Section
44C, is a non obstante clause stating that in the case of a non-resident, no
allowance shall be made in respect of so much of expenditure in the nature of
head office expenditure as is in excess of the amount computed as an amount
equal to 5% of the adjusted total income or the amount of so much of the
expenditure in the nature of head office expenditure as is attributable to the
business of the assessee in India, whichever is less. Clause (iv) to
Explanation to Section 44C illustrates the head office expenses.
Text of Section 44C
[1][44C.
Deduction of head office expenditure in the case of non-residents
Notwithstanding anything to the contrary
contained in sections 28 to 43A, in the case of an assessee, being a
non-resident, no allowance shall be made, in computing the income chargeable
under the head “Profits and gains of business or profession”, in respect of so
much of the expenditure in the nature of head office expenditure as is in
excess of the amount computed as hereunder, namely:-
(a)
an amount equal to five per cent of the adjusted total income; or
[2][(b) [***]
(c)
the amount of so much of the expenditure in the nature of head office
expenditure incurred by the assessee as is attributable to the business or
profession of the assessee in India,
whichever is the least :
PROVIDED that in a case where the adjusted total
income of the assessee is a loss, the amount under clause (a) shall be computed
at the rate of five per cent of the average adjusted total income of the
assessee.
Explanation. - For the purposes of this section,
-
(i) “adjusted total income” means the total
income computed in accordance with the provisions of this Act, without giving
effect to the allowance referred to in this section or in sub-section (2) of
section 32 or the deduction referred to in section 32A or section 33 or section
33A or the first proviso to clause (ix) of sub-section (1) of section 36 or any
loss carried forward under sub-section (1) of section 72 or sub-section (2) of
section 73 or [3][sub-section (1) or sub-section (3) of section 74]
or sub-section (3) of section 74A or the deductions under Chapter VI-A;
(ii) “average adjusted total income” means, -
(a) in a case where the total income of the
assessee is assessable for each of the three assessment years immediately
preceding the relevant assessment year, one-third of the aggregate amount of
the adjusted total income in respect of the previous years relevant to the
aforesaid three assessment years;
(b) in a case where the total income of the
assessee is assessable only for two of the aforesaid three assessment years,
one-half of the aggregate amount of the adjusted total income in respect of the
previous years relevant to the aforesaid two assessment years;
(c) in a case where the total income of the assessee
is assessable only for one of the aforesaid three assessment years, the amount
of the adjusted total income in respect of the previous year relevant to that
assessment year;
[4][(iii) [***]
(iv)
“head office expenditure” means executive and general administration
expenditure incurred by the assessee outside India, including expenditure
incurred in respect of—
(a)
rent, rates, taxes, repairs or insurance of any premises outside India used for
the purposes of the business or profession;
(b)
salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites
or profits in lieu of or in addition to salary, whether paid or allowed to any
employee or other person employed in, or managing the affairs of, any office outside
India;
(c)
travelling by any employee or other person employed in, or managing the affairs
of, any office outside India; and
(d)
such other matters connected with executive and general administration as may
be prescribed.
KEY NOTE
1. Inserted by the
Finance Act, 1976, with effect from 01.06.1976.
2. Omitted by the Finance Act, 1993, with effect
from 01.04.1993.
3.
Substituted for “sub-section (1) of section 74” by the Finance Act, 1987,
with effect from 01.04.1988.
4. Omitted by the Finance Act, 1993, with effect
from 01.04.1993.
Purpose
of section 44C
The purpose of section 44C is
to remove the difficulty in scrutinizing the common expenses incurred by the
head office. The key objectives of the section were (a) obviate the hardship in
allocating the correct proportion to the Indian branch and (b) restricting the
amount of expenditure allowable on account of head office expenses.
Applicability of Section 44C
§
Section 44C is applicable only in the
cases of those non-residents, who carry on business in India through their
branches.
§
The said section was introduced to get
over difficulties in scrutinising claims in respect of general administrative
expenses incurred by the foreign head office insofar as such expenses stand
related to their business or profession in India having regard to the fact that
foreign companies operating through branches in India sometimes try to reduce
incidence of tax in India by inflating their claims in respect of the head
office expenses.
§
In other words, section 44C seeks to
impose a ceiling/restriction on head office expenses.
§ However,
section 44C contemplates allocation of expenses amongst various entities. That,
the expenditure which is covered by section 44C is of a common nature, which is
incurred for the various branches or which is incurred for the head office and
the branch.
