The Calcutta High Court has ruled that Automated Teller Machines (ATMs) can be treated as “computers” for claiming the higher depreciation rate under the Income Tax Rules. The court rejected the Revenue’s view that ATMs should be classified as general office equipment or machinery.
The court said an ATM is not simply a machine used to dispense cash. It is a specialised computing device that uses processing power, software and network connectivity to communicate with a bank’s central systems.
ATM Functions Similar to Computers
The court explained that the classification of an asset for depreciation purposes should consider its functional use in the taxpayer’s business. In the case of a bank, an ATM performs functions similar to computers, workstations and servers.
The court noted that the main operation of an ATM involves processing digital data. Its technical features therefore fall within the broad category of computers covered under Appendix I of the Income Tax Rules. Based on these features, the court held that ATMs qualify for the higher depreciation rate applicable to computers.
Case Involved Royal Bank of Scotland
The case involved The Royal Bank of Scotland N.V. and related to Assessment Year 2003-04. The bank had claimed the higher depreciation rate prescribed for computers under Item 2B of Appendix I to the Income Tax Rules.
The Income Tax Appellate Tribunal (ITAT), Kolkata, had restricted the bank’s claim. This led to the question of whether an ATM could be treated as a computer for depreciation purposes. A Division Bench comprising Justice Rajarshi Bharadwaj and Justice Uday Kumar heard the bank’s appeal against the ITAT’s July 10, 2007 order.
Court Rejects Revenue’s Classification
The court held that treating ATMs as ordinary office equipment or machinery would not reflect their actual technical and functional nature. It said the technical specifications of ATMs are consistent with the broad category of computers mentioned in the Income Tax Rules. The court therefore answered the ATM depreciation issue against the Revenue and in favour of the bank.
Other Tax Issues Decided Against the Bank
The ATM depreciation issue was one of four substantial questions considered by the court. The other issues related to the tax rate applicable to the foreign bank and the treatment of interest involving its Indian Permanent Establishment (PE).
On the tax rate issue, the bank argued that it should be taxed at the rate applicable to domestic companies under the non-discrimination provision of Article 24(2) of the India-Netherlands Double Taxation Avoidance Agreement (DTAA).
The court rejected this argument. It observed that the bank was a foreign company and did not meet the statutory definition of a domestic company. The court also referred to the Explanation to Section 90 of the Income Tax Act, which states that applying a higher tax rate to a foreign company does not amount to less favourable treatment.
Interest Paid to Overseas Head Office
The court also upheld the disallowance of ₹99,77,325 in interest paid by the Indian branch to its overseas head office.
The bank argued that the payment was effectively a payment to itself because the branch and head office were part of the same legal entity. However, the court rejected this argument while considering the taxable profits of the Permanent Establishment.
The court applied the separate-entity approach under Article 7 of the DTAA and held that the bank was required to comply with applicable tax deduction requirements. Since tax had not been deducted at source, the disallowance was upheld.
Interest Received by Indian PE
The court also ruled that interest received by the Indian Permanent Establishment from its overseas head office and other foreign branches had to be included while calculating its taxable profits in India.
The court said that the PE and overseas head office are treated as separate and distinct enterprises for determining profits under Article 7 of the DTAA. Therefore, the bank could not exclude the interest by treating it as a payment to itself.
Appeal Partly Allowed
The appeal was partly allowed. The court decided the first three substantial questions in favour of the Revenue, while the ATM depreciation issue was decided in favour of the bank.
The court modified the ITAT’s order to that extent and directed the Assessing Officer to pass a consequential order giving effect to the relief granted to the bank for Assessment Year 2003-04.
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