Case Law Details
Sheladia Associates INC Vs ADIT (ITAT Hyderabad)
The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) partly allowed, for statistical purposes, the appeal of a US-incorporated company operating in India through a branch office and five project offices, in a dispute concerning the allowability of certain head office-related expenses and the applicability of tax deduction at source (TDS) provisions. The appeal arose from the assessment order passed under Sections 143(3) read with 144C(13) of the Income-tax Act, 1961, pursuant to the directions of the Dispute Resolution Panel (DRP).
The dispute related to Backstopping Technical Support Expenses of ₹1.68 crore and Business Development Expenses of ₹64.15 lakh claimed by the assessee. The assessee contended that these represented reimbursements of salary costs incurred by its US Head Office for employees exclusively engaged in Indian projects. According to the assessee, these were direct project expenses rather than executive or administrative head office expenses covered by Section 44C. It also argued that the reimbursements were made on a cost-to-cost basis without any markup and therefore did not require deduction of tax at source under Section 195.
The Assessing Officer (AO) held that the expenses represented executive and managerial services rendered by Head Office personnel outside India and therefore constituted Head Office expenditure under Section 44C. The AO further treated the payments as fees for technical services (FTS), held that tax ought to have been deducted under Section 195, and consequently disallowed the expenditure under Section 40(a)(i). The DRP affirmed both findings.
Before the Tribunal, the assessee relied on earlier orders in its own cases for Assessment Years 2020-21, 2021-22, and 2022-23, contending that similar issues had previously been restored to the AO for verification. It submitted that the same designated Head Office employees were involved in the relevant year and produced timesheets, salary details, employee records, and other documents to support its claim that the expenses related exclusively to Indian projects. The assessee also raised additional grounds contending that if the expenditure was held to fall within Section 44C, the AO should compute the deduction allowable under that provision instead of disallowing the entire amount.
The Tribunal admitted the additional grounds, holding that they involved purely legal issues arising from the existing record. On the merits of Section 44C, it observed that the Head Office personnel performed functions such as identifying projects, bidding, directing, supervising, coordinating, and monitoring Indian operations, which at first glance appeared managerial, supervisory, and executive in nature. However, noting that in the assessee’s own earlier case the Tribunal had directed verification of whether similar expenses were exclusively attributable to Indian projects, and considering that the AO had subsequently accepted the claim after verification, the Tribunal restored the matter to the AO. It directed the AO to verify whether the impugned expenditure constituted “Head Office expenditure” within the meaning of the Explanation to Section 44C and to pass a speaking order after providing the assessee a reasonable opportunity of being heard. The Tribunal also observed that if the expenditure was found not to fall within the definition of Head Office expenditure, the AO should verify the allocation basis, actual remittances, and commercial justification for the reimbursements.
The Tribunal further observed that, in light of the Supreme Court’s decision in Director of Income Tax (International Taxation) v. American Express Bank Ltd., expenditure falling within the definition of Head Office expenditure would remain subject to the statutory limitation under Section 44C even if incurred wholly for Indian operations.
On the disallowance under Section 40(a)(i), the Tribunal upheld the AO’s action. It held that merely describing payments as reimbursements did not determine their taxability and that the real nature of the transaction had to be examined. It observed that the services rendered by the Head Office personnel included technical support, consultancy, supervision, coordination, and managerial functions. The Tribunal found that the assessee had not produced sufficient material to establish that no technical knowledge or expertise was made available to the Indian Permanent Establishment. It also noted that the assessee had neither sought a determination under Section 195(2) nor demonstrated that the payments were not chargeable to tax in India. Referring to its own decision for Assessment Year 2022-23, the Tribunal upheld the disallowance under Section 40(a)(i) for failure to deduct tax at source.
The Tribunal also rejected the assessee’s reliance on Article 26 of the India-US DTAA, holding that Section 40(a)(i) distinguishes between residents and non-residents based on withholding tax obligations and does not amount to nationality-based discrimination.
While sustaining the disallowance under Section 40(a)(i), the Tribunal accepted the assessee’s alternative plea and directed that, if the AO ultimately concludes that the expenditure falls within Section 44C, the deduction should be computed in accordance with the statutory limits instead of disallowing the entire expenditure. The issue of penalty under Section 270A was held to be premature. The appeal was accordingly partly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
The present appeal filed by the assessee company is directed against the final assessment order passed by the Assessing Officer (for short, “AO”) u/s 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (for short, “the Act”), dated 22/01/2026, pursuant to the directions of the Dispute Resolution Panel, Bengaluru (for short, “DRP”), vide the latter’s order passed under Section 144C(5) of the Act, dated 29/12/2025 for AY 2023-24. The assessee company has assailed the impugned order on the following grounds of appeal before us:
“Ground 1: The order of the AO is contrary to the provisions of law and therefore is bad in law
Ground 2: The order of the AO is erroneous on facts and in law
Ground 3: The AO erred in disallowing Backstopping Expenses Technical Support expense claimed amounting to Rs. 1,68,80,151/-
Ground 4: The AO erred in disallowing Business Development Expense claimed amounting to Rs. 64,15,569/-
Ground 5: The AO has erred in overlooking the Article 26 of India US DTAA and disallowing 100% of the backstopping expense technical support and business development expense u/s 40(a)(i).
