Case Law (SC) – Section 44C applies to ‘head office expenditure’ regardless of whether it is common expenditure or expenditure incurred exclusively for the Indian branches. Accordingly, 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 assessee in India.
ISSUE BEFORE COURT IS: -
Whether Section 44C of the
Income Tax Act merely covers ‘common expenditure’ incurred by the head office
attributable to an assessee’s business in India or would also include
‘exclusive expenditure’ incurred by the head office for the Indian branches.
DECISION: -
“86. A
conspectus of our legal discussion regarding Section 44C of the Act, 1961, is
as under:
a) Section 44C is a special
provision that exclusively governs the quantum of allowable deduction for any
expenditure incurred by a non-resident assessee that qualifies as ‘head office
expenditure’.
b) For an expenditure to be
brought within the ambit of Section 44C, two broad conditions must be
satisfied: (i) The assessee 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 the Section.
c) 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).
d) Once the conditions in (b)
referred to above 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 assessee in India.
87. Based on the aforesaid
discussion, it is manifest that the plain language of Section 44C, when viewed
against the backdrop of the specific mischief it sought to curtail, is
unambiguous. The statutory definition is broad and inclusive, containing no indication
that ‘exclusive expenditure’ is to be excluded from its ambit. Furthermore, the
term ‘attributable’ in Clause (c) does not create a statutory distinction
between ‘common’ and ‘exclusive’ expenditure.
88. Thus, the question of law formulated by us is squarely answered in favour of the Revenue. We hold that Section 44C applies to ‘head office expenditure’ regardless of whether it is common expenditure or expenditure incurred exclusively for the Indian branches.”
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