2005 (11) TMI 370 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of section 115A of the Income-tax Act to interest earned by a non-resident on deposits with an Indian branch of a foreign bank.
2. Levy of interest under section 234B of the Income-tax Act when the entire income of the non-resident assessee was liable to deduction of tax at source under section 195 of the Act.
3. Qualification for exemption under section 10(15)(iv)(fa) of the Income-tax Act for interest paid by the Indian branch of a foreign bank to the non-resident assessee.

Issue-wise Detailed Analysis:

1. Applicability of Section 115A:
The primary issue was whether section 115A of the Income-tax Act applies to interest earned by a non-resident on deposits with the Indian branch of a foreign bank. Section 115A stipulates that interest received by a non-resident from an Indian concern on monies borrowed in foreign currency is taxable at a concessional rate of 20%. The term "Indian concern" is not defined in the Act. The Assessing Officer and CIT(A) held that the Bank of Nova Scotia, being a foreign bank, could not be considered an Indian concern, thus applying a tax rate of 48%. However, the Tribunal noted that section 9(1)(v) of the Act deems interest paid by a non-resident for business carried on in India as accruing or arising in India. The Tribunal emphasized that the term "Indian concern" should include businesses carried on in India, even if by non-residents. They referred to the CBDT Circular No. 740, which treats branches of foreign banks in India as separate entities for taxation, supporting the application of section 115A. Thus, the Tribunal ruled in favor of the assessee, applying the 20% tax rate.

2. Levy of Interest under Section 234B:
The second issue involved the levy of interest under section 234B when the non-resident's income was subject to tax deduction at source under section 195. The CIT(A) dismissed the assessee's appeal, stating no appeal lies against charging interest. The Tribunal disagreed, noting the settled legal position that such grievances should be admitted and decided on merits. The Tribunal remitted the matter to the CIT(A) for adjudication on merits.

3. Exemption under Section 10(15)(iv)(fa):
The third issue was whether the interest paid by the Indian branch of a foreign bank to the non-resident assessee qualifies for exemption under section 10(15)(iv)(fa). This section exempts interest payable by a scheduled bank to a non-resident on deposits in foreign currency, provided the acceptance of such deposits is approved by the Reserve Bank of India (RBI). The assessee raised this issue as an additional ground, submitting correspondence with the RBI as evidence. The Tribunal admitted the ground, noting it was a legal issue. However, since the matter was not examined by the authorities below, the Tribunal remitted it to the Assessing Officer to ascertain whether the RBI had approved the acceptance of the deposits, thus fulfilling the conditions for exemption.

Conclusion:
The Tribunal ruled in favor of the assessee on the applicability of section 115A, applying a 20% tax rate on the interest income. The issue of levy of interest under section 234B was remitted to the CIT(A) for a decision on merits. The exemption under section 10(15)(iv)(fa) was also remitted to the Assessing Officer for fresh adjudication. The appeal was partly allowed.