Treaty PE profit computation remains subject to domestic deduction limits, while MAT was inapplicable to the banking company for that year.

Domestic-law limits on deductibility, including section 44C, continued to apply when computing the Indian permanent establishment profits of a UAE resident bank under Article 7 of the India-UAE DTAA because the treaty contained no express contrary rule for the period in question. The later protocol amendment was treated as clarificatory, not a basis to displace those restrictions retrospectively. On MAT, section 115JB did not apply to a banking company for the relevant assessment year because the provision then depended on accounts prepared under Parts II and III of Schedule VI, which did not govern banks in the same way; the MAT addition was therefore deleted.

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Issues: (i) Whether the restrictions on deductibility under domestic law, including section 44C, applied while computing the profits of an Indian permanent establishment of a UAE resident bank under Article 7 of the India-UAE DTAA; (ii) Whether section 115JB applied to a banking company for the relevant assessment year.

Issue (i): Whether the restrictions on deductibility under domestic law, including section 44C, applied while computing the profits of an Indian permanent establishment of a UAE resident bank under Article 7 of the India-UAE DTAA.

Analysis: Article 7(3) allows deduction of expenses incurred for the permanent establishment, but Article 25(1) preserves the operation of domestic law unless the treaty expressly provides otherwise. The treaty contained no specific contrary provision excluding the domestic-law restrictions on deductions for the period in question. The earlier coordinate-bench decision in the assessee's own case had already held that the computation of PE profits under the India-UAE DTAA remained subject to domestic limitations. The later protocol amendment only made explicit what had already been judicially understood for the pre-amendment period. The plea that treaty wording by itself displaced section 44C and similar restrictions was rejected.

Conclusion: The domestic-law restrictions on deduction remained applicable, and the disallowance was sustained.

Issue (ii): Whether section 115JB applied to a banking company for the relevant assessment year.

Analysis: The provision, as it then stood, operated on the basis of preparation of accounts in accordance with Parts II and III of Schedule VI to the Companies Act, which did not govern banking companies in the same manner. The amendment extending the provision to cases where accounts were not prepared under Schedule VI was prospective and did not apply to the assessment year in issue. On that legal position, MAT could not be levied on the assessee bank for the year under consideration.

Conclusion: Section 115JB was held inapplicable, and the MAT addition was directed to be deleted.

Final Conclusion: The appeal succeeded only in respect of the MAT issue, while the disallowances based on domestic-law limitations in computing PE profits were upheld.

Ratio Decidendi: In the absence of an express treaty provision to the contrary, domestic-law restrictions on deductibility continue to govern computation of permanent-establishment profits under a tax treaty; and section 115JB, as it then stood, did not apply to banking companies not required to prepare accounts under Schedule VI to the Companies Act.

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