2024 (2) TMI 1591 - AT - Income Tax

Nostro charges not taxable to PE; CSR donations deductible under Section 80G; Article 11 limits interest tax to 5%

First Abu Dhabi Bank PJSC Versus Deputy Commissioner of Income-tax (IT), Circle 2 (3) (1), Mumbai

ITAT MUMBAI allowed the assessee's appeal: (1) Nostro account charges recovered by an overseas bank from the assessee's foreign account are not ... Disallowing of “Nostro Account” charges by the overseas bank with respect of to Nostro Account maintained outside India - HELD THAT:- As undisputed fact that these charges were recovered directly by debiting the account of the assessee maintained outside India with the overseas bank and there was no remittance of money by the assessee in respect of such account maintenance charges. AO could not controvert the fact that the charges recovered by the overseas bank was not in the nature of managerial, technical or consultancy services and the said income has no nexus with its PE in India. On this issue the ITAT Mumbai in the case of Oman International Bank [2014 (2) TMI 743 - ITAT MUMBAI] held that no tax is required to be deducted at source in respect of the bank charges paid on Nostro Account. Therefore, the income in the form of bank charges was earned by the foreign bank from a source outside India without attributable to permanent establishment (PE) of the foreign bank in India. The assessing officer is directed to allow the claim of deduction of the charges recovered by the bank with respect to the nostro account maintained by the assessee outside India. Accordingly, this ground of appeal is allowed. Disallowance of CSR expenses (Corporate Social Responsibility) as per explanation to Section 37 - assessee has claimed part of CSR expenses as donation and claimed deduction in chapter VIA of the Act - AO disallowed the claim of deduction u/s 80G on the ground that assessee has not spent the amount voluntarily and the same was spent as per the requirement of spending under CSR expenses - HELD THAT:- We find that there is nowhere provided that assessee is not eligible to claim the deduction u/s 80G of the Act in respect of the expenditure which has been spent as a donation out of the CSR expenses in case all conditions laid down in Section 80G are fulfilled. We have perused the decision of ITAT in the case of March Mclennan Global Services India - Private Ltd. [2022 (12) TMI 1436 - ITAT MUMBAI] wherein identical issue on similar fact has been adjudicated in favour of the assessee Assessee is eligible for deduction u/s 80G in respect of amount spent on donation u/s 80G of the Act if all the conditions laid down in Sec. 80G of the Act are fulfilled even though on such expenses deduction for CSR expenses was not allowed. Therefore, this ground of appeal is allowed. Treating of payment of interest by the assessee to its head office as income under the head profits and gains from business and profession - assessee has paid interest to head office branch as payment towards interest and taxed it @ 5% under India – UAE DTAA instead of @ 40% as per explanation to 9(1)(v) - HELD THAT:- Considering the provision of Article 11 of India-UAE Tax Treaty and circular no. 740 dated 17.04.1996 issued by the CBDT, we find the lower authority have not brought any contrary material to disprove the claim of the assessee that impugned interest income is taxable @ 5% as per India UAE Treaty. ISSUES PRESENTED AND CONSIDERED 1. Whether bank charges debited to a foreign-maintained Nostro account and recovered outside India are taxable in India or disallowable under section 40(a)(i) where no tax was deducted at source. 2. Whether expenditure incurred as Corporate Social Responsibility (CSR) which is otherwise disallowed under Explanation 2 to section 37 can nevertheless qualify for deduction under section 80G if it satisfies the conditions of section 80G. 3. Whether interest paid by an Indian permanent establishment (PE) to its head office (HO) abroad is taxable in India as business profits of the PE under explanation to section 9(1)(v) (taxed at higher domestic rate) or is chargeable under the India-UAE DTAA at the treaty rate applicable to interest (5% for bank interest), and whether both domestic and treaty taxation can be applied resulting in double taxation. 4. Validity/timeliness and procedural grounds raised (invalid notice under section 143(2), final order beyond section 153 outer time limit, initiation of penalty proceedings under section 270A, and premature/adjunct grounds) to the extent they impact substantive relief granted on merits. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability and disallowance of Nostro account charges (section 40(a)(i)) Legal framework: Section 40(a)(i) disallows expenditure where tax is required to be deducted at source on payments to non-residents and tax is not deducted. Taxability of income of a non-resident depends on source, situs of accrual, and nexus with a PE in India. Precedent treatment: The Tribunal followed earlier coordinate-bench authority holding that bank charges debited to Nostro accounts maintained outside India, and recovered by foreign banks without remittance from India, are not subject to Indian TDS and therefore not within section 40(a)(i) disallowance. Interpretation and reasoning: The Court found undisputed facts that (a) Nostro accounts were maintained outside India; (b) charges were directly debited by overseas banks from those accounts; (c) there was no remittance from India in respect of such charges; and (d) the charges were not for managerial, technical or consultancy services and had no nexus with any PE in India. Applying the source and nexus principles, the income in the hands of foreign banks arose outside India and was not attributable to any PE in India; consequently no Indian TDS obligation arose. Ratio vs. Obiter: Ratio - where bank charges are recovered by debiting a Nostro account maintained outside India and have no economic nexus with any PE in India, they are not taxable in India and cannot be disallowed under section 40(a)(i). The Tribunal explicitly follows and applies prior coordinate-bench authority to the same factual matrix. Conclusion: Disallowance under section 40(a)(i) was quashed; deduction for Nostro account charges allowed. Issue 