UNITED OVERSEAS BANK LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME-TAX , MUMBAI

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:-

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.

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)]

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.

(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.

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.