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Facts
The assessee, a Singapore-incorporated bank with a branch in India, claimed deduction for head office expenses allocated to its Indian branch. The AO disallowed this claim, stating the expenses were notional and not actual expenditure. The DRP upheld the AO's decision.
Held
The Tribunal held that head office expenses incurred for the business purpose, including executive and general administrative expenses, are deductible under Section 44C, provided they are within the limits prescribed. The Tribunal found that the expenses claimed were substantiated and within the statutory limits.
Key Issues
Whether head office expenses allocated to the Indian branch are deductible under Section 44C of the Income Tax Act, and whether the AO was justified in disallowing them as notional.
Sections Cited
147, 143(3), 144C(13), 143(2), 144B(8), 153, 44C, 37, 270A, 36(1)(viia)
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI PAWAN SINGH, JM &
(Assessment Year: 2020-21) United Overseas Bank Limited., ACIT (International Tax) Circle- Unit 31 and 37, 3rd Floor, 4(3)(1), Maker Maxity, Bandra Kurla Air India Building, Nariman Point, Vs. Complex, Bandra, Mumbai-400021. Mumbai-400051. PAN: AABCU0296L Appellant) : Respondent) Appellant /Assessee by : Shri Madhur Agarwal, AR : Shri Krishna Kumar- Sr. DR Revenue / Respondent by : 09.04.2025 Date of Hearing Date of Pronouncement : 21.04.2025 O R D E R Per Padmavathy S, AM:
This appeal by the assessee is against the order of the Assistant Commissioner of Income Tax. International Tax Circle-4(3)(1), Mumbai passed under section 147 r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) dated 31.07.2023 for AY 2020-21. The assessee raised the following grounds of appeal:
On the facts and in circumstances of the case and in law, the learned AO General Ground United Overseas Bank Limited 1. erred in assessing the Appellant's income at Rs. 1,24,84,46,090 instead of the returned income of Rs. 1,24,74,42,870, Validity of proceedings concluded in absence of a valid notice under section 143(2) of the Act 2. erred in completing the assessment under section 143(3) read with section 144C(13) of the Act disregarding the principles of natural justice when notice under section 143(2) of the Act is issued by one authority and assessment was completed by another authority: 3. erred in completing the assessment under section 143(3) read with section 144C(13) of the Act without appreciating the fact that the notice issued under section 143(2) of the Act was not issued to the Appellant (being a foreign company) by the learned AO but by the National Faceless Assessment Centre which does not have valid jurisdiction over the Appellant and therefore, the entire proceedings are bad in law and ought to be quashed: 4. erred in completing the assessment without following the procedure prescribed under section 1448(8) of the Act for transfer of case from the National Faceless Assessment Centre to the jurisdictional officer which could only have been done by the Principal Chief Commissioner (National Faceless Assessment Centre)/ Principal Director General (National Faceless Assessment Centre), if he considered it necessary and after obtaining prior approval of the Central Board of Direct Taxes, Order under section 143(3) read with section 144C(13) of the Act dated 31 July 2023 is barred by limitation: 5. erred in not passing the final assessment order within the time limit prescribed under section 153 of the Act which is the outer time limit for passing the final assessment order and hence, the final assessment order dated 31 July 2023 which is passed after 30 September 2022 (being the time limit as per the provisions of Section 153 of the Act) is time barred and liable to be quashed. Arguments on merits 6. erred in concluding that the head office expenses incurred by the head office of the Appellant are not executive and general administration expenses under section 44C of the Act, United Overseas Bank Limited 7. erred in concluding that the head office expenses incurred by the head office of the Appellant incurred outside India and allocated to the Indian Branch is a notional expenditure: 8. erred in concluding that the Appellant has not furnished evidence that the said HO expenditure is being utilized in India; 9. erred in concluding that the no real expenditure has been utilized for the purpose of business in India by Appellant, 10. erred in concluding that in order to claim the deduction of the head office expenditure under section 44C of the Act, the expenditure needs to be allowable under section 37 of the Act; Initiation of penal proceedings under section 270A of the Act: 11. Erred in initiating penal proceedings under section 270A of the Act,
2. The assessee is a banking company incorporated in Singapore and caries on banking activities in India through its Branch in India. The Indian branches of the assessee are treated as Permanent Establishment (PE) of the assessee and income arising there from is offered to tax in India. The assessee filed a return of income for AY 2020-21 on 15.02.2021 declaring total income of Rs. 1,24,74,42,870/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. During the year under consideration the Head Office (HO) of the assessee has incurred certain expenditure being in the nature of executive and general administrative expenses and an amount of Rs. 10,03,222/- has been allocated to the Indian Branch of the assessee. The assessee while filing the return of income has claimed the said amount as deduction under section 44C of the Act. The AO issued a show-cause notice to the assessee to furnish relevant details as to why the HO expenses should be allowed as a deduction. The assessee submitted that as per Article-7 of the DTAA between India and Singapore, the PE shall be allowed as deduction expenses incurred for the purpose of business including executive and general administrative expense whether incurred in India or outside India subject to United Overseas Bank Limited provisions of section 44C of the Act. The assessee further submitted that the amount claimed by the Branch is well within the limit as prescribed under section 44C of the Act. Accordingly, the assessee submitted that the amount should be allowed as a deduction. The AO after perusing the details furnished held that “6.4.12 It is pertinent to mention here that, as per clause (c) of section 44C, the amount of expenditure to be considered for computing allowability u/s 44C is the actual expenditure incurred by the assessee for the purpose of Business income in the nature of head office expenses and not the allocated notional amount. Under section 44C of the IT Act, an assessee is eligible for the least of the following two amounts:-
Equal to 5% of the adjusted total income or
1. 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. ("NIL" in assessee's case)” 3. Aggrieved, the assessee filed further appeal before the Dispute Resolution Panel (DRP). The DRP confirmed the disallowance made by the AO by holding that the services for which the expenses are allocated to the PE do not fall within the purview of section 44C of the Act. The DRP further upheld the view of the AO that the expenses are notional in nature for the reason that no evidence that the Executive and General Administrative Expenditure has been utilized in India is furnished by the assessee. The assessee is in appeal before the Tribunal against the final order passed by the AO in accordance with the directions of the DRP.