Ceiling limit in respect of
head office expenses in the case of non-residents [Section
44C]
As per section 44C, in case
of a foreign company, which operates directly in India, and has a branch office
or other presence, which constitutes a Permanent Establishment, of the foreign
company in India, the head office may incur certain expenditures in relation to
the Indian PE. In addition to this, certain general expenses which are incurred
by the Head Office, may also be related to the Indian PE, but cannot be
identified specifically. In order to prevent foreign companies charging higher
expenditure to the Indian branch, Section 44C restricts the claim of head
office expenditure of a non-resident to the lower of following expenses: –
(a)
5% of “adjusted total income” in case of profit, or
in case of loss, 5% of the average adjusted total income;
(b)
Head office expenditure incurred by the assessee,
as is attributable to the business or profession of the assessee in India.
Meaning
of Adjusted Total Income [Explanation (i) to Section
44C]
Adjusted Total Income refers
to the total income of the assessee, computed in accordance with
the provisions of the Income Tax Act without giving effect to the following:
§ Allowance
under Section 44C of Income Tax Act for Head office expenditure
§ Unabsorbed
depreciation under section 32(2).
§ Investment
allowance under section 32A.
§ Development
Rebate under section 33.
§ Development
allowance under section 33A.
§ Family
planning Expenditure incurred by a company under first proviso to section
36(1)(ix).
§ Brought
forward Business loss under section 72(1).
§ Brought
forward Speculation loss under section 73(2).
§ Loss under the
head Capital Gain under section 74(1).
§ Brought
forward Loss from certain specified sources under Section 74A(3).
§ Deductions
under Chapter VI-A.
“Average
adjusted total income” means [Explanation (ii) to Section 44C]
The adjusted total income
of the assessee shall be computed based on, whether the foreign company was
assessable to tax for one, two or three preceding years: –
(a) Assessable
for each of the three assessment years immediately preceding the relevant
assessment year : –
When the total income of the assesse, was assessable for each
of the three preceding assessment
years , one third of the “aggregate amount of the
adjusted total income” in respect of previous years relevant to the aforesaid
three assessment years.
PROVISIONS
ILLUSTRATED : 1
Foreign Head office
incurred certain expenditure and allocated a part of it to Indian Branch. The
adjusted total income of Indian branch is a loss in the current year. The total
income of Foreign company was assessable for three immediately preceding Financial
years. Determine the average adjusted total income of Indian branch from the
following data:
|
Financial Year |
2022-23 (in crores) |
2021-22 (in crores) |
2020-21 (in crores) |
|
Adjusted Total Income |
100 |
200 |
300 |
SOLUTION :
Average adjusted total
income = (1/3rd of the “aggregate amount of the adjusted total
income” in respect of the three previous years)
= 100+200+300/3 = Rs 200
crores
(b)
Assessable two out of the three preceding assessment years
When the total income of
the assessee was assessable for only two out of three preceding assessment
years, One half of the “aggregate amount of the adjusted total income” in
respect of previous years relevant to those two assessment years
PROVISIONS
ILLUSTRATED : 2
–
Foreign Head office incurred certain expenditure
and allocated a part of it to Indian Branch. The adjusted total income of
Indian branch is a loss. The total income of Foreign company was assessable for
preceding two years only. Determine the average adjusted total income of Indian
branch from the following data:
|
Financial year |
2022-23 (in crores) |
2021-22 (in crores) |
|
Adjusted Total Income |
100 |
200 |
SOLUTION :
Average adjusted total income = (1/2 of the
“aggregate amount of the adjusted total income” in respect of the two previous
years)
= 100+200/2 = Rs 150 crores
(c) Assessable for only one out of three preceding assessment years
When
the total income of the assessee was assessable for only one out of three
preceding assessment years, “adjusted total income” in respect of the previous
years relevant to that assessment years
PROVISIONS ILLUSTRATED: 3 –
Foreign Head office incurred certain expenditure and allocated a part of it to Indian Branch. The adjusted total income of Indian branch is a loss. The total income of Foreign company was assessable for preceding one year only. Determine the average adjusted total income of Indian branch from the following data:
|
Financial year |
2022-23 (in crores) |
|
Adjusted Total Income |
100 |
SOLUTION :
Average adjusted total income = (“Aggregate
amount of the adjusted total income” in respect of the previous year)
= 100 crores
Meaning of Head Office Expenditure [Explanation (iv) to Section 44C]
As per Explanation (iv) to Section 44C, head
office expenditure means executive and general administration expenditure
incurred by the assessee outside India. The Explanation lists 4 clauses under
which such expenditure can be categorized.
For the purpose of this clause, executive and general administration expenditure shall mean such expenditure incurred by the assessee outside India. Specifically, the following expenditure shall be included in executive and general administration expenditure:-
(a)
rent,
rates, taxes, repairs or insurance of any premises outside India used
for the purpose of the business or profession.
(b)
Salary,
wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or
profit in lieu of or in addition to salary, whether paid or allowed to
any employee or other person employed in, or managing the affairs of, any
office outside India;
(c)
traveling by
any employee or other person employed in, or managing the affairs, of any
office outside India; and
(d)
such
other matters connected with executive and general administrative as
may be prescribed.
