Interest on fixed deposit made for business purpose should be considered as business income and not as income from other sources

Interest on fixed deposit made for business purpose should be considered as business income and not as income from other sources

Submitted by : caupdate08 on dated Saturday, December 18th, 2010

Court : Mumbai bench of the Income-tax Appellate Tribunal 

Brief : Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) held that interest income earned on fixed deposit made for the purpose of business should be considered as business income and not as income from other sources. Further, the Tribunal held that salary and welfare expenses of taxpayer’s staff will not be covered under section 44C of the Income-tax Act, 1961 (the Act) since the expenses are directly related to the Indian Project. The Tribunal also held that the payment made for procurement services cannot be considered to be a payment towards fees for technical services as per India-Korea Tax Treaty (the tax treaty) since procurement services were purely commercial in nature and had nothing to do with rendering of any technical managerial or consultancy services. 

Citation : DDIT v. Samsung Engineering Co. Ltd. [2010-TII-169-ITAT-MUM-INTL] Judgement Date 10 November 2010 AY 200 1-02, 2002-03 and 2004-05)

Judgement : 

Interest received on fixed deposits

 Facts of the case

•           The taxpayer, a tax resident of Korea, is engaged in turnkey projectsrelating to procurement, engineering and construction. The taxpayer was awarded a contract by Indian Oil Corporation Ltd. For the purpose of executing the contract, the taxpayer obtained RBI permission to set up a project office and a site office in India. 

•           The taxpayer had to open letter of credit, performance bond, etc. in favour of various vendors in India and since bankers insisted on margins before opening such letter of credits or for giving guarantees, the taxpayer had to keep fixed deposits on which interest income was earned. The taxpayer treated thisinterest income as business income. 

•           The Assessing Officer (AO) held that the interest income has to be assessed as “income from other sources” unless the taxpayer is engaged in the business of money lending. However, the AO accepted the fact that the interest income was effectively connected with the PE.

Taxpayer’s contentions

•           Maintaining fixed deposits was required for obtaining letter of credit and other guarantees for the various projects. Hence, theinterest income is directly related to the business and should be treated as business income. 

•           RBI had granted permission to open a Project Office and a Site Office for the purpose of executing the contract. The approval of the RBI for operation in India is restricted exclusively for the execution of the contract and therefore the interest income is inextricably connected with the Project Office in India.

Tribunal’s ruling

•           The Tribunal relied on the Delhi High Court’s decision in the case of CIT v. Koshika Telecom (2006) 287 ITR 478 (Bom) and Bombay High Court’s decisions in the case of CIT v. Indo Swiss Jewels Ltd. (2005) 284 ITR 389 (Bom) and Lok Holdings (2008) 308 ITR 256 (Bom) wherein it was held that when deposits are made in connection to business activity, interest earned from such deposits constitutes business income. 

•           Accordingly, the Tribunal held that interest income earned on fixed deposit made for the purpose of business should be considered as business income.