Three Important Judgements On TDS On Discounting Charges, Profit Split Method And S. 80-P Deduction For Co-op Society

The following important judgements are available for download at itatonline.org.

ITO vs. M K J Enterprises Ltd (ITAT Kolkata)

Expenditure on discounting/factoring charges is not in the nature of interest for purposes of TDS u/s 194A or disallowance u/s 40(a)(ia)

The term “interest” relates to a pre-existing debt, which implies a debtor creditor relationship. Unpaid consideration gives rise to a lien over goods sold and not for money lent as held in Bombay Steam Navigation Co. Pvt. Ltd. Vs. CIT (1963) 56 ITR 52 (SC) where interest on unpaid purchase price was not treated as interest on loan. It is clear from the definition that before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred. According to us, discounting charges of Bill of Exchange or factoring charges of sale cannot be termed as interest. The assessee in the present case is acting as an agent. Now what is this is to be seen. A Del Credere is an agent, who, selling goods for his principal on credit, undertakes for an additional commission to sell only to persons for whom he can stand guarantee. His position is thus that of a surety who is liable to his principal should the vendee make default. The agreement between him and his principal need not be reduced to or evidenced by writing, for his undertaking is a guarantee. A Del Credere Agent is an agent who not only establishes a privity of contract between his principal and the third party, but who also guarantees to his principal the due performance of the contract by the third party. He is liable, however, only when the third party fails to carry out his contract, e.g., by insolvency. He is not liable to his principal if the third party refuses to carry out his contract, for example, if the buyer refuses to take delivery. In the present case before us the assessee has assessed the income as Del Credere being trading in goods and merchandise and also dealing in securities and which is assessed as income from business and not income from other sources. The expenditure incurred is also on account of business expenditure and not interest expenditure in the nature of interest falling u/s. 194A of the Act. Accordingly, these discount/factoring charges do not come within the purview of section 194A and assessee is not liable to TDS on these charges

ITO vs. Net Freight (India) P. Ltd (ITAT Delhi)

Transfer Pricing: Law for applying Profit Split Method as per Rule 10B (1) (d) explained

The Profit Split Method as provided under Rule 10 B(1)(d) is applicable mainly in international transactions: (a) involving transfer of unique intangibles; (b) in multiple international transactions which are so interrelated that they cannot be valuated separately. The method specified in clause (ii) of Rule 10 B(1)(d) that the relative contribution made by each of associated enterprise should be evaluated on the basis of FAR analysis and on the basis of reliable external data. Thus, bench marking by selection of comparables is mandatory under this Method. The profits need to be split among the AEs on the basis of reliable external market data, which indicate how unrelated parties have split the profits in similar circumstances. For practical application, we are of the view that, bench marking with reliable external market data is to be done, in case of residual profit split method, at the first stage, where the combined net profits are partially allocated to each enterprise so as to provide it with an appropriate base returns keeping in view the nature of the transaction. The residual profits may be split as per relative contribution of the Associated Enterprise. In our view at this stage of splitting of residual profits, no bench marking is necessary, as it is not practicable. Nevertheless, for splitting the residuary profits a scientific basis for allocation may be applied

CIT vs. Jafari Momin Vikas Co-op Credit Society Ltd (Gujarat High Court)

Bar in s. 80P(4) applies only to credit co-operative banks but not to credit co-operative societies

From CBDT circular No.133 of 2007 dated 9.5.2007 it can be gathered that sub-section (4) of section 80P will not apply to an assessee which is not a co-operative bank. In the case clarified by CBDT, Delhi Coop Urban Thrift & Credit Society Ltd. was under consideration. Circular clarified that the said entity not being a cooperative bank, section 80P(4) of the Act would not apply to it. In view of such clarification, we cannot entertain the Revenue’s contention that section 80P(4) would exclude not only the co-operative banks other than those fulfilling the description contained therein but also credit societies, which are not cooperative banks. In the present case, respondent assessee is admittedly not a credit co-operative bank but a credit co-operative society. Exclusion clause of sub-section (4) of section 80P, therefore, would not apply.