Quantum of Head Officer expenses allowable
Section
44C of the Income-tax Act, 1961 restricts the allowability of the head office
expenses allocated by the foreign company to the Indian branch to the extent of
lower of an amount equal to 5% of the adjusted total income or the amount
actually incurred as is attributable to the business of the assessee in India.
PROVISIONS ILLUSTRATED: 4 –
The net result of the
business carried on by a branch of foreign company in India for the year ended
31.03.2023 was a loss of Rs 90,00,000 after charging head office expenses of Rs
1,90,00,000, which were allocated to the branch. Explain with reasons the income
to be declared by the branch in its return for the Assessment year 2023-24 ?
SOLUTION –
The amount of income to be
declared by the assessee for Assessment year 2023-24 will be as under: –
|
S.
No. |
Particulars |
Amount (in Rs.) |
|
1. |
Net loss for the year
ended on 31.03.2023 |
(90,00,000) |
|
2. |
Add: Amount of head office
expenses to be considered separately as per section 44C |
1,90,00,000 |
|
3. |
Adjusted total income
[2 – 1] |
1,00,00,000 |
|
4. |
Less: Head Office
expenses allowable under section 44C is the lower of (i) Rs 5,00,000, being
5% of 1,00,00,000, or (ii) Rs 1,90,00,000. |
5,00,000 |
|
5. |
Income to be declared
in return [3 - 4] |
95,00,000 |
Rules on taxability of airport management services vis-a-vis India-Germany DTAA Protocol
Delhi ITAT holds
that the services provided by a German entity (Assessee) under
Airport Operator Agreement are inextricably linked with its PE in India,
directs Revenue to examine the nature of services and exclude
planning, project, construction or research activities and technical services
in view of Para 1(b) of Protocol to India-Germany DTAA; Assessee-Company,
a tax resident of Germany and a global airport operator offering comprehensive
airport management services, entered into Airport Operator Agreement with Delhi
International Airport Limited (DIAL) for providing airport management services
to DIAL in the areas of General Services,
Managerial Services and Consultancy Services; For provision of such
services, Assessee had deputed its employees, given guarantees, indemnity,
provided consultancy services, undertaken liability for liquidated damages and
lent its Intellectual Property Rights (IPR) and set up a project office in
India, which is treated as its PE; During the Assessing Officer 2007-08,
Assessee received Rs. 1.46 Cr for provision of the aforesaid services, which was
not offered to tax in India; Rejecting Assessee’s claim that the amount
received by the PE was in respect of consultancy services directly provided by
head office in Germany and thus not taxable in India, Revenue held the amount
to be taxable as FTS under Article 12 of India-Germany DTAA as well as under
Section 9(1)(vii), which was confirmed by DRP; ITAT notes that in terms with
airport operator agreement, various kind of services are being rendered in
connection with the operation of airport, opines that “it is evident that
such services cannot be rendered from the head office of the assessee without
active involvement of the PE.”; ITAT explains that though such
services may fall in the category of managerial or technical or consultancy
services falling within the definition of FTS under Article 12(4) of
India-Germany DTAA, the treaty carves out exception in Article 12(5) by
providing that receipts will not fall under the category of royalty or FTS, if
the beneficial owner is a resident of one contracting state,
carries on business in other contracting state through a PE in
respect of which the royalty or FTS is paid; Points out that as per Article
12(5), in such situation provisions of Article 7 (business profits) or Article
14 (Independent Personal Services) may apply, states that the receipts in the
present case certainly cannot fall within scope of Article 14, “Therefore,
the only provision under which the receipts can fall is business profits as
provided under Article 7 of the tax treaty”; Refers to Para 1(b)
of the Protocol to India-Germany DTAA which provides that income from
planning, project, construction or research activities and technical services,
even though connected to PE in India, will not be taxable in India, accordingly
directs Assessing Officer to examine the nature of income and not to tax the
income of the nature specified in Para 1(b) of the Protocol to
the DTAA; As regards disallowance of office and administrative cost, ITAT
states that although in principle the expenditure incurred by the head office
directly connected to the PE has to be allowed without imposing the
restrictions of Section 44C, “however, burden is entirely on the
assessee to establish on record through authentic evidence that such
expenditure was actually incurred by head office for the PE"; Notes
that both Assessing Officer and DRP gave concurrent
findings that Assessee had not furnished any evidence to establish that the
expenses were incurred by the head office exclusively for the PE, accordingly
upholds DRP’s action of confirming the disallowance. [In favour of Both, Partially] (Related Assessment year : 2012-13) – [Fraport A.G. Frankfurt Airport Services
Worldwide v. ACIT/ADIT (International Taxation) [TS-185-ITAT-2023(DEL)] – Date of Judgement : 03.04.2023 (ITAT Delhi)]
NOTE
Para 1(b) of Protocol to India-Germany DTAA is
with reference to Article 7 (Business Profits) and reads follows:
Income derived by a resident of a Contracting
State from planning, project, construction or research activities as well as
income from technical services exercised in that State in connection with a
permanent establishment situated in the other Contracting State, shall not be
attributed to that permanent establishment.
