SECTION 44C – HEAD OFFICE EXPENDITURE
IN CASE OF NON-RESIDENTS
Treatment of technical expenses when being remitted to head office of a non-resident enterprise by its branch office in India
1. Section 44C of the Income-tax Act, 1961, provides for deduction of Head Office expenditure in the case of non-residents. It defines “head office expenditure” to mean executive and general administrative expenditure incurred by the assessee outside India, including certain specified expenditure. The Board had occasion to examine the treatment to be given to technical fees being remitted to the head office of a non-resident enterprise by its Indian branch office for certain technical services rendered by the head office.
2. Technical fees that are not covered under head office executive and general administrative expenditure specified in section 44C of the Income-tax Act are to be allowed deduction without any limit while computing the business profit of the branch office – permanent establishment – in India. However, the technical fees received by the head office will be taxable in accordance with the Double Taxation Avoidance Agreement read with Income-tax Act. In other words, if there is a tax treaty with the concerned country which supplies technical services to the permanent establishment in India then the payment towards the technical fees will be taxable either on the gross or on the net basis depending on the agreement. On the other hand, if the fees are paid to a resident of a country with which there is no tax treaty then the payment will be taxable in accordance with the provisions of section 115A, read with section 44D of the Income-tax Act.
3. The above position will hold good when the technical services are provided by a third party and the payment is made by the permanent establishment in India to the head office directly by way of reimbursement or through the Head Office to the third party in respect of such services. In such circumstances, the rate of taxation will be as prescribed in the relevant tax treaty or if there is no tax treaty then in accordance with the relevant provisions of the Income-tax Act.
4. In view of the fact that Head Office technical expenses will have to be allowed in full, it is necessary for the Assessing Officer to carefully scrutinise any claim of Head Office technical expenditure while completing the assessment of assessee making such payments. The first aspect to be borne in mind is to verify the genuineness of the technical nature of the services rendered before allowing them as head office technical expenditure. The second aspect to be taken into account is that when such deductions are claimed, the amount so claimed should be allowed subject to the provisions of section 40(a)( i) of the Income-tax Act so that the collection of taxes on such payments is not lost sight of.
5. The branch – permanent establishment – should ensure tax deduction at source in such cases in accordance with the provisions of section 195 of the Income-tax