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2025 (2) TMI 332 - AT - Income TaxDisallowance of deduction claimed of head office expenses allocated to the Indian branches - Scope of amended Article 7(3) - assessee is a non-resident banking company incorporated in United Arab Emirates (UAE) and operates in India through its branches in Mumbai and New Delhi - whether head office expenses allocated to the PE in India is allowable u/Article 7(3) of the treaty without any limit or subject to the restrictions imposed under section 44C of the Act ? HELD THAT - On a careful reading of Article 7(3) of the Treaty as it existed prior to its amendment it becomes very much clear that while determining the profit of a PE all deductions and expenses attributable to the PE have to be allowed. There are no restrictions/conditions imposed in Article 7(3) of the Treaty to limit the expenditure to a particular percentage. Therefore in absence of any restrictions/conditions expressly provided in Article 7(3) no such restrictions/conditions can either be imported or read between the lines. As in the amended Article 7(3) of the Treaty specific restriction/condition was imposed providing that the deduction of expenses relating to the PE has to be allowed in accordance with the provisions of and subject to limitations of the tax laws of the particular State where the PE is situated. A reading of the amended Article 7(3) would make it clear that there were no restrictions/conditions imposed with regard to the limit of deduction of expenses earlier to the Protocol. If Revenue s contention that even without the Protocol amending Article 7(3) Article 25(1) provided for computation of deduction under Article 7(3) as per the provisions of domestic law is accepted then there was no need for amending Article 7(3) by the Protocol. The language used in Article 7(3) of the treaty prior to and post amendment demonstrates that at the time of entering into the DTAA the treaty partners initially never intended to put any restriction of the domestic laws on allowability of expenses in computing the business profits of the PE. Subsequently the treaty partners having felt that the benefits provided under Article 7(3) needs to be withdrawn or restricted agreed to amend the provision. Thus in our view prior to amendment of Article 7(3) the understanding between treaty partners is to allow all expenses attributable to the PE without applying the limitation/restriction imposed under the domestic laws. Thus we hold that Article 7(3) of the Treaty being an express provision contrary to the domestic law will override the domestic law. As per the language of pre-amended Article 7(3) of the Treaty the disallowance of expenditure attributable to the PE has to be allowed in full without applying the restriction imposed under section 44C of the Act. Thus we agree with the view expressed in case of Dalma Energy LLC 2012 (5) TMI 10 - ITAT AHMEDABAD Abu Dhabi Commercial Bank 2012 (7) TMI 703 - ITAT MUMBAI State Bank of Mauritius Ltd 2012 (10) TMI 134 - ITAT MUMBAI . Having gone through the decision we are of the view that it was decided upon different set of facts hence not applicable. Firstly in the case before us there is no allegation by the Departmental Authorities that the non-resident assessee is getting a more favorable treatment than the resident assessee s. Secondly while computing profit of business and profession business expenses are allowed to a resident assessee under the Indian Income Tax Act. Accordingly ground no.1 is decided in favour of the assessee. Disallowance of deduction claimed being expenses specifically incurred outside India for the Indian branches - whether the provisions of section 44C would apply to such expenditure ? - HELD THAT - Looking at the nature of expenditure incurred there cannot be any doubt that they are exclusively related to the operations of Indian branches. The expenditure covered under section 44C is of common nature which is incurred for various branches or which is incurred for the head office and branches. In case of DIT Vs Credit Agricole Indosuez 2015 (6) TMI 974 - BOMBAY HIGH COURT as held that expenses incurred by head office on behalf of Indian branch are deductible u/s 37(1) of the Act without applying the restrictions of section 44C of the Act. Same view was expressed in case of American Express Bank Ltd. 2015 (4) TMI 1041 - BOMBAY HIGH COURT The ratio that can be deduced from these decisions are the expenditure specifically incurred for the branches has to be allowed without the restrictions of section 44C. Thus keeping in view the definition of head office expenditure under section 44C and the ratio laid down in the judicial precedents discussed above we hold that the expenditure incurred outside India exclusively for the Indian branches does not fall within the ambit of section 44C. Hence would be allowable in full. This ground is allowed.
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