Royal Bank of Scotland N. V. v. CIT (2024)

🏦 Royal Bank of Scotland N.V. vs. CIT – Calcutta High Court on Tax Rates and Non-Discrimination under India–Netherlands DTAA (2024)

📌 Background

The principle of non-discrimination under Article 24(2) of Double Taxation Avoidance Agreements (DTAAs) ensures that foreign enterprises operating in a Contracting State are not taxed less favorably than domestic enterprises under similar circumstances. However, this principle does not equate foreign and domestic entities in terms of classification or tax rate applicability where the distinction is recognized under domestic law.

In Royal Bank of Scotland N.V. v. CIT [(2024) 341 CTR 981 / 162 taxmann.com 780 (Cal)(HC)], the Calcutta High Court examined whether a branch of a foreign bank (ABN Amro Bank N.V., Netherlands) operating in India could claim the same rate of income tax as a domestic company, invoking the non-discrimination clause under Article 24(2) of the India–Netherlands DTAA.

The Court held that there was no conflict between the DTAA and the Income-tax Act, 1961, and that the assessee, being a foreign company, was taxable at the rates applicable to companies other than domestic companies as prescribed under the Finance Act.

📂 Facts of the Case

• Assessee: Royal Bank of Scotland N.V. (formerly ABN Amro Bank N.V., Netherlands)
• Nature: Foreign bank incorporated in the Netherlands, operating a branch in India.
• Indian Operations: Registered as a Scheduled Bank under the Second Schedule of the RBI Act, 1934.
• Issue: Whether the assessee’s Indian branch should be taxed at the same rate as domestic banks, relying on the non-discrimination provision under the India–Netherlands DTAA.

Revenue’s Position:

• The assessee had a Permanent Establishment (PE) in India and was liable to tax on income attributable to the PE.
• However, being a foreign company, it was taxable at the rates applicable to companies other than domestic companies under the Finance Act.

Assessee’s Argument:

• Invoked Article 24(2) of the India–Netherlands DTAA, claiming that since domestic banks and foreign banks carry on the same banking business in India, they should be taxed at the same rate.
• Argued that taxing foreign branches at higher rates amounted to discrimination, contrary to treaty protection.

❓ Point of Dispute

Whether, under the India–Netherlands DTAA, a branch of a foreign bank (having a PE in India) should be taxed at the same rate as a domestic company, invoking the non-discrimination clause under Article 24(2) of the DTAA.

📑 Submissions by the Assessee

• The assessee contended that it was engaged in identical banking activities in India as Indian domestic banks.
• Under Article 24(2) (Non-Discrimination) of the India–Netherlands DTAA:

“Enterprises of a Contracting State carrying on business in the other Contracting State through a permanent establishment shall not be less favorably taxed in that other State than enterprises of that other State carrying on the same activities.”

• Hence, taxing the Indian branch of a foreign bank at a higher rate than a domestic bank violates the non-discrimination principle.
• The DTAA, being a special law under Section 90, overrides domestic provisions where inconsistent.
• Therefore, the branch should be taxed at the same rate as domestic banks.

📑 Submissions by the Revenue

• The Revenue argued that:
  • The classification between domestic and foreign companies under Indian law is recognized and legitimate, not discriminatory.
  • The rates of tax for “domestic companies” and “companies other than domestic companies” are clearly prescribed under the Finance Act.
  • The DTAA’s non-discrimination clause ensures equality in tax treatment for similar activities, not equality of tax rates, which are sovereign policy decisions.
  • The Explanation to Section 90 of the Act confirms that the provisions of the DTAA cannot override domestic classification where no inconsistency exists.

⚖️ Legal Principles & Court’s Findings

1. Classification under Domestic Law

The Court examined the statutory framework:

• Section 2(17) – defines a “company.”
• Section 2(22A) – defines a “domestic company.”
• Section 2(23A) – defines a “foreign company.”
• Section 90 – governs relief under DTAAs.

The Court noted that two distinct classes of companies exist under Indian tax law:

1. Domestic Companies – incorporated in India.
2. Companies other than Domestic Companies – i.e., foreign companies.

These are taxed at different prescribed rates, and this classification is not discriminatory but a legitimate legislative distinction.

2. Scope of Article 24(2) – Non-Discrimination

The Court analyzed Article 24(2) of the India–Netherlands DTAA and observed:

• The clause ensures that foreign enterprises operating through a PE are not subjected to unfavorable taxation as compared to domestic enterprises engaged in similar activities.
• However, the difference in tax rate between domestic and foreign companies is not “discrimination” but a policy-based differentiation recognized internationally.
• The OECD Commentary also recognizes that differential rates applicable to resident and non-resident companies do not violate non-discrimination provisions.

3. Explanation to Section 90

The Court held that the Explanation to Section 90 (clarifying that DTAA provisions apply only to the extent they are not inconsistent with domestic law) is not in conflict with the DTAA itself.
Thus, the DTAA does not override statutory classification between domestic and foreign companies.

4. No Conflict between DTAA and Income-tax Act

• Both laws operate harmoniously, with no inconsistency or overlap.
• The non-discrimination article does not mandate identical tax rates for foreign and domestic companies, only similar tax treatment for similar income under similar circumstances.
• Since the distinction arises from place of incorporation, not nature of activity, it does not amount to discrimination.

🏁 Held

The Calcutta High Court held that:

✅ There is no conflict between the India–Netherlands DTAA and the Income-tax Act, 1961.

✅ The non-discrimination clause under Article 24(2) does not extend to equalizing tax rates between domestic and foreign companies.

✅ The assessee, being a foreign company, falls under the category of “a company other than a domestic company” as per Section 2(23A).

✅ Therefore, it is liable to tax at the rate prescribed for foreign companies under the Finance Act.

✅ The Revenue’s classification and differential tax rate do not violate treaty obligations.

✅ Practical Impact for Taxpayers

• Branches of foreign banks and other foreign companies in India cannot claim tax rates applicable to domestic companies merely by invoking the non-discrimination clause under DTAAs.
• Different tax rates ≠ Discrimination: Differential rates based on residence/incorporation are accepted as legitimate under both domestic and international law.
• DTAA harmonized with Indian law: Article 24(2) ensures equality in tax treatment, not tax rate parity.
• Foreign enterprises must follow Finance Act rates: They remain taxable under rates applicable to “companies other than domestic companies.”

🔑 Key Takeaways

1. Non-discrimination ≠ identical tax rates: The clause ensures equal tax treatment, not identical tax percentages.
2. Legitimate classification: Indian law distinguishes between domestic and foreign companies, and this is consistent with global tax norms.
3. DTAA and domestic law aligned: Both provisions coexist without conflict or overlap.
4. Foreign branches taxed at foreign company rates: Regardless of similar operations, the rate classification remains distinct.

📢 Why This Case Matters

The Royal Bank of Scotland N.V. v. CIT (2024) decision clarifies the scope of non-discrimination clauses under DTAAs. It affirms that foreign banks and branches cannot claim domestic company tax rates merely due to operational similarity.

This judgment reinforces that tax sovereignty and classification under domestic law prevail, provided they do not amount to arbitrary or prejudicial treatment. The ruling aligns with global tax practices and OECD principles, ensuring a balanced interpretation of treaty and domestic provisions.

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