The ld. AR submitted that the HO expenses allocated to the assessee are towards the Directors Fees and remuneration which is allocated on the basis of the turnover to all the Branches across the Globe by the assessee. In this regard the ld. United Overseas Bank Limited AR drew out attention to the workings of the expenses allocated to the assessee's Indian Branch (page 71 of PB) to submit that the amount allocated to the Indian Branch constitutes only 0.2% of the total expenses incurred by the HO. The ld. AR further submitted that the assessee has submitted that a certificate from the Chartered Accountant (CA) certifying the amount allocated to the Indian Branch before the AO and that the AO has not considered the same. The ld. AR also submitted that the nature of expenses are well within the definition of Executive and General Administrative Expenses within the meaning of section 44C of the Act and that the AO is not correct in holding that the same does not fall within the ambit of section 44C of the Act. The ld. AR also drew our attention to the workings as given below to substantiate that the amount claimed as deduction is well within the monetary limits as specified in section 44C of the Act.
Particulars Amount (Rs.) Adjusted total income for AY 2017-18 518,991,154 Adjusted total income for AY 2018-19 398,797,330 Adjusted total income for AY 2019-20 488,851,360 Total Adjusted total income 1,406,639,844 1/3 of the Adjusted total income 468,879,948 5% of the Average Adjusted total income (A) 23,443,997 Actual expenditure incurred (B) 1,003,222 Deduction allowable under section 36(1)(viia) of the Act [Lower 1,003,222 of (A) or (B)]
The ld. AR in this regard relied on the order of the Co-ordinate Bench in the case of ADIT (IT) vs. Bank of Bahrain & Kuwait [2011] 9 taxmann.com 309 (Mum.).
United Overseas Bank Limited 6. The ld. DR on the other hand relied on the order of the AO and the directions of the DRP.
We heard the parties and perused the material on record. The assessee during the year under consideration has claimed deduction under section 44C towards the HO expenses allocated. The AO disallowed the claim stating that the amount allocated is notional in nature and that only the actual expenditure could be allowed as deduction under section 44C of the Act. The assessee's contention is that the PE which is to be considered as an independent entity is eligible to claim deduction towards expenditure incurred for business purposes including general and administrative expenses incurred within India or outside India subject to provisions of section 44C of the Act. The assessee further argues that the impugned expenditure which are allocated are in the nature of general and administrative expenses and the amount claimed is well within the limits prescribed under section 44C of the Act. Therefore before proceeding further we will look at the relevant provisions of section 44C of the Act and Article 7 of the DTAA between India and Singapore which read as under - 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 (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.
(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.
“ARTICLE 7 : BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as it directly or indirectly attributable to that permanent establishment.
Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis.
