INCOME TAX ACT, 1961

Section 195

Tax deduction at source - Under section 195 - Usance charges paid to Indian Bankers to provide letters of credit to foreign seller -

Assessee was importing raw material from sellers in Japan, Belgium Germany, USA, etc., towards such purchase/import transactions assessee was required to provide letters of credit. Accordingly, assessee would provide letters of credit from Indian bankers in order to secure payments to purchasers abroad. In order to provide such letters of credit, assessee had to pay service fees and other charges to Indian bankers. For this purpose, assessee incurred expenditure of Rs. 17,14,806. This included LC Charges and commission paid to the Indian Banks. These expenses are referred to as usance charges in trade parlance. AO disallowed deduction of said usance charges for want of TDS under section 195. Held: Assessee imported the raw material for its consumption based on a letter of credit and paid usance charges, the beneficiary of such charges was the foreign seller. The issuing bank of assessee's has merely acted as an agent of the assessee. Usance charges, therefore, constituted income of non-resident as envisaged in the provisions of section 9(1)(v)(b) read with section 5(2). Therefore, section 195(1) got attracted and assessee was obliged to deduct tax at source, failing which such expenditure could not be exempted under section 40(a)(i).

REFERRED :

FAVOUR : Against the assessee.

A.Y. : 2009-10

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