India-UAE DTAA Prevails: ITAT Allows 100% Deduction for Head Office Expenses, Bypasses Section 44C Restrictions [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the limitation under Section 44C of the Income Tax Act, 1961, is overridden by the provisions of the India-UAE Double Taxation Avoidance Agreement ( DTAA ), allowing a full deduction of head office expenses claimed by a foreign bank’s Indian branch.

The appellant in the case, Mashreq Bank PSC, a banking company incorporated in the United Arab Emirates and operating a branch in India, filed its return of income for the assessment year 2018–19 declaring a total income of Rs. 18,27,97,370. During the assessment proceedings, the Assessing Officer restricted the claim of the appellant regarding head office expenses. The appellant had claimed an allocation of head office expenses amounting to Rs. 3,92,18,477 in line with Article 7(3) of the India-UAE DTAA. However, the Assessing Officer restricted the deduction to Rs. 1,59,44,182 under the limitations prescribed by Section 44C of the Income tax Act.

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The Dispute Resolution Panel upheld the Assessing Officer’s action, prompting the appellant to approach the ITAT. The appellant contended that the provisions of the DTAA, being more beneficial, override the domestic law as per Section 90(2) of the Income Tax Act. It was submitted that Article 7(3) of the India-UAE DTAA provides for a deduction of all executive and general administrative expenses reasonably incurred by the head office for the permanent establishment, without importing the restrictive computation mechanism of Section 44C.

The Revenue defended the disallowance by asserting that Section 44C operates as a machinery provision for computing income and does not contradict the DTAA. However, the Tribunal disagreed with the Revenue’s interpretation, observing that Section 44C limits the deduction of head office expenses, while Article 7(3) of the DTAA permits a full deduction of reasonable expenses without any such cap.

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The ITAT held that the India-UAE DTAA specifically allows for a deduction of all reasonable executive and general administrative expenses and that this clause would be rendered ineffective if the restriction under Section 44C is applied. It concluded that there exists a clear inconsistency between the DTAA and Section 44C, and under Section 90(2), the treaty provision must prevail.

The ITAT Bench composed of Amit Shukla (Judicial Member) and Amarjit Singh (Accountant Member) directed that the entire head office expenditure of Rs. 3,92,18,477 claimed by the appellant be allowed as a deduction under Article 7(3) of the DTAA.

To Read the full text of the Order CLICK HERE

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