Ground 6: The AO has erred in disallowing 100% of the backstopping expense technical support and business development expense u/s 44C while both the expenses are project direct expenses.
Ground 7: The AO has erred in assessing the total income at Rs. 5,08,61,997/-
Ground 8: The AO has erred in raising a demand of Rs. 1,15,01,680/-
Ground 9: The AO has erred in initiating penalty proceedings u/s 270A of the Act.
Ground 10: Any other grounds that may be urged at the time of hearing”
Apart from that, the assessee company has raised the following additional grounds of appeal:
“1. Having disallowed Backstopping expense Technical Support expenses under section 44C of the Act, the AO erred in not computing the expenditure allowable under Section 44C of the Act.
2. Having disallowed Business Development expense under section 44C of the Act, the AO erred in not computing the expenditure allowable under section 44C of the Act.”
2. Succinctly stated, the assessee, a foreign company incorporated in the USA, is engaged in providing professional consultancy services in the fields of engineering, design, project management, feasibility studies, contract management, and rural development projects. During the year under consideration, the assessee company carried on operations in India through a branch office and 5 project offices, which constituted a Permanent Establishment (“PE”) in India.
3. The assessee company had filed its original return of income for the Assessment Year (AY) 2023-24 on 27/09/2023 (revised on 29/12/2023), declaring a total income of Rs. 2,75,66,277/-. Subsequently, the case of the assessee company was selected for complete scrutiny assessment, and notice under Section 143(2) of the Act, dated 28/06/2024, was issued and served upon the assessee company.
4. During the course of the assessment proceedings, the AO observed that the assessee company had claimed certain expenses aggregating to Rs. 3,61,92,920/-, viz. (i) Allocated head office overheads: Rs.1,09,56,680; (ii). Backstopping Expenses Technical Support: Rs.1,68,80,151/-; (iii). Business Development Expenses: Rs. 68,47,695/-; and (iv). Other Residuary Project Expenses: Rs. 15,08,394/-. On being queried, it was submitted by the assessee company that out of the aforesaid expenses, certain amounts were payable to the Head Office account concerning its India business operations, viz. (i) Allocated head office overheads: Rs.1,09,56,680; (ii). Backstopping Expenses Technical Support: Rs.1,68,80,151/-; and (iii). Business Development Expenses: Rs. 64,15,569/-.
5. The AO observed that the assessee company had itself allocated Head Office overheads amounting to Rs. 1,09,56,680/- and classified it under Section 44C of the Act, claiming a deduction of 5% of the adjusted gross total income amounting to Rs. 14,50,856/-. It was observed that the assessee company had voluntarily added the Head Office expenses of Rs. 1,09,56,680/- under Point 23 of “Schedule BP” in its return of income and claimed 5% of the allowable expense, i.e., Rs. 14,50,856/-, under Point 32 of “Schedule BP”. However, it was observed that the assessee company had claimed that the “Backstopping technical support” and “Business development expenses” were direct project-related expenses incurred for Indian operations and therefore outside the scope and ambit of Section 44C of the Act. The assessee company had claimed that the HO from its pool of business development and marketing team has dedicated designated team members based in the USA, viz., Jan Twarowski, Manish D Kothari, Anil Anumarlapudi, Ahmed Majdiyar, Almas Tasawar, Safi Ahmad, Seydi Fatou, Te’asia L. Capies, Jenphaniah Samwel, Paul Lord, and Mohammad Kaak, Corey Best, to take care of its Indian operations. Elaborating further, it was submitted that the job role of the said persons was to take care of the company’s Indian operations, like identifying eligible projects, bidding for projects, designing, directing, supervising, and monitoring the project activities, etc., and the team so designated was responsible and accountable for the operations in India. Explaining the nomenclature of the expenditure, it was submitted by the assessee company, viz. (i). that the cost relating to the pre-bid and post-bid functions incurred by the HO on the Indian operations which were in turn reimbursed to the HO by the branch were recorded by the branch in its books of accounts under the head “Business Development and Marketing Cost (HO)”; and (ii). reimbursements for costs incurred for technical support functions were recorded as “Backstopping expense Technical Support”. It was further stated that the services provided by the HO team were directly in relation to the Indian business operations and were not general and administrative in nature. Elaborating further, it was submitted that the cost incurred by the HO team for the technical support services provided was considered as direct expenses recorded in the P&L A/c under the head “Backstopping expenses Technical Support” and were not considered as HO expenditure falling within the scope and ambit of Section 44C of the Act. The assesse company, to support its contention, had filed with the AO copies of the employees’ time sheets forming part of the HO-designated team for the subject year, along with copies of the pay sheets of the HO-designated team members for the year under consideration. It was submitted that as the services provided by the HO team was directly related to Indian business operations and were not of a general or administrative nature, the same were treated as direct expenses and recorded in the Profit & Loss Account under “Backstopping Expenses Technical Support” expenses and did not fall within the scope and ambit of Section 44C of the Act, which pertained to general head office expenses. Apart from that, it was submitted that the designated team cost payable to HO by the PE was a pure reimbursement of the costs incurred by HO towards the designated team’s salaries for services rendered in relation to the Indian business operations, i.e., a reimbursement on a cost-to-cost basis without any markup. Accordingly, it was submitted by the assessee company that though the services rendered by the designated team were technical in nature, but as there was no mark-up being charged by the HO, there was no income accruing or arising or deemed to accrue or arise in India to the HO from the technical services being rendered by the HO to the Indian PE. It was, thus, submitted that as there was no sum chargeable to tax in India on the subject reimbursements, the question of deduction of tax at source under Section 195 of the Act did not arise at all.
