Permanent establishment taxation retains foreign-company rates, requires TDS on head-office interest, and treats ATMs as computers for depreciation.
Indian PE taxation of a foreign bank remains at foreign-company rates where domestic-company conditions are unmet and Article 24(2) does not apply because domestic and foreign companies are not similarly situated. Under Article 7, PE-head-office dealings are treated separately for profit attribution, but interest remitted overseas requires TDS compliance under section 195; non-compliance triggers disallowance under section 40(a)(i). Conversely, interest received by the PE from overseas offices forms taxable PE business income. ATMs performing digital data processing, software functions, and network communication fall within the computer category for depreciation.
Issues: (i) Whether the Indian PE of a Netherlands bank is entitled under Article 24(2) to tax at domestic-company rates; (ii) Whether interest paid by the Indian PE to its overseas head office and branches is deductible without TDS compliance; (iii) Whether interest received by the Indian PE from its overseas head office and branches must be excluded as a payment to self; (iv) Whether ATMs qualify as computers for the applicable depreciation rate.
Issue (i): Whether the Indian PE of a Netherlands bank is entitled under Article 24(2) to tax at domestic-company rates.
Analysis: Section 2(22A) confines domestic-company status to an Indian company or a company satisfying the prescribed dividend-payment arrangements; the non-resident bank did not meet those conditions. The Explanation to Section 90 clarifies that a higher tax rate for a foreign company is not less favourable treatment. Article 24(2) was inapplicable because domestic and foreign companies are not in the same circumstances: the latter is taxable in India only on Indian-source income, while the former is taxable on global income. The DTAA contains no specific rate provision overriding the applicable domestic rate.
Conclusion: The Indian PE is not entitled to the domestic-company tax rate; the issue is decided against the assessee and in favour of the Revenue.
Issue (ii): Whether interest paid by the Indian PE to its overseas head office and branches is deductible without TDS compliance.
Analysis: Article 7 treats the PE and head office as separate and distinct enterprises for computing PE profits. The deduction contemplated for banking enterprises under Article 7(3) remains subject to domestic-law requirements. Interest remitted to the overseas head office attracts tax deduction at source under Section 195, and non-compliance results in disallowance under Section 40(a)(i).
Conclusion: Interest paid without complying with TDS requirements is not deductible; the issue is decided against the assessee and in favour of the Revenue.
Issue (iii): Whether interest received by the Indian PE from its overseas head office and branches must be excluded as a payment to self.
Analysis: The disallowance of outgoing interest arose from non-compliance with TDS requirements, not from any finding that the PE and head office are one person. Under the separate entity framework of Article 7, interest received by the PE from the overseas head office or branches is business income of the PE and cannot be excluded on a payment-to-self theory.
Conclusion: Interest received by the Indian PE from its overseas head office and branches is includible in its taxable Indian profits; the issue is decided against the assessee and in favour of the Revenue.
Issue (iv): Whether ATMs qualify as computers for the applicable depreciation rate.
Analysis: Asset classification for depreciation depends on functional utility. ATMs undertake digital data processing through internal processing capability, specialised software, and network communication with banking servers. Their functional parity with computing equipment brings them within the computer category in Item 2B of Appendix I to the Income-tax Rules.
Conclusion: ATMs qualify as computers for depreciation purposes; the issue is decided in favour of the assessee and against the Revenue.
Final Conclusion: The assessment must retain the foreign-company tax rate and include the disputed interest income while denying deduction of interest remitted without TDS compliance; depreciation on ATMs must be computed at the rate applicable to computers.