M. Sons Enterprises Pvt. Ltd., New Delhi vs Assessee

M. Sons Gems N Jewellery Pvt. Ltd., vs. Addl. CIT, Range 6, (formerly : M Sons Enterprises Pvt. Ltd.) New Delhi. c/o SSAR & Associates, Chartered Accountants, 4852/24, 1st Floor, Near Sanjivan Hospital, Ansari Road, Daryaganj, New Delhi - 110 002.

(PAN : AADCM9406A)

(APPELLANT) (RESPONDENT)

ASSESSEE BY : Shri Sachin Jain, CA REVENUE BY : Shri P. Dam Kanunjna, Senior DR

Date of Hearing : 12.06.2015 Date of Pronouncement : 17.06.2015

ORDER

PER GEORGE GEORGE K., JUDICIAL MEMBER :

This appeal, at the instance of the assessee, is directed against the order of

the Commissioner of Income-tax (Appeals)-IX, New Delhi dated 27.07.2012. The

relevant assessment year is 2009-10.

2 ITA No.5419/Del/2012 2. The assessee in its grounds of appeal raised six grounds. All the grounds

relate to the issue whether the CIT (A) is justified in confirming the addition of

Rs.93,68,870/- by invoking the provisions of section 40(a)(ia) of the Income-tax

Act, 1961.

3. The assessee is a private limited company engaged in the business of

manufacturing and trading in gold, diamond jewellery and bullion. For the

relevant year, return of income was filed on 07.03.2010 declaring an income of

Rs.2,79,89,810/-. The assessment was taken up for scrutiny by issuance of notice

u/s 143 (2) of the Act and scrutiny assessment u/s 143(3) was completed vide order

dated 16.12.2011 assessing total income at Rs.3,73,58,680/-. The Assessing

Officer made an addition of Rs.93,68,870/- on account of factoring/discounting

charges by invoking the provisions of section 40(a)(ia) of the Act as no tax at

source was deducted on the same.

4. Brief facts with regard to the addition are as follows.

In the course of assessment proceedings, it was noticed from the "note to the

accounts" filed by the assessee at point no.11 of the audited report as under :-

"11. The company has availed the factoring facility from Global Trade Finance Limited on which the same has been charging discount. The company has not deducted TDS as it is not an interest."

3 ITA No.5419/Del/2012 The AO further noticed that in the P&L account, an amount of Rs.93,68,870/- was

debited under the head factoring / discounting charges. The said payment was

made by the assessee to M/s. Global Trade Finance Limited (hereinafter referred to

GTF). The assessee was show-caused to submit the details in respect of expenses

incurred under the head factoring/discounting charges. The Assessing Officer,

after analyzing and examining the explanation filed by the assessee, brought out a

distinction between factoring/bill discounting charges. The Assessing Officer also

examined the agreement between the assessee and GTF. The Assessing Officer

was of the view that these factoring charges are nothing but interest payment and

tax ought to have been deducted on the same when the payments were made. The

Assessing Officer disallowed the said expenses by invoking the provisions of

section 40(a)(ia) of the Act, since the tax was not deducted at source while making

these payments.

5. Aggrieved, the assessee preferred an appeal to the first appellate authority.

The CIT (A) confirmed the disallowance made by the assessee. The relevant

finding of the CIT (A) reads as under :-

"6. I have considered the findings recorded by the ld. AO as per the assessment order, the submissions made by the ld. AR and the facts of the case on record. The ld. AO has elaborately discussed the concept of factoring in the assessment order and has categorically brought out the differences between the factoring and bill discounting. On the basis of the detailed discussion, (and referring to the various clauses of the Agreement entered into by 4 ITA No.5419/Del/2012

the appellant with GTF), the Id. AO has successfully established that the arrangement the appellant had with GTF, falls in the realm of factoring. The following distinctive facts emerge from the findings recorded by the ld. AO in the assessment order :

(i) The whole concept of factoring charges shows that they are in the nature of specialized services rendered by the financial institutions. The concept of factoring also shows that the prepayments made, against the invoices, is nothing but a short-

term financing facility provided by the financial Institution (factor), on which the client is under a legal obligation to pay interest at a fixed rate along with the factoring charges.

(ii) The finance so provided is to be recovered by the factor from the debtors of the client and in case of default by the debtors the entire advance given by the factor is liable to be repaid by the client to the factor along with the interest. The "interest" paid by the client is also termed as "discount charges", however, the terminology itself cannot change the nature of charge from interest to anything else.