6. The AO was of the view that the aforesaid expenses represented executive and managerial services rendered by Head Office personnel outside India and accordingly constituted Head Office expenditure within the meaning of Section 44C of the Act. The AO further held a conviction that the payments also partook the character of fees for technical services (“FTS”), and since tax was not deducted at source on the subject payments under Section 195 of the Act, the same were liable to be disallowed under Section 40(a)(i) of the Act.
7. Accordingly, the AO, vide his draft assessment order passed under Section 144C(1) of the Act, dated 28/03/2025, based on his aforesaid deliberations, proposed to disallow, viz. (i) Backstopping Expenses Technical Support: Rs. 1,68,80,151/-; and (ii) Business Development Expenses: Rs. 64,15,569/-
8. Aggrieved, the assessee company filed objections before the DRP. The DRP, vide its order dated 29/12/2025, passed under Section 144C(5) of the Act, confirmed the additions/disallowances, holding that the services rendered by Head Office personnel were managerial and supervisory in nature and therefore fell within the scope and ambit of Section 44C of the Act. The DRP further upheld the disallowance of the expenses made by the AO under Section 40(a)(i) of the Act.
9. Thereafter, the AO, vide his order passed under Section 143(3) r.w.s 144C(13) of the Act, dated 22/01/2026, framed the assessment and determined the income of the assessee company at Rs. 3,46,84,526/-.
10. The assessee company, aggrieved with the assessment order passed by the AO under Section 143(3) r.w.s 144C(13) of the Act, dated 22/01/2026, has carried the matter in appeal before us.
11. Ms. Aluru V Sai Sudha, CA, Learned Authorized Representative (for short, “Ld. AR”) for the assessee company, at the threshold of hearing of the appeal, took us to the “additional grounds of appeal” which were raised by the assessee company. The Ld. AR submitted that the AO/DRP, having disallowed the backstopping technical support expenses and business management expenses under section 44C of the Act, had erred in failing to compute the expenditure allowable under section 44C of the Act. The Ld. AR submitted that as the adjudication of the aforesaid “additional grounds of appeal”, which were in the form of an alternative plea, will not require looking any further beyond the facts available on record, the same, in all fairness and in the interest of justice, be admitted.
12. Coming to the merits of the case, the Ld. AR submitted that the impugned expenses were the reimbursement of actual salary costs incurred by the Head Office for dedicated technical personnel working in the USA exclusively on Indian projects. It was submitted that the expenses were directly linked to the execution of Indian consultancy contracts and therefore constituted direct operational expenses rather than the executive or administrative overheads contemplated under Section 44C of the Act. The Ld. AR submitted that the AO/DRP had grossly erred in law and facts of the case in recharacterizing viz., (i) backstopping expenses technical support: Rs.1,68,80,151/-; and (ii) business development expenses: Rs.64,15,569/-, which were the reimbursement of the expenses by the Indian project office to its Head Office (HO) of the cost incurred by the HO towards the designated teams salaries for the services rendered in relation to the Indian business operations, and treating the same as general and administrative expenses which did not directly contribute to the income generation but only supported over all India operations from a management perspective. The Ld. AR submitted that a similar issue had come up before the Tribunal in the assessee’s own case for the AY 2020-21 in ITA No. 423/Hyd/2023, dated 16/10/2024, wherein, after deliberations, the Tribunal, after drawing support from the judgment of the Hon’ble High Court of Bombay in the case of CIT vs. Emirates Commercial Bank Ltd. (2004) 134 Taxman 682 (Bom) and the order of a coordinate bench of the Tribunal in DDIT Vs. Samsung Engg. Co. Ltd. [2011] 43 SOT 38 (Mumbai) and certain other judgments/orders had observed that the expenditure incurred by the Head Office (HO) directly connected to the PE has to be allowed without subjecting the same to any ceiling under section 44C of the Act. Elaborating further on her contention, the Ld. AR submitted that the Tribunal, after deliberating on a similar set of facts on the subject issue as was involved in the case before them, had after taking cognizance of the time sheets maintained on a daily basis for each employee, etc., produced by the assessee company before them, principally concurred with the assessee company that the expenditure incurred by the Head Office (HO) directly connected to the PE had to be allowed without any ceiling contemplated under section 44C of the Act, and