Treaty-based taxation of branch operations: expatriate salary, MAT and head office expense claims were largely upheld, while the tax-rate challenge failed.

Expatriate salaries paid for personnel working exclusively for the Indian permanent establishment were treated as deductible branch expenditure, and routing payment through the head office did not defeat the claim. MAT under section 115JB was held inapplicable to the banking company, with treaty protection under section 90(2) prevailing where more beneficial. The challenge to the tax rate on income attributable to the permanent establishment failed because the DTAA anti-discrimination argument could not override the statutory clarification that a higher rate for a foreign company is not less favourable treatment. Interest adjustments between the branch and head office, and head office expenditure under section 44C, were also accepted as deductible or not taxable on the facts.

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Issues: (i) Whether salaries paid overseas to expatriates working exclusively for the Indian permanent establishment were allowable as deduction; (ii) whether section 115JB applied to a banking company carrying on operations through an Indian permanent establishment under the India-Japan DTAA; (iii) whether the applicable rate of tax on income attributable to the Indian permanent establishment could exceed the domestic company rate under Article 24 of the DTAA; (iv) whether interest paid by the Indian branches to the head office and interest received by the Indian branches from the head office was allowable or taxable as determined by the lower authorities; and (v) whether head office expenditure was deductible under section 44C.

Issue (i): Whether salaries paid overseas to expatriates working exclusively for the Indian permanent establishment were allowable as deduction.

Analysis: The expenditure was treated as incurred wholly and exclusively for the Indian branch operations, and the issue was covered by binding precedent in the assessee's own case. The claim was also not defeated by the fact that payment was routed through the head office abroad.

Conclusion: Deduction was allowable, in favour of the assessee.

Issue (ii): Whether section 115JB applied to a banking company carrying on operations through an Indian permanent establishment under the India-Japan DTAA.

Analysis: The profit and loss account of a banking company is not prepared under the normal corporate regime contemplated for MAT, and the treaty provisions under section 90(2) prevail where they are more beneficial. The issue was held to be governed by the assessee's own precedent.

Conclusion: Section 115JB was held inapplicable, in favour of the assessee.

Issue (iii): Whether the applicable rate of tax on income attributable to the Indian permanent establishment could exceed the domestic company rate under Article 24 of the DTAA.

Analysis: The statutory explanation to section 90(2) expressly provides that a higher rate for a foreign company is not to be regarded as less favourable treatment. The prior coordinate bench view was followed.

Conclusion: The assessee's contention was rejected, in favour of the Revenue.

Issue (iv): Whether interest paid by the Indian branches to the head office and interest received by the Indian branches from the head office was allowable or taxable as determined by the lower authorities.

Analysis: The issue was covered by the assessee's own precedent and by earlier High Court rulings on identical branch and head office transactions. The additions made by the revenue authorities could not be sustained.

Conclusion: The issue was decided in favour of the assessee.

Issue (v): Whether head office expenditure was deductible under section 44C.

Analysis: The claim was accepted on the footing that the expenditure was covered by the governing appellate directions and could not be denied on the stated objections.

Conclusion: Deduction under section 44C was allowable, in favour of the assessee.

Final Conclusion: The assessee succeeded on the principal substantive grounds relating to expatriate salary, MAT applicability, interest and head office expenditure, while the challenge to the tax rate failed.

Ratio Decidendi: A banking company carrying on business through an Indian permanent establishment is entitled to treaty-based computation where more beneficial, expatriate salaries incurred exclusively for the branch are deductible, and treaty provisions cannot override the express anti-discrimination clarification in section 90(2) to limit a higher foreign-company tax rate.

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