Interest paid on long term borrowings is presented as an addition to Net Profit before tax, being a:

Non-operating item

The correct answer is Option (3) - Non-operating item

CASH FLOW FROM OPERATING ACTIVITIES-
Net Profit/Loss before Tax and Extraordinary Items
 ADD: Deductions already made in Statement of Profit and Loss on account of Non-cash items such as Depreciation, Goodwill to be Written-off.
 ADD: Deductions already made in Statement of Profit and Loss on Account of Non-operating items such as Interest.
DEDUCT: Additions (incomes) made in Statement of Profit and Loss on Account of Non-operating items such as Dividend received, Profit on sale of Fixed Assets
Operating Profit before Working Capital changes
Add : in case of increase in current assets (other than cash and cash equivalent) and decrease in current liabilities.
Less : in case of decrease in current assets (other than cash and cash equivalent) and decrease in current liabilities.
Cash Flows from Operation Activities before Tax and Extraordinary items
– Income Tax Paid
+/–Effects of Extraordinary Item

*INTEREST PAID ON LONG TERM BORROWINGS IS A FINANCING ACTIVITY.