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Section 44c of Income Tax Act

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June 5, 2021

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12 mins read

Section 44C of Income Tax Act – Deduction in respect of Head Office Expenses of Non residents

Section Section 44c of Income Tax Act
Particulars Deduction for Head office Expenditure.
Rate of presumptive income/deduction Deduction would be Lower of 5% of adjusted total income; or Head office expenses as attributable to business or profession of taxpayer in India.
Type of business Non Resident

In case of a foreign company, which operates directly in India, and has a branch office or other presence, which constitutes a Permanent Establishment, of the foreign company in India, the head office may  incur certain expenditures in relation to the Indian PE. In addition to this, certain general expenses which are incurred by the Head Office, may also be related to the Indian PE , but cannot be identified specifically. In order to prevent foreign companies charging higher expenditure to the Indian branch,  Section 44C restricts the claim of head office expenditure of a non-resident to the lower of following expenses : –

  • 5% of “adjusted total income” in case of profit, or in case of loss, 5% of the average adjusted total income ;
  • Head office expenditure incurred by the assessee , as is attributable to the business or profession of the assessee in India.

Meaning of Adjusted Total Income – Section 44c of Income Tax Act

ADJUSTED TOTAL INCOME refers to the total income of the assessee, computed in accordance with the provisions of the Act without giving effect to the following :

  • Allowance under Section 44C of Income Tax Act for Head office expenditure
  • Unabsorbed depreciation u/s 32(2).
  • Family planning Expenditure incurred by a company under first proviso to section 36(1)(ix).
  • Brought forward Business loss under section 72(1).
  • Brought forward Speculation loss under section 73(2).
  • Loss under the head Capital Gain under section 74(1).
  • Brought forward Loss from certain specified sources under Section 74A(3).
  • Deductions under Chapter VI-A.

Meaning of Average Adjusted Total Income

The adjusted total income of the assessee shall be computed based on , whether the foreign company was assessable to tax for one, two or three preceding years : –

Assessable for each of the three preceding assessment years:

When the total income of the assesse,  was assessable for each of the three preceding assessment years , one third of the “aggregate amount of the adjusted total income” in respect of previous years relevant to those three assessment years.

Section 44c of Income Tax Act Example 1 –

Foreign Head office incurred certain expenditure and allocated a part of it to Indian Branch. The adjusted total income of Indian branch is a loss in the current year. The total income of Foreign company was assessable for three immediately preceding FYs. Determine the average adjusted total income of Indian branch from the following data:

FY 2015-16 (in crores) 2014-15 (in crores)  2013-14 (in crores)
Adjusted Total Income 100 200 300

Solution –

Average adjusted total income = (1/3rdof the “aggregate amount of the adjusted total income” in respect of the three previous years)
= 100+200+300/3 = Rs 200 crores

Assessable two out of  the three preceding assessment years

  1. When the total income of the assessee was assessable for only two out of three preceding assessment years , One half of the “aggregate amount of the adjusted total income” in respect of previous years relevant to those two assessment years

Section 44c of Income Tax Act Example 2 –

Foreign Head office incurred certain expenditure and allocated a part of it to Indian Branch. The adjusted total income of Indian branch is a loss. The total income of Foreign company was assessable for preceding two years only. Determine the average adjusted total income of Indian branch from the following data:

FY 2015-16 (in crores) 2014-15(in crores)
Adjusted Total Income 100 200

Solution –

Average adjusted total income = (1/2 of the “aggregate amount of the adjusted total income” in respect of the two previous years)

= 100+200/2 = Rs 150 crores

Meaning of Average Adjusted Total Income – Section 44c of Income Tax Act

Assessable for  only one out of three preceding assessment years

  • When the total income of the assessee was assessable for only one out of three preceding assessment years , “adjusted total income” in respect of the previous years relevant to that assessment years

International Taxation Services

Section 44c of Income Tax Act Example 3 –

Foreign Head office incurred certain expenditure and allocated a part of it to Indian Branch. The adjusted total income of Indian branch is a loss. The total income of Foreign company was assessable for preceding one year only. Determine the average adjusted total income of Indian branch from the following data:

FY 2015-16 (in crores)
Adjusted Total Income 100

Solution –

Average adjusted total income = ( “Aggregate amount of the adjusted total income” in respect of the previous year)
= 100 crores

Meaning of Head Office Expenditure

For the purpose of this clause,  executive and general administration expenditure shall mean such expenditure incurred by the assessee outside India. Specifically, the following expenditure shall be included  in executive and general administration expenditure :-

  1. rent, rates, taxes, repairs or insurance of any premises outside India used for the purpose of the business or profession.
  2. Salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profit 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;
  3. traveling by any employee or other person employed in, or managing the affairs, of any office outside India; and
  4. such other matters connected with executive and general administrative as may be prescribed.

Section 44c of Income Tax Act Example 4 –

The net result of the business carried on by a branch of foreign company in India for the year ended 31.03.2018 was a loss of Rs 90 lakhs after charging head office expenses of Rs 190 lakhs , which were allocated to the branch. Explain with reasons the income to be declared by the branch in its return for the Assessment Year 2018-19 ?

Solution –

The amount of income to be declared by the assessee for A.Y. 2018-19 will be as under: –

Particulars Amount (in lakhs)
Net loss for the year ended on 31.03.2018 (90 lakhs) (90)
Add: Amount of head office expenses to be considered separately as per section 44C 190
Adjusted total income 100
Less: Head Office expenses allowable under section 44C is the lower of
(i) Rs 5 lakhs, being 5% of 100 lakhs, or
(ii) Rs 190 lakhs.
5
Income to be declared in return 95

For any queries, please write them in the Comment Section or Talk to our tax expert

Presumptive Taxation Provisions for Non residents

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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