(iii) In the case of the appellant, GTF, which is a Non-banking Financial Corporation (NBFC), provided factoring services. The services provided by GTF were "recourse factoring services" where the risk of bad debts was not borne by the former and was passed on to the appellant after a specific period of time.

(iv) "GTF had secured personal guarantee of the Directors of the appellant company before granting the factoring facility.

(v) GTF had also secured English mortgage on the residential bungalow located at 0-926, New Friends Colony, New Delhi prior to granting the funding. This clearly indicates that the provided facility was not of "discounting of bills" as contended by the appellant as GTF had ensured that the funds provided by it were secured and recoverable from the appellant, in case of any default committed by the debtors.

(vi) GTF also took an undertaking that any purchases/advances from debtors mentioned in the term sheet shall be with prior 5 ITA No.5419/Del/2012

intimation to GTF. Likewise, an undertaking for debtors was also required to be submitted to GTF.

(vii) The General Term No.11 of the agreement specifies that GTF treats prepayments of 80% of invoices as "borrowings".

(viii) As per the General Term No.12, it has been categorically stated that if the appellant commits default in "repayment of loan or payment of interest" on the due dates, it will be declared as a defaulter to RBI and CIBIL. This categorical condition further confirms the fact that financing by GTF is in the nature of loan on which it is charging interest. This loan is given by way of prepayment of 80% of the invoice.

(ix) The General Term No. 13 is most specific in stating that the "interest rates" mentioned in the. Agreement, are based on the current market conditions and are subject to change at the sole discretion of GTF. It further says that the "interest rates are applicable on the facilities", provided by GTF. In view of such categorical mention of "loan and interest" in the Agreement, there is very little doubt left to imagine any thing contrary to that.

(x) An examination of the Term Sheet issued by GTF shows that the prepayment (loan or borrowing) is fixed at 80% of all invoices, and discount charges (interest) @ 13% per annum was charged on this prepayment. Along with this interest, GTF is also charged factoring charges @ 0.10% on the gross invoice amount. Hence, GTF was charging "interest" on the finances and the "factoring charges" on the factoring services provided by it. The "factoring charges" are administrative charges which are charged towards providing services to the operational overheads and collection of debts etc.

6.1 On the basis of the aforesaid facts, I find that the appellant's contention that it did not pay interest to GTF on factoring services is not tenable and is against the whole concept of factoring. The appellant's contention that 'Factoring' is synonymous with 'Bill/Invoice Discounting' this is factually incorrect as 'Factoring' and 'Sill/Invoice discounting' are two different concepts having 6 ITA No.5419/Del/2012

distinctive features as elaborately brought out by the ld. AO in the assessment order.

6.2 It is clear from the plain reading of Section 2(28A) that money paid in respect of amount borrowed or debt incurred, is interest payable in any manner. The definition of interest in Section 2(28A) after referring to the interest payable in any manner in respect of any moneys borrowed or debt incurred proceeds to include in the terms the money borrowed or incurred, deposits, claims and 'other similar rights or obligations' and further includes any service, fees or other charges in respect of such money borrowed or debt incurred which would include deposit, claim or other similar rights or obligations as also in respect of any credit facilities which has not been utilized. Thus, the statutory definition given under Section 2(28A) regards amounts which may not otherwise be regarded as interest, for the purpose of the statute. Undisputedly, in the instant case, the factoring charges were paid in respect of an obligation incurred in relation to the money borrowed through bills, therefore, no fault can be found on the part of the AO for treating these charges as interest and liable for tax deduction at source under Section 194A. The mere fact that the appellant did not characterize such payment as interest, will not take the same out of the ambit of the definition of "interest", insofar as payment made by the appellant was in respect of an obligation incurred under the terms of the bill so discounted. The appellant had essentially taken a financial help against the bills and the amount of charges paid was with respect to the amount of bill and the period for which the money was so utilized. In view of the above discussion, I hold that there was no infirmity in the order of the AO for bringing the factoring charges within the definition of Section 2(28A) of the Act and thereby holding the assessee liable for deduction of tax at source under Section 194A .

