While explaining that Section 44C of the Income Tax Act is a special provision that exclusively governs the quantum of allowable deduction for any expenditure incurred by a non-resident taxpayer that qualifies as ‘head office expenditure’, the Supreme Court ruled that Section 44C would come into play irrespective of fact that expenditure was ‘common’ or ‘exclusive’, once it is incurred by non-resident taxpayer outside India.
The Court clarified that it does not matter whether expense was common expense or expense exclusively for Indian branch, so long as expense incurred is for business or profession. This view is fortified by the fact that Section 44C does not distinguish between head office expenditure incurred by non-resident taxpayer as is attributable to business or profession of taxpayer in India, or expenses incurred exclusively for Indian branches, for claiming deduction under Section 37 of the Income Tax Act.
A Two-Judge Bench comprising Justice J B Pardiwala and Justice K V Viswanathan observed that for an expenditure to be brought within the ambit of Section 44C, two broad conditions must be satisfied: (i) The non-resident taxpayer claiming the deduction must be a non-resident; and (ii) The expenditure in question must strictly fall within the definition of ‘head office expenditure’ as provided in the Explanation to Section 37.
The Bench emphasised that the Explanation prescribes a tripartite test to determine if an expense qualifies as ‘head office expenditure’ – (i) The expenditure was incurred outside India; (ii) The expenditure is in the nature of ‘executive and general administration’ expenses; and (iii) The said executive and general administration expenditure is of the specific kind enumerated in clauses (a), (b), or (c) respectively of the Explanation, or is of the kind prescribed under clause (d).
Once the conditions referred in clause (b) are met, the operative part of Section 44C gets triggered. Consequently, the allowable deduction is restricted to the least of the following two amounts: (i) an amount equal to 5% of the adjusted total income; or (ii) the amount of head office expenditure specifically attributable to the business or profession of the non-resident taxpayer in India, added the Bench.
The Bench explained that in the term ‘head office expenditure’ under Section 44C, the legislature does not have the limited scope to cover only common expenditure incurred by the head office for the benefit of various branches, including those in India. In fact, for an expenditure to be considered as head office expenditure, it must meet two conditions only: (i) it has to be incurred outside India by the assessee, (ii) it must be expenditure of a nature related to executive and general administrative expenses. It does not matter whether the expense was a common expense or an expense exclusively for the Indian branch, so long as the expense incurred is for the business or profession.
The Bench pointed out that in income tax disputes, the expression ‘attributable to’ is of a much wider import than the expression ‘derived from’. While ‘derived from’ envisages a direct nexus, ‘attributable to’ also covers an indirect nexus. Thus, the primary legislative object was to enact Section 44C solely for ‘common’ expenditure.
Briefly, the respondent, a non-resident banking company engaged in the business of providing banking-related services, filed its ITR declaring an income of INR 79.45 Crores, claiming deductions for the expenses under Section 37(1) on (i) INR 6.39 Crores incurred for solicitation of deposits from Non-Resident Indians; and (ii) INR 13.50 Crores incurred at the head office directly in relation to the Indian branches. The respondent was asked to explain why the expenses in question should not be subjected to the ceiling specified in Section 44C. In response, it was clarified that the expenses could not have been classified as head office expenditure for the reason that Section 44C, presupposes that at least a part of the expenditure is attributable to the business outside India.
The AO, however, limited the deduction to 5% of the gross total income by applying Section 44C, opining that Section 44C is a non-obstante provision that begins with the words “notwithstanding anything to the contrary contained in Section 28 to 43A,” and therefore, the head office expenses allowable to the respondent are subject to the limits set out under Section 44C. The AO also opined that the purpose of inserting Section 44C was to address the difficulties encountered in scrutinising the books of account maintained outside India. On appeal, the ITAT held that exclusive expenses incurred by the assessee are required to be allowed as deduction u/s 37(1) without any reference to section 44C.
Appearances:
ASG Raghavendra P Shankar, AOR Madhulika Upadhyay, along with Advocates Karan Lahiri, Navanjay Mahapatra, Sarthak Karol, V C Bharathi, and Priyanka Terdal, for the Appellant/ Revenue
Senior Advocates Aniruddha A Joshi and Percy Pardiwala, AORs Rajeev Maheshwaranand Roy and Kishore Kunal, along with Advocates Rajeev Kumar Panday, P Srinivasan, Hitesh Chande, Aditya Rathore, Nishant Thakkar, and Nikhil Rajan, for the Respondent/ Taxpayer
