Treaty non-discrimination and intra-entity payments: foreign branch transfers to head office were treated as payments to self, not taxable in India.

Retrospective clarification under section 90 was applied to preserve the higher tax rate for foreign companies, so the India-France Treaty non-discrimination clause did not secure domestic-company tax treatment for the assessee. Payments by an Indian branch to its head office or overseas branches for data processing charges and interest were treated as intra-entity transfers, or payments to self, and were not taxable in India on the footing of royalties, fees for technical services or interest. The Tribunal followed its earlier rulings on both points, rejected the parity claim, deleted the additions, and dismissed both appeals.

---

---

Issues: (i) Whether the assessee was entitled to be taxed at the rate applicable to domestic companies under the non-discrimination clause of the India-France Tax Treaty. (ii) Whether amounts paid by the Indian branch to its head office and overseas branches by way of data processing charges and interest were taxable in India.

Issue (i): Whether the assessee was entitled to be taxed at the rate applicable to domestic companies under the non-discrimination clause of the India-France Tax Treaty.

Analysis: The claim for parity in tax rate was examined in earlier years and was rejected on the footing that the Explanation to section 90 of the Income-tax Act, 1961, inserted retrospectively, saves the higher tax rate applicable to foreign companies from being treated as a violation of the treaty's non-discrimination clause. The earlier view, followed in the present year, treated the issue as covered against the assessee.

Conclusion: The claim for application of the domestic-company tax rate was rejected and the issue was decided against the assessee.

Issue (ii): Whether amounts paid by the Indian branch to its head office and overseas branches by way of data processing charges and interest were taxable in India.

Analysis: The Tribunal followed its earlier orders and the Special Bench ruling that payments by an Indian branch to its head office or overseas branches are payments to self. On that reasoning, such payments do not give rise to taxable income in India in the hands of the foreign bank, and the treaty provisions invoked for taxing royalties, fees for technical services or interest did not justify the additions. The disallowance and taxation of these intra-entity payments were therefore unwarranted.

Conclusion: The additions on account of data processing charges and interest were deleted and the issue was decided against the Revenue.

Final Conclusion: The Tribunal followed its earlier decisions on both issues, leaving one substantive claim against the assessee and the departmental challenge rejected, with both appeals dismissed.

Ratio Decidendi: Retrospective domestic-law clarification under section 90 prevents the treaty non-discrimination clause from neutralising the higher tax rate on foreign companies, and payments between a foreign bank's Indian branch and its own head office or overseas branches are payments to self not chargeable to tax in India.

---