Section 9(1)(v)(c) IT Act | Interest from Nostro Accounts Not Taxable Under Mutuality Principle : ITAT Mumbai

The Income Tax Appellate Tribunal, Mumbai, has delivered a landmark ruling clarifying that interest earned by an Indian permanent establishment of a foreign bank from its own head office and overseas branches is not taxable in India, as it constitutes a transaction between self and self under domestic law. The decision also limits the scope of Section 9(1)(v)(c) and reinforces that Section 14A cannot apply to income that does not enter the computation stream.

Background & Facts

The Dispute

The dispute centered on the taxability of interest income received by the Indian branches of Barclays Bank PLC, a non-resident banking company incorporated in the United Kingdom, during the assessment years 1998-99, 1999-2000, and 2000-01. The bank maintained permanent establishments (PEs) in Mumbai and New Delhi. The Assessing Officer (AO) sought to tax interest earned by these branches from two sources: (1) Nostro accounts and fund placements with the bank’s head office and overseas branches, and (2) interest received from other overseas banks (third-party institutions).

Key Facts

• Barclays Bank PLC filed original returns for A.Y. 1998-99 on 30.11.1998 declaring income of Rs. 7,38,03,150/-
• Revised return for A.Y. 1998-99 filed on 30.03.2000 declared income of Rs. 3,66,09,620/-
• The assessee claimed exemption from tax on interest income of Rs. 6,68,50,601/- earned from Nostro accounts and placements with head office and overseas branches
• The interest income from other overseas banks was Rs. 6,68,50,601/-
• The bank also claimed deductions for: (a) interest expenses on FCNR(B) deposits, (b) club membership fees, (c) broken period interest on SLR securities, (d) foreign exchange revaluation losses, and (e) penalty payments to RBI
• The AO disallowed these claims under Sections 14A, 37, 115A, and 36(1)(vii)
• The Department levied interest under Section 234B on refunds granted under Section 143(1)(a)

Procedural History

• 30.11.1998: Original return filed for A.Y. 1998-99
• 30.03.2000: Revised return filed for A.Y. 1998-99
• 2001-2004: Multiple appeals filed before Commissioner of Income Tax (Appeals)-VII, Mumbai
• 2012: Special Bench decision in Sumitomo Mitsui Banking Corporation v. DDIT delivered on 31.03.2012
• 2013: Cross-objections filed by Revenue in multiple cases, with delays ranging from 553 days to over 12 years
• 2024: Supreme Court decisions in Bank of Rajasthan Ltd. v. CIT and South Indian Bank v. CIT delivered
• 23.04.2026: Hearing before ITAT Mumbai
• 30.06.2026: Judgment pronounced

The Parties' Positions

For the Assessee (Barclays Bank PLC):

• Argued that the Indian PE and head office are not separate entities under Indian domestic law
• Invoked the principle of mutuality: one cannot earn profit from oneself (Sir Kikabhai Premchand v. CIT)
• Contended that interest from third-party overseas banks does not satisfy the conditions of Section 9(1)(v)(c) as the payers (overseas banks) did not carry on business in India
• Asserted that Section 14A is inapplicable where no exempt income is claimed
• Relied on Credit Agricole Indosuez v. Jt. CIT, Sumitomo Mitsui Banking Corporation v. DDIT, and Assam Fronter Tea Co. Ltd. v. ITO

For the Revenue:

• Argued that under the India-UK DTAA, the PE is a distinct entity
• Contended that interest received by the PE from head office is taxable under Section 9(1)(i) and Section 9(1)(v)(c)
• Maintained that Section 14A applies to expenditures attributable to exempt income
• Sought to levy interest under Section 234B on refunds granted under Section 143(1)(a)

Relief Sought

The assessee sought:

• Exclusion of Rs. 6,68,50,601/- (interest from head office and overseas branches) from total income
• Exclusion of Rs. 6,68,50,601/- (interest from third-party overseas banks) from total income
• Deletion of disallowance of Rs. 2,21,05,763/- under Section 14A on FCNR(B) interest
• Deletion of disallowance of Rs. 11,07,000/- under Section 14A on exempt interest
• Allowance of Rs. 33,45,486/- loss on foreign exchange revaluation
• Allowance of broken period interest of Rs. 4,45,09,027/- (AY 1998-99) and Rs. 11,73,76,223/- (AY 2000-01)
• Deletion of interest under Section 234B on refunds
• Condonation of delay in cross-objections rejected

The Legal Issue

The central questions were: (1) Whether interest received by an Indian permanent establishment of a foreign bank from its own head office and overseas branches constitutes taxable income under Indian domestic law, and (2) Whether Section 9(1)(v)(c) applies when the payer of interest has not carried on business in India.

Arguments Presented

For the Appellant/Petitioner

The assessee relied on the principle of mutuality, established in Sir Kikabhai Premchand v. CIT, to argue that a legal entity cannot earn income from itself. It emphasized that under Indian domestic law, the head office and its Indian branch are one and the same assessee. The Tribunal’s Special Bench in Sumitomo Mitsui Banking Corporation v. DDIT had previously held that interest payments between PE and head office are not deductible because they are payments to self. By parity of reasoning, receipts from self cannot be income. The assessee further argued that Section 9(1)(v)(c) requires the non-resident payer to have used the borrowed funds for business in India - a condition not met here. It cited Credit Agricole Indosuez and Assam Fronter Tea Co. Ltd. to support that the provision cannot be stretched to tax interest from third-party banks with no Indian business nexus. Regarding Section 14A, the assessee contended that the provision applies only to expenditures attributable to exempt income - not to income that is not taxable at all.

