The Calcutta High Court has held that interest payments by Permanent Establishment (PE) to head office cannot be excluded on the ground of mutuality or as a ‘payment to self’ and require TDS compliance as business income in India. Essentially, interest payments by an Indian PE to its overseas head office attract mandatory tax deduction at source under Section 195, and failure to deduct tax triggers automatic disallowance under Section 40(a)(i) even though Article 7(3) of the DTAA permits such deduction for banking enterprises.
The Court ruled that a non-resident foreign bank operating through a PE in India cannot claim the domestic company tax rate by invoking the non-discrimination clause in Article 24(2) of the India-Netherlands DTAA, as the explanation to Section 90 clarifies that charging a higher rate on foreign companies is not ‘less favourable’ treatment.
The Explanation to Section 90, inserted by the Finance Act 2001 with retrospective effect from April 1, 1962, is clarificatory in nature and bars foreign companies from claiming the domestic company tax rate by invoking the non-discrimination clause in Article 24(2) of the India-Netherlands DTAA, added the Court.
The High Court also said that Automated Teller Machines qualify as ‘computers’ under item 2B of Appendix I to the Income Tax Rules and are entitled to the higher rate of depreciation, given their functional character as complex data-processing units integral to modern digital banking infrastructure. Hence, ATMs are data-processing units entitled to higher depreciation.
On the tax rate issue, the Division Bench comprising Justice Rajarshi Bharadwaj and Justice Uday Kumar observed that the definition of ‘domestic company’ under Section 2(22A) of the Income Tax Act requires the company to be an Indian company or to have made prescribed arrangements for declaration and payment of dividends within India, which the appellant admittedly did not fulfil, placing it squarely within the definition of a ‘foreign company’ under Section 2(23A).
The Court placed strong reliance on the explanation to Section 90, inserted by the Finance Act, 2001 with retrospective effect from April 1, 1962, which expressly declares that charging a higher rate of tax on a foreign company shall not be regarded as ‘less favourable’ treatment. Following its earlier decision in Royal Bank of Scotland N.V. v. Commissioner of Income Tax [(2026) 494 ITR 171], the Court treated this explanation as clarificatory and binding. The Court further held that the ‘same circumstances’ requirement in Article 24(2) of the DTAA was not satisfied because a foreign company is taxed only on Indian-sourced income while a domestic company is taxed on global income, and CBDT Circular No. 333 only prioritises treaty provisions where a specific contrary provision exists, which the India-Netherlands DTAA did not contain.
On the interest deductibility issue, the Court observed that under Section 40(a)(i) of the Act, any interest payable outside India cannot be deducted in computing profits if tax has not been deducted at source. The appellant’s argument that the payment was a ‘payment to self’ because the branch and head office are the same legal entity was rejected, since Article 7 of the DTAA requires the PE to be treated as a separate and distinct enterprise for computing profits. The Court held that the appellant could not take advantage of the ‘separate entity’ fiction to claim a deduction while discarding the same fiction to avoid TDS obligations.
Referring to CBDT Circular No. 740, the Court noted that 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, attracting the TDS requirements of Section 195. Allowing a deduction while exempting the same amount from TDS would create an asymmetrical tax advantage not intended by the DTAA or the Act.
On the corresponding interest received by the PE, the Court observed that the disallowance of interest expenditure under question (2) was triggered not by treating the PE and head office as a single entity, but by the appellant’s failure to comply with mandatory TDS requirements, which is a procedural statutory disallowance that does not alter the underlying character of the transactions. Under the ‘separate entity’ framework of Article 7 of the DTAA, the branch and head office are recognised as independent establishments, and interest received by the PE from the head office or other foreign branches represents taxable business income earned by the Indian PE. The Court held that the interest income could not be characterised as an excludable ‘payment to self’ or shielded under the principle of mutuality.
On the ATM depreciation issue, the Court observed that an ATM is not merely a mechanical cash dispenser but a complex data-processing unit relying on internal processing power, specialised software, and constant network communication with central banking servers. The Court held that the classification of an asset for depreciation purposes must be determined by its functional utility in the business of the assessee, and that 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 Court found that the technical specifications of an ATM align with the broad category of computers described in Appendix I, and that the functional parity between an ATM and a computer is sufficient to warrant its inclusion under the relevant rule for depreciation.
Briefly, the Royal Bank of Scotland N.V. (formerly ABN Amro Bank N.V.), a non-resident foreign company incorporated in the Netherlands, carries on banking operations in India through a branch that is recognised as a Permanent Establishment (PE) under the Income Tax Act, and the India-Netherlands Double Taxation Avoidance Agreement (DTAA). For Assessment Year 2003-04, the appellant filed its return of income and claimed that it should be taxed at the rate applicable to domestic companies rather than the higher rate for foreign companies, relying on the non-discrimination clause in Article 24(2) of the DTAA.
The appellant also claimed a deduction for interest payments made by its Indian PE to its overseas head office and other branches and sought depreciation on its Automated Teller Machines (ATMs) at the higher rate reserved for ‘computers’ under the Income Tax Rules. The Assessing Officer, the CIT(Appeals), and the Income Tax Appellate Tribunal largely upheld the revenue’s position on the tax rate and the disallowance of interest payments for want of tax deduction at source (TDS), but restricted the higher depreciation claim on ATMs.