thus, in all fairness had set aside the matter to the file of the AO for verifying the factual position. The Ld. AR to buttress her contention that the backstopping technical support expenses and business development expenses for the subject year pertaining to eight employees of Head Office (HO) were incurred exclusively for the Indian Operations had taken us through the monthly details of the salary which were paid to them, Annexure-15/Page 630 of APB. Also, the Ld. AR has taken us through the respective profiles/employee records at Page 1047 of APB. The Ld. AR further submitted that the Tribunal in the assessee’s case for AY 2020-21 in ITA No.423/Hyd/2023, dated 16/10/2024, had set aside the matter to the AO’s file with an observation that if certain expenses were exclusively incurred for the Indian project by the Head Office and were not in the nature of overheads, then such expenses be excluded from the purview of Section 44C of the Act. The Ld. AR submitted that the AO, pursuant to the directions of the Tribunal, vide his order giving effect, dated 07/11/2025, had, after carrying out necessary verifications, found the claim of the assessee company in order and vacated the entire amount of disallowance made by the AO/DRP, which, inter alia, comprised of, viz. (i). Consultancy charges: Rs. 46,40,500/-; and (ii). Business development expenses: Rs. 1,81,67,730/-. The Ld. AR submitted that the same set of employees as were present in the assessee’s case for the preceding year, i.e., AY 2020-21, were present in its case for the subject year. The Ld. AR had taken us through the order passed by the Tribunal in the assesse’s own case for AY 2020-21 in ITA No.423/Hyd/2023, dated 16/10/2024, wherein the Tribunal had restored the issue pertaining to restricting of the assessee’s claim for deduction under section 44C to the file of the AO for necessary verification, Pages 108 to 115 of the APB. Also, the Ld. AR submitted that a similar view was earlier taken by the Tribunal while disposing of the assessee’s appeal for AY 2021-22 in ITA No.537/Hyd/2023, dated 21/06/2024, Pages 116 to 127 of APB. The Ld. AR had further drawn our attention to the order passed by the Tribunal in the assessee’s own case in ITA No.1401/Hyd/2024, dated 22/05/2025 for AY 2022-23.
13. Elaborating further on her contention, the Ld. AR submitted that the subject reimbursements were made on a cost-to-cost basis without any markup, and, therefore, as no income accrued to the Head Office, no tax was deductible at source under Section 195 of the Act. Alternatively, the Ld. AR submitted that though the reimbursement by the assessee company to its Head Office (HO) were for the technical services provided by the aforesaid set of designated employees, but as no technical knowledge, skills or know-how was “made available” by the Head Office (HO) to the Indian operations, thus, as per the Article-12 of the Indo-US DTAA the same could not be brought within the meaning of ‘Fee for Technical Services’ (FTS) liable for deduction of tax at source under section 195 of the Act. However, the Ld. AR, on being confronted with the fact that the said issue, qua its liability for deduction of tax at source under section 194 of the Act, had been decided against it by the Tribunal vide its order passed in ITA No.1401/Hyd/2024, dated 22/05/2025 for AY 2022-23, failed to rebut the same.
14. The Ld. AR had further drawn our attention to the time sheets of the respective employees, Page 266 to Page 358 of APB. Carrying her contention further, the Ld. AR once again vehemently submitted that in the absence of satisfaction of the “make available” clause, no liability could have been fastened upon the assessee company for deduction of tax at source on the subject payments under section 195 of the Act. The Ld. AR, to support her contention, had taken us through Article 12 of the Indo-US DTAA, Page 838 of APB. Apart from that, it was submitted that as the assessee company had only reimbursed the expenses that were incurred by the Head Office (HO) on its behalf on a cost-to-cost basis without markup, therefore, in the absence of any income element, no obligation was cast upon it for the deduction of tax at source under section 195 of the Act.
15. Coming back to the “additional grounds of appeal”, the Ld. AR submitted that though the AO/DRP had disallowed the “Backstopping Expenses Technical Support”, and “Business Development Expenses” under section 44C of the Act, they had erred in not computing the expenditure allowable under section 44C of the Act. The Ld. AR submitted that in case her other contentions regarding the allowability of the assessee’s claim for deduction of the subject expenses do not find favor with the Tribunal, then, in all fairness and in the interest of justice, the aforesaid additional grounds of appeal be allowed and the AO be directed accordingly.
