Non-discrimination treaty clause does not override domestic tax rate, while fixed-asset and donation deductions were disallowed for lack of business nexus.

A foreign bank's income was held taxable at the higher rate applicable to non-resident companies because the treaty non-discrimination clause did not override the domestic statutory rate structure, and section 90's explanation treated that differential as permissible. Expenditure on purchase of fixed assets was not deductible in computing permanent establishment profits under the treaty, as those profits remained subject to the domestic law basis of computation. Donation payments were also disallowed because no sufficient evidence showed that they were wholly and exclusively incurred for business purposes or had a staff welfare nexus.

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Issues: (i) whether a foreign bank's income could be taxed at the higher rate applicable to non-resident companies in view of the non-discrimination provisions of the relevant tax treaty and the statutory clarification in section 90; (ii) whether the expenditure incurred on purchase of fixed assets was deductible while computing the permanent establishment's business profits under the treaty; and (iii) whether the donation payments of Rs. 15,000 were allowable as business expenditure.

Issue (i): whether a foreign bank's income could be taxed at the higher rate applicable to non-resident companies in view of the non-discrimination provisions of the relevant tax treaty and the statutory clarification in section 90.

Analysis: The treaty non-discrimination clause did not prevent application of the tax rate prescribed by domestic law for a foreign company where the treaty did not prescribe a different rate for such entity. The statutory explanation to section 90 clarified that a higher rate charged to a foreign company than to a domestic company is not to be regarded as less favourable treatment. The issue was therefore governed by the applicable statutory rate structure and not by any asserted parity with domestic companies.

Conclusion: The higher rate of tax applicable to non-resident companies was upheld, and the assessee was not entitled to be taxed at the domestic company rate.

Issue (ii): whether the expenditure incurred on purchase of fixed assets was deductible while computing the permanent establishment's business profits under the treaty.

Analysis: The treaty provision governing computation of business profits required the profits of the permanent establishment to be determined in accordance with the taxation laws of the State in which the permanent establishment was situated. Commercial principles could not override the domestic law basis of computation merely because the expenditure related to the business of the establishment. The cited precedent on identical facts had rejected the claim for deduction of such capital expenditure.

Conclusion: The disallowance of expenditure on purchase of fixed assets was confirmed.

Issue (iii): whether the donation payments of Rs. 15,000 were allowable as business expenditure.

Analysis: The claim depended on proof that the payments, though described as donations, were in substance incurred wholly and exclusively for business purposes. No sufficient evidence was produced to establish business exigency or staff welfare nexus. In the absence of such proof, the payments could not be treated as deductible business expenditure.

Conclusion: The disallowance of the donation amount was upheld.

Final Conclusion: The appeal succeeded only on the tax-rate question and failed on the remaining grounds, leaving the assessee with partial relief only.

Ratio Decidendi: A tax treaty's non-discrimination clause does not, by itself, displace the domestic statutory rate applicable to a foreign company, and treaty-based computation of business profits remains subject to the domestic law governing deductibility unless the assessee proves a business nexus for the expenditure claimed.

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