 1961 (the Act). Accordingly, the

Tribunal confirmed the disallowance made by the

Assessing Officer (AO) under Section 40(a)(i) of the

Act.

Facts of the case

The taxpayer is an exporter, and against the export proceeds receivable from the overseas buyer the taxpayer allowed discount for making advance payment.

During the Assessment Year 2008-09, the taxpayer allowed discount of INR5.9 million on sales made to foreign buyers for making advance payment.

_____________ 1 DCIT v. Kothari Food & Fragrances (ITA No.92/LKW/2012) – Taxsutra.com

The Assessing Officer (AO) held that discounts credited in the foreign buyers account in the taxpayer's books of accounts constituted a ‘credit’, though not 'payment'. Accordingly, provisions of Section 195(1) of the Act are applicable. Since the taxpayer had debited an equivalent amount as expenditure, by not deducting or withholding tax on such payment, the AO disallowed the expenditure on account of discount allowed under Section 40(a)(i) of the Act.

The Commissioner of Income-tax (Appeals) [CIT(A)] deleted the additions made by the AO.

Tribunal’s ruling

On a perusal of the purchase contract, it was indicated that the seller shall cause the issuance of a banker’s guarantee or Stand-By Letter of Credit (SBLC) by the seller’s bank for an amount equal to the provisional price plus interest in the form acceptable to the buyer, and that will be informed in a separate message.

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The Tribunal observed that within two business days from the date when the buyer’s bank receives the bank guarantee, the buyer shall pay to the seller the pre-payment amount. Hence, it was not mentioned in the purchase contract that any pre-payment discount will be allowed by the taxpayer.

The payment was to be made by the buyer was the provisional price after furnishing of the bank guarantee by the taxpayer. As per the purchase invoices, pre-payment discount was allowed by the taxpayer, and the taxpayer asked the buyer to make the payment of the balance amount against the invoiced price after adjusting the advance received by the taxpayer and pre-payment discount.

Asking the buyer to pay lesser amount after adjusting discount or making payment of discount to the buyer is equivalent to the buyer receiving benefit out of it.

In the case of Pearl Bottling (P) Ltd.2, the

Visakhapatnam Tribunal held that when Maximum Retail Price (MRP) has been fixed for the products which were supplied to the retailers on a discounted rate, no tax at source was deductible under Section 194H of the Act because the relation between the taxpayer and its distributor is in the nature of ‘principal-to-principal’ basis. However, the facts of the present case were different since lesser price has been realised by the taxpayer from the buyers against the agreed price between the taxpayer and the buyer, and this lesser realisation from the buyer is on account of advance payment received from the buyer.

Relying on the Delhi High Court’s decision in the case of Havells India Limited

3, it has been observed

that since in the present case the exports were made from India and the pre-payment advance was also received in India against the provision of bank guarantee, the income in the form of discount or interest (whatever name we give to it) is taxable in India. Therefore, the Supreme Court’s decision in the case of G. E. India Technology Centre (P) Ltd.

4

relied on by the taxpayer was not applicable.

As per Section 195 of the Act, the taxpayer was required to deduct tax from any sum paid to a non-resident which is chargeable under the provisions of the Act, and it is not necessary that only commission or interest payment is subject to Tax Deduction at Source (TDS) under Section 195 of the Act. However, in the case of Foster’s India (P) Ltd.

5,

relied on by the taxpayer, the payer and the payee were located in India and Section 195 of the Act was not applicable in that case. Therefore, the said decision was not applicable in the present case.

________________ 2 ACIT v. Pearl Bottling (P) Ltd. [2011] 46 SOT 133 (Visakhapatnam)

3 CIT v. Havells India Ltd (ITA No 55/2012 and ITA No 57/2012)

4 G.E. India Technology Centre (P) Ltd. v. CIT [2010] 327 ITR 456 (SC)

5 Foster’s India (P) Ltd. v. ITO [2008] 117 TTJ 346 (Pune)

Various decisions6 relied on by the taxpayer was

disregarded by the Tribunal and observed that the dispute in those cases was with respect to deductibility of TDS under Section 194H of the Act and not under Section 195 of the Act. Therefore, those cases were not applicable in the facts of the present case.

The decision in the case of Ankur Udyog Ltd.7 was

also not applicable since in that case the dispute was with respect to deductibility of TDS against quantity discount provided by the taxpayer to its buyers. Quantity discount is in fact reduction in sale price and hence, it cannot be considered as payment of interest. However, the benefit allowed by the taxpayer in the present case to the buyer was in the name of discount in respect of advance payment received and therefore, it has to be considered in the nature of interest in the present case.

The Tribunal observed that the benefit allowed by the taxpayer in the present case to its buyers under the name of discount was in the nature of interest because the same was in consideration of receiving advance payment. On receiving advance payment, one may compensate the maker of advance payment by way of allowing interest, or the same benefit can be given in the name of discount, but merely because a different nomenclature has been given, it does not change its character.

Accordingly, the Tribunal held that TDS was deductible under Section 195 of the Act on the discount allowed to foreign buyers for making advance payment and consequently, the disallowance made by the AO was justified.

Our comments

The Tribunal in this decision has held that discount allowed to foreign buyers towards advance payment on sales is in the nature of interest, and therefore liable for withholding of tax under Section 195 of the Act. The taxpayer relied on various decisions dealing with withholding tax provisions under Section 194H of the Act. However, the Tribunal disregarded these decisions and observed that the dispute in those cases was with respect to deductibility of TDS under Section 194H of the Act and not under Section 195 of the Act; therefore, those cases were not applicable in the facts of the present case. The taxpayer also relied on the wordings of Section 195 of the Act which provides that ‘any payment to a non-resident which is

_______________ 6 CIT v. Singapore Airlines Ltd. [2009] 319 ITR 29 (Del)

ITO v. Mother Dairy Food Processing Ltd. [2011] 7 ITR (Trib) 16 (Del) NMDC Ltd. v. ACIT [2011] 7 ITR (Trib) 690 (Visakhapatnam) 7 Ankur Udyog Ltd. v. ACIT (ITA No.96/Alld/2013)

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

chargeable to tax in India’. However, the Tribunal observed that as per Section 195 of the Act, the taxpayer was required to deduct tax from any sum paid to a non-resident which is chargeable under the provisions of the Act. The Tribunal re-characterised the discount allowed to foreign buyers towards advance payment as interest and observed that the benefit allowed by the taxpayer to its buyers under the name of discount was in the nature of interest because the same was in consideration of receiving advance payment. Accordingly, the Tribunal disallowed the expenditure of discount allowed under Section 40(a)(i) of the Act for non deduction of tax at source.

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we

endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue

to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International

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