A non- resident assessee is
entitled to claim deduction of an amount equal to 5% of the adjusted total
income as expenditure in the nature of Head Office (HO) Expenses. The fact that
the expenses are not debited in the Profit & loss account or the books of
account is irrelevant. The entries in the books of account are not conclusive
Assessee was a UK based
company. It had a Branch Office (BO) in India which provided professional
services in nature of technical assistance/advice in relation to expatriate tax
and business tax compliance services. During relevant years, assessee claimed
deduction under section 44C on account of head office Expenditure. Assessing
Officer finding that assessee had not claimed such expenditure in profit &
loss account of Indian branch office, disallowed same. Assessing Officer
further made addition in respect of undisclosed markup on cost incurred by Head
Office in UK. So far as addition made by Assessing Officer on account of
undisclosed markup on cost incurred by head office in UK was concerned, income,
if any that accrued on account of expenditure incurred by Head Office, would be
income of head office and not Indian Branch Office. As regards disallowance of
deduction claimed by assessee under section 44C, since there was no dispute to
fact that head office had incurred expenditure for Branch Office, genuineness
of which had not been doubted and since assessee had claimed deduction in
computation statement, Assessing Officer was not justified in disallowing claim
merely for not debiting same in profit & loss account. In view of aforesaid,
impugned order passed by Assessing Officer was to be set aside. [In favour of
assessee] (Related Assessment years : 2012-13 and 2013-14) – [Ernst &
Young Ltd v. ACIT (International Taxation) [2018] 94 taxmann.com 227 (ITAT
Delhi)]
Salary paid to expatriates
who were stationed in India working exclusively for the business operations of
the Indian PE of the assessee; Held allowance and that provision of Section 44C
is not applicable
The Tribunal held that
salary paid to expatriates who were stationed in India working exclusively for
the business operations of the Indian PE of the assessee, was allowable as
business expenditure bang incurred wholly and exclusively for the Indian
branch. It also held that no part of these expenses could be allocated to other
branches. Accordingly, it was held that section 44C was not applicable. – [Dy.
DIT v. Bank of Tokyo-Mitsubishi, UFG Ltd. (2018) 61 ITR(T) 272 (ITAT Delhi)]
Head office expenditure - to be allowed
fully in view of Article 7(3) of the treaty prior to 01.04.2008 - Amendment
brought by way of protocol which mandates applicability of domestic laws -
Prospective in nature
The assessee was a banking company incorporated in
UAE and has 2 branches in India. The income from banking operations in India
was offered for tax in India in view of India- UAE DTAA. The business profit of
the bank related to its Indian operations was required to be computed in
accordance with the provisions of Art. 7 of the DTAA which allowed the
deduction of all expenses wherever incurred and reasonably allocable to the PE.
During the year under consideration, the assessee had incurred head office
expenses. There were administrative expenses which were allocated by head
office to its branches. In the first round of proceedings, the Tribunal had set
aside the claim to Assessing Officer in view of amendment to Section 44C. In
the second round of proceedings, the Assessing Officer restricted the expenses
in view of Section 44C. On appeal to Tribunal, it was held that in view of
provisions contained in Article 7(3) of Indo- UAE DTAA prior to 01.04.2008, the
income of the PE of the assessee was to be computed as business income after
allowing all the expenses attributable to its business in India including the
head office expenses without invoking the provisions of Section 44C. The
amendment brought by way of Protocol by which Article 7(3) has been amended and
limitation clause has been brought in, which mandates applicability of domestic
law , would apply from 01.04.2008 and has no retrospective effect. (Related Assessment
years : 1995-96 to 2000-01) – [Abu Dhabi Commercial Bank Ltd. v. ADIT (2016)
176 TTJ 115 (ITAT Mumbai)]
Denies Head Office-expenses deduction, differs from Abu-Dhabi
ruling; Sumitomo-SB does not ‘impliedly overrule’ Mashreq-1
ITAT denies deduction to
Mashreq Bank PSC (assessee, a UAE based bank) for head office (‘HO’) expenses
allocated to its Indian branches for Assessment year 2002-03; As assessee
incurred losses during relevant Assessment year, it did not claim HO expenses under
section 44C (which restricts HO expenses deduction to 5% of profits), but
rather claimed the same as per Article 7(3) of India - UAE DTAA (which
according to assessee, provides for business expenses deduction without
applying 5% limit); Rejects assessee’s deduction claim following co-ordinate
bench ruling in assessee's own case for Assessment year 1996-97 (‘Mashreq-1’),
rendered prior to amendment in India-UAE DTAA which specifically extends
restrictions under domestic tax law to computation of taxable profits under
Article 7 w.e.f April, 2008; Notes that co-ordinate bench in Mashreq-1 had
applied Article 25(1) providing that law in force in the State will govern the
