Deduction for head office expenditure in case of non-residents
Introduction
While computing the income of a non-resident under the head "Profits and gains of business or profession", deduction for head office expenditure in the nature of executive and general administration expenditure shall be allowed to the extent of 5% of the adjusted total income or actual expenditure, whichever is lower.
1. About
Head office expenditure in the case of a non-resident is allowed in accordance with provisions of section 60. This section is a non obstante provision, and anything contrary contained in sections 26 to 54 is not applicable.
1.1. Limit on deduction for head office expenditure
Deduction to a non-resident in respect of head office expenditure is restricted to the least of the following:
(a) 5% of the adjusted total income, or in case of loss, 5% of average adjusted total income;
(b) Actual expenditure incurred in the nature of head office expenditure which is attributable to the business or profession of assessee in India.
1.2. When this provision does not apply?
The Courts have held that in the following circumstances, the restriction of Section 60 shall not apply to limit the head office expenditure:
(a) Where an expenditure is incurred wholly and exclusively for purposes of Indian business, it will not fall within the purview of Section 60
(b) Section 60 is not applicable where the computation of non-resident’s Indian income is made in accordance with Rule 9
If the Assessing Officer is of opinion that the actual amount of the income accruing or arising to any non-resident person, in the situation provided under Section 9(2), cannot be definitely ascertained, the amount of such income may be calculated as per method prescribed under Rule 9.
1.3. Meaning of Head office Expenditure
‘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) Other matters, as may be prescribed, connected with executive and general administration.
The CBDT has clarified
1.4. Meaning of Adjusted Income
Adjusted income shall be computed in accordance with the provisions of the Income-tax Act without giving effect to the following allowances:
(a) Head office expenditure;
(b) Unabsorbed Depreciation;
(c) Investment allowance;
(d) Family planning expenditure under Section 32(i)(A);
(e) Business loss brought forward;
(f) Speculation loss brought forward;
(g) Losses under the head capital gain;
(h) Losses under the head other sources; and
(i) Deductions under Chapter VIII.
1.5. Average adjusted total Income
1.5-1. Where income is assessable for 3 years
Where total income of the assessee is assessable for each of the 3 tax years immediately preceding the relevant tax year, the arithmetic mean of his adjusted total income over those 3 tax years.
1.5-2. Where income is assessable for 2 years
Where total income of the assessee is assessable only for 2 out of the aforesaid 3 tax years, the arithmetic mean of his adjusted total income over those two tax years.
1.5-3. Where income is assessable for 1 year
Where total income of the assessee is assessable only for 1 out of the aforesaid 3 tax years, his adjusted total income for that tax year.
References
DIT v. Samsung Engg. Co. Ltd. [2011] 43 SOT 38 (Mum.) (URO)
CIT v. Saudi Arabian Air Lines [1985] 155 ITR 65 (Bom.)
Circular No. 649, dated 31-3-1993
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.