Is Tds applicable on trade credit interest to foreign vendor

We purchased machinery through trade credit basis (3 years repayment) from liberia to india. Is Tds applicable against trade credit interest payable to foreign vendor under sec 195? 

 

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Quick Summary
This discussion explores whether Tax Deducted at Source (TDS) is applicable on interest paid to a foreign vendor for trade credit used to purchase machinery. While initially suggested that TDS is applicable, further analysis and case law indicate that interest on delayed payment of purchase price might be considered part of the purchase cost rather than 'interest' under Section 2(28A) of the Act. This distinction could mean TDS under Section 194A may not apply, though differing interpretations from tax authorities are possible.

Yes, applicable.               

Thanks for your reply

You are welcome.                  

Dear Sir, Trade Credit Interest- is it consider as "interest" or " penalty & Damages"? 

It is interest only, just like purchased on EMI.

Sir we purchased machinery not through bank. when I pay  Interest to Vendor against Trade Credit basis, May it consider as interest? 

It is said to be purchased on credit. You need not purchase it through bank, but when you pay interest to the vendor under purchase contract, it is called interest only.

ACIT v. Trimex Industries (P) Ltd. (ITA No. 422 of 2013) (Chennai Tribunal)- rendered on October 29, 2015 It was held in this case, that the amount to be paid is not a question of money borrowed, and interest thereon, but a payment made for purchase and a compensatory charge for the period of credit utilized for payment of the amount due. Considering the above legal analysis and jurisprudence, it can be contended that interest paid/payable for delay in purchase price partakes the nature of purchase price and not ‘interest’ in the sense defined under section 2(28A) of the Act. Once the payment is not within the meaning as defined in section 2(28A) of the Act, TDS provision under section 194A will have no application on payment of such interest. Having said this, there may be diverse decision[5], but there is no decision of the jurisdictional High Court or the Supreme Court on the subject and therefore, the lower tax authorities may dispute the characterization of the payment. Conclusion: It can be contended that no TDS is required to be deducted under section 194A on interest payable on delayed payment of unpaid purchase price, which is supported by decisions specifically stated above. 

"Sir, Judgement which is above is not applicable in my case. Am I correct Sir? """""""""

It is trivial issue, no High court or Supreme court judgement over it.

The trouble is if you capitalize the interest as said above, and do not deduct TDS, department may issue notice for non-deduction of TDS. In that case you may have to take support of such judgements in appeal.

It is unto the decision of assessee, which option he likes.

Thank you very much Sir

My Pleasure.              

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