Tds on interest in buyers credit

This query is : Resolved 

(Querist) 26 September 2011

Dear Sir
We have taken loan through Buyers Credit with usance period of 90 days. TDS under section 195 needs to be deducted on interest to be paid to the foreign Bank. In this transaction It might happens that interest will be booked at one rate of Foreign Currency but at the time of Payment Interest Liability may increase due to variance in rate of Foreign Currency. Due to increase in the Interest amount TDS liability will also increase with the increase of Foreign Currency rate? Example is given below explaining our scenario:-

At the time of Credit:-
Interest 10 USD @ Rs.40 = Rs.400
TDS u/s 195@10% 1 USD @Rs.40 = Rs.40

At the time of Payment:-
Interest 10 USD @ Rs.50 = Rs.500
We would like to know whether TDS needs to be paid on Rs.100 paid extra as interest on Exchange Rate Variance?
Kindly guide us as soon as possible.

Thanks & Regards
Vishal Chandarana

CA Siddhartha Bhardwaj (Expert) 27 September 2011

The extra amount paid by you due to change in exchange rate is not interest. As per AS-11, it will be treated as foreign exchange fluctuation loss and will be transferred to P&L.

Your interest amount will always remain the same, in your case, Rs. 400.

So, there is no need to pay TDS on the excess amount.

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