16. Per Contra, the Ld. Departmental Representative (for short, “DR”) strongly relied upon the orders of the AO and DRP. It was submitted that the functions performed by the HO personnel, such as identifying projects, bidding, directing, supervising, and monitoring Indian operations, are managerial and supervisory in nature and squarely fall within the definition of Head Office expenditure under section 44C of the Act. The Ld. DR further submitted that the assessee company has failed to furnish reliable evidence regarding the allocation basis, actual remittances, and commercial justification for the impugned reimbursements. It was submitted that the assessee company had merely recharacterized Head Office expenditure as technical support expenses to avoid the ceiling contemplated under Section 44C of the Act. It was submitted that a mere reliance upon the time sheets would not prove the nature of services rendered by the employees, which, thus, had rightly been brought within the meaning of Managerial Services by the AO/DRP. The Ld. CIT-DR, to buttress his contention that the true nature of the expenses must be determined in the backdrop of the doctrine of substance over form, had relied upon the judgment of the Hon’ble Supreme Court in the case of The Authority for Advance Rulings (Income Tax) and Ors. vs. Tiger Global International III Holdings (Civil Appeal No. 262 of 2026). The Ld. CIT-DR further submitted that as the services rendered constituted technical/consultancy services chargeable to tax in India, tax was deductible under Section 195 of the Act. Elaborating further on his contention, the Ld. CIT-DR submitted that in the absence of any tax having been deducted at source by the assessee company on the subject reimbursements, the disallowance u/s 40(a)(i) was rightly made by the AO. The Ld. CIT-DR had also relied upon the earlier order of the Tribunal for AY 2021-22, wherein the disallowance under section 40(a)(i) of the Act for failure to deduct tax at source under section 195 of the Act had been upheld by the Tribunal.
17. We have given thoughtful consideration to the contentions advanced by the Ld. Authorized Representatives of both parties in the backdrop of the orders of the lower authorities.
18. Apropos the additional grounds of appeal raised by the assessee company before us, we find that it is the Ld. AR’s claim that as the same arise from the facts borne on record and involve a legal issue, the same, in all fairness, be admitted.
19. Per contra, Dr. Narendra Kumar Naik, the Learned CIT- DR, objected to the admission of the additional grounds of appeal
20. In our view, as the adjudication of the aforesaid additional grounds of appeal involves a purely legal issue and will not require looking any further beyond the facts borne on record, the same merits admission.
21. Coming to the merits of the case, we find that the primary issue involved in the present appeal is whether the impugned expenditure falls within the scope and ambit of “Head Office expenditure” contemplated under Section 44C of the Act.
22. Section 44C of the Act places a limitation on the deduction of executive and general administrative expenditure incurred by a nonresident outside India in relation to its Indian business operations. Further, the “Explanation” to Section 44C specifically includes within the meaning of “Head Office expenditure”, the expenditure incurred in respect of salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites, or profits in lieu of salary of employees engaged in the management and administration of the affairs of offices situated outside India.
23. In the present case, we find that the material placed before us reveals that the designated Head Office personnel were involved in functions such as identifying projects, bidding activities, directing, supervising, coordinating, and monitoring Indian operations. In fact, the assessee company itself has admitted that the said personnel formed part of its Head Office business development and technical support teams and were assigned responsibility for Indian operations.
24. Although at the first blush, we were of firm conviction that the aforesaid functions of the personnel are managerial, supervisory, and executive in nature, and they clearly fall within the scope and ambit of Head Office expenditure contemplated under Section 44C of the Act, but find that the Tribunal in the assessee’s case for AY 2020-21 in ITA No.423/Hyd/2023, dated 16/10/2024 wherein identical issue was involved, had set aside the issue to the AO’s file with an observation that if the subject expenses were exclusively incurred for the Indian project by the Head Office and were not in the nature of overheads, then such expenses are to be excluded from the purview of Section 44C of the Act. As brought to our notice, the AO, pursuant to the directions of the Tribunal, vide his order giving effect, dated 07/11/2025 for AY 2020-21, apparently without recording any specific reasons, has held the claim of the assessee company in order and vacated the entire amount of disallowances made by the AO/DRP, which, inter alia, comprised, viz. (i). Consultancy charges: Rs. 46,40,500/-; and (ii). Business development expenses: Rs. 1,81,67,730/-, Page Nos. 1187-1188 of APB. The Ld. AR has submitted before us that the subject expenses for the year under consideration pertain to the same set of employees as were present in the assessee’s case for the preceding year, i.e., AY 2020-21. In our view, considering the aforesaid factual position, for the sake of consistency, we deem it apposite to set aside the matter to the file of the AO with a direction to verify as to whether or not the subject expenditure incurred by the Head Office for the Indian project fall within the meaning of “Head Office expenditure” as defined in the “Explanation” to Section 44C of the Act. The AO is directed to pass a speaking order along with reasons on the aforesaid issue while giving effect to our observations in the course of the set aside proceedings. Needless to say, the AO shall, in the course of the set aside proceedings, afford a reasonable opportunity of being heard to the assessee company.
