Section 194N Exemption for Foreign Representations: Key Highlights of the New Income-Tax Notification

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  On 28th November 2024 , the Ministry of Finance issued Notification No. 123/2024 , bringing clarity to the applicability of Section 194N of the Income-tax Act, 1961. The notification exempts specified foreign representations from the provisions of this section, reinforcing India's commitment to international diplomatic norms and global cooperation. Effective from 1st December 2024 , this move comes after due consultation with the Reserve Bank of India (RBI) and aligns with international protocols such as the Vienna Convention and the United Nations Privileges and Immunities Act . Understanding Section 194N of the Income-tax Act Section 194N mandates tax deduction at source (TDS) on cash withdrawals exceeding ₹1 crore in a financial year . The provision applies to withdrawals from banks, co-operative banks, and post offices, aiming to curb cash usage and promote digital transactions. Fifth Proviso to Section 194N The fifth proviso grants the Central Government the authority ...
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Proper Classification of Late Payment Charges: Insights from Raha Limited Case

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Introduction

Accurate financial reporting is crucial for maintaining the trust of stakeholders and ensuring compliance with accounting standards. A recent case involving Raha Limited, a joint venture company operating a gas-based Ammonia-Urea plant, has highlighted key issues in the classification of late payment charges in financial statements. This blog examines the debate surrounding the classification of such charges and provides clarity based on relevant provisions of Ind AS 1 and expert advisory opinions.

Case Background

Raha Limited delayed payments to G Ltd. under a long-term gas sales agreement during 2022-23, leading to late payment charges of ₹79.88 crore in 2023-24. These charges were classified under "Finance Costs" in the financial statements.

Auditor’s Concerns

  1. Classification: The auditor argued that late payment charges should be included under "Other Expenses" based on the Guidance Note on Division II – Ind AS Schedule III.
  2. Disclosure as Exceptional Item: The auditor suggested that the significant increase in late payment charges compared to the prior year warranted separate disclosure as an exceptional item under Ind AS 1.

Company’s Position

  • The company maintained that these charges represent a working capital financing cost, consistent with the principle of substance over form.
  • It argued that reclassifying the charges under "Other Expenses" might mislead stakeholders and violate Ind AS 1, which limits the use of exceptional item disclosures.

Key Provisions and Expert Guidance

Relevant Ind AS Provisions

Ind AS 1: Presentation of Financial Statements

  • Para 82(b): The profit or loss section must include finance costs as a separate line item.
  • Para 97: Material items of income or expense should be disclosed separately.
  • Materiality Definition: Information is material if its omission, misstatement, or obscurity could influence users’ decisions.

Ind AS 32 and Ind AS 109

  • Interest on financial liabilities measured at amortised cost should be presented as finance costs.
  • Since late payment interest arises from a contractual obligation to deliver cash, it qualifies as a financial liability and must be classified under finance costs.

Expert Advisory Committee (EAC) Opinion

The EAC addressed two critical aspects:

1. Classification of Late Payment Interest

  • Late payment charges are linked to overdue payments for raw material purchases and are part of the company’s financial liability.
  • Interest incurred on delayed payments qualifies as finance costs because it is an expense arising from the amortised cost of a financial liability under Ind AS 109.
  • Recording such interest under finance costs aligns with the nature of expense method outlined in Ind AS 1.

2. Exceptional Item Disclosure

  • Ind AS Schedule III requires separate presentation of exceptional items but does not define them.
  • Since late payment charges are a routine business expense, they do not meet the criteria for exceptional item classification.
  • However, given their materiality, the charges should be disclosed separately within finance costs, accompanied by detailed notes to ensure clarity and transparency.

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