THE ROYAL BANK OF SCOTLAND N. V. vs DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATION, KOLKATA

Form No. J(2)

IN THE HIGH COURT AT CALCUTTA
SPECIAL JURISDICTION (Income Tax)
(Original Side)



Coram: THE HON’BLE JUSTICE RAJARSHI BHARADWAJ,
And
THE HON’BLE JUSTICE UDAY KUMAR



Reserved on : 31.07.2026.
Pronounced on : 22.09.2026

ITA 4 of 2011


Royal Bank of Scotland, N.V.
...Appellant
-Vs-

Director of Income Tax, International Taxation, Kolkata

...Respondent

Present:-

Mr. Percy J. Pardiwalla, Adv.
Mr. Akhilesh Kumar Gupta, Adv.
Mr. Asit Kumar De, Adv.


…for the appellant

Mr. Prithu Dudhoria, Adv.
Mr. Amit Sharma, Adv.

….. for the Respondent

Rajarshi Bharadwaj, J:

1. The appellant has filed this appeal under Section 260A of the Income Tax
Act, 1961 (hereinafter referred to as "the Act"), challenging the order dated June
30, 2010 passed by the Learned Income Tax Appellate Tribunal (ITAT), Kolkata

ITA 4 of 2011 -2-
Bench “C”, for the assessment year AY 2004-05, on the substantial questions of
law formulated at the time of admission.
2. The facts of the case in a nutshell are that the appellant, Royal Bank of
Scotland N.V. (formerly known as ABN Amro Bank N.V.), is a non-resident
foreign company incorporated in the Netherlands. The parties are before this
Court regarding disputes arising for the Assessment Year 2004-05. The
appellant carries on banking operations in India through a branch, which is
recognised as a Permanent Establishment (PE) under the Income Tax Act, 1961
and the Double Taxation Avoidance Agreement (DTAA) between India and the
Netherlands.
3. For the assessment year in question, the appellant filed its Return of
Income and asserted that it should be taxed at the rate applicable to domestic
companies rather than the higher rate for foreign companies. This claim was
based on the non-discrimination clause in Article 24(2) of the DTAA.
Additionally, the appellant claimed a deduction for interest payments made by
the Indian PE to its overseas head office and other branches. The appellant’s
position on these two issues, i.e., the tax rate and interest deductibility was
consistent with the positions taken in its appeals for earlier years, specifically
the 1999-2000 assessment year.
4. A significant factual development for the 2004-05 assessment year
involves the appellant’s treatment of lease rentals for motor vehicles. On October
1, 2000, the appellant entered into an agreement with Lease Plan India Ltd. to
lease vehicles for its employees. During the relevant financial year, the appellant
paid a total of Rs.4,26,32,238/- in lease rentals. Following the introduction of
Accounting Standard 19 (AS-19), the appellant bifurcated these payments into a
principal component and an interest component. Specifically, Rs.3,26,79,546 /-
pertained to the current assessment year, while Rs.99,52,692/- related to the
period prior to April 1, 2001.
5. In its tax filings, the appellant claimed the entire lease rental amount of
Rs.4,26,32,238/- as revenue expenditure and did not claim depreciation on the

ITA 4 of 2011 -3-
vehicles. The Assessing Officer (AO), however, determined that the principal
component of these rentals, totaling Rs.3,00,39,208/-, was capital in nature.
The AO concluded that the transaction was effectively a hire-purchase
agreement and that the appellant remained the beneficial owner of the vehicles.
Therefore, the AO disallowed the deduction for the principal component but
allowed the interest components as revenue expenditure. When the appellant
alternatively requested depreciation on these vehicles if the expense was deemed
capital, the AO rejected the request on the grounds that the lessor had likely
already claimed depreciation.
6. Furthermore, the appellant disputed the depreciation rate applicable to its
Automated Teller Machines (ATMs). The appellant claimed depreciation on these
machines at the higher rate reserved for "computers" under the Income Tax
Rules. However, the Tribunal restricted this claim, leading to the current
challenge regarding whether an ATM qualifies as a computer for tax purposes.
7. The procedural history shows that the CIT(Appeals) and the Tribunal
largely upheld the AO’s findings regarding the higher tax rate and the
disallowance of interest payments for lack of TDS. Regarding the lease rentals,
while the CIT(A) and Tribunal confirmed the treatment of the principal
component as capital expenditure, the CIT(A) did direct the AO to grant
consequential depreciation to the appellant. This Court subsequently admitted
this appeal to determine six substantial questions of law covering the tax rate,
interest deductions, lease rental classifications and ATM depreciation.
8. Learned counsel appearing for the appellant raises the issue on the
following substantial questions of law that have been admitted:
i. Whether on a true and proper interpretation of the provisions of sections
2(22A) and 90 of the Income Tax Act, 1961 read with CBDT Circular No. 333
dated April 2, 1982 and CBDT's letter dated November 21, 1994 and Article
24(2) of the Double Taxation Avoidance Agreement between India and
Netherlands, the Tribunal was justified in law in holding that the Appellant

