HSBC Not Liable To Deduct TDS On Nostro Account Maintenance Charges: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the assessee, HSBC, was not under obligation to withhold tax from Nostro Account Maintenance Charges in terms of Section 195 of the Income Tax Act and therefore could not be treated as an ‘assessee in default’.

The bench of Rahul Chaudhary (Judicial Member) has observed that Nostro Account Maintenance Charges are in the nature of bank charges levied on transactions and are not subject to tax deduction at source under Section 195 of the Income Tax Act.

The assessee/respondent maintained Nostro accounts with banks outside India as well as with branch offices of the assessee outside India. The Nostro Accounts Maintenance Charges were levied by such overseas banks or branches on the assessee with respect to the Nostro Accounts maintained outside India.

As a common practice, the Nostro Account Maintenance Charges were directly debited by the overseas bank or branches to such Nostro Accounts, and therefore, there was no remittance made by the assessee on account of the same. The overseas bank or branches were providing services, if any, outside India that were, in any case, not in the nature of managerial, technical, or consulting services.

The Nostro Account Maintenance Charges were also not in the nature of interest as defined in Section 2(28A), and therefore, the assessee was not under an obligation to deduct tax under Section 195 of the Income Tax Act.

However, the assessing officer was not convinced. The Assessing Officer concluded that Nostro Accounts Maintenance Charges fell within the definition of interest’ as defined in Section 2(28A) of the Income Tax Act.

The Assessing Officer treated the assessee as being an ‘assessee in default’ and raised a demand of INR 1,72,50,730.

The assessee appealed before the CIT (A). The CIT (A) has concluded that the assessee was not under obligation 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’. The demand raised by the Assessing Officer on the assessee under Sections 201(1) and 201(1A) of the Act was deleted by the CIT (A).

The department contended that Nostro Account Maintenance Charges are in the nature of ‘interest’ as defined under Section 2(28A) of the Income Tax Act.

The ITAT concurred with the findings of the CIT(A) and relied on the co-ordinate bench ruling in Oman International Bank SAOG vs. Dy. Director of Income-tax (International Taxation), by which it held that the transaction charges paid on Nostro Account were in the nature of bank charges for maintaining the accounts with banks outside India. These charges were recovered directly by way of debits to the concerned accounts of the assessee with these banks, and the same represented business income of those banks that accrued or arose outside India. No tax was therefore required to be deducted.

Case Title: ITO Versus HSBC

Case No.: ITA No. 2191/MUM/2022

Date: 20.07.2023

Counsel For Appellant: Anil Sant

Counsel For Respondent: Porus Kaka

Click Here To Read The Order