25. Coming to the other facet of the contention advanced by the assessee company that as the expenditure was incurred wholly and exclusively for Indian operations and therefore, falls outside the scope of Section 44C of the Act, we are unable to persuade ourselves to subscribe to the same. We say so for the reason that the Hon’ble Supreme Court in the case of Director of Income Tax (International Taxation) v. American Express Bank Ltd. (2025) 181 taxmann.com 433 (SC), has clarified that once the expenditure falls within the nature of Head Office expenditure contemplated under Section 44C of the Act, the statutory limitation prescribed therein would apply even if such expenditure was incurred exclusively in connection with Indian operations. Accordingly, even assuming that the impugned expenditure was incurred wholly for Indian projects and operations, the same would nevertheless remain subject to the restriction contemplated under Section 44C of the Act once the expenditure answers the description of Head Office expenditure within the meaning of the said provision.
26. Insofar as reliance is placed by the Ld. AR on the earlier orders of the Tribunal in the assessee’s own case for AY 2020-21 and AY 202122 is concerned, we find that the said decisions had, inter alia, proceeded on the premise that expenditure directly connected with Indian operations would stand outside the purview of Section 44C of the Act. However, in view of the subsequent authoritative exposition of law by the Hon’ble Supreme Court in the case of Director of Income Tax (International Taxation) v. American Express Bank Ltd. (supra), the said view can no longer be regarded as laying down the correct legal position and therefore cannot be followed.
27. We thus are of the considered view that the allowability of the subject expenditure incurred by the Head Office for the Indian project is dependent on the fact that the same does not fall within the meaning of “Head Office expenditure” as defined in the “Explanation” to Section 44C of the Act. At the same time, we may herein reiterate that, as per the judgment of the Hon’ble Supreme Court in Director of Income Tax (International Taxation) v. American Express Bank Ltd. (supra) even if the impugned expenditure was incurred wholly for Indian projects and operations, the same would nevertheless remain subject to the restriction contemplated under Section 44C of the Act once the expenditure answers the description of Head Office expenditure within the meaning of the said provision. Accordingly, the matter is set aside to the file of the AO, who is directed to verify, viz. (i). that as to whether or not the subject expenditure incurred by the Head Office for the Indian project falls within the meaning of “Head Office expenditure” as defined in the “Explanation” to Section 44C of the Act; and (ii). if the subject expenditure does not fall within the meaning of “Head Office Expenditure” as defined in the “Explanation” to Section 44C of the Act, then, while considering the allowability of the assessee’s claim for deduction of the subject expenditure, verify the allocation basis, actual remittances, and commercial justification for the reimbursements made to the Head Office.
28. We shall now advert to the disallowance made by the AO under Section 40(a)(i) of the Act. As observed hereinabove, the Ld. AR’s principal contention is that the payments merely represented reimbursement of expenditure without markup and therefore did not contain any income element chargeable to tax in India.
29. We have given thoughtful consideration and are unable to accept the aforesaid contention. In our view, merely because a payment is styled as a reimbursement does not, by itself, determine its taxability. It is not the nomenclature but the real nature and substance of the transaction that is required to be examined.
30. In the present case, the payments were made by the Indian PE towards services rendered by the Head Office personnel in connection with Indian business operations. As observed hereinabove, the services rendered by the HO personnel to the Indian PE involved technical support, project supervision, consultancy, coordination, and related managerial functions. As per Article 12 of the India-USA DTAA, managerial and consultancy services become taxable when they “make available” technical knowledge, experience, skill, or know-how.
However, the assessee company has failed to place sufficient material demonstrating that no technical knowledge or expertise was made available to the Indian PE. On the contrary, the nature of services involving project design, supervision, monitoring, and technical support indicates continuous transfer of technical expertise and managerial inputs to Indian operations. We find that the assessee company had merely relied upon selective emails and timesheets, which are insufficient to discharge the burden cast upon it. Apart from that, we find that the assessee company had neither approached the AO under Section 195(2) of the Act nor obtained any authoritative determination regarding the non-taxability of the payments. We are of firm conviction that in the absence of sufficient material conclusively demonstrating that the payments were not chargeable to tax in India, the assessee company cannot be absolved of its statutory obligation cast under Section 195 of the Act.
31. Apart from that, we find that the Tribunal in the assessee’s own case for the immediately preceding year in ITA No. 1401/Hyd/2024 dated 22/05/2025 for AY 2022-23, wherein identical facts were involved, has upheld the disallowance made by the AO under Section 40(a)(i) of the Act for the failure of the assessee company to deduct tax at source on the payments made to the Head Office towards FTS by observing as under:
7. We have considered the rival submissions as well as relevant material on record. The assessee has admitted this fact that the payment is made to the Head Office towards services provided by the dedicated team of Head Office in identifying and choosing projects, analysing technical feasibility, making technical presentation, price negotiation etc. apart from the supervising and monitoring the project activities in India. The assessee has also accepted that these services are technical in nature and to that extent accepted the AO’s finding that the services provided by the Head Office are technical in nature. The dispute before us is only whether the payment made by the assessee to the Head Office towards rendering these services falls in the term “fee for technical services” as per the definition u/s 9(1)(vii) of the Act as well as the definition provided in Article 12 of Indo-US DTAA. So far as the term “fee for technical services” provided in section 9(1)(vii) of the Act is concerned, the assessee has not disputed that the payment in question falls in the category of fee for technical services, which is an income in the hand of the US company arising in India. Even otherwise, as per explanation 1 and 2 of section 9(1)(vii) makes it clear that the fee for technical services means any consideration for rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel. The assessee has strongly raised upon the definition of FTS provided in Article 12 of Indo-US DTAA. For ready reference, Article 12 of Indo-US DTAA is reproduced as under:
ARTICLE 12
ROYALTIES AND FEES FOR INCLUDED SERVICES
1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed :
a. in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph] :
i. during the first five taxable years for which this Convention has effect,
a. 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company ; and
b. 20 per cent of the gross amount of the royalties or fees for included services in all other cases ; and
ii. during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services ; and
b. in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services.