For the Respondent/State

The Revenue argued that the India-UK DTAA treats the PE as a separate entity for profit attribution purposes, and therefore, interest flows between PE and head office should be taxable. It relied on Section 9(1)(i) as a general provision to tax income deemed to accrue in India. It further contended that Section 9(1)(v)(c) is a special provision that captures interest received by non-residents from any source, regardless of the payer’s business presence in India. On Section 14A, the Revenue maintained that any expenditure linked to income not chargeable to tax - whether exempt or not taxable - must be disallowed. It also sought to invoke Section 234B to charge interest on refunds granted under Section 143(1)(a), arguing that such refunds represent an underpayment of advance tax.

The Court's Analysis

The Tribunal undertook a meticulous analysis of domestic law, treaty provisions, and judicial precedents. It distinguished between the concept of a PE under the DTAA - which is a fiction for profit attribution - and the legal identity of the assessee under the Income-tax Act. The Court observed:

"Undisputedly, the Indian branch and head office cannot be regarded as distinct and separate entities for tax purpose under the domestic law. Of-course, under the treaty provision, applying the concept of PE, the Indian branch can constitute a distinct entity, but only for the limited purpose of attributing profit generated through PE."

It affirmed that the principle of mutuality, as upheld in Sir Kikabhai Premchand and reinforced in Sumitomo Mitsui Banking Corporation, governs the domestic tax treatment. The Tribunal held that the interest received from head office and overseas branches is not income because it is a transfer within a single legal entity. The Court further clarified that the Antwerp Diamond Bank decision, cited by the Revenue, was distinguishable as it concerned deduction under DTAA provisions, not receipt of income under domestic law.

Regarding Section 9(1)(v)(c), the Tribunal parsed the statutory language: the provision taxes interest payable by a non-resident where the borrowed funds were used for business in India. The Court emphasized that the phrase "such person" refers to the non-resident payer, not the recipient. Since the overseas banks paying interest had no business presence in India, the condition of the section was not satisfied. The Tribunal noted:

"The departmental authorities have failed to correctly interpret the provision of section 9(1)(v)(c) of the Act, hence, committed the error of bringing to tax the interest received by the Indian branches from other overseas branches."

On Section 14A, the Tribunal held that the provision applies only to expenditures attributable to exempt income - not to income that is not taxable under any provision. Since the interest from head office was not income at all, Section 14A had no application. The Court also rejected the Revenue’s attempt to invoke Section 234B for interest on refunds, noting that Section 234D - the correct provision - was not in force during the relevant years.

The Verdict

The assessee succeeded on all material grounds. The Tribunal allowed the appeals and dismissed the Revenue’s appeals and cross-objections. The key outcomes were:

• Interest income of Rs. 6,68,50,601/- from head office and overseas branches is not taxable
• Interest income of Rs. 6,68,50,601/- from other overseas banks is not taxable under Section 9(1)(v)(c)
• Disallowance of Rs. 2,21,05,763/- under Section 14A on FCNR(B) interest is deleted
• Disallowance of Rs. 11,07,000/- under Section 14A on exempt interest is deleted
• Loss of Rs. 33,45,486/- on foreign exchange revaluation is allowed
• Broken period interest of Rs. 4,45,09,027/- (AY 1998-99) and Rs. 11,73,76,223/- (AY 2000-01) is allowed as revenue expenditure
• Interest under Section 234B on refunds is deleted
• Cross-objections filed with delays exceeding 553 days to over 12 years are dismissed in limine for inordinate delay

What This Means For Similar Cases

Interest from Head Office Is Not Income Under Domestic Law

• Practitioners must argue that interest received by an Indian PE from its own head office or overseas branches is not taxable under domestic law, regardless of DTAA provisions
• The principle of mutuality overrides treaty-based PE fiction for receipt of income
• This applies to all banking and financial institutions with overseas branches

Section 9(1)(v)(c) Requires Business Nexus by the Payer

• The provision does not tax interest received by a non-resident from any foreign bank
• The payer must have used the borrowed funds for business in India
• Revenue authorities cannot stretch this provision to tax interest from third-party banks with no Indian operations

Section 14A Applies Only to Exempt Income, Not Non-Taxable Income

• Expenditure cannot be disallowed under Section 14A if the income is not chargeable to tax at all
• This distinction is critical: exempt income (e.g., under Section 10) triggers Section 14A; non-taxable income (e.g., payment to self) does not
• Practitioners must clearly plead whether income is exempt or non-taxable to avoid erroneous disallowances

Delay in Filing Cross-Objections Will Not Be Condoned Without Just Cause

• Delays exceeding 553 days, and especially those over 9-12 years, are inordinate
• Reliance on subsequent judgments as justification for delay is not acceptable unless the judgment directly alters the legal position
• Cross-objections filed after the appeal is decided are likely to be dismissed outright

Broken Period Interest on SLR Securities Is Allowable

• The Supreme Court’s decision in Bank of Rajasthan Ltd. v. CIT settles that broken period interest on SLR securities is revenue expenditure
• Banks can claim this deduction without fear of disallowance
• Accounting practices under FEDAI and RBI guidelines support this position