There?s some relief for multinational banks plagued by hefty losses. Thanks to the turmoil in financial markets?their India operations may have to shell out a little lesser in taxes. The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has ruled that there will be no tax liability in India on fees charged by foreign banks for transactions in India , but carried out through international credit cards issued by their overseas branches.
The landmark ruling comes in response to an appeal filed by Standard Chartered Grindlays Bank against the income tax department?s claim for payment of taxes. The court?s verdict effectively implies Grindlays will not have to pay tax on transaction in India by a credit card issued by its branch abroad to a customer outside the country.
The Tribunal held where the foreign branch has issued credit cards and even if the transaction takes place in India , ?the credit is given to the customer outside India and the debt also arises outside India .? The ruling also noted that the charges were received by the foreign branch for providing credit to their card holders outside India .
Banks charge commission for a number of services provided for credit card transactions such as providing funds and foreign exchange. The commission is added to the net income of foreign banks on which a maximum tax of 42% can be levied.
Tax experts said that while the ruling is specific to credit card operations of banks, it clarifies important tax principles. Mukesh Butani, partner BMR Advisors said, ?This is a welcome relief and gives an interpretation of deeming legislation in favour of the taxpayer.? Jayesh Thakur, associate director PricewaterhouseCoopers said, ?It will go a long way in giving credence to foreign branches of banks and their credit card operations.?
Standard Chartered Grindlays is a non-resident banking company based in the United Kingdom with a permanent establishment (PE) and branches in India . Foreign branches of the bank were issuing international credit cards to its customers, and the transactions were carried out in India , either through acquiring banks?its own branches or through other banks in India . Standard Chartered Grindlays offered the commission earned by it for taxes on transactions handled by its acquiring and issuing branches in India . But where the acquiring bank was not its branch of Grindlays, it did not have any records of the transactions nor did it offer the commission earned on it .
The income tax department contended even for such transactions, the bank receives remuneration for providing funds and exchange facility, and an amount is deducted for the merchant shipment. Further, services of providing exchange facility and cash exchange facility to the vendor for transactions affected in India are taxable as fees for technical services under the Indo-UK tax treaty.