2 - Deduction of amounts spent as donations out of CSR expenditure (section 80G versus Explanation 2 to section 37) Legal framework: Explanation 2 to section 37 disallows expenditure on CSR for business deduction purposes; section 80G provides specific deductions for donations if statutory conditions are met. Section 144C(13) requires AO to give effect to DRP directions. Precedent treatment: Coordinate-bench decisions of the Tribunal have held that CSR spending, though disallowed under section 37, may nonetheless qualify for section 80G deduction if the donation satisfies all conditions of section 80G; prior Tribunal orders directing remand for conformity with DRP directions were followed. Interpretation and reasoning: The Tribunal observed that Explanation 2 to section 37 removes CSR expenditure from general business deductions but does not contain an express prohibition against subsequent allowance under chapter VIA (section 80G) where the statutory conditions of section 80G are otherwise satisfied. Given the assessee had identified specific donations out of CSR expenditure and sought section 80G relief and given the coordinate-bench authority and DRP directions on similar facts, the Tribunal held there is no bar to allowing section 80G deduction where conditions of that section are fulfilled. The Tribunal noted that AO must act in conformity with DRP directions under section 144C(13). Ratio vs. Obiter: Ratio - CSR expenditure disallowed under section 37 is not ipso facto barred from relief under section 80G; if donations forming part of CSR expenditure meet section 80G conditions, section 80G deduction can be allowed. The requirement to give effect to DRP directions is binding. Conclusion: Deduction under section 80G allowed for the identified donation amounts subject to fulfillment of section 80G conditions; AO directed to comply with DRP directions and prior Tribunal precedent. Issue 3 - Taxation of interest paid by PE to HO: domestic law (explanation to section 9(1)(v)) v. DTAA (Article 11) Legal framework: Domestic provision treats income attributable to a PE and certain payments between PE and head office under explanation to section 9(1)(v); section 90/90(2) provides that where DTAA applies, the more beneficial of domestic law or treaty prevails; Article 11 of the India-UAE DTAA caps withholding/taxation of interest arising in one Contracting State and paid to a resident of the other State (5% for bank loans). Precedent treatment: Coordinate-bench and higher authority decisions, including a Special Bench and High Court rulings on analogous issues, have addressed whether the PE/GE fiction in Article 7(2) should extend to Article 11 and whether interest paid by a PE to its HO is to be taxed in India or under the treaty rate. Administrative guidance (CBDT circular) clarifies that branch of foreign company is a separate entity for tax purposes and treaty rates apply where beneficial. Interpretation and reasoning: The Tribunal applied section 90(2) to determine that the DTAA rate (Article 11) which was beneficial to the assessee applies. The Tribunal considered that the interest was within Article 11's scope, that the assessee claimed the benefit of the 5% treaty rate for bank interest, and that neither the AO nor DRP produced contrary material to displace the treaty application. The Tribunal relied on prior coordinated authorities that treated the payment as eligible for treaty relief and on CBDT circular signaling applicability of the treaty rate for interest paid by an Indian branch to its head office where beneficial. Ratio vs. Obiter: Ratio - where DTAA applies and offers a lower rate, interest paid by an Indian PE to its non-resident head office that falls within the treaty definition of interest is taxable at the treaty-stipulated rate rather than higher domestic rate; domestic deeming provisions do not automatically negate DTAA benefit where treaty is more favourable. The application of prior authorities is binding for the facts. Conclusion: Interest taxed at the treaty rate (5%) under Article 11; AO's charge at domestic higher rate set aside. Consequential ground alleging double taxation unnecessary to decide after allowing treaty relief. Issue 4 - Procedural/timeliness and penalty-related grounds (sections 143(2), 153, 270A, Form 69 withdrawal) Legal framework: Validity of assessment depends on compliance with notice requirements and statutory time limits (sections 143(2), 153). Penalty under section 270A requires established under-reporting/misreporting. Form 69 procedure is prescribed for withdrawal of claims. Precedent treatment: The Tribunal treated ancillary/procedural grounds as academic or premature where substantive relief on merits was granted or where penalty proceedings were yet to be concluded. Interpretation and reasoning: As merits were decided favourably on principal grounds, the Tribunal deemed several procedural objections academic or premature: (a) challenge to notice under section 143(2) and to time-bar under section 153 were not adjudicated because substantive issues resolved; (b) penalty initiation under section 270A was premature and dismissed at this stage; (c) where the assessee filed Form 69 to withdraw a contested deduction, AO was directed to place the withdrawal on record for consideration in penalty proceedings. Ratio vs. Obiter: Obiter/administrative - procedural and penalty challenges were not finally adjudicated given merits disposition; direction to AO to record Form 69 withdrawal is interlocutory rather than a final ruling on penalty liability. Conclusion: Procedural/timeliness objections left open or dismissed as premature/academic in view of substantive allowances; AO directed to record claim of withdrawal (Form 69) for any future penalty consideration. Overall Disposition The appeal was partly allowed: (a) Nostro account charges allowed; (b) section 80G deduction allowed for donations meeting statutory conditions despite arising from CSR spending; (c) interest payment to HO taxed at DTAA rate (5%) rather than domestic higher rate; procedural/timeliness and penalty grounds were treated as academic or premature and either left open or dismissed at this stage, with directions to the assessing officer where appropriate (e.g., recording Form 69).