3. The term “royalties” as used in this Article means :
a. payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and
b. payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8.
4. For purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:
a. are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or
b. make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.
5. Notwithstanding paragraph 4, “fees for included services” does not include amounts paid:
a. for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ;
b. for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ;
c. for teaching in or by educational institutions ;
d. for services for the personal use of the individual or individuals making the payments ; or
e. to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).
6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be shall apply.
7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
(b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State.
8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for included services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of the Convention.”
8. Thus, if the payment is found to be in the nature of fee for technical services, then the same is liable to be taxed @15% of gross amount of the payment in case if the fee is paid by the Government of the contracting state and @20% in other cases for the duration of first 5 years and thereafter 15% of the gross amount of such fee. A similar corresponding provision is also made in the Act in section 44DA of the Act and therefore, the contention of the assessee that this payment does not involve any element of profit or mark up but, it is only the reimbursement of the expenses incurred by the Head Office towards providing the services would not hold good, when the payment itself is liable to be taxed at gross amount basis. The assessee has not produced any communication between the assessee PE and the Head Office to throw some light about the nature and scope of services rendered by the Head Office. However, what is undisputed from the record is that the Head Office has designated a dedicated team of members for providing services to the assessee, which includes identifying the eligible projects, bidding for projects, designing, directing, supervising, monitoring the project activity. There is no doubt that the services provided by the Head Office by the team of experts and technical personnel and therefore, the complete task of the business operations of the assessee PE, right from identifying the eligible projects, bidding for project, designing, directing, supervising and monitoring of the project activity are undertaken by the designated team. Thus, the decisions relied upon by the assessee cannot be directly applied to the facts of the present case, when it is not a case of service provided by the Head Office only for certifying or providing some consultancy service. But the services are undertaken by the Head Office team on wholesale basis and provided in India. It is not that the assessee has outsourced some of the activity to the Head Office, but the entire technical and skill work has been undertaken and carried out by the designated team, comprising of all technical and expertise of the field and even provided the managerial services also while monitoring and supervising the project activities. The issue before the Hon’ble Karnataka High Court in the case of CIT Vs. ABB Inc. (supra) was only for rendering the technical and consultancy service to an Indian company. The Hon’ble High Court has held in para 11 to 14 as under:
“11. We have carefully perused the above provision. It is applicable only if ‘services’ are made available. The word ‘services’ used is in plural and it is referrable to both technical and consultancy services. It is relevant to note that clause (b) which excludes fee for ‘included services’ is applicable to both technical and consultancy services. It is recorded by the DRP in Para 6.4 as follows:
“The Indian company approaches the assessee company for risk evaluation of the proposed project and the prospective steps to be taken towards bidding process. Through a web based software “RISK REVIEW”, the Indian Company submits the details of the proposed project which include the name of the project, customer details, geography, end user, human resources, products and services to be rendered, time for execution etc.”
12. Assessee’s contention that the service rendered by the assessee is ‘project based’ is not disputed by the Revenue. Thus, in substance, the Indian entity seeks the opinion of its one of the group companies based in USA to review the risk factor involved in the particular project. The DRP has also recorded that Minutes of Meeting is circulated to the whole team which contains the issues discussed and action to be taken to mitigate the risks involved in executing the project and based on such discussion, the working team of Indian company makes necessary changes in the proposed project and the bid is submitted to the proposed customer for evaluation.
13. Thus, it is clear that the fee paid is for the evaluation of risk factor by the assessee company which is based in USA. Though it was argued by Shri Aravind that the results of such activities are made available to the other entities with ABB group, we may record the explanation given by Shri Suryanarayana that the word ‘made available’ used in portion of the agreement extracted in Para 6.7 of DRP’s directions refers only to the results which the entities in the group companies may use and the same cannot be interpreted or equated to any other technical design or consultancy, the benefit of which the ABB India can derive in perpetuity. He is right in his submission because the services rendered by the assessee is project specific and terminates with submission of bid by the ABB India after making necessary changes or corrections in the bid based on the evaluation report. If the agreement permits the assessee to make available the results for guidance to other entities in the group, the same cannot be attributed as services ‘made available’ which could be used in perpetuity.
