The Calcutta High Court has held that automated teller machines (ATMs) qualify as computers for depreciation under the Income-tax Rules, granting relief to the assessee. At the same time, it rejected the bank’s claims to the lower tax rate applicable to domestic companies and to a deduction for interest remitted by its Indian branch to its overseas head office without deducting tax at source.
The Bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar directed the Assessing Officer to pass a consequential order giving effect to the relief on ATM depreciation.
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The appellant/assessee is incorporated in the Netherlands and conducts banking business in India through a branch treated as a permanent establishment (PE). Its appeal challenged an Income Tax Appellate Tribunal order dated March 9, 2007.
The dispute before the High Court concerned four questions: whether the India–Netherlands tax treaty entitled the bank to the domestic-company tax rate; whether interest paid by its Indian PE to its overseas head office and branches was deductible; whether interest received by the PE from those overseas establishments could be excluded from Indian profits; and whether its ATMs qualified for depreciation as computers.
The bank relied on the non-discrimination provision in Article 24(2) of the India–Netherlands Double Taxation Avoidance Agreement. It argued that taxing its Indian PE at the higher rate applicable to foreign companies amounted to less favourable treatment than that given to an Indian enterprise carrying on similar business.
The Court rejected that argument. It found that the bank did not meet the statutory definition of a domestic company under Section 2(22A) of the Income-tax Act. It also relied on the Explanation to Section 90, inserted retrospectively by the Finance Act, 2001, which states that charging a foreign company a higher rate does not amount to less favourable treatment.
The Bench further held that a foreign company and a domestic company were not in the same circumstances for this purpose: the former was taxed on its Indian-sourced income, while the latter was taxed on its global income. It found no treaty provision prescribing a rate that displaced the applicable domestic law.
The Indian branch had claimed a deduction for ₹99,77,325 in interest paid to its overseas head office. The Court upheld its disallowance under Section 40(a)(i) because tax had not been deducted at source.
The bank argued that a branch and its head office are part of the same legal entity, making the remittance a payment to itself. The Court held that this argument could not be used selectively. Article 7 of the treaty treats the PE as a separate enterprise when calculating its profits—the basis on which the bank sought the interest deduction. The Bench held that the bank had to comply with the corresponding tax deduction requirements under Section 195.
The Court made clear that the disallowance arose from the failure to deduct tax, rather than from a finding that interest paid to the head office could never be deducted.
The bank also sought to exclude interest received by its Indian PE from the overseas head office and other foreign branches. It argued that, if a payment to the head office was treated as a payment to itself, a receipt from the head office should likewise be left out of its income.
The Bench rejected that reasoning because it had not denied the interest expense on a “payment to self” basis. Applying the separate-enterprise treatment under Article 7 consistently, it held that interest received by the Indian PE formed part of its taxable business profits in India.
The bank succeeded on the depreciation issue. The Court found that an ATM does more than dispense cash: it processes data, runs specialised software and communicates with central banking servers to carry out transactions.
The Bench held that ATMs fall within the computer category under the relevant Income-tax Rules. It set aside the Tribunal’s restriction of the bank’s depreciation claim on those machines.
The appeal was therefore allowed in part. The three questions concerning the tax rate and interest transactions were decided in favour of the Revenue, while the ATM depreciation question was decided in favour of the bank. The judgment’s operative direction specifies Assessment Year 2002–03, although an earlier paragraph of the order refers to Assessment Year 2003–04.
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