Withholding Tax (WHT) is applicable on Suppliers Credit Transactions

As seen in earlier article on WHT on Buyers credit, Under Sec 195 of Income Tax Act 1961, Tax is required to be deducted on the interest amount paid by the Indian corporate to overseas lenders (bank / suppliers) on the loans taken.

WHT tax

What is Suppliers Credit ?

Supplier’s Credit relates to credit for imports into India extended by

  • The overseas suppliers or
  • Financial institutions outside India.

Whether WHT is applicable on interest payment towards Suppliers Credit Transactions ?

Yes it is applicable.  Mumbai bench of the Income-tax Appellate Tribunal in the case of Uniflex Cables (Ltd) held that payment made to a foreign supplier towards finance charges for availing credit for purchase of raw material is in the nature of “Interest” under Section 2 (28A) of the Income Tax Act, 1961. Thus any payment made to overseas supplier or financial institution for such payment attracts WHT under Section 195.

Interest within the meaning of Sec.2(28A) of the Act. Sec.2(28A) of the Act was introduced by the Finance Act, 1976, w.e.f 1-4-1976 and it reads as under: “(28A) “Interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;”

  1. The Tribunal relied on the Gujarat High Court’s decision in the case of Vijay Ship Breaking Corporation where it was held that the non-resident is taxable under the Act in respect of usance interest and the same would be deemed to have accrued and arisen in India in view of the provisions of sec. 9(1)(v)(b) of the Act.
  2. Additionally, DTAA for the country in question needs to be referred. If the sum in question is treated as interest under the Act, whether the same is liable to tax in India in view of the DTAA between India and the countries of which the persons who supplied raw material to the assesse were tax residents. Reason The provisions of the Agreement will override the provisions of the Act.”  (Ref: Countrywise DDTA Agreements Copy)

Reference: Court Cases by both sides of the case.

  1. Uniflex Cables Ltd v. DCIT [I.T.A. No.7019/Mum/2006]
  2. CIT v. Vijay Ship Breaking Corpn [2003] 261 ITR 113 (Guj)
  3. Vijay Ship Breaking Corporation v. DCIT [2003] 86 ITD 497 (Rajkot)
  4. Transmission Corporation of A.P. Ltd v. CIT [1999] 239 ITR 587 (SC)
  5. CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP)
  6. CIT v. India Pistons Ltd [2006] 282 ITR 632 (Mad)
  7. Vijay Electricals Ltd v. DIT [ITA No.1072/Hyd/2004] dated 22 July 2011
  8. Delhi Developmnt Authority v. ITO [1995] 52 TTJ 107 (Del)
  9. Oriental Insurance Company Ltd v. ITO [2005] 96 TTJ 589 (Del)
  10. CIT v. Cargill Global Trading (I) (P) Ltd [2011] 56 DTR 188 (Del)
  11. CIT v. Govinda Choudhury & Sons [1993] 203 ITR 881 (SC)
  12. ABC International Inc. [2011] 199 Taxman 211 (AAR)
  13. Islamic Investment Co. v. Union of India & Anr [2004] 265 ITR 254 (Bom)
  14. Bombay Steam Navigation Co Pvt Ltd v. CIT [1953] 56 ITR 52 (SC)
  15. Bikram Singh & Ors v. Land Acquisition Collector & Ors [1997] 224 ITR 551 (SC)
  16. British Bank of Middle East v. CIT [1998] 233 ITR 251 (Bom)
  17. A & M Agencies v. CIT [1999] 239 ITR 136 (Mad)
  18. Shree Annapurna Financing Co. (P) Ltd. v. CIT 273 ITR 284 (Cal)
  19. Bhura Exports Ltd. v. ITO [2012] 202 Taxman 88 (Cal)

CBDT Circular

  • Circular No 65 dated 02 September 1971
  • Circular No 647 dated 22 March 1992

Impact on Importers

Process flow of payment of Withholding Tax

  1. First check the country from which supplier’s credit is to be made available to finalize rate of TDS (Refer link: Countrywise double taxation summary chart).
  2. Deposit the tax through challan no. 281 (Nature of payment 195).
  3. Get Form 15CB issued from Chartered Accountant (CA) for the suppliers credit interest payment.
  4. Submit online Form 15CA based on form 15CB provided by CA.
  5. Along with Form A2 submit Form 15CA and Form 15CB to Authorised Dealer (AD Bank) on or before due date of making payment for suppliers credit interest.
  6. File Quarterly return of withholding tax through Form No. 27Q (Section Code: 195).
  7. AD Bank forwards a copy of document to Assessing Officer / Income Tax Department.

Note: 

  1. If DTAA & PAN of suppliers credit providing bank is available, then as per DTAA .
  2. If no DTAA or PAN, then @ 20% (see section 206 AA of Income Tax Act).
  3. As per DTAA, rate of TDS should not exceed tax rate given in DTAA. Which means, where rate as per DTAA is applicable, Surcharge and Education Cess shall not apply.

Important Related Links

Example

For example: Withholding tax is 10% of the gross amount of the interest on loans made or guaranteed by a bank or other financial institution carrying on bonafide banking or financing business.

To explain you mathematically:

Suppliers Credit Foreign Bank :  If WHT is 10% than,

SC Amount: $100000, Libor: 1%, Margin: 1% (net of WHT) , Tenure: 180 days, USD / INR:  50

Net Interest Amount = $ 1000 = {$100000*2%*(180/360)}

Gross Interest Amount = $1111 = {$1000* (100/90)}

Withholding tax = $ 111 = Rs. 5550

Grossed up margin in % : 1.22% pa ($1111 / $100000 * 2)

* Note: Above content is collected from various sources. Request to consult a tax expert before using the same.

** As per Income Tax Act 1961: Sec 195A. [In a case other than that referred to in sub-section (1A) of section 192, where under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.]

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2 thoughts on “Withholding Tax (WHT) is applicable on Suppliers Credit Transactions”

  1. We did a BUYERS CREDIT ROLL OVER recently.
    Assuming the Net amount we paid comes to Rs10 Lacs to StanChart Bank on say 05/03/13 what will be the “additional” TDS we will have to pay GOI u/s 195 and what will be the due date for such TDS Payment? Will it be 10%(since INDIA has a DTA with UK) of Rs10 Lacs or 20%(since STANCHART does not hold an Indian PAN NO.?)
    What will be the next process? What will the TDS be paid as(code,if any) in online Payment?What will be the TDS Cert in FORM 16A(certified by a CA) and given to STANCHART?

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