Deduction of head office expenditure in case of nonresidents.

60(1)

Irrespective of anything to the contrary contained in sections 26 to 54, in the case of a non-resident assessee, deduction of head office expenditure incurred by such assessee as is attributable to his business or profession in India, shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession” subject to provisions of sub-section (2).

60(2)

The deduction allowable under sub-section (1) shall be restricted to—

• (a) if the adjusted total income of the assessee is a loss, to an upper monetary limit of 5% of the average adjusted total income of the assessee; or
• (b) in any other case, to an upper monetary limit of 5% of the adjusted total income of the assessee.

60(3)

In this section,—

• (a) “adjusted total income” means the total income computed under this Act, without giving effect to the allowance referred to in this section or in section 33(11) or the deduction referred to in section 32(i)(i) or any loss carried forward under section 112(1) or 113(2) or 115(1) or the deductions under Chapter VIII;

• (b) “average adjusted total income” means,—

  • (i) if the assessee is assessable for each of the three tax years immediately preceding the relevant tax year, the arithmetic mean of his adjusted total income over those three tax years;
  • (ii) if the assessee is assessable only for two of the said three tax years, the arithmetic mean of his adjusted total income over those two tax years;
  • (iii) if the assessee is assessable only for one of the said three tax years, his adjusted total income for that tax year;

• (c) “head office expenditure” means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of—

  • (i) rent, rates, taxes, repairs or insurance of any premises outside India used for the business or profession;
  • (ii) 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;
  • (iii) travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and
  • (iv) such other matters connected with executive and general administration, as prescribed.

Explanation

Section Summary:

This section deals with the deduction of head office expenditure for non-resident taxpayers in India. It allows non-residents to claim deductions for expenses incurred by their head office (outside India) that are attributable to their business or profession in India. However, the deduction is subject to certain limits and conditions outlined in sub-sections (2) and (3).

Key Changes:

1. Introduction of a Cap on Deductions: The deduction for head office expenses is now capped at 5% of the adjusted total income of the non-resident taxpayer. This is a new restriction compared to previous laws, which did not explicitly limit such deductions.
2. Definition of Adjusted Total Income: The section introduces the concept of "adjusted total income," which excludes certain deductions and losses when calculating the limit for head office expenses.
3. Clarification of Head Office Expenditure: The section provides a detailed definition of what constitutes "head office expenditure," including executive and administrative costs incurred outside India.

Practical Implications:

1. For Non-Resident Taxpayers: Non-residents operating in India must now carefully calculate their head office expenses and ensure they do not exceed the 5% cap on adjusted total income. This may reduce the amount of deductible expenses compared to prior years.
2. Impact on Loss-Making Entities: If a non-resident taxpayer has a loss (negative adjusted total income), the deduction is still allowed but capped at 5% of the average adjusted total income over the preceding three years (or fewer, if applicable).
3. Compliance Burden: Taxpayers must maintain detailed records of head office expenses and ensure they align with the definitions provided in the law.

Critical Concepts:

1. Adjusted Total Income: This is the total income calculated without considering certain deductions (e.g., under sections 32(i)(i), 33(11), or Chapter VIII) or carried-forward losses. It serves as the base for calculating the 5% cap.
2. Average Adjusted Total Income: For taxpayers with a loss, the cap is calculated based on the average adjusted total income over the preceding three years (or fewer, if applicable).
3. Head Office Expenditure: Includes executive and administrative costs incurred outside India, such as rent, salaries, travel, and other general administration expenses.

Compliance Steps:

1. Calculate Adjusted Total Income: Compute total income without applying the deductions or losses excluded under this section.
2. Determine Head Office Expenditure: Identify and document all head office expenses attributable to Indian operations.
3. Apply the 5% Cap: Ensure the claimed deduction does not exceed 5% of the adjusted total income (or average adjusted total income in case of losses).
4. Maintain Records: Keep detailed records of head office expenses and calculations for audit purposes.

Examples:

1. Scenario 1: A non-resident company has an adjusted total income of ₹10 crore in the current year. Its head office expenses attributable to India are ₹60 lakh. The maximum deductible amount is 5% of ₹10 crore, i.e., ₹50 lakh. Therefore, only ₹50 lakh can be claimed as a deduction, and the remaining ₹10 lakh cannot be deducted.
2. Scenario 2: A non-resident company has a loss (negative adjusted total income) of ₹5 crore. Its average adjusted total income over the past three years is ₹2 crore. The maximum deductible head office expense is 5% of ₹2 crore, i.e., ₹10 lakh.

This section ensures that non-residents cannot claim excessive deductions for head office expenses, aligning their tax treatment more closely with that of resident taxpayers.