Letter of Credit(LC)is opened by the buyer in favour of the supplier for supply of goods, which ensures the payment to the supplier at the end of the period of LC.Since the money is not immediately received, the supplier discounts LC with bank and realise the money. The supplier pays LC discounting charges.
As per the terms agreed, the buyer reimburses the LC discounting charges to the supplier.
Queries: 1. The LC discounting charges reimbursed by the buyer is in the nature of interest. Is it correct? 2. If it is correct, is it subject to TDS? 3. The buyer in his books of account does not show the Suppliers account in creditors but shows the LC account under acceptance creditors since the LC is opened in favour of the supplier? Is it correct?
SRI DHAVAL ONE OF OUR ESTEEMED MEMBERS OF C.A FORUM HAS REPLIED THIS ISSUE, WHICH I REPRODUCE BELOW FOR THE BENEFIT OF OUR MEMBERS. YOUR QUERY 1 AND 2 ARE REPLIED BELOW. Discounting of usance bills and hundis - Where the supplier of goods makes over the usance bill/hundi to his bank which discounts the same and credits the net amount to the supplier’s account straightaway without waiting for realisation of the bill on due date, the property in the usance bill/hundi passes on to the bank and the eventual collection on due date is a receipt by the bank on its own behalf and not on behalf of the supplier. For such cases of immediate discounting the net payment made by the bank to the supplier is in the nature of a price paid for the bill. Such a payment cannot technically be held as including interest and therefore no tax need be deducted at source from such payments by the bank. Where there is no immediate discounting and the bank merely acting as agent receives on the expiry of the period the payment for the bill from the buyer on behalf of the supplier and credits it to him accordingly, the bank receives interest on behalf of the supplier and the buyer will have to deduct the tax from the interest.—Circular: No. 65 [F. No. 275/79/ITJ], dated 2-9-1971. YOUR QUERY 3 IS ANSWERED IN AFFIRMATIVE AS TO WHAT YOU STATED IS CORRECT. R.V.RAO