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. 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)