[Opinion] Whether usance charges paid to Indian Banker on import purchases by assessee is liable for TDS?

Most of the importers in India imports goods on the basis of Letter of Credit and pay usance charges to Banks for said credit facility. Now question arise whether the importer is liable to deduct tax under section 195 of the Income Tax Act,1961 on the usance charges paid to Indian Bank.

Usance means the allowable period of time permitted by customs between the date of bill and its payment. The usance of a bill varies between countries. The charges paid for usance period are called usance charges.

Usance charges in import purchases are paid on letter of credit. Usance letter of credit is a letter of credit that requires beneficiary to present as a necessary document. The ultimate beneficiary of the usance charges is the supplier of goods/services.

As per section 2(28A) of the Income Tax Act,1961 “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 money borrowed or debt incurred or in respect of any credit facility.

Now from the above definition, it is clear that the expression “Interest” for the purpose of Income Tax Act, 1961 includes any service fee or other charges in respect of any credit facility. Therefore, on a plain reading of the said clause, the charges paid by the assesses in respect of the credit facility amount to interest. Hence the usance charges paid by the importer comes under the definition of interest.

As per Section 195(1) of the Income Tax Act Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) (or section 194LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:

[Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode.]

[Explanation 1.—For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest Payable Account” or “Suspense Account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.]

[Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—

Though Usance charges may be paid to the Indian bankers by way of LC Charges and commission, nevertheless, such payment, is a part of the transaction involving purchase/import of raw material from non-residents.

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