In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which United Overseas Bank Limited the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. 4. to 7. **** 8. From the combined perusal of the provisions of the Act and the Article of the DTAA, it is clear that the PE is deemed to be an separate entity and is entitled to claim deduction towards expenses which are incurred for the purpose of the business including Executive & General Administrative Expenses incurred either in India or outside India subject to the provisions of section 44C of the Act. In the given case from the perusal of the facts we notice that the expenses claimed by the assessee under section 44C of the Act are allocated by the HO to the Indian Branch towards Director's remuneration and Director's Fee in the proportion of turnover. The workings of the allocation submitted by the ld. AR before lower authorities is extracted below:
United Overseas Bank Limited 9. From the observations of the AO for the purpose of making the disallowance as extracted in the earlier part of this order, we notice that the AO has given a finding that the expenses incurred are notional without taking into consideration the detailed working submitted by the assessee in this regard which is certified by the CA. Further the DRP has confirmed the disallowance stating that the expenditure has to undergo the test of principles of provision interalia section 37 of the Act, since section 44C of the Act says "notwithstanding anything to the contrary contained in section 28 to 43A". In our considered view the said interpretation given by the DRP for the purpose of denying the claim of the assessee is not tenable since the actual meaning of the said phrase is that the provisions of section 44C overrides the conflicting provisions if any in section 28 to 43A. In other words, if the nature expenditure falls within purview of expenditure as mention in section 44C and is within the limits specified in the said section then it would be allowed independent of conflicting provisions if any contained in section 28 to 43A. From the perusal of the nature of expenditure in assessee's case i.e. Director's remuneration & Director's fees it is clear that the same fall within the purview of section 44C since these are common expenses are incurred by Head Office and allocated to India in the ratio of revenue. Now coming to Article-7 of the DTAA between India and Singapore we notice that the only condition for claiming the expenditure towards Executive & General Administrative Expenses incurred even outside India is that the same should be subject to the limitations of the Act. In the given case the assessee has clearly substantiated the fact that the expense incurred are Executive & General Administrative Expenses and also the fact that the amount claimed under section 44C of the Act are will within the limitation specified under the said section. Accordingly, we see no reason to deny the benefit of deduction towards expenses allocated by the HO to the assessee. We notice in this regard that the Co-ordinate United Overseas Bank Limited Bench while considering a similar issue in the case of Bank of Bahrain and Kuwait has considered a similar issue where it has been held that – “13. At this juncture, it would be relevant to note that broadly there may be two types of head office expenses, viz., those incurred by the head office in common to be shared by the benefiting branches and those incurred exclusively for the Indian branch. The spirit of section 44C, as discussed above, is to do away with the exercise of finding the correct proportion of the common head office expenses claimed by the assessee. Resultantly, the cap provided under section 44C becomes operative only qua the share in common expenditure incurred by the Head Office. The second category of expenses incurred by the head office exclusively for the Indian branch are outside the purview of section 44C as there is no question of finding any share of the assessee in the expenses incurred by the head office, as the entire amount relates to the Indian branch alone. Such expenses are deductible as per the regular provisions and are in addition to the common expenditure for which restrictive limit has been enshrined in section 44C. From here it follows that whereas common head office expenses as per the Explanation (iv) are governed by section 44C, the exclusive head office expenses are deductible separately as per the regular provisions of the Act. The Hon'ble jurisdictional High Court in CIT v. Emirates Commercial Bank Ltd. [2003] 262 ITR 55 (Bom.) has held that section 44C has no application to the expenses exclusively incurred by the Branch Office in India. It has been specifically laid down: "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. However, in this case, we are concerned with the expenditure exclusively incurred for the Branch. In this case, there is a concurrent finding of fact recorded by the CIT(Appeals) as well as the Tribunal stating that the Officers came from the Head Office at Abu Dhabi to Bombay to attend to the work of the Bombay Branch and, in connection with that work, the expenses were incurred. That, the expense was initially incurred by the Head Office which was recovered from the Head Office from the Branch in India by raising a debit note. Therefore, the expenses were incurred for the Branch Office in India. These are concurrent findings of fact. We do not wish to interfere with those findings. Hence, section 44C has no application." On going through the mandate of the Hon'ble jurisdictional High Court, become vivid that any expenditure incurred by the Head Office exclusively for the Indian Branch is distinctly deductible as per the other provisions of the Act and section 44C applies only to allocated/shared expenses amongst various entities.”
United Overseas Bank Limited 10. From the above observations of the Hon'ble High Court it is clear that expenses incurred by the Head Office in common which is to be shared by the benefiting branch through allocation is allowable under section 44C subject to the ceiling specified under the said section. From the perusal of the facts, as already stated, the impugned expenditure of incurred by the head office towards directors remuneration and directors fees are allocated to Indian Branch and therefore would fall within the scope of section 44C. It is also an established fact that the amount claimed as deduction is within the ceiling prescribed under section 44C. In view of the above discussion and considering the facts in assesee's case we are of the view that the AO is not correct in denying the benefit of deduction under section 44C to the assessee for the reason that the amount is notional and not in the nature of expenditure under section 44C of the Act. Accordingly, we direct the AO to delete the disallowance made in this regard. Ground No. 6 to 10 raised by the assessee are allowed.
Ground No. 2 to 5 raised by the assessee are with regard to the legal contentions and considering that we have allowed the ground raised on merits in favour of the assessee, the legal contention have become academic and left open.
Ground No.1 is general and Ground No.11 is consequential. Hence, these grounds do not warrant a separate adjudication.
In result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 21-04-2025. Sd/- Sd/- (PAWAN SINGH) (PADMAVATHY S) Judicial Member Accountant Member *SK, Sr. PS United Overseas Bank Limited Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT