TREATMENT OF EXPENSES INCURRED BY NON RESIDENT HEAD OFFICE ON BEHALF OF DOMESTIC BRANCH UNDER INCOME TAX ACT

[Mr. M. GOVINDARAJAN]

                        After globalization starting business in any place of the world is common.   Likewise having branches in foreign countries is also common.   India is not an exception to this.   Income tax act also has provisions regarding the treatment of expenses in such cases.  We may take one case in this regard.  'DIT V. Ravva Oil (Singapore) Pvt. Ltd.,' - 2008 -TMI - 4054 - DELHI HIGH COURT.   In this case the assessee company was a non resident company.   It is having its head office at Singapore.   In India there is a sole branch.  The main business of the company is exploration of the oil.   The assessee company incurred expenses at its head office on account of administration, accounting and management services being wholly relating to its Indian Branch.   The assessee claimed deduction of such expenses contending that all its operation related to India only.  It is further contended that the assessee had no business outside India.   The contention of the assessee was opposed by the Assessing Officer.   The AO contended that being a non resident company, the provision of Sec. 44C would be applicable and whole of the expenses would not be available for deduction.

                        The main question involved in this case is whether expenses incurred by non resident head office on its sole branch is allowed as deduction.  To answer this, the provisions of Sec. 43C of the Income tax may be analyzed.

                        Sec. 43C of the Income Tax Act provides that 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 as hereunder namely-

·  An amount equal to five per cent of the adjusted total income; or

·  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.

                        In a case where the adjusted total income of the assessee is a loss the amount shall be computed at the rate of five per cent of the average adjusted total income of the assessee.

                        The explanation to the section defines 'adjusted total income' and 'average adjusted total income', 'head office expenditure'.

                        'Adjusted total income' means the total income computed in accordance with the provisions of Income tax Act, without giving effect to the allowance referred to in Sec. 32(2) or the deduction referred to in Sec. 32A or Sec. 33 or Sec. 33A or the first proviso to clause (ix) of Sec. 36(l) or any loss carried forward under Sec. 72(1) or Sec. 73(2) or Sec.74 (3) or the deductions under Chapter VI-A.

                        'Average adjusted income' means-

·  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;

·  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;

·  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.

'Head Office expenditure' means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of-

·  Rents, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession;

·  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;

·  Traveling by any employee or other person employed in, or managing the affairs of, any office outside India; and

·  Such other matters connected with executive and general administration as may be prescribed.

In 'Rupenjuli Tea Co. Ltd., V. CIT (1991) 92 CTR (Cal) 37,  the Calcutta High Court held that Section 44C is applicable only if the assessee has branches in India as well as outside India.    The question of apportioning the head office expenses attributable to the business in India as contemplated by Sec. 44C of Income Tax Act would not arise where the assessee's operations are restricted only to India and no part of the expense is allocable to operations outside India.  Therefore it was held that the expenses incurred by the assessee at its head office at Singapore on account of administration, accounting and management services being wholly related to its India operations as it had no business outside India.  So Sec. 44c would not be applicable to the present case.