Non-discrimination clause and branch-head office mutuality shape treaty tax treatment for foreign banks and branch remittances.

A foreign company's claim to the domestic company and co-operative bank tax rate under the India-France treaty's non-discrimination clause was rejected because earlier Tribunal rulings, read with the retrospective Explanation to section 90 of the Income-tax Act, preserved the domestic tax differential. Interest remitted by the Indian branch to its head office was held not taxable in India under Article 12, following prior Tribunal orders and the Special Bench view that branch and head office are not separate persons for this purpose and that such remittance is a payment to self, attracting mutuality. The appeal succeeded only on the interest issue.

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Issues: (i) Whether the assessee, a foreign company, could claim the tax rate applicable to domestic companies and co-operative banks under Article 26 of the India-France Tax Treaty for the relevant assessment year. (ii) Whether interest paid by the Indian branch office to the assessee's head office was taxable in India under Article 12 of the India-France Tax Treaty.

Issue (i): Whether the assessee, a foreign company, could claim the tax rate applicable to domestic companies and co-operative banks under Article 26 of the India-France Tax Treaty for the relevant assessment year.

Analysis: The issue was treated as covered by earlier Tribunal decisions in the assessee's own case for multiple assessment years. The reasoning accepted in those decisions was that the higher tax rate applicable to foreign companies did not violate the non-discrimination clause because the Explanation to Section 90 of the Income-tax Act, 1961, with retrospective effect, protected the domestic statutory tax differential from being treated as treaty discrimination.

Conclusion: The claim was rejected and the issue was decided against the assessee.

Issue (ii): Whether interest paid by the Indian branch office to the assessee's head office was taxable in India under Article 12 of the India-France Tax Treaty.

Analysis: The issue was also held to be covered by earlier Tribunal orders in the assessee's own case and by the Special Bench decision in Sumitomo Mitsui Banking Corporation. The Tribunal followed the view that the branch and head office are not to be treated as separate persons for this purpose and that the remittance was in the nature of a payment to self, attracting the principle of mutuality rather than taxability as interest income under the treaty.

Conclusion: The interest was held not taxable in India and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded only in part, with relief granted on the interest-taxability issue while the challenge to the tax rate under the non-discrimination clause failed.

Ratio Decidendi: Where a matter is already covered by binding or consistently followed Tribunal precedent, the non-discrimination clause in a tax treaty does not nullify a domestic statutory tax differential protected by Section 90 of the Income-tax Act, 1961, and payments between a branch and its head office may be treated as non-taxable on the principle of mutuality as a payment to self.

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