Salaries Paid By Foreign Bank's Head Office To Expatriates Working For Indian Branch Not Head Office Expenses: ITAT Mumbai

Salary paid by the head office of a foreign bank to expatriate employees working exclusively for its Indian operations cannot be treated as head office expenditure merely because the payment was initially made outside India, the Mumbai Income Tax Appellate Tribunal (ITAT) has held.

A bench of Judicial Member Beena Pillai and Accountant Member Arun Khodpia dismissed the Revenue's appeal. It upheld the Commissioner (Appeals)' order allowing Standard Chartered Bank's claim for deduction of expatriate salary expenditure.

The tribunal also held that the expenditure was allowable while computing the profits attributable to the bank's Indian permanent establishment under Article 7 of the India–UK Double Taxation Avoidance Agreement (DTAA).

The tribunal observed, "The applicability of section 44C depends upon the nature and character of the expenditure and not merely on the fact that the payment has been made from outside India."

Standard Chartered Bank, incorporated in the United Kingdom, claimed a deduction of about ₹8.64 crore towards salaries paid to expatriate employees deputed to its India branch for the 2004-05 assessment year.

The employees worked exclusively for the Indian branch. A part of their salary and allowances was paid abroad by the head office with the Reserve Bank of India's approval. The bank stated that the Indian branch reimbursed the head office for those payments.

The Assessing Officer disallowed the overseas salary component after treating it as head office expenditure covered by the restriction applicable to executive and general administrative expenses incurred outside India. The bank challenged the disallowance. It argued that the employees were engaged solely in its Indian operations and that the expenditure had been incurred wholly for its Indian business.

After being appraised of the facts, the tribunal held that the nature of the expenditure, and not the place from which the payment originated, determines whether the statutory restriction applies. It found that the expatriate employees were deputed exclusively to the Indian branch and that their salary had a direct nexus with the business carried on in India.

The tribunal held, "The said expenditure was neither incurred for managing any office outside India nor was it in the nature of common executive and administrative overheads of the Head Office requiring allocation between Indian and overseas operations. The expenditure pertained exclusively to the Indian business of the assessee incurred by the assessee in India. Therefore, the same cannot be regarded as “head office expenditure” within the meaning of section 44C merely because the salary component was initially paid by the Head Office."

The tribunal further held, "The fact that such employees were employees of the overseas Head Office or that a part of the salary was initially borne by the Head Office would not, by itself, disentitle the assessee from claiming the expenditure, if the same has been incurred for the business operations of the PE in India."

The tribunal also noted that the Revenue had not produced any material to establish that the expatriate employees did not perform any functions for the Indian branch. It also found no material to show that the expenditure lacked any nexus with the business carried on in India.

The tribunal observed, "In the absence of any such finding, the expenditure cannot be disallowed merely on a general observation that the liability was incurred outside India or was connected with the Head Office."

Turning to the treaty, the tribunal held that the bank was entitled to rely on the more beneficial provisions of the India–UK DTAA by virtue of Section 90(2). It held that Article 7 independently allowed deduction of expenses incurred for the purposes of the Indian permanent establishment.

The tribunal, therefore, held, "The treaty provision being more beneficial to the assessee, the same would prevail over the restrictive provisions of the Act in terms of section 90(2) of the Act. Therefore, even from the perspective of the India–UK DTAA, the impugned expenditure could not be disallowed or restricted by applying section 44C of the Act."

For Assessee:  Porus Kaka, Senior Counsel, with Manish Kanth, instructed by Vijay Budhwani.

For Revenue: Ajay Chandra, CIT-DR.