Nostro Account maintenance charge not interest under Section 2(28A); Section 195-TDS inapplicable

The Mumbai Income Tax Appellate Tribunal (ITAT) has ruled that the maintenance charges for Nostro Accounts are not liable to be treated as interest under Section 2(28A) of the Income Tax Act. Additionally, the ITAT determined that Section 195, which pertains to Tax Deducted at Source (TDS), is not applicable to these charges.

The case pertained to HSBC, and the ITAT’s decision stemmed from an assessment year spanning 2013-14 and 2014-15. The central question revolved around whether HSBC should have withheld tax on the expenses linked to the maintenance of Nostro Accounts. The ITAT held that these charges are better characterized as standard bank fees rather than subject to tax deduction at source under Section 195.

The ITAT’s position was supported by a previous ruling by a co-ordinate bench in the case of Oman International Bank SAOG v. Dy. Director of Income-tax (International Taxation) [ITA No. 6800/Mum/2010], dated 27.12.2013. In this precedent, it was determined that charges related to Nostro Accounts were akin to bank charges for managing accounts held with foreign banks. These charges were directly debited from the respective accounts of the assessee with these overseas banks. Consequently, the ITAT concluded that these charges were the business income of the foreign banks, accruing outside of India, and thus not subject to tax deduction.

Counter to the Revenue’s argument, which attempted to categorize these charges as interest under Section 2(28A), the ITAT found no substantiated evidence to suggest that the assessee had taken on any debt, borrowed money, or utilized any credit facility for which the Nostro Account maintenance charges were incurred.

To delve into the specifics of the case, for the assessment year 2013-14, the Revenue disallowed the Nostro Account maintenance charges that the assessee had paid outside of India. This disallowance was made under Section 40(a)(i) due to the non-deduction of tax at source according to Section 195. Subsequently, proceedings under Section 201(1) and 201(1A) were initiated against the assessee for Tax Deducted at Source (TDS) non-compliance.

The assessee argued that these charges had been directly debited by overseas banks and weren’t separately remitted. The Revenue, however, asserted that the Nostro Account maintenance charges should be classified as ‘interest’ under Section 2(28A), consequently treating the assessee as a TDS defaulter.

The Commissioner of Income Tax (Appeals) [CIT(A)] favored the assessee’s viewpoint and allowed their appeal. This led the Revenue to appeal against the CIT(A)’s decision. The ITAT upheld the CIT(A)’s stance, concurring that the charges paid in relation to Nostro Accounts were fundamentally bank charges incurred for managing accounts situated in foreign banks. These charges were directly debited in the accounts held with these overseas banks, ultimately constituting the business income of these foreign banks, accruing outside of India.

The ITAT rejected the Revenue’s contention that the charges were akin to interest under Section 2(28A), highlighting the absence of any evidence indicating that the assessee had engaged in borrowing, credit utilization, or incurring debt linked to the Nostro Account maintenance charges.

Furthermore, the ITAT clarified that Section 40(a)(i) couldn’t be invoked in cases where Nostro Account maintenance charges were deemed as remittances without the deduction of tax at source. In essence, the ITAT concluded that no obligation existed to deduct tax from these charges.

In summary, the Mumbai ITAT ruled in favor of HSBC, holding that the maintenance charges for Nostro Accounts should not be categorized as interest under Section 2(28A) and that Section 195, pertaining to TDS, doesn’t apply to these charges. The ITAT’s decision was influenced by a co-ordinate bench ruling and was based on the premise that these charges were essentially standard bank fees rather than interest payments. Therefore, the Revenue’s appeal was dismissed. This decision pertained to the assessment years 2013-14 and 2014-15. [ITO v. The Hongkong & Shanghai Banking Corporation Ltd. [TS-471-ITAT-2023(Mum)] – Date of Judgement: 20.07.2023 (ITAT Mumbai)]

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