Usance interest paid under letter of credit liable for TDS

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INCOME TAX APPELLATE TRIBUNAL, MUMBAI

I.T.A. No.7434/Mum/2007 (A.Y. 2005-06)

M/s. Sunoco Industries Pvt. Ltd., [Presently M/s. Gandhar Oil Refinery (India) Ltd.],

Vs.

Dy.Commr. of Income-tax

Briefly stated facts of the case are that the assessee paid a sum of Rs.9,54,684/- to a foreign bank without deduction of tax at source. In the audit report, it was mentioned that it was a usance interest paid under the letter of credit and hence not liable for any deduction of tax at source. In support of its case, the assessee relied on the order passed by the Tribunal in the case of Vijay Ship Breaking Corporation vs. DCIT (2002) 76 TTJ 169 (Rajkot) by contending that the interest paid to bank related to the purchases and hence should be considered as part of purchase price. Not convinced with the assessee’s submission, the AO came to hold that the assessee was required to deduct tax at source on such interest and having not done so, the amount was disallowable u/s.40(a)(i). The ld. CIT(A) upheld the action of the AO on this point.

Mumbai Bench of the Tribunal in Uniflex Cables Ltd. vs. DCIT has decided identical issue in ITA No.7019/Mum/2006. Vide order dated 28-03-2012, the Tribunal has held that such amount is in the nature of interest u/s.2(28A) and thus under the provisions of the Act there is a requirement to deduct tax at source. Having not deducted tax at source, the provisions of section 40(a)(i) have been held to be rightly invoked.