ITA 4 of 2011 -4-
was liable to income tax at the higher rate applicable to a foreign company
and not at the rate of tax applicable to a domestic company?
ii. Whether on a true and proper interpretation of the provisions of the Income
Tax Act, 1961 and the Double Taxation Avoidance Agreement between India
and the Netherlands, the Tribunal was justified in law in holding that the
interest payment made to the head office and other branches abroad was
not to be allowed as a deduction in computing the profits of the permanent
establishment of the Appellant in India?
iii. Whether and in any event, if the interest paid by the permanent
establishment to the head office/other branches abroad is not an allowable
deduction in the computation of the profits of the permanent establishment
on the ground that it represents interest paid to self, the interest received by
the permanent establishment from the head office/other branches abroad is
also not to be included in computing the profits of the permanent
establishment and the Tribunal was justified in law in not directing
exclusion of such interest received?
iv. Whether the Tribunal erred in law in not treating ATM as "computer" falling
under item 2B of Appendix I to the Rules and restricting the claim for
depreciation?
v. Whether the Tribunal erred in holding that the said leasing agreement was
financing agreement and not for hiring of the vehicles and the lease rentals
payable there under were not allowable as revenue expenditure and
whether such finding of the Tribunal is vitiated and is perverse by reason of
non-consideration of relevant materials and for reliance on irrelevant
materials?
vi. Whether the Tribunal erred in law by treating the principal component of the
lease rentals paid to LPIL amounting to Rs.3,00,39,208/- as capital
expenditure?

ITA 4 of 2011 -5-

9. We have heard the appellant and learned Counsel for the respondent
revenue at length. Since the issues involved are pure questions of law, this
Court proceed to decide the appeal on merits.
10. This Court has carefully considered the rival submissions regarding
whether the appellant, a non-resident banking company incorporated in the
Netherlands, is entitled to be taxed at the lower rate applicable to domestic
companies by virtue of the non-discrimination clause in Article 24(2) of the
India-Netherlands Double Taxation Avoidance Agreement (DTAA). The
appellant’s primary contention rests on the premise that its Indian Permanent
Establishment (PE) should not be subjected to a tax treatment less favourable
than that of an Indian enterprise carrying on similar activities. However, the
statutory framework of the Income Tax Act, 1961, particularly after the
retrospective amendment to Section 90, dictates a different conclusion.
11. The definition of a "domestic company" under Section 2(22A) is clear and
requires a company to either be an Indian company or to have made prescribed
arrangements for the declaration and payment of dividends within India. The
appellant has admittedly not fulfilled these criteria and thus falls squarely
within the definition of a "foreign company" under Section 2(23A). This Court
finds that the classification between domestic and foreign companies for the
purpose of tax rates is a valid and reasonable classification, a principle upheld
by a catena of the Supreme Court judgements.
12. The central issue is the impact of the explanation to Section 90, inserted
by the Finance Act, 2001, with retrospective effect from April 1, 1962. The
explanation explicitly declares that charging a higher rate of tax on a foreign
company shall not be regarded as "less favourable" treatment. As held by the
Division Bench of this Court in Royal Bank of Scotland N.V. v. Commissioner
of Income Tax reported in (2026) 494 ITR 171 , the explanation is clarificatory
and must be given full effect as part of the statute. The judgment emphasised
that even without the explanation, the statutory provisions of the Finance Act

