ITAT Mumbai Rules Barclays Bank's Interest From Overseas Branches Not Taxable In India

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that interest earned by the Indian branches of Barclays Bank PLC from its Head Office, overseas branches and other overseas banks is not taxable in India.

It ruled that transactions between the Indian branch and its Head Office amount to payments to self and cannot give rise to taxable income under domestic tax law.

A bench of Vice President Saktijit Dey and Accountant Member Prabhash Shankar observed that, while a permanent establishment may be treated as a distinct entity for attributing profits under a tax treaty, the Indian branch and the Head Office remain the same legal entity under domestic tax law.

The tribunal observed, "The expression 'such person' in the concluding part of the provision is with reference to the non-resident who has incurred the debt or borrowed the money for use in business or profession carried out in India."

It further observed, "The departmental authorities have failed to correctly interpret the provision of section 9(1)(v)(c) of the Act, hence, committed the error of bringing to tax the interest received by the Indian branches from other overseas branches."

Barclays Bank PLC, a UK-incorporated bank, had challenged the addition of interest earned by its Indian branches from Nostro accounts, placements with its Head Office and overseas branches, and deposits placed with other overseas banks. The tax department had treated the interest as taxable in India.

The bank argued that the Indian branch and its Head Office formed a single legal entity under domestic tax law and, therefore, it could not earn income from itself. It also contended that the interest received from other overseas banks could not be taxed because those banks had not borrowed the funds for use in a business or profession carried on in India.

Accepting these submissions, the tribunal held that interest received by the Indian branch from its own Head Office and overseas branches amounted to a payment to itself and therefore not taxable in India

The tribunal also held that the interest received from other overseas banks fell outside the scope of the provision governing the taxation of such income. It found that the tax department had failed to establish that the overseas banks had incurred the debt or borrowed the money for use in a business or profession carried on in India, a mandatory condition for bringing the interest to tax.

It also rejected the department's contention that the income could instead be taxed under the general charging provision. The tribunal held that where the Income Tax Act contains a specific provision governing the taxation of interest income, the general provision cannot be invoked.

Accordingly, the tribunal allowed Barclays Bank's appeals for the assessment years 1998-99, 1999-2000 and 2000-01 on this issue, deleted the additions made by the tax authorities, and dismissed the Revenue's appeals and cross-objections.

For Assessee: P.J. Pardiwala, Shri Madhur Agrawal & Shri Fenil Bhatt

For Revenue: Krishna Kumar, Sr.- DR