14. In view of the above, the contention urged on behalf of the revenue that opinion tendered by the assessee falls within the parameters ‘made available’ must fail. Resultantly, this appeal is devoid of merits and hence, the following;
ORDER
i. Appeal is dismissed;
ii. Questions of law are answered in favour of the assessee and against the revenue. No costs.”
9. Therefore, in the said case, the Indian company approaching the foreign entity for risk evolution of the proposed project and prospective steps to be taken towards bidding process. The service of providing risk evolution of the project and prospective step towards bidding process was only in the nature of reviewing the proposed project of the Indian company by the US company. In the case in hand with limited material available before us and in the absence of the relevant communication if any, between the parties, we find that when the entire task of identifying, choosing projects, analysing technical feasibility, making technical presentation, price negotiations, monitoring, supervising of the projects are undisputedly technical services rendered by the US Head Office. Since these services were rendered in India therefore, falls in the terms of make available as per the Article 12 of Indo-US DTAA. It is not the case of seeking a review or evolution of the proposed projects but the entire services right from selecting the project to the bidding and completion of the projects are provided by the Head Office. The DRP has considered this issue in para 2.2.1 to 2.2.8 as under:
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10. Thus, it is clear that the assessee was given another opportunity at the level of DRP to substantiate its claim that the payments do not fall in the ambit of section 195 for deduction of TDS and after considering the remand report, the DRP has passed the directions. So far as the order of this Tribunal for the A.Y.2020-21, we find that in the said assessment year, the AO made an addition by treating the payment u/s 44C, which was disputed by the assessee and claimed that the payment is not for general administrative, but it is for technical services and therefore, the Tribunal vide order dated 16.10.2024 in ITA No.423/Hyd/2023 held as under:
“16. We have gone through the record in the light of the submissions and found that if the assessee proves that certain expense was exclusively incurred for the Indian project by the head office and such expense is not in the nature of overheads, the Revenue has to examine the time sheet on daily basis for each employee in the organization by recording the manhours on daily basis and if such exclusive nature of such expenditure is established then such expense has to be excluded from the purview of section 44C of the Act. In this case, it is evident from the record that since the authorities have taken a stand that salaries and perks to the employees fall under section 44C of the Act and did not proceed further to verify the evidence in the light of the decisions of the coordinate Bench in the case of Samsung Engg.Co.Ltd. (supra), we deem it just and proper to restore this issue to the learned Assessing Officer to verify this fact and if it is found that such expenses were exclusively attributable to the Indian project not to make any disallowance under section 44C of the Act. Ground No.5 is allowed in above terms.
17. In the result, appeal of the assessee is allowed for statistical purpose.”
11. Thus, the Tribunal remanded the matter to the record of the AO for proper verification of the facts regarding these payments and consequently, the said order of the Tribunal would not help the case of the assessee. Accordingly, in the facts and circumstances of the case, we do not find any error or illegality in the impugned order of the AO passed in pursuance to the directions of the DRP.
12. In the result, appeal filed by the assessee is dismissed.”
We, thus, finding no infirmity in the disallowance made by the AO under Section 40(a)(i) of the Act, which has been upheld by the DRP, uphold the same.
32. Apropos the reliance placed by the assessee company on Article 26 of the India-USA DTAA, we find no merit in the same. Article 26 prohibits discrimination based on nationality. We find that the disallowance contemplated under Section 40(a)(i) of the Act is founded upon failure to comply with withholding tax obligations applicable to payments chargeable to tax made to non-residents. In our view, as the distinction drawn by the statute is residence-based and not nationality-based, the assessee company has failed to demonstrate any discrimination prohibited under Article 26 of the DTAA. The Ground of appeal No. 5 is dismissed.
33. However, we find substantial force in the alternative plea raised by the Ld. AR based on the additional grounds of appeal filed by the assessee company before us. We are of firm conviction that if the AO in the course of the set-aside proceedings finds that the impugned expenditure falls within the scope and ambit of Section 44C of the Act, then instead of disallowing the entire expenditure, he shall, as per the extant law, compute the deduction admissible within the statutory limits prescribed under Section 44C of the Act. Needless to say, the AO shall, in the course of the set aside proceedings, afford the assessee company a reasonable opportunity of being heard. Before parting, we may herein observe as a word of caution that the consequential impact, if any, of Section 40(a)(i) of the Act shall also be worked out by the AO in accordance with law while giving effect to the present order. The Grounds of appeal Nos. 3, 4 & 6 are partly allowed for statistical purposes in terms of our aforesaid observations.
34. The Ground of appeal No. 9 relating to the initiation of penalty proceedings is premature and therefore dismissed.
35. The Grounds of appeal Nos. 1,2, 7, 8 & 10 being general and consequential to the core issues involved in the appeal are disposed of in terms of our observations recorded in the order.
36. In the result, the appeal of the assessee company is partly allowed for statistical purposes in terms of our aforesaid observations.
Order pronounced in the open court on 03/06/2026.
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