Interest Received by Indian Branch from Overseas Head Office of American Express Is Not Taxable on Principle of Mutuality: ITAT

The Income Tax Appellate Tribunal (ITAT) Mumbai has held that interest transactions between an Indian branch and its overseas Head Office or foreign branches are transactions with self and, therefore, cannot give rise to taxable income under Indian law.

American Express Bank Ltd is a non-resident banking company headquartered in the United States and it carries on banking operations in India through its Mumbai branch, constituting its Permanent Establishment (PE). During assessment year 1999-2000, the Indian branch received interest from and paid interest to its overseas Head Office and foreign branches through Nostro accounts. The AO held that interest received from the Head Office and overseas branches comes under taxable income in India; however, the assessee argued that such receipts represented transactions with itself and, therefore, no income could arise.

Another issue before the court is about the applicability of Section 44C to expenses done by the Head Office outside India on behalf of the Indian branch.

The Tribunal observed that under Indian law, the Head Office and branch are not separate and a person cannot make profit out of itself. The Tribunal relied on the decision of the Bombay High Court in Sumitomo Mitsui Banking Corporation, where the court ruled that interest received from or paid to the overseas Head Office and branches is governed by the principle of mutuality and does not come under taxable income. Accordingly, the addition relating to interest on Nostro accounts was deleted and the Revenue’s ground was dismissed.

With regard to disallowance under Section 14A, the Tribunal held that receipts covered by the doctrine of mutuality are not “exempt income” but are not income at all. Therefore, Section 14A has no application. So, the Tribunal directed deletion of the disallowance.

On the question of expenditure under Section 44C, the Tribunal referred to the decision of the Supreme Court in American Express Bank Ltd on 15 December 2025. It observed that an expenditure would qualify under Section 44C only if it satisfied the test laid down by the Court. Since the facts regarding the nature of expenditure had not been properly examined, the matter was restored to the AO for fresh adjudication.

Accordingly, the Revenue’s appeal was partly allowed for statistical purposes, while the assessee’s appeal was partly allowed.