taxation in that State except contrary provision made in the DTAA) to extend
restriction contained in Section 44C to DTAA provision and had accordingly
denied HO expense deduction; Explains that every specific amendment to
the law or a treaty, particularly when it is disadvantageous to the taxpayers
and is enacted ex abundanti cautela (as a measure of abundant caution) is
generally, fraught with, what tax academicians and policymakers term as, the
risk of its ‘kill effect’”; Further explaining the rider to this ‘kill
effect’, ITAT states that The rider is that even on the first principles and in
a situation in which a binding judicial precedent or judicial analysis of the
pre amendment legal or treaty provision has already come to the same
conclusions, as indicated by the specific amendment as a measure of abundant
caution, such a kill effect” is ruled out. That precisely is the situation
before us.”; Further, ITAT disagrees with co-ordinate bench ruling in Abu-Dhabi
Bank Ltd. which followed Ahmedabad ITAT ruling in ADIT
v. Dalmas Energy LLC (2012) 150 TTJ 70 (ITAT Ahmedabad) over coordinate bench ruling in Mashreq Bank v. JDIT (2007) 14 SOT 1 (ITAT Mumbai) to hold that domestic law limitations on
deductions are applicable only with effect from 01.04.2008; Rejecting view of
co-ordinate bench in Abu Dhabi case that Mashreq Bank 1 case stands impliedly”
overruled by Mumbai ITAT five member bench ruling in Sumitomo Mitsui Banking Corporation Ltd. v. DDIT (2012) 136 ITD SB
66 (ITAT Mumbai),
ITAT remarks that the very concept of a binding precedent being implied
overruled” is a myth” in view of jurisdictional High Court ruling in case of CIT v. Sudhir Jayantilal Mulji (1995) 214 ITR 154 (Bom.); ITAT also opines that that If at all the subsequent
bench had doubts on correctness of these views, the matter could have been
referred to a special bench ..”, accordingly holds coordinate bench in Abu
Dhabi ruling as ‘per incurium’ and in conflict with law laid down by Andhra
Pradesh High Court full bench ruling in CIT
v. B.R. Constructions (1993) 202 ITR 222 : 113 CTR 1 (AP)(FB);
Remarks that ..because of this deviation and particularly as we have no doubts
about correctness of our approach we see no reasons to refer this issue to a
special bench”; Moreover, observes that Sumitomo ruling was rendered in context
of taxability of interest income, whereas Mashreq-1 ruling was in context of
admissibility of disallowances under the Act in computation of income under
article 7, opines that the observations made by the five member bench cannot be
considered to be reversing, disapproving or even dealing with the ratio
decidendi of Mashreq Bank decision.” [In favour of revenue] (Related Assessment
year : 2002-03) – [Mashreq Bank PSC v. Deputy Director of Income Tax
(International Taxation) [TS-49-ITAT-2016(Mum)] – Date of Judgement : 15.01.2016 (ITAT Mumbai)]
License fees; Management
charge payment by India Branch outside of Head Office expense limit under
section 44C
ITAT deletes addition on
account of adjustment under section 44C, payment of
‘license fee’ and ‘management service fee’ by India Branch (‘assessee’) to its
UK Head-office, not in the nature of ‘head office expenses’ as contemplated under
section 44C; Clarifies only executive and general administration expenditure
(viz salary, rent, traveling expenses etc) incurred by assessee outside India
as enumerated in clause (iv) of Explanation to Section 44C falls under purview
of ‘head office expenses’; Upholds CIT(A)’s order that ‘license fee’ payment
for use of brand/trademark and other business intangibles, being in the nature
of intellectual property, falls outside Section 44C ambit; However, overturns
CIT(A)’s order holding 50% of management fees hit by Section 44C, observes none
of the services elaborated in management services agreement (viz. corporate
communications, corporate finance, IT, HR etc.) falls under section 44C ambit;
Holds “For computing the deduction of head office expenditure, it is
sine-qua-non that the nature of head office expenses must fall within the
illustration given in clause (iv) of Explanation. [In favour of assessee]
(Related Assessment year : 2005-06) - [Lloyd’s Register Asia (India Branch Office) v. ACIT [TS-324-ITAT-2015(Mum)] – Date of Judgement :
10.06.2015 (ITAT Mumbai)]
Scope of definition of
“head office expenditure” under section 44C
ITAT after examining the
facts of the case and the scope of definition of “head
office expenditure” under section 44C, observed that the “head office
expenditure “enumerated in the section is in the nature of executive and
general administration expenditure incurred by the assessee outside India. Ruling in favour of assessee, ITAT held “From
the nature of expenditure as enumerated in sub clause (a) to sub clause (c) of
the aforesaid Explanation and if compared with the nature of expenditure
incurred by the assessee branch, then it will be seen that none of the
expenditure under the head “license fees” falls within this category, even
remotely. The payment of ‘license fee’ is purely for using of brand/trademark
and other business intangibles, which are in the nature of intellectual
property. Nowhere such types of expenditure fall within the scope of “head office
expenditure” as illustrated in clause (iv). (Related
Assessment year : 2005-06) - [Lloyd’s Register Asia (India Branch Office) v.
