Bank of Tokyo Mitsubishi UFJ Ltd. & Ors. v. Asstt. DIT

INCOME TAX ACT, 1961

--Business expenditure--AllowabilityRemuneration to expartiate employees vis-a-vis head office expenditure--Assessee/bank, was a company incorporated in Japan and is resident of Japan within the meaning of Article 4 of the Double Taxation Avoidance Agreement between India and Japan. In the relevant assessment year under consideration, the assessee was engaged in wholesome banking operations in India. The assessee operated in India under license from the RBI and was governed by the Banking Regulation Act, 1949. The branches of the assessee in India constituted a permanent establishment in India, within the meaning of article 5 of the DTA. Therefore, the profits earned by such PE of the assessee in India were computed in accordance with the provisions of Article 7 of the DTA by assessee. From the computation of income filed by the assessee, the AO noticed that the assessee during the year under consideration, had claimed a deduction on account of salaries paid in Japan to expatriates over and above the salary paid in Indian Rupees by the branches in India which were routed through profit and loss account. He noted that this expenditure had not been debited to profit and loss account of the branch, i.e., had not been incurred in India, but had been claimed by way of a deduction in the computation of income. The assessee had claimed this deduction on the ground that the payment was directly attributable to the business operations of the assessee in India. The assessee pointed out that these expatriates were working in India wholly and exclusively with the assessee bank. The assessee pointed out that the expenses were allowable in view of article 7(3) of the Indo-Japan treaty as these expenses had been incurred in connection with the Indian business of the assessee bank. The assessee further pointed out that the provisions of section 44C were not attracted to these payments. The salary paid in foreign currency by the Head Office (HO) was not routed through the profit and loss account of the Indian branches. Therefore, while computing the profits attributable to the Permanent Establishment ('PE') of the assessee in India, in the return of income filed, a separate deduction is claimed in respect of salaries paid by the Head Office and taxes thereon, as the said sum represented expenditure incurred for the Indian operations of the assessee. The AO was, however, of the opinion that the impugned amount was covered under the provisions of section 44C. He also pointed out that similar disallowances had earlier been mde. He, accordingly, made addition on account of salaries paid in Japan to expatriates. Held: The claim of the assessee in regard to the payment of remuneration to the expatriate employees rendering whole time services in India throughout the accounting year has been accