Fees Collected by Foreign Bank Branch Not Taxable in India

In a significant ruling, the Hon’ble High Court of Delhi in Director of Income Tax v. ANZ Grindlays Bank, ITA 563/2007 & connected matters, dated September 19, 2024, determined that fees collected by a foreign branch of a banking company for extending credit lines to account holders outside India are not subject to taxation in India.

ANZ Grindlays Bank (the “Bank”) had mobilized funds abroad, which were then brought back to India in foreign currency accounts for use in its Indian operations. The Bank claimed that the benefits derived from these funds, as accounted for by its Indian branches or permanent establishments, constituted Indian income.

The Assessing Officer (AO) had classified these expenses as head office expenses under Section 44C of the Income Tax Act, leading to their disallowance. However, the Income Tax Appellate Tribunal (ITAT) overturned this decision, ruling that the expenses incurred for securing business from non-resident Indians (NRIs) did not fall under the definition of head office expenses. The ITAT instructed the AO to allow the deduction for the actual expenditures made by the bank.

The Hon’ble High Court of Delhi noted that the expenses related to the bank’s initiative to attract NRIs to open deposits in Indian branches were supported by a Reserve Bank of India (RBI) Circular dated October 16, 1991. The Bench emphasized that these expenditures were solely for the bank’s operations in India, they were fully deductible, and not subject to the limits of Section 44C of the Income Tax Act, which applies to general administrative expenses of foreign branches.

Additionally, the Delhi High Court also addressed the issue of commissions on credit card transactions in India, related to cards issued by the bank’s foreign branches. The Court found that the fees charged for these transactions were associated with credit lines extended outside India. It concluded that since the debt incurred by credit cardholders was also outside India, the fees associated with these transactions would not be taxable in India.

This ruling provides clarity for banking institutions regarding the tax treatment of fees and expenses related to their foreign branches, reinforcing the notion that income and expenses tied to operations outside India may not be subject to Indian taxation.