ATMs Are 'Computers' Under Income Tax Rules, Calcutta High Court Allows Higher Depreciation

The Calcutta High Court has held that Automated Teller Machines (ATMs) qualify as “computers” for claiming the higher depreciation rate under the Income Tax Rules, rejecting the Revenue's classification of the machines as general office equipment or machinery.

“The revenue's attempt to categorise these units as general office equipment or machinery ignores the technical reality that they are specialised computing devices. Given that the technical specifications of an ATM align with the broad category of computers described in Appendix I, the appellant's claim for the higher depreciation rate is sustainable. This court finds that the functional parity between an ATM and a computer is sufficient to warrant its inclusion under the relevant rule for depreciation. We answer the substantial question (4) in the negative, i.e., against the revenue and in favor of the assessee,” the court ruled.

The dispute concerned the rate at which The Royal Bank of Scotland N.V. could depreciate its ATMs for Assessment Year 2003-04. The bank had claimed the higher rate prescribed for computers under item 2B of Appendix I to the Income Tax Rules.

The tribunal had restricted the claim, leading to the question of whether an ATM could be treated as a computer for depreciation purposes.

A Division Bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar was hearing the bank's appeal against a July 10, 2007 order of the Income Tax Appellate Tribunal, Kolkata.

The court explained that an ATM is not merely a mechanical cash dispenser. It is a data-processing unit that relies on internal processing power, specialised software and constant network communication with central banking servers.

It held that the classification of an asset for depreciation purposes has to be determined by its functional utility in the assessee's business. For a banking enterprise, the court noted, ATMs perform functions similar to those of standard workstations or servers.

The court said the core of an ATM's operation involves digital data processing. It held that the technical characteristics of the machines aligned with the broad category of computers described in Appendix I. The functional parity between an ABM and a computer was therefore sufficient to bring the machines within the relevant depreciation category.

The ATM issue was one of four substantial questions before the court. The other issues concerned the tax rate applicable to the foreign bank and the treatment of interest paid and received by its Indian Permanent Establishment (PE).

The bank had argued that it should be taxed at the rate applicable to domestic companies by relying on the non-discrimination provision in Article 24(2) of the India-Netherlands Double Taxation Avoidance Agreement (DTAA). The court rejected the claim.

The court noted that the bank was a foreign company and did not satisfy the statutory definition of a domestic company. It also relied on the Explanation to Section 90 of the Income Tax Act, which provides that charging a foreign company at a higher rate would not be regarded as less favourable treatment.

The court further held that the “same circumstances” requirement under Article 24(2) was not met. It noted that a foreign company is taxed only on its Indian-sourced income, while a domestic company is taxed on its global income. The court therefore answered the first substantial question against the assessee and in favour of the Revenue.

On the second issue, the court upheld the disallowance of ₹99,77,325 in interest paid by the Indian branch to its overseas head office. The issue concerned Section 40(a)(i), which restricts the deduction of certain payments made outside India where the required tax has not been paid or deducted at source.

The bank had argued that the payment was effectively a payment to itself because the branch and head office formed part of the same legal entity. The court rejected this argument in the context of determining the taxable profits of a Permanent Establishment. It held that the separate-entity approach under Article 7 of the DTAA meant that the bank had to comply with the applicable tax deduction requirements.

The court consequently upheld the disallowance because the bank had failed to deduct tax at source. It answered the second substantial question against the assessee and in favour of the Revenue.

On the third issue, the court held that interest received by the Indian PE from its overseas head office and other foreign branches had to be included while computing its taxable profits in India.

The court explained that the PE and the overseas head office are treated as separate and distinct enterprises for determining profits under Article 7 of the DTAA. It therefore rejected the argument that the interest could be excluded as a “payment to self”

The appeal was partly allowed. The court answered the first three substantial questions in favour of the Revenue and the ATM depreciation question in favour of the bank.

It modified the tribunal's order to that extent and directed the Assessing Officer to pass a consequential order giving effect to the relief granted to the bank for Assessment Year 2003-04.

For Appellant: Senior Advocate Percy J. Pardiwalla, along with Advocates Akhilesh Kumar Gupta and Asit Kumar De

For Revenue: Advocates Prithu Dudhoria and Amit Sharma appeared for the Revenue