Dt. 09.05.

2012

To
M/s Varma & Varma,
Chartered Accountants,
Cochin.

Kind attn.: Mr. Radhesh Bhatt

Sub: Legal Advise/opinion on TDS u/s 194A applicability on Interest Payment – Reg.

Please note that we are opening Inland LC’s with our Bank in favour of Suppliers of Cotton on the
following terms & conditions:

(1) Supplier shall be presenting the documents drawn in confirmative with the LC terms with Bill
of Exchange accepted by us for Discounting and getting funds from their Banker

(2) Their Banker is charging interest for the usance period of 90 days from the supplier and net
amount is being funded to them

(3) As per the LC terms, the interest for the usance period shall be on our account which should
not exceed the Bank Rate

(4) Supplier is raising TWO Bill of Exchanges representing Invoice for the material cost e.g say
Rs.10 Lacs and other towards Debit Note for Interest say 0.30 lacs

In this case whether the TDS u/s 194A is applicable, if so how to deduct TDS and give
acceptance/payment as the documents are being routed through Bank.

As per our knowledge the provisions of Section 194A is not applicable in the following case :---

“where Interest is credited or paid to any banking company, co-operative society engaged in
banking business, public financial institutions, the Life Insurance Corporation, the Unit Trust of
India, a company or a co-operative society carrying on the business of insurance, or notified
institutions”.

Hence in the present case we opine that TDS is to be deducted u/s 194A since the Interest is
charged by Supper and not by the Bank and the Net Amount only to be remitted to Bank against the
documents . However and If we deduct TDS the same will lead to Short Payment to Bank?. How to
overcome this problem?

However the Supplier is arguing that TDS u/s 194A is not applicable since you are making Payment
to the Bank against Documents and there after your Bank is making Payment to our Banker which
is only a REIMBURSEMENT and finally our Bank is crediting the same to our A/c net of Interest
charged by them.

In view of the above kindly give your expert opinion on the above mentioned subject matter at the
earliest.
Best Regards,

M.SATYANARAYANA
Vice President (F&A).