ACIT [TS-324-ITAT-2015(Mum)] – Date of Judgement :
10.06.2015 (ITAT Mumbai)]
Head office expenditure - Application of provision; since the
assessee could not produce any evidence to prove that head office expenses to
tune of Rs. 1.06 crore were directly attributable to Indian branch, such
expenses could only be allowed within ceiling prescribed under section 44C
The
assessee claimed deduction for head office expenses at Rs. 1.06 crore on the
ground that it was directly attributable to the Indian branch. Assessee claimed
that the ceiling provided under section 44C would not apply. The Assessing
Officer, however, observed from the invoices submitted by the assessee that the
expenses in question were ‘allocated’ to the assessee by the head office; that
in some cases the basis of allocation was not given. The Assessing Officer,
therefore, held such amount of Rs. 1.06 crore to be covered within the ceiling
prescribed under section 44C. On appeal by the assessee, the Commissioner
(Appeals) directed Assessing Officer to allow independent deduction distinct
from section 44C. Being aggrieved against order of the Commissioner (Appeals),
the revenue raised instant ground of appeal. Tribunal held that since the
assessee could not produce any evidence to prove that head office expenses to
tune of Rs. 1.06 crore were directly attributable to Indian branch, such
expenses could only be allowed within ceiling prescribed under section 44C. [In
favour of revenue] (Related Assessment years : 1994-95 & 1998-99 to
2000-01) – [DCIT v. Banque Indosuez (Known as Credit Agricole Indosuez)
(2013) 55SOT 38 (ITAT Mumbai)]
Data processing charges paid by the bank to its foreign Head Office not royalty; Disallowance under section 40(a)(i) based on characterisation as royalty cannot be allowed; Such charges in the nature of Head Office expenses and to be considered on the touchstone of Section 44C; Matter restored to file of Assessing Officer to consider deductibility of expenses
The assessee, Credit Agricole Indosuez (now
Calyon Bank) has its Head Office (HO) at Paris. The assessee claimed deduction
of Rs. 91.03 Lakhs being data processing cost paid to HO. Assessing Officer treated the aforesaid payment as
'royalty' and in the absence of deduction of tax at source by the asseessee,
the Assessing Officer disallowed amount under section 40(a)(i). The
disallowance was confirmed by the CIT(A). Aggrieved, the assessee preferred an
appeal before ITAT.
Ruling in favour of the assessee, ITAT held that
the payment made by the assessee was not royalty but were HO expenses. The ITAT
stated that the action of the Revenue of treating the amount being in the
nature of royalty and hence not allowable u/s 40(a)(i), cannot be allowed. ITAT
further stated that the assessee made the payment on account of data processing
cost to its HO and therefore could not be considered royalty as a consideration
for the use of the assets specified under Explanation 2 to Sec. 9(1)(vi).
ITAT held that said amount was in the nature of
HO expenses. ITAT further stated that, “The assessee did not include this
amount in the ambit of head office expenses to be considered on the touchstone
of section 44C of the Act”. Thus, the Assessing Officer having considered
the payment as royalty, had not considered the deductibility of the amount
under section 44C. Accordingly, in the interest of justice, ITAT set aside the
order and restored the matter to the file of Assessing Officer, to consider the
deductibility of such expenses by treating it as head office expenses.
Separately, the assessee submitted that the
entire branch network, maintained NOSTRO account with Banker’s Trust Company
(BTC) in USD. It remained as a floating account available with the assessee to
be drawn, whenever required. Thus, the assessee’s Indian branch also maintained
its account in FCNR- B deposit in foreign currency. Due to high costs on
forward dealings, the assessee's Indian Branch had not converted its funds into
INR till such time it was economically feasible, to convert the same for its
business of lending. BTC paid interest on the credit balances @ 2% less then
fed fund rates. The assessee hence earned interest of Rs. 1.13 Cr. on NOSTRO
A/c maintained with BTC. The assessee claimed it as an exempt income, however,
the Assessing Officer and CIT(A) disallowed the exemption and made a
disallowance under section 14A with regard to expenditure incurred in relation
to interest income and general administration expenses on NOSTRO balances with
BTC.
