Factoring Charges are not in the Nature of Interest, TDS u/s 40(a)(ia) not Applicable: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has recently in an appeal filed before it, held that factoring charges are not in the nature of interest and hence that TDS u/s 40 (a) (ia) will not be applicable to it.

The aforesaid observation was made by the Tribunal when an appeal was preferred before it by the Revenue, as against the order of Commissioner of Income Tax(Appeals)-18, Mumbai dated 14/10/2019, passed under section 250 of the Income-tax Act, 1961, pertaining to the assessment year 2012-13.

The facts of the case are that the assessee 3i Infotech Consultancy Services is engaged in the business of outsourcing voice management, data management, etc, it had filed its return of income for the assessment year under consideration on 29/11/2012, declaring total loss at Rs.2,04,88,580/.

The assessee having revised its return of income on 26/03/2014 declaring its total income at Rs.2,79,50,780/, the case of the assessee was selected for scrutiny through CASS, and the assessment order under section 143(3) dated 12/03/2015 was passed, determining the total income at Rs.4,35,61,338/, making disallowance of Rs.1,56,10,554 under section 40(a(ia),  along with other additions.

And being aggrieved by this, the assessee was in appeal before the CIT, who deleted the said addition by relying upon the Supreme Court decision in the case of Bombay Steam Navigation Com. Pvt Ltd vs CIT, wherein it was held that interest on unpaid purchase price was not to be treated as interest on the loan and also that the discounting charge of bills of exchange or factoring charges of sale cannot be termed as interest, and it is against this deletion of the aforesaid addition by the CIT(A) that the Revenue has preferred the instant appeal before the Tribunal.

The grounds of the Revenue’s appeal are the question as to whether on the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the addition made by the Assessing Officer u/s 40(a)(ia) of the Act, without appreciating the facts that the factoring charges debited by the assessee-company are of the nature of interest only and TDS is liable to be deducted under section 40(a)(ia) of the Act, it was contended by the AR  that the factoring charges incurred are not in the nature of interest and that section 194A is not applicable in assessee’s case.

The AR further states that the certificate of Chartered Accountant in Form 26A certifies that the impugned amount of factoring charges paid by the assessee company has been offered by M/s SBI Global Factors Ltd as taxable income, denying the fact that it is the assessee company which is to be treated as assessee in default,

the Tribunal consisting of Prashant Maharshi, the Accountant Member, and Kavitha Rajagopal, the Judicial Member observed as follows :

“We have considered the rival submissions and perused the materials on record. It is evident that the assessee company has incurred factoring expenses of Rs.1,56,10,554/- and the same was clubbed under the interest expenditure account. The Assessing Officer treated the factoring expenses as interest expenditure and disallowed the same on the ground that the assessee has failed to deduct tax under the provisions of section 40(a)(ia).”

“Pursuant to the factoring agreement with M/s SBI Global Factors Ltd, the debt arising on the sale made by the assessee for whom payment is to be received is discounted with M/s SBI Global Factors Ltd. Further, it is M/s SBI Global Factors Ltd who has paid the bill amount when the same was discounted after deducting its factoring charges. The assessee had claimed the said factoring charges as expenditure”, they commented.

 “It is further submitted that since the expenses incurred are only of factoring charges and not as interest, the assessee is not under the obligation to deduct and pay TDS as per provisions of section 194A. The Ld. CIT(A) has relied on the CBDT circular No.65 dated 02/09/1971 and has held that bill discounting charges received by M/s SBI Global Factors Ltd are not in any way in the nature of interest and that the assessee is not under an obligation to deduct tax at source. The Ld. CIT(A) has further relied on the decision of Hon’ble Delhi High Court in the case of ACIT vs Kargil Global Trading (P) Ltd in Income Tax Appeal No.231 of 2011 & 204 of 2011 judgment dated February 17, 2011, wherein it was held that the discounting charges were not in the nature of the interest paid and that the assessee was not under an obligation to deduct tax at source under section 195 of the I.T. Act, 1961 and the same is to be disallowed as per provisions of section 40(a)(ia) of the Act.”, adding to their comment the Bench further said.

Thus, dismissing the Revenue’s appeal they ruled:

“The Ld.CIT(A) has further stated that the assessee company has submitted the certificate of Chartered Accountant in form 26A enclosed as Annexure I which certifies that the amount of factoring charges paid by the assessee company is considered by M/s SBI Global Factors Ltd while calculating its taxable income and that the same was offered for tax. It is observed that as tax has been paid by the payee, the assessee cannot be treated as an assessee in default under the First Proviso to section 201(1). 7. From the above observation, we are of the view that the factoring charges incurred by the assessee company are not in the nature of interest and that the assessee was not under the obligation to deduct TDS as per the provisions of section 40(a)(ia) of the I.T. Act.”

To Read the full text of the Order CLICK HERE

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