Sec 40(A)(I) Does Not Get Attracted In Case Of Deemed Remittance Of Nostro A/S Maintenance Charges Without Deducting Tds

While hearing an appeal involving the issue as to whether TDS is to be deducted on charges levied by a bank from other banks for maintenance of Nostro Accounts, the Mumbai ITAT held that Nostro Account Maintenance Charges are in the nature of bank charges levied on transaction and the same are not subject to tax deduction at source under Section 195 of the Act.

A Division Bench of Mr. Rahul Chaudhury, Judicial Member, and Mr. S Rifaur Rehman, Accountant Member, observed that the provisions of Section 40(a)(i) of the Act cannot be attracted in case of the deemed remittance of Nostro Account Maintenance Charges without deduction of tax at source.

The Appellant-Revenue was represented by Mr. Anil Sant, whereas the Respondent-Assessee was represented by Mr. Porus Kaka.

Briefly, the Assessee is a non-resident banking organization incorporated in Hong Kong also engaged in banking in India through its branches in India. The Assessing Officer (AO) received information that deduction of about Rs 278.35 Lakhs was claimed by the Assessee in respect of Nostro Account Maintenance Charges. Such deduction was disallowed by the AO under Section 40(a)(i) of the Income Tax Act, on grounds that the Assessee failed to deduct TDS under Section 195 on such charges. The Assessee was held to be in default as per the provisions of Sections 201(1) & (1A) of the Act.

The Assessee submitted written submissions in reply thereto, but the same were rejected by the AO, who concluded that Nostro Accounts Maintenance Charges fell within the definition of term ‘interest’ as defined in Section 2(28A) of the Act. Demand of about Rs 1.72 Crores was raised under Section 201(1) of the Act, being the amount that the Assessee ought to have withheld after grossing up the Nostro Account Maintenance Charges of about Rs 2.78 Crores. Further, demand was also raised under Section 201(1A), being interest computed @ 1% on the tax demand computed under Section 201(1).

On appeal, the Commissioner of Income Tax (Appeals) set aside the demands raised under Section 201(1) and under Section 201(1A).

On hearing the arguments of both sides, the Bench noted from the findings of the Commissioner of Income Tax (Appeals), that the Assessee was not obligated to withhold tax from Nostro Account Maintenance Charges in terms of Section 195 of the Act and therefore, could not be treated as an ‘assessee in default’.

Hence the Bench found there to be no requirement to interfere with findings of the Commissioner of Income Tax (Appeals) in setting aside the tax demands raised by the AO.

Cause Title: Income Tax Officer (IT) 2(2)(2), Mumbai Vs The Hongkong & Shanghai Banking Corporation Ltd. [ITA No. 2191/MUM/2022 / 2023-Enterslice-7-ITAT-Del]

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