Interest remitted by an Indian permanent establishment to its foreign head office requires TDS compliance for deduction.

The appellant, formerly ABN Amro Bank N.V., was a Netherlands-incorporated non-resident banking company carrying on business in India through a permanent establishment (PE).

For AY 1999–2000, it computed its tax liability at the rate applicable to domestic companies and claimed deductions for interest of Rs.99,77,325 paid to its head office and overseas branches, as well as offshore remuneration of Rs.57,22,807.

The Assessing Officer applied the higher rate applicable to foreign companies and disallowed the interest deduction under Section 40(a)(i) on the ground that tax had not been deducted at source.

The CIT(A) affirmed these findings, and the Tribunal followed its earlier orders on the applicable tax rate and a Special Bench decision treating the interest payments as “payments to self”.

The appellant also sought exclusion of Rs.1,52,17,356 received as interest from its head office and overseas branches if the corresponding interest payments were disallowed; the Tribunal rejected that contention.

1. Whether the appellant, a foreign company operating through an Indian PE, was entitled under Sections 2(22A) and 90 of the Income Tax Act, CBDT Circular No. 333, CBDT’s 1994 letter, and Article 24(2) of the India–Netherlands DTAA to be taxed at the rate applicable to domestic companies rather than at the higher rate applicable to foreign companies.

2. Whether interest paid by the Indian PE to the appellant’s head office and overseas branches was deductible in computing the PE’s taxable profits under the Income Tax Act and the India–Netherlands DTAA.

3. Whether such interest payments were taxable in India as income of the head office or overseas branches, thereby neutralising any deduction claimed by the Indian PE.

4. Whether, if the interest paid to the head office and overseas branches was not deductible as a “payment to self”, corresponding interest received by the Indian PE from those entities was also required to be excluded from its taxable income.

Section 2(22A) defines a “domestic company” by reference to its status as an Indian company or its compliance with prescribed arrangements for declaration and payment of dividends in India, while Section 2(23A) covers companies that do not satisfy that definition.

Section 90, including its retrospective Explanation inserted by the Finance Act, 2001, clarifies that the levy of a higher tax rate on a foreign company does not constitute less favourable treatment.

Article 24(2) of the India–Netherlands DTAA prohibits discriminatory taxation only where enterprises are in the same circumstances; Article 7 treats a PE as a separate and distinct enterprise for determining business profits, and Article 7(3) permits deduction of expenses incurred for the PE’s business.

Under Section 40(a)(i), interest payable outside India is disallowable where the applicable tax has not been deducted or paid at source, and Section 195 requires deduction of tax from payments to non-residents.

The Court also relied on CBDT Circular No. 740 concerning the treatment of a foreign bank’s Indian branch and on Royal Bank of Scotland N.V. v. Commissioner of Income Tax, reported in (2026) 494 ITR 171, concerning the retrospective Explanation to Section 90.

The Court held that the appellant did not qualify as a domestic company under Section 2(22A) and was therefore correctly classified as a foreign company.

The retrospective Explanation to Section 90 validly clarified that the higher rate applicable to foreign companies was not discriminatory, and Article 24(2) did not apply because a foreign company taxed only on Indian-source income was not in the same circumstances as a domestic company taxed on global income.

In relation to the interest payments, the Court applied the Article 7 separate-enterprise fiction: although the PE and head office were parts of the same legal entity, they were treated as separate establishments for determining taxable profits.

Accordingly, the interest remittances attracted Section 195, and the appellant’s failure to deduct tax triggered disallowance under Section 40(a)(i).

The Court rejected the attempt to rely on the “payment to self” principle for deduction purposes while avoiding the TDS obligation.

It further held that the disallowance resulted from non-compliance with TDS requirements rather than from treating the transaction as legally nonexistent; consequently, interest received by the PE from the head office and overseas branches remained taxable business income under the separate-enterprise framework.

The appeal was stated to be allowed, the Tribunal’s order was set aside, and the Assessing Officer was directed to pass a consequential order for AY 1999–2000; connected applications were disposed of without an order as to costs.