Interest remitted by a foreign bank’s Indian PE to its head office requires TDS to secure deduction.

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 a permanent establishment (“PE”) under the Income-tax Act, 1961 and the India–Netherlands DTAA.

For the relevant assessment year, the appellant claimed: (i) taxation at the rate applicable to domestic companies under Article 24(2) of the DTAA; (ii) deduction of interest paid by the Indian PE to its overseas head office and foreign branches; (iii) exclusion of corresponding interest receipts from its taxable PE profits; and (iv) depreciation on Automated Teller Machines (“ATMs”) at the higher rate applicable to computers under Appendix I to the Income-tax Rules.

The Assessing Officer and the appellate authorities rejected the claims relating to the tax rate, interest deduction and interest receipts, while restricting the depreciation claim on ATMs.

The appellant challenged the Tribunal’s order dated 9 March 2007 under Section 260A of the Act.

Whether the appellant was entitled to taxation at the rate applicable to a domestic company, rather than the higher rate applicable to a foreign company, by relying on Sections 2(22A) and 90 of the Act, CBDT Circular No. 333, and Article 24(2) of the India–Netherlands DTAA?

Whether interest paid by the Indian PE to the overseas head office and foreign branches was deductible in computing the PE’s taxable profits, particularly where tax had not been deducted at source under Section 195?

Whether, if the interest paid by the PE to the head office or foreign branches was not deductible as a payment to oneself, corresponding interest received by the PE from those entities was also required to be excluded from its taxable income?

Whether an ATM qualified as a “computer” under Item 2B of Appendix I to the Income-tax Rules and was therefore eligible for the higher depreciation rate applicable to computers?

The Court applied Sections 2(22A) and 2(23A) of the Income-tax Act, under which a “domestic company” must be an Indian company or must satisfy the prescribed arrangements for declaration and payment of dividends in India, while a non-qualifying company is a foreign company.

It relied on Section 90 and its Explanation, inserted retrospectively by the Finance Act, 2001, which clarifies that charging a higher rate of tax on a foreign company does not constitute less favourable treatment.

Article 24(2) of the India–Netherlands DTAA prohibits less favourable treatment only in comparable or similar circumstances; the Court held that a foreign company taxable only on Indian-source income and a domestic company taxable on worldwide income are not in the same circumstances.

Under Sections 40(a)(i) and 195, interest payable outside India is disallowable where the applicable tax has not been deducted or paid at source, and remittances to a foreign head office are subject to TDS where the PE is treated as a separate enterprise for treaty purposes.

Article 7 of the DTAA permits determination of PE profits by applying the separate-enterprise fiction, including the attribution of appropriate expenses and income.

The Court also relied on CBDT Circular Nos. 333 and 740 and on Royal Bank of Scotland N.V. v. Commissioner of Income Tax, reported in (2026) 494 ITR 171, concerning the effect of the retrospective Explanation to Section 90.

For depreciation, the Court applied the functional and technical meaning of “computer” under Item 2B of Appendix I, treating equipment that performs electronic data processing and related computing functions as falling within that category.

The Court held that the appellant did not satisfy the statutory definition of a domestic company and was therefore prima facie taxable as a foreign company.

Article 24(2) did not assist the appellant because the domestic company and the foreign PE were not situated in identical or comparable circumstances, and the Explanation to Section 90 expressly excluded a higher foreign-company tax rate from the concept of discriminatory treatment.

On the interest deduction, the Court reasoned that the appellant could not invoke the separate-entity fiction under Article 7 to claim a deduction and simultaneously disregard that fiction to avoid TDS obligations.

Interest remitted by the Indian PE to its overseas head office or branches was consequently subject to Section 195, and the failure to deduct tax attracted disallowance under Section 40(a)(i).

The Court rejected the proposed symmetry between disallowed interest payments and interest receipts: the disallowance resulted from non-compliance with TDS provisions, not from treating the PE and head office as one indivisible person.

Applying the Article 7 separate-enterprise fiction consistently, interest received by the PE from overseas establishments remained taxable business income in India.

In contrast, for depreciation purposes, the Court adopted a functional approach and found that ATMs are sophisticated electronic data-processing devices using internal processors, software and network communication.

Their essential computing functions justified classification as computers under Appendix I.

Substantial questions 1, 2 and 3 were answered in the affirmative against the assessee and in favour of the Revenue: the appellant was taxable at the foreign-company rate; the interest paid to the overseas head office and branches was disallowable for failure to comply with TDS requirements; and interest received from those entities was includible in the PE’s taxable profits.

Substantial question 4 was answered in the negative, in favour of the assessee, and ATMs were held eligible for depreciation at the rate applicable to computers.

The Tribunal’s order was modified to that extent, and the Assessing Officer was directed to pass a consequential order for the relevant assessment year.

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