A foreign company’s higher tax rate does not violate the DTAA’s non-discrimination clause.

The appellant, Royal Bank of Scotland N.V., formerly ABN Amro Bank N.V., is a Netherlands-incorporated non-resident banking company carrying on business in India through a branch recognised as its Permanent Establishment (PE) under the Income-tax Act, 1961 and the India–Netherlands DTAA.

For Assessment Year 2003–04, the appellant claimed that it should be taxed at the rate applicable to domestic companies under Article 24(2) of the DTAA, rather than at the higher rate applicable to foreign companies.

It also claimed deduction of interest paid by its Indian PE to its overseas head office and other foreign branches, and claimed depreciation on Automated Teller Machines (ATMs) at the rate applicable to computers.

The Assessing Officer and appellate authorities rejected or restricted these claims, including disallowing the interest deduction for failure to deduct tax at source and denying the higher depreciation rate for ATMs.

The appeal under Section 260A of the Act was admitted on substantial questions concerning the applicable tax rate, deductibility and taxability of inter-branch interest, and the classification of ATMs for depreciation purposes.

1. Whether the appellant was entitled to be taxed at the rate applicable to a domestic company, rather than the higher rate applicable to a foreign company, by relying on Section 2(22A), Section 90 and Article 24(2) of the India–Netherlands DTAA?

2. Whether interest paid by the Indian PE to its overseas head office and other foreign branches was deductible in computing the PE’s taxable profits?

3. If the interest paid by the PE was not deductible, whether corresponding interest received by the PE from its overseas head office and foreign branches was required to be excluded from its taxable income?

4. Whether an ATM is a “computer” under Item 2B of Appendix I to the Income-tax Rules and is therefore eligible for the higher rate of depreciation?

Section 2(22A) of the Income-tax Act defines a “domestic company” by reference to an Indian company or a company satisfying the prescribed arrangements for declaration and payment of dividends in India, while Section 2(23A) covers companies that do not meet that definition.

Section 90, including its Explanation inserted retrospectively by the Finance Act, 2001, provides that the levy of tax at a higher rate on a foreign company does not constitute less favourable treatment for purposes of a tax treaty.

Article 24(2) of the India–Netherlands DTAA prohibits discriminatory taxation only where enterprises are in the same circumstances, and Article 7 requires PE profits to be determined by treating the PE as a separate and distinct enterprise.

Under Sections 195 and 40(a)(i), payment of interest outside India without deduction or payment of applicable tax at source attracts disallowance of the expenditure.

CBDT Circular No. 740 was relied upon for the treatment of a foreign bank’s Indian branch as a separate taxable entity and the applicability of TDS provisions to interest remitted to its head office.

CBDT Circular No. 333 establishes that treaty provisions prevail where they specifically conflict with domestic law, but does not override a domestic provision where the treaty contains no contrary prescription.

For depreciation purposes, the Court applied a functional interpretation of the expression “computer” in Appendix I, holding that technologically integrated equipment performing electronic data processing may fall within that category.

The Court also relied on the earlier decision in Royal Bank of Scotland N.V. v. Commissioner of Income Tax, reported at (2026) 494 ITR 171, concerning the retrospective Explanation to Section 90.

The appellant was admittedly a Netherlands company and had not satisfied the statutory conditions for being treated as a domestic company under Section 2(22A).

The Court held that the distinction between domestic and foreign companies was legally valid and that Article 24(2) did not assist the appellant because a foreign company taxed only on Indian-source income and a domestic company potentially taxed on global income were not in identical circumstances.

The retrospective Explanation to Section 90 clarified that the higher rate applicable to a foreign company was not discriminatory, and the DTAA contained no specific provision prescribing a different tax rate.

As to the interest paid to the overseas head office and branches, the Court applied the separate-enterprise fiction under Article 7 but held that the appellant could claim the deduction only subject to domestic procedural requirements.

Since the appellant failed to deduct tax at source under Section 195, Section 40(a)(i) mandated disallowance of the interest expenditure.

The same separate-entity treatment meant that interest received by the Indian PE from the head office or foreign branches constituted taxable business income and could not be excluded as a payment to oneself.

In contrast, the Court found that an ATM performs substantial electronic data-processing and communication functions through specialised hardware and software.

Applying a functional approach, it held that an ATM fell within the computer category in Appendix I and qualified for the higher depreciation rate.

The fourth question was answered in favour of the appellant, with the Court holding that an ATM is a computer eligible for the higher depreciation rate.

The appeal was accordingly allowed in part, the Tribunal’s order was modified to that extent, and the Assessing Officer was directed to pass a consequential order for AY 2003–04.

Connected applications were disposed of, with no order as to costs.