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2005 (9) TMI 227 - AT - Income TaxExpenses incurred at the head office - Non-resident - Whether or not the limitation on deduction of head office expenditure, as set out in section 44C of the Indian Income-tax Act, will apply in the case of non-resident companies governed by the India-Canada DTAA, particularly in the light of non-discrimination clause in the said DTAA - HELD THAT:- We are of the considered view that a restriction on admissibility of head office overheads of permanent establishment of a Canadian company constitutes discrimination against such a PE vis-a-vis a domestic Indian entity because no such restriction is applicable for deduction of head office or controlling office overheads of an Indian entity. It puts PE of a Canadian company to an unfair disadvantage inasmuch as even legitimate business expenses attributable to the PE and deductible u/s 37(1) cannot be allowed as a deduction in the light of restriction placed u/s 44C of the Act, whereas all the legitimate business expenses of the Indian entity operating in India will be allowed as a deduction. The scope of deduction u/s 37(1) thus stands curtailed for PE of a Canadian company. When domestic tax laws permit such discrimination, such legal provisions have to be treated as overridden by the provisions of the Indo-Canadian DTAA. There is no dispute about the fact that when the provisions of the Income-tax Act and the DTAA are in conflict, the provisions of the Act will be applicable only to the extent the same are more beneficial to the assessee. In other words, the provisions of the treaty prevail over the provisions of the Act. Therefore, the restriction placed on the allowability of the head office expenditure by section 44C of the Act is to be ignored in the light of the provision of Article 24(2) of the Indo-Canadian DTAA. We have noted that the CIT(A) has, in the assessment years 1994-95 and 1996-97, has restored the matter to the file of the Assessing Officer for examining the claim of expenditure as attributable to the permanent establishment in India, and the assessee is not in appeal against these directions. Therefore, beyond dispute, only such expenses are to be allowed as a deduction on account of head office expenses as can be fairly allocated to the permanent establishment. The only impact of the applicability of non-discrimination clause will be that the scope of deduction u/s 37(1) will not stand curtailed by the restriction placed u/s 44C of the Act. In our considered view, this direction of the CIT(A) is justified and calls for no interference. As far as assessment year 1993-94 is concerned, the CIT(A) has held that the provisions of section 44C will apply, but then, for the reasons set out above, we are of the considered view that section 44C has no application in the matter and that the assessee is to be allowed deduction of such head office expenses as can be fairly allocated to the permanent establishment. Accordingly, as for the assessment year 1993-94, the matter is to be restored to the file of the Assessing Officer for adjudication de novo in the light of the above observations. In the result, the appeals filed by the revenue are dismissed and the appeal filed by the assessee is allowed for statistical purposes.
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