Against the order of CIT(A), the assessee
appealed before ITAT. With reference to co-ordinate bench rulings in assessee’s
own case for previous years, ITAT held that as the assessee had agreed to the
interest income being chargeable to tax, the issue of computing the
disallowance under section 14A comes to a naught. Accordingly, said
disallowance was deleted by ITAT. [In favour of both partly] (Related
Assessment year 2001-02) - [Credit Agricole Indosuez v. DDIT [TS-381-ITAT-2013(Mum)] – Date of Judgement : 07.08.2013 (ITAT Mumbai)]
The
assessee, John Wyeth & Brother Limited, is a non-resident company engaged
in manufacturing pharmaceutical products. It has its Head Office (HO) in UK and
a separate and independent establishment for its branch business in India. For
Assessment year 1981-82, the Assessing Officer disallowed
the assessee’s claim for deduction of laboratory expenses, by applying Section
44C. The Assessing Officer took the view that the entire R&D activities had
been centralized under the Wyeth Laboratories in UK, and the expenses were
merely in the nature of general administrative and executive expenses. Hence
the applicability of Section 44C was inevitable. Accordingly, the Assessing Officer
held that the entire claim of laboratory expenses was covered / restricted as
per the provisions of Section 44C.
On
first appeal, the CIT(A) confirmed the disallowance. He observed that the
assessee had filed certificates of overseas auditors, Arthur Anderson and Co.
UK, along with details of R&D expenses and apportionment of total
laboratory expenses. He held that it was a well known fact that Arthur Anderson
was a tainted tax audit company and its certificates could not be taken for
granted. The CIT(A) held that the assessee had failed to produce any evidence
to show that the expenditure had not been allowed or was proportionately
disallowed in case of the HO in the UK Income Tax assessment.
Before
ITAT, the assessee argued that against the order passed by the Tribunal for Assessment
years 1980-81 and 1981-82, Bombay High Court in John Wyeth & Brother
Ltd. v. CIT (2008) 220 CTR 416 (Bom.) had examined the issue of
applicability of Section 44C to laboratory expenses. While upholding the order
of the Tribunal in remanding the matter to the file of the Assessing Officer
for disposal afresh, High Court held that if the assessee was to satisfy that
the expenses incurred towards laboratory expenditure did not include any
executive or general administration expenditure, the claim would be allowable.
The
Revenue argued that even as per the High Court’s judgment, the assessee was
required to prove whether the expenses claimed were or were not general
administrative / executive in nature. However, the assessee had failed to
produce the book of accounts and other relevant documents in this regard.
Ruling
in favour of the assessee, Mumbai bench of ITAT allowed the assessee’s claim
for deduction of laboratory expenses.
ITAT
noted that upto Assessment year 1976-77, the Revenue had accepted apportionment
of the expenses based on the percentage of gross sales of the Indian Branch to
total gross sales of Head Office in UK. The assessee had filed auditor’s
certificates (pursuant to High Court ruling), details of the R&D expenses
incurred, as well as details of apportionment of the expenditure. Further, the
assessee has also filed financial statements to show that the UK Company had
shown executive or general administration expenditure, as indicated in clauses
(a), (b), (c) and (d) of Explanation (iv) to Section 44C, separately.
Thus,
ITAT held that the assessee had proven beyond doubt that the laboratory
expenses did not include any executive or general administration expenses
indicated in clauses (a), (b), (c) and (d) of Explanation (iv) to Section 44C.
ITAT further held that all these details were already filed by the assessee
before the Assessing Officer and the CIT(A), and the Revenue Authorities,
without examining the same or without pointing out any item of disallowable
nature to show that the said item of expense did not pertain to laboratory
expenses, had disallowed the assessee’s claim.