ITA 4 of 2011 -6-
and the Income Tax Act remain clear that a non-domestic company is liable to
the rate specified for such an entity.
13. Furthermore, the "same circumstances" requirement in Article 24(2) of the
DTAA is not met. A foreign company and a domestic company are not in
identical circumstances because the former is taxed only on Indian-sourced
income, whereas the latter is taxed on its global income. Consequently, the
differential tax rate does not constitute prohibited discrimination under the
treaty. Regarding CBDT Circular No. 333, this Court observes that it only
prioritises treaty provisions where a specific contrary provision exists. However,
the India-Netherlands DTAA contains no specific provision prescribing a tax rate
that overrides the domestic Finance Act. Therefore, this Court must adhere to
the settled law that the retrospective legislative amendment clarifies the original
intent, leaving no room for the appellant to claim the domestic rate. We answer
substantial question (1) in the affirmative, i.e., against the assessee and in
favour of the revenue.
14. The dispute regarding the deductibility of Rs. 99,77,325/- paid as interest
by the Indian branch to its overseas head office hinges on the mandatory
compliance with Tax Deducted at Source (TDS) provisions. The revenue’s
position is anchored in Section 40(a)(i) of the Act, which stipulates that any
interest payable outside India shall not be deducted in computing profits if tax
has not been paid or deducted at source. The appellant’s primary defense that
the payment is a payment to self because the branch and head office are the
same legal entity, fails to account for the specialised "separate entity" fiction
required for international tax purposes.
15. For the purpose of determining the profits of a Permanent Establishment
(PE) under Article 7 of the DTAA, the branch is treated as if it were a separate
and distinct enterprise. The appellant seeks to take advantage of this fiction to
claim an interest deduction as a business expense but attempts to discard the
same fiction to avoid the obligation to deduct tax at source. This Court finds this
approach legally untenable. As clarified by CBDT Circular No. 740, the branch

ITA 4 of 2011 -7-
of a foreign bank is treated as a separate entity for taxation and interest
remitted to its head office is liable to tax in India. Consequently, such payments
attract the TDS requirements of Section 195.
16. If the appellant’s contention were accepted that the PE and Head Office
are one person then the interest payment would not qualify as a business
expense at all, as one cannot legally pay interest to oneself in a way that
generates a tax deduction. However, since Article 7(3) of the DTAA allows for the
deduction of such expenses in the case of banking enterprises, it necessarily
implies that the recipient (the head office) is receiving income that has its source
in India. The procedural safeguard of TDS is the mechanism by which the
Indian state ensures the collection of tax on this income.
17. The failure to deduct tax before making these remittances directly triggers
the disallowance under Section 40(a)(i) of the Income Tax Act. The limitation on
allowability of interest is subject to the domestic laws of the State where the PE
is situated and the appellant must comply with the procedural mandates of the
Income Tax Act to avail of the treaty benefit. Allowing a deduction for an interest
expense while exempting the same amount from TDS would create an
asymmetrical tax advantage not intended by the DTAA or the Act. Therefore, the
Tribunal was justified in upholding the disallowance of the interest payment due
to non-compliance with the statutory TDS requirements. We answer substantial
question (2) in the affirmative, i.e., against the assessee and in favour of the
revenue.
18. The issue under substantial question (3) concerns whether interest
received by the Indian Permanent Establishment (PE) from its overseas head
office and other foreign branches must be excluded from the computation of its
Indian profits. The appellant argues that if interest payments to the head office
are treated as non-deductible "payments to self," the corresponding interest
received from those same entities should, by the same logic, be excluded from
taxable income. This Court, however, finds the appellant's argument
unsustainable.

ITA 4 of 2011 -8-

19. First, substantial questions (2) and (3) are distinct and independent
issues. The disallowance of interest expenditure under question (2) was not
because the PE and the head office are treated as a single entity to deny the
deduction, rather, it was triggered by the appellant's failure to comply with the
mandatory tax deduction at source (TDS) requirements under Section 40(a)(i) of
the Act. This procedural statutory disallowance does not alter the underlying
character of the interest transactions.
20. Second, under Article 7 of the India-Netherlands DTAA, a legal fiction
treats the PE and the overseas head office as separate and distinct enterprises
for the purpose of determining profits. Under this "separate entity" framework,
the branch and the head office are recognised as independent establishments.
Just as interest paid by the PE to the head office is an allowable deduction in
the hands of the PE (subject to statutory compliance like TDS), similarly,
interest received by the PE from the head office or other foreign branches
represents taxable business income earned by the Indian PE.
21. Because the PE operates as a separate establishment for tax purposes
under the DTAA, the interest received cannot be characterised as an excludable
"payment to self" or shielded under the principle of mutuality. To hold otherwise
would disrupt the consistent application of the separate entity fiction required
for international taxation.
22. Consequently, the interest income received by the PE from its foreign head
office and other branches must be included in computing its taxable profits in
India. The Tribunal was fully justified in law in not directing the exclusion of
such interest received. We answer the substantial question (3) in the affirmative,
i.e., against the assessee and in favour of the revenue.
23. The fourth question pertains to the appropriate rate of depreciation for the
Automated Teller Machines (ATM) and whether they should be classified as
"computers" under the Income Tax Rules. The appellant contends that the
Tribunal erred by not treating ATMs as computers, which would have qualified
them for a higher rate of depreciation under item 2B of Appendix I to the Rules.

