17 October, 2014

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Discount allowed to foreign buyer shall be taken under the ambit of Section 195 of Income Tax Act

In case where an Indian exporter sells goods to a foreign buyer there can be circumstances where the former is required to deduct the tax on the transaction above mentioned. If the foreign buyer makes an advance payment to the seller the discount allowed by the buyer shall be treated as interest. The discount given to the buyer is as a benefit for the pre payment. And hence it shall be considered as “any amount “ paid to a non resident.

Section 195 of the income tax act states that tax shall be deducted on any payment to a non resident.

Further section 40(a)(i) specifies the expenses which shall be disallowed if tax is not deducted on them u/s195.

Recently the Luckhnow branch of the income tax appellate tribunal (the Tribunal) in the case of food and fragrances (the taxpayer) held that discount allowed to foreign buyers for making advance payment on sale proceeds is in the nature of interest and it is liable for withholding tax u/s 195 of the income tax act 1961 (the act). Accordingly the tribunal confirmed the disallowance made by the assessing officer (AO) u/s 40(a)(i) of the act.

To defend itself the assessee relied upon various decisions, however the same were disregarded by the Tribunal and observed that the dispute in those cases was with respect to deductibility of TDS u/s 194 H and not 195. Hence the same were not applicable. There were some other cases referred to by the assessee such as ACIT v. Pearl Bottling (P) Ltd, CIT v. Havells India Ltd.

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