ITAT
concluded that “In the absence of any contrary material placed on record by the
Revenue to show that the laboratory expenses claimed by the assessee did
include the expenses incurred on executive or general administration as
indicated in clauses (a), (b), (c) and (d) of Explanation (iv) to section 44C
of the Act, we are of the view that the ld. CIT(A) was not justified in
sustaining the disallowance of laboratory expenses.” Accordingly, ITAT deleted
the disallowance. [In favour of Assessee (Related Assessment
years : 1981-82
& 1982-83) - [John Wyeth & Brother Ltd vs. ACIT [TS-567-ITAT-2012(Mum)]
- Date of Judgement : 25.07.2012 (ITAT Mumbai)]
Although section 44C places a cap on the head office
expenditure at 5% but section 44C cannot curtail the expenditure incurred by
the branch office. Further, the travel expenses incurred by the staff members of the head office on their
visit to a branch has to be fully allowed as that o the branch as they have
been incurred exclusively for work of the branch
Assessing
Officer allowed deduction of Rs. 5 lakhs to assessee under section 44C(c) - On
appeal, Commissioner (Appeals) by invoking clause (b) of section 44C, enhanced
amount of deduction to around Rs. 13 lakhs - Tribunal confirmed view taken by
Commissioner (Appeals) - In absence of any details of expenditure in Assessing
Officer’s order and moreover in view of fact that a deduction of around Rs. 13
lakhs had been allowed to assessee during earlier assessment years being least
of expenditure under clauses (a), (b) and (c) of section 44C, Tribunal was
right in invoking clause (b) of section 44C, and allowing deduction of Rs. 13
lakhs for relevant assessment year as well
On
assessment, the Assessing Officer took the view that the assessee was entitled
to a deduction to the extent of Rs. 5 lakhs under clause (c) of section 44C, as
the assessee had failed to give the break-up of the expenses. On appeal, the
Commissioner (Appeals) by invoking clause (b) of section 44C, increased the
amount of deduction to around Rs. 13 lakhs. On further appeal by the revenue,
the Tribunal confirmed the order passed by the Commissioner (Appeals). On
reference :
Held
: Section 44C refers to deduction of head office expenditure in case of
non-residents. The scheme of section 44C suggests that the non-resident
assessee is entitled to deduction, proportionate to the expenditure allocable
to Indian operations, out of the total expenditure of the non-resident bank.
Section 44C gives three clauses (a), (b) and (c). These three clauses refer to
three items of expenditure. Section 44C provides that the non-resident is given
an allowance for head office expenses, which will not exceed the prescribed
limit and that prescribed limit is provided for by the least of the three items
of expenditure mentioned in clauses (a), (b) and (c). Clause (a) refers to five
per cent of the net income, whereas clause (b) refers to average expenditure
and clause (c) refers to actual head office expenditure in Indian operations.
In
the instant case, the details of the expenditure in the Assessing Officer’s
order under clause (a) were not available. It was found by the Commissioner
(Appeals) that in the earlier years, the assessee was allowed deduction of
around Rs. 13 lakhs being least of the three items of expenditure under clauses
(a), (b) and (c) of section 44C. That view had been confirmed by the Tribunal.
No reason was found to interfere with the order of the Tribunal. The average
head office expenditure allowed by the department for three earlier assessment
years was around Rs. 13 lakhs. In such circumstances, there was no reason to
interfere with the order of the Tribunal. [In favour of assessee] (Related Assessment
year : 1981-82) -
Assessee a non-resident bank claimed deduction in respect of travelling expenses incurred on staff members of head office on their visit to its branch office in India; Reverses ITAT ruling; Allows direct expenses incurred deductible under section 37(1) against Section 44C; Assessee’s claim was maintainable
The assessee a non-resident bank claimed
deduction in respect of travelling expenses incurred on the staff members of
the head office on their visit to its branch office in India. The Tribunal
allowed the claim of the assessee. On reference :
Section 44C is applicable only in the cases of
those non-residents, who carry on business in India through their branches. The
said section was introduced to get over difficulties in scrutinising claims in
respect of general administrative expenses incurred by the foreign head office
insofar `as such expenses stand related to their business or profession in
India having regard to the fact that foreign companies operating through
branches in India sometimes try to reduce incidence of tax in India by inflating
their claims in respect of the head office expenses. In other words, section
44C seeks to impose a ceiling/restriction on head office expenses. However,
section 44C contemplates allocation of expenses amongst various entities. The
expenditure which is covered by section 44C is of a common nature, which is
incurred for the various branches or which is incurred for the head office and
the branch. However, in the instant case, the expenditure was exclusively
incurred for the branch. There was a concurrent finding of fact recorded by the
Commissioner (Appeals) as well as the Tribunal stating that the officers came
from the head office to India to attend to the work its branch and, in
connection with that work, the expense was incurred. That, the expense was initially
incurred by the head office which was recovered by the head office from the
branch in India by raising a debit note. Therefore, the expense was incurred
for the branch office in India. Those were concurrent findings of fact.
Therefore, there was no need to interfere with the aforesaid findings. Hence,
section 44C had no application.
The High Court reversed the ITAT ruling and held
that the Tribunal was not right in holding that the allowability of direct
expenses incurred at the head office on behalf of the Indian branch of the
assessee was covered within section 44C and not section 37(1). Thus allows
direct expenses incurred deductible under section 37(1) against Section 44C [In
favour of assessee] - [CIT v. Emirates Commercial Bank Ltd. (2003) 262 ITR
55 : (2004) 134 Taxman 682 : [TS-43-HC-2003(BOM)]
-v Date of Judgement : 30.04.2003 (Bom.)]
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