Foreign bank branch taxation: statutory rate classification prevails over treaty non-discrimination and CBDT communications.

The text explains that a foreign bank branch, not being a domestic company, falls within the class of companies other than domestic companies and is therefore taxed at the rate applicable to that class under the Income-tax Act and Finance Act. It states that the Explanation to section 90 is not inconsistent with Article 24(2) of the India-Netherlands DTAA because the non-discrimination rule does not prevent distinct statutory classes from carrying different tax rates. It also states that CBDT Circular No. 333 and the 21.11.1994 letter cannot override clear statutory rate provisions. The statutory classification between domestic and foreign companies is presented as governing the applicable rate of tax.

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Issues: (i) Whether the appellant, being a foreign bank branch and not a domestic company, was liable to be taxed at the rate applicable to a company other than a domestic company; (ii) whether the Explanation inserted in section 90 of the Income-tax Act, 1961 conflicted with Article 24(2) of the India-Netherlands DTAA; (iii) whether CBDT Circular No. 333 dated 02.04.1982 and the CBDT letter dated 21.11.1994 could override the statutory rate of tax.

Issue (i): Whether the appellant, being a foreign bank branch and not a domestic company, was liable to be taxed at the rate applicable to a company other than a domestic company.

Analysis: The statutory scheme treated companies in two relevant classes for rate purposes, namely domestic companies and companies other than domestic companies. The appellant did not satisfy the definition of domestic company and therefore fell within the residuary class of foreign companies. The rate structure in the Finance Act separately prescribed tax rates for those two classes, and the language used in the charging and rate provisions was clear and unambiguous. In a taxing statute, the clear words must be given effect to and no equity or intendment can be imported.

Conclusion: The appellant was liable to tax at the rate applicable to a company other than a domestic company, against the appellant.

Issue (ii): Whether the Explanation inserted in section 90 of the Income-tax Act, 1961 conflicted with Article 24(2) of the India-Netherlands DTAA.

Analysis: Section 90 authorises treaty implementation, but where the domestic statute itself clearly classifies companies and prescribes different rates, the treaty provision must be read in that framework. The Explanation stated that a higher rate of tax on a foreign company would not, for that reason alone, be regarded as less favourable. This was held to be consistent with the domestic rate structure and not repugnant to Article 24(2), which was understood as prohibiting discrimination within the same class and not as preventing the Legislature from maintaining distinct classes of taxpayers.

Conclusion: There was no conflict between the Explanation to section 90 and Article 24(2) of the DTAA, against the appellant.

Issue (iii): Whether CBDT Circular No. 333 dated 02.04.1982 and the CBDT letter dated 21.11.1994 could override the statutory rate of tax.

Analysis: A circular can operate only within the framework of the statute and cannot prevail over clear statutory language. The circular dealt with treaty provisions where the DTAA specifically provided otherwise, but the relevant treaty did not create a specific rate rule contrary to the Act and Finance Act. The letter expressing the Board's earlier opinion was only an administrative communication and could not displace the plain statutory provisions, especially after the retrospective explanation to section 90.

Conclusion: Neither the circular nor the letter could override the statutory provisions, against the appellant.

Final Conclusion: The tax appeals were rejected on the core question of rate of tax, and the statutory classification between domestic and foreign companies was upheld as valid and applicable to the appellant. The connected writ petition also stood dismissed.

Ratio Decidendi: Where the charging and rate provisions of the Income-tax Act and Finance Act clearly classify taxpayers into domestic and foreign companies, that unambiguous statutory classification governs the applicable rate of tax; a treaty non-discrimination clause and administrative circulars cannot override such clear domestic law unless the treaty itself specifically provides otherwise.

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