The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that interest received by an Indian branch of a foreign bank from its own head office or overseas branches is not chargeable to tax in India because both are the same entity under domestic law and such receipts are in the nature of payment to self. Further, interest received from other overseas banks is not taxable under Section 9(1)(v)(c) of the Income Tax Act unless it is shown that the debt incurred or money borrowed by those non-residents was used for a business or profession carried on by them in India, and Section 9(1)(i) cannot be invoked where the specific charging framework of Section 9(1)(v) if the Income Tax applies.
The Division Bench comprising Saktijit Dey (Vice President) and Prabhash Shankar (Accountant Member) observed that interest earned by the Indian branches from Nostro accounts and placements with the head office and overseas branches could not be taxed because, under domestic law, the Indian branch and head office are not distinct and separate entities, and one cannot make profit out of oneself. It further held that although treaty provisions may treat the permanent establishment as a distinct entity, that is only for the limited purpose of profit attribution.
As regards interest received from other overseas banks, the Tribunal found that Section 9(1)(v)(c) did not apply because the Department failed to establish that the non-resident overseas banks had used the borrowed money for any business or profession carried on by them in India. The Tribunal also rejected the Revenue’s attempt to invoke Section 9(1)(i), holding that once a specific provision like Section 9(1)(v) governs interest income, the general provision cannot be applied.
On the expenditure issues, the Tribunal observed that Section 14A was wrongly invoked in relation to interest income taxed at the beneficial rate under Section 115A because this was not a case of exempt income. It also held that no disallowance of interest expenditure could be made against exempt income where the assessee had sufficient interest-free funds. On broken period interest paid on purchase of current securities held as stock-in-trade for SLR purposes, the Tribunal followed Supreme Court precedent and held it allowable as revenue expenditure.
On the write-back of bad debts, the Tribunal observed that if the amount had already been taxed in an earlier year, it could not be taxed again and directed factual verification. It also upheld allowability of club membership fees for employees, deleted interest levied under Section 234B on refund granted under Section 143(1)(a), allowed foreign exchange revaluation loss following Special Bench precedent, and upheld deduction of RBI charges for inadequate CRR/SLR balance, treating them as allowable and not hit by the proviso to Section 37(1).
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Briefly, the appellant i.e., Barclays Bank PLC, is a non-resident banking company incorporated in the United Kingdom with branches in Mumbai and New Delhi constituting its permanent establishment in India. The principal dispute was whether interest received by the Indian branches from Nostro accounts, placements with the head office and overseas branches, and placements with other overseas banks was taxable in India. The case also involved issues relating to disallowance under Section 14A, taxability of FCNR(B) interest on gross basis under Section 115A, write-back of bad debts, broken period interest on purchase of securities, club membership fees, levy of interest under Section 234B, foreign exchange revaluation loss, and deductibility of amounts paid to RBI for shortfall in CRR/SLR maintenance.
