20 November 2007
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? Please clear the facts in terms of Circular: No. 65 [F. No. 275/97-ITJ], dated 2-9-1971 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?
20 November 2007
YES. L/C DISCOUNT CHARGES ARE OF THE NATURE OF INTEREST. BUT UNDER SEC 194 A int. paid to bank doe not attract tds. LETTERS OF CREDIT AS PER PRUDENT ACCOUNTING NORMS AND ICAI GUIDELINES ARE SHOWN AS CONTINGENT LIABILITIES IF THEY ARE NOT DUE. BUT IF THE LIABILITY IS ALREADY CRYSTALLISED BY BANK WHICH DEBITS THE CUSTOMER ACCOUNT AFTER PAYING THE FOREIGN BANK, IT IS A CONFIRMED LIABILITY( LIABLE TO BANK) TO BE SHOWN AS CURRENT LIABILITY. SUPPLIR IS NOT IN PICTURE. ONLY DIFFERENCE IS TIMING DEPENDING IF IT IS A CASE OF BILLS DRAWN AT SIGHT OR ON ACCEPTANCE BASIS. IN THE LATTER CASE ON THE DUE DATE ONLY THE LIABILITY CRYSTALLISES,WHERE AS SIGHT BILLS NEEDTO BE DEBITED IMMDTLY BY BANK. R.V.RAO
07 January 2013
First, It the finance transaction with your bank and not with customer. The customer not giving you any interest to your compnay. The customer has to pay only invoice amount only for goods. (Bill amt. only to his bank not to us).
In such case discount is received by your bank and not customer. 194A has exemption from TDS of interest payment to bank.
Secondly, TDS on u/s 194A in on interest paid and not on bill discounting as you are receiving less money from your bill. following judgement may help you:
[2009] 34 SOT 424 (DELHI)
IN THE ITAT DELHI BENCH ‘B’
Assistant Commissioner of Income-tax, Circle 3(1), New Delhi v. Cargill Global Trading (I) (P.) Ltd.
Sec 194A provides certain exception for non deduction of TDS like if such interest credited or paid to - (a) Any banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies, but the LC contains two clauses mostly like Interest from date of Bill of Exchange or date of negotiation..... In First case, interest has been charged for whole period in BOE but the discounting bank charged only from date of discounting. Hence, the Bank will give credit for whole BOE Amount but the "interest will charged only from discounting date.
In second case, the Interest collected will be same as chrged in BOE, hence no Interest element received to Beneficiary.
Therefore, it may be safer side to deduct TDS on such Interest when making BOE.
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