ITA 4 of 2011 -9-
The classification of hardware in the modern banking sector requires an
understanding of the functional and technical characteristics of the equipment
in question. An ATM is not merely a mechanical cash dispenser, it is a complex
data-processing unit that relies on internal processing power, specialised
software and constant network communication with central banking servers to
perform its primary functions.
24. The appellant’s submissions on this point are consistent with those raised
in earlier assessment years, specifically the appeals for the 2002-03 period. The
argument rests on the fact that the core of an ATM’s operation is digital data
processing which is the defining characteristic of a computer as envisioned by
the tax rules. By restricting the depreciation rate, the authorities have adopted
an overly narrow interpretation of the term "computer" that fails to account for
the technological integration inherent in modern banking infrastructure. In the
digital age, devices that perform automated processing and data transmission
should be afforded the same tax treatment as other computing hardware,
provided their primary function is the electronic management of information.
25. The classification of an asset for depreciation purposes must be
determined by its functional utility in the business of the assessee. For a
banking enterprise, ATMs serve as the primary interface for digital transactions,
performing many of the same tasks as a standard workstation or server. The
revenue's attempt to categorise these units as general office equipment or
machinery ignores the technical reality that they are specialised computing
devices. Given that the technical specifications of an ATM align with the broad
category of computers described in Appendix I, the appellant’s claim for the
higher depreciation rate is sustainable. This court finds that the functional
parity between an ATM and a computer is sufficient to warrant its inclusion
under the relevant rule for depreciation. We answer the substantial question (4)
in the negative, i.e., against the revenue and in favour of the assessee.
26. The final two questions involve the characterisation of lease rentals paid
by the appellant for motor vehicles used by its employees. The appellant entered

ITA 4 of 2011 -10-
into a leasing agreement with Lease Plan India Ltd. and claimed the total lease
rentals, amounting to Rs.4,26,32,238/-, as revenue expenditure. The revenue,
however, sought to capitalise the principal component of these rentals, totaling
Rs. 3,00,39,208/-, by treating the arrangement as a finance lease or hire-
purchase agreement rather than a simple hiring agreement. This
recharacterisation by the AO was based largely on the accounting treatment
required by Accounting Standard 19, which mandates the capitalisation of
leased assets in the books of the lessee.
27. This court holds that the revenue’s reliance on accounting standards to
dictate tax liability is misplaced. As explicitly clarified in CBDT Circular No. 2 of
2001, the accounting standards issued by the ICAI regarding leases do not have
a direct implication on the allowance of depreciation or the characterisation of
expenses under the Income Tax Act. The accounting treatment is designed to
reflect a true and fair view of the financial statements, but the computation of
taxable income must be governed strictly by the provisions of the Act. The
agreement in this case was for the hiring of vehicles to facilitate the business
operations of the bank and there is no evidence that the appellant intended to
acquire legal ownership of the vehicles through these payments. The entire
rental amount represents a legitimate cost of doing business and should be
deductible as revenue expenditure.
28. Furthermore, it is noted that the Revenue had allowed the entire lease
rental amount as revenue expenditure in the appellant’s own assessments for
the preceding years of 2002-03 and 2003-04. There is no justification for a
sudden departure from this established position when the nature of the leasing
agreement remained unchanged. Even if one were to accept the revenue's
argument for capitalisation, the appellant would be entitled to consequential
depreciation as the vehicles were undeniably used for business purposes.
However, the primary relief remains the allowance of the rentals as revenue
expenses. The attempt to bifurcate the lease payments into principal and
interest components for tax purposes, solely based on an accounting standard

ITA 4 of 2011 -11-
that the CBDT has declared non-binding for tax calculations, is unsustainable.
We answer the substantial question (5) and (6) in the negative, i.e., against the
revenue and in favour of the assessee.
29. For the foregoing reasons, the appeal under Section 260A is allowed in
part, with substantial questions of law (1), (2) and (3) answered in the
affirmative and in favour of the revenue, while substantial questions (4), (5) and
(6) are answered in the negative and in favour of the appellant-assessee. The
impugned order of the Learned Tribunal dated January 07, 2010, is hereby
modified to this extent and the Assessing Officer is directed to pass a
consequential order giving effect to the reliefs granted herein for the Assessment
Year 2004-05.
30. All connected applications are disposed of accordingly. There shall be no
order as to costs.
31. Urgent certified copy, if applied for, be supplied upon compliance with
requisite formalities.




(RAJARSHI BHARADWAJ, J )



(UDAY KUMAR , J)
Kolkata
22.09.2026
PA(BS)