THE ROYAL BANK OF SCOTLAND N.V. vs COMMISSIONER OF INCOME TAX, KOL III

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 191 of 2006
With
GA 1 of 2014 ( Old No.3589 of 2014)

The Royal Bank of Scotland, N.V.
…Appellant
-VS-

Commissioner of Income Tax, Kolkata III

….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
February 28, 2006 passed by the Learned Income Tax Appellate Tribunal (ITAT),
Kolkata Bench “C”, for the assessment year AY 1999-2000, on the substantial
questions of law formulated at the time of admission.

ITA 191 of 2006 -2-

2. The facts of the case in a nutshell are that the appellant, Royal Bank of
Scotland N.V. (formerly ABN Amro Bank N.V.), is a non-resident foreign
company incorporated in the Netherlands. It carries on banking operations in
India through a branch, which is recognized as a Permanent Establishment (PE)
under the law. For the Assessment Year 1999-2000, the appellant filed its
Return of Income and was subsequently subject to assessment proceedings that
led to the present appeal before the High Court.
3. In its tax return for the year under consideration, the appellant computed
its tax liability by adopting the rate applicable to domestic companies.
Additionally, the appellant claimed a deduction of Rs.99,77,325/- representing
interest paid to its head office and other overseas branches for funds used in its
banking business. The return also included a claim for off-shore remuneration
amounting to Rs.57,22,807/- paid to expatriate employees.
4. The Assessing Officer (AO) initially issued an intimation under Section
143(1) of the Income Tax Act, 1961, which charged the appellant at the higher
tax rate applicable to foreign companies rather than the domestic rate. The
appellant unsuccessfully challenged this intimation before the CIT(Appeals), who
confirmed the higher rate. Subsequently, on March 20, 2002, the AO passed a
formal assessment order under Section 143(3) for the same assessment year. In
this order, the AO maintained the application of the foreign company tax rate
and further disallowed the deduction of Rs.99,77,325/- in interest payments.
This disallowance was based on the fact that the appellant had not deducted
Tax Deducted at Source (TDS) on these remittances as required under Section
40(a)(i) of the Act.
5. The appellant appealed these findings to the CIT(Appeals), who upheld the
AO’s decision. Regarding the interest deduction, the CIT(Appeals) held that the
allowability was subject to the conditions of Section 40(a)(i), and since TDS was
not deducted, the payment was not permissible as a deduction. The matter then
proceeded to the Income Tax Appellate Tribunal (Tribunal). On the issue of the
tax rate, the Tribunal followed its own previous decisions in the appellant’s case

ITA 191 of 2006 -3-
for the assessment years 1992-93 to 1995-96, affirming the higher rate. On the
issue of interest disallowance, the Tribunal followed a Special Bench decision
concerning the appellant’s 1997-98 and 1998-99 assessment years, which had
held such payments to be "payments to self" and therefore not deductible.
6. During the pendency of the appeal before the Tribunal, the appellant
raised an additional ground concerning interest it had received from its head
office and overseas branches, totaling Rs.1,52,17,356/-. The appellant had
originally offered this amount for tax in its return. The additional ground
requested that if the interest paid was disallowed as a "payment to self," then
the interest received should likewise be excluded from its assessable income.
The Tribunal did not initially adjudicate this ground in its main order but,
following a miscellaneous application, passed a subsequent order on December
22, 2006, dismissing the additional ground. On January 7, 2010, this Court
admitted the present appeal to determine four substantial questions of law
arising from these various findings.
7. A 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 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

ITA 191 of 2006 -4-
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 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 such interest paid by the permanent establishment in India
to the head office/other branches abroad was liable to tax in India as
income of the head office/other branches abroad and would neutralize
the deduction of such interest if allowed in computing the profits of the
permanent establishment?
iv. 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?
8. 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.
9. 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

ITA 191 of 2006 -5-
statutory framework of the Income Tax Act, 1961, particularly after the
retrospective amendment to Section 90, dictates a different conclusion.
10. 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 judgments.
11. 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
and the Income Tax Act remain clear that a non-domestic company is liable to
the rate specified for such an entity.
12. 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

ITA 191 of 2006 -6-
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 favor
of the revenue.
13. 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.

14. 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
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.
15. 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.

ITA 191 of 2006 -7-

16. The failure to deduct tax before making these remittances directly triggers
the disallowance under Section 40(a)(i). 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
questions (2) and (3) in the affirmative, i.e., against the assessee and in favor of
the revenue.
17. The issue under substantial question (4) 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.
18. First, substantial questions (2) and (4) 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.
19. 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.

ITA 191 of 2006 -8-
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.
20. 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.
21. 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 (4) in the affirmative,
i.e., against the assessee and in favour of the revenue.
22. For the foregoing reasons, the appeal under Section 260A is allowed, with
all the substantial questions of law (1), (2), (3) and (4) answered in the
affirmative and in favour of the revenue. The impugned order of the Learned
Tribunal dated February28, 2006, is hereby set aside and the Assessing Officer
is directed to pass a consequential order giving effect to the reliefs granted
herein for the Assessment Year 1999-2000.
23. All connected applications are disposed of accordingly. There shall be no
order as to costs.
24. 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)