Facts of the Case

The assessee, M/s Kohinoor Impex Pvt. Ltd., had imported brushless motors from M/s Kashpo International Ltd., U.K. and made payment amounting to Rs.19,94,704/-, which was claimed as expenditure. Initially, the Assessing Officer completed assessment without disallowing the expenditure.

Subsequently, the Commissioner of Income Tax invoked revisional jurisdiction under Section 263 of the Income Tax Act and directed fresh examination of the issue whether the assessee had failed to deduct tax at source under Section 195 and whether provisions of Section 40(a)(i) were attracted. The Commissioner also referred to Section 9(1)(v) relating to interest payable to non-residents.

During reassessment proceedings, the Assessing Officer held that the amount represented interest paid on delayed payment for imported goods and therefore constituted income deemed to accrue in India. Consequently, the expenditure was disallowed under Section 40(a)(i) for failure to deduct TDS.

However, the Commissioner of Income Tax (Appeals) reversed the findings and held that the amount paid was not interest but part of settlement of the final purchase price of imported goods. The Tribunal affirmed the findings of the CIT(A).

The Revenue thereafter preferred appeal before the Delhi High Court.

Issues Involved

  1. Whether payment made to a foreign supplier on account of delayed payment for imported goods constituted “interest” under Section 9(1)(v) of the Income Tax Act?
  2. Whether tax was required to be deducted at source under Section 195 on such payment?
  3. Whether disallowance under Section 40(a)(i) could be made for non-deduction of tax at source?
  4. Whether the payment represented interest or formed part of the final settled sale consideration for imported goods?
  5. Whether CBDT Circular No. 23 of 1969 and DTAA provisions had relevance in determining taxability of the payment?

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The payment of Rs.19,94,704/- represented interest on delayed payment made to the foreign supplier.
  • Such payment was taxable in India under Section 9(1)(v) of the Income Tax Act.
  • Since the assessee failed to deduct tax at source under Section 195, the expenditure was liable to be disallowed under Section 40(a)(i).
  • The Assessing Officer correctly treated the payment as interest and not as purchase consideration.
  • The banking arrangement used by the assessee did not alter the character of the payment.
  • The Tribunal erred in treating the amount as part of sale consideration.

Respondent’s Arguments (Assessee)

The assessee argued that:

  • The payment did not represent interest on any borrowing or loan transaction.
  • The amount was paid as part of settlement of the final purchase price relating to imported goods.
  • No separate stipulation regarding interest payment existed.
  • The transaction was purely a principal-to-principal sale transaction with a foreign supplier.
  • Since the amount represented sale consideration, it was not taxable in India and no TDS under Section 195 was required.
  • Consequently, Section 40(a)(i) had no application.

Court Findings / Court Order

The Delhi High Court observed that the Tribunal had recorded a factual finding that the payment represented final settled purchase price for imported goods and not interest payment.

The Court noted that:

  • The Revenue failed to place crucial documents and agreements on record.
  • The report of the Deputy Commissioner of Income Tax supported the assessee’s contention that the amount was not interest on borrowing.
  • The Assessing Officer relied upon Section 9(1)(i) instead of specifically invoking Section 9(1)(v).
  • Important factual aspects such as contractual terms, stipulation for delayed payment charges, transfer of title, and nature of settlement were not properly examined.

The Court further observed that if the payment actually represented interest, then issues regarding exemption under Section 10(15)(iv)(c) and applicability of DTAA provisions would also arise.

The High Court referred to CBDT Circular No. 23 dated 23.07.1969, which clarified that extended credit facilities provided by non-residents in principal-to-principal transactions would not automatically attract tax liability in India where contracts were executed outside India.

Considering absence of complete records and findings of fact recorded by the Tribunal, the High Court declined to answer the substantial questions of law and disposed of the appeal without interference.

Important Clarification

The Delhi High Court clarified that:

  • Delayed payment charges paid to foreign suppliers may be treated as “interest” under Section 9(1)(v) depending upon facts and contractual terms.
  • However, where the payment is intrinsically linked with final settlement of sale consideration and forms part of purchase price, it may not attract TDS under Section 195.
  • Taxability depends upon documentary evidence, contractual structure, DTAA provisions, and applicability of statutory exemptions.
  • CBDT Circular No. 23 of 1969 continued to apply for the relevant assessment year despite subsequent withdrawal in 2009.

Sections Involved

  • Section 195 of the Income Tax Act, 1961
  • Section 40(a)(i) of the Income Tax Act, 1961
  • Section 9(1)(i) of the Income Tax Act, 1961
  • Section 9(1)(v) of the Income Tax Act, 1961
  • Section 10(15)(iv)(c) of the Income Tax Act, 1961
  • Section 143(3) of the Income Tax Act, 1961
  • Section 263 of the Income Tax Act, 1961
  • Section 80HHC of the Income Tax Act, 1961
  • Double Taxation Avoidance Agreement (DTAA) provisions
  • CBDT Circular No. 23 dated 23.07.1969

Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:4226-DB/SKN28082014ITA1792001.pdf

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