Interest Received By American Express India Branch From Head Office, Overseas Branches Not Taxable: ITAT Mumbai

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that interest received by the Indian branch of American Express Bank from its Head Office and overseas branches is not taxable in India.

The Tribunal found that the transactions were between different parts of the same entity and therefore attracted the principle that a person cannot make a profit from oneself.

A bench of Vice President Saktijit Dey and Accountant Member Prabhash Shankar was hearing cross-appeals relating to Assessment Year 1999-2000 involving American Express Bank, a non-resident banking company with a Permanent Establishment in India.

Referring to an earlier Special Bench ruling, the Tribunal observed, "In case of Sumitomo Mitsui Banking Corporation (supra), a five-member Special Bench of ITAT has decided identical issue in favour of the assessee by holding that the interest received from and paid to head office and foreign branches is not taxable either at the hands of PE or at the hands of the head office or foreign branches, applying the principles of mutuality under the domestic law."

During assessment proceedings, the tax department took the view that interest received by the Indian branch from the bank's overseas Head Office and foreign branches through NOSTRO accounts was taxable in India.

American Express Bank, however, argued that the Head Office and branches were not separate entities under domestic law. The bank maintained that any payment or receipt between them amounted to a transaction with itself.

The Tribunal noted that the issue had already been considered by the Special Bench in Sumitomo Mitsui Banking Corporation and by the Bombay High Court in Credit Agricole Indosuez.

Following those precedents, it upheld the Commissioner of Income Tax (Appeals)' decision deleting the addition made by the Assessing Officer on account of the interest receipts.

The tribunal also examined the Revenue's challenge to the allowance of expenses incurred by the foreign Head Office on behalf of the Indian branch.

While considering the issue, the Tribunal referred to the Supreme Court's ruling in Director of Income Tax (IT)-I, Mumbai v. American Express Bank Ltd. It noted that the Supreme Court had rejected any distinction between common head office expenditure and expenditure incurred exclusively for Indian operations.

The tribunal held, "Thus, keeping in view the aforesaid observations of Hon'ble Supreme Court, it needs to be examined whether the deduction claimed of Rs.11,06,92,634/- would fall within the meaning of 'head office expenditure' as explained under the Explanation (iv) to section 44C of the Act."

The tribunal observed that the lower authorities had not adequately examined the nature and character of the expenses claimed by the bank. It noted that some of the expenditure appeared capable of falling within the statutory definition of "head office expenditure". However, the required factual findings were not available on record.

It, therefore, restored the issue to the Assessing Officer for fresh adjudication. The Assessing Officer was directed to undertake a detailed examination of the expenditure claimed by the bank.

Another dispute concerned a disallowance relating to exempt income earned from tax-free bonds and dividends.

The Commissioner (Appeals) had found that American Express Bank possessed interest-free funds that substantially exceeded the investments made for earning exempt income. The Tribunal agreed with that finding. It also noted that the tax department had failed to establish a direct nexus between borrowed funds and the investments generating exempt income.

Explaining the position, the Tribunal observed, "Now, it is fairly well settled that when the assessee has kitty of mixed funds available with it comprised of both interest free and interest-bearing funds, the presumption would be the interest free funds have been utilized for investments in exempt in yielding assets."

Accordingly, the tribunal upheld the deletion of the disallowance made on that account.

The Revenue's appeal was partly allowed for statistical purposes. Certain issues were remanded to the Assessing Officer for fresh consideration.

For Appellant: P. J. Pardiwala/Hiten Thakkar

For Respondent: Satya Pal Kumar-CIT(DR)