6.3 I further find that the case laws relied upon by the appellant are all on the issue of discounting charges in respect of bill discounting and none on the factoring facility. Even the CSOT Circular No. 65 dated to 02.09.1971 which has been relied upon by the Hon'ble Courts in these judgements does not deal with the factoring charges. The said circular deals with the discounting 7 ITA No.5419/Del/2012

charges on the discounting of bills. Hence, the case of appellant is distinguishable on facts from the cases relied upon and therefore those decisions do come to its rescue. Furthermore, the appellant has not been able to substantiate its claim that no TDS was required to be made on the payments to GTF because of its being a subsidiary of SBI. The fact that no other person making a payment to it or the appellant itself did not deduct tax in the earlier years cannot absolve the appellant from discharging its legal obligation.

6.4 Moreover, as mentioned earlier, GTF is an NBFC and not a banking company governed by the Banking Regulation Act 1949. The appellant's contention is, therefore, found to be baseless and devoid of any merits and accordingly liable to be rejected.

6.5 Although, the Id. AR vehemently argued that there is no difference between factoring and bill discounting and if there are any differences at all, the same prove that both are nothing but the same type of facility, but it could not meaningfully counter the differences elaborately pointed out by the Ld. AO in the assessment order. The contentions / averments made by the appellant on the differences pointed out between Bill Discounting and Factoring by the AO are too shallow superfacial and hence not tenable.

6.6 In view of the aforesaid detailed discussion, I hold that the ld. AO has rightly disallowed the amount of Rs.93,68,870/- invoking the provisions of section 40(a)(ia) of the Act as no TDS was made by the appellant. Accordingly, the ground nos. 2 and 4 are rejected.

6. The assessee, being aggrieved, is in second appeal before us.

7. The ld. Counsel for the assessee submitted that the factoring charges is not

to be treated as interest and is not liable to be deducted at source u/s 194A of the

Act. For the above proposition, ld. AR relied on the judgment of the Hon'ble

Calcutta High Court in the case of CIT vs. MKJ Enterprises reported in GA 8 ITA No.5419/Del/2012

No.1927 of 2014 (Kol.). It was further submitted that Hon'ble jurisdictional High

Court in the case of CIT vs. Cargill Global Trading (P.) Ltd. reported in 335 ITR

94 (Del.) is also clearly applicable to the facts of the case. It was submitted that

the factoring charges/bill discounting charges is not coming within the ambit of

definition of interest u/s 2(28A) of the Act. The ld. AR also relied on the judgment

of Hon'ble Allahabad High Court in the case of Vector Shipping Services Pvt. Ltd.

reported in 357 ITR 642 (All.) for the proposition that amounts are not outstanding

as payable at the end of the year and, therefore, no disallowance u/s 40(a)(ia) can

be made.

8. Ld. DR supported the orders of the authorities below.

9. We have heard the rival submissions and perused the material on record. In

the instant case, the Assessing Officer, at page 13 of the assessment order, had

listed out the distinction between factoring and bill/invoicing discount. It was

further held by the Assessing Officer that as per the terms of agreement entered

between the assessee and GTF, the "discounting charges" mentioned therein is actually

interest component on the loan. However, we notice that the Hon'ble Calcutta High

Court in the case of CIT vs. M/s. MKJ Enterprises Limited (GA No.1927 of 2014,

copy enclosed) was specifically considering a case where factoring charges

tantamount to interest and whether the tax is to be deducted at source on the same.

The Hon'ble High Court held that factoring charges were not interest and as such, 9 ITA No.5419/Del/2012

provisions of TDS are not applicable. The Hon'ble High Court was considering

the following question of law :-

"Whether on the facts and in the circumstances of the case the Learned Tribunal was justified in law to hold inter alia that the factoring charges of Rs.56,33,112/- was not interest and as such provision of TDS under Section 194A of the said Act was not applicable, hence disallowance under section 40(a)(ia) of the said act was not warranted, ignoring the fact that the assesses itself shown this expenditure under the head interest in its books of account and as such disallowance under Section 40(a)(ia) was rightly made on account of non deduction of tax under section 194A."

The Hon'ble Calcutta High Court, on considering the above question of law, held

categorically that factoring charges on sale cannot be termed as interest. In view of

the Hon'ble Calcutta High Court judgment, we hold that the factoring charges will

not come within the purview of section 2(28A) of the Income-tax Act, 1961 and as

such, the provisions of TDS are not applicable on facts and circumstances of the

case.

10. In the result, the appeal filed by the assessee is allowed.

Order pronounced in open court on this 17th day of June, 2015.

Sd/- sd/- (S.V. MEHROTRA) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated the 17th day of June, 2015/TS 10 ITA No.5419/Del/2012

Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-IX, New Delhi 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.