By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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Restriction under Article 7(3) of India-USA DTAA on allowability of expenses applies to all the expenses covered in various sections dealing with deductions and allowances and not only to the expenses covered by section 44C.
Facts
The taxpayer was a banking company incorporated in USA. It was carrying on banking operations in India through its branches in India. In terms of Article 7 of India-USA DTAA, the taxpayer had PE in India. Article 7(3) of DTAA provided that while certain expenses which are allocated to the PE will be allowed as deduction, such deduction will be in accordance with the provisions of and subject to the limitations of the taxation laws of that states.
The taxpayer claimed deduction of certain head office expenditure and marketing expenditure and contended that these were direct expenses exclusively incurred for the Indian Branch and hence, question of applicability of the restriction on allowability u/s 44C of I T Act did not arise. According to the taxpayer, the restriction in Article 7(3) applied only to the latter part starting with ” … a reasonable allocation of executive and general administrative expenses … ” and accordingly, only the expenses included within the ambit of section 44C would be subject to the restriction of domestic tax law while other expenses should be fully allowable.
Held
Rejecting taxpayer’s contention, the Tribunal held as follows.
- Language of Article 7(3) indicates that deductibility of all the expenses is subject to the restrictions set out under various sections in Chapter IV-D and such restriction is not confined only to section 44C.
- Further, the limiting provision in Article 7(3) is set out at end of the sentence. Thus, it is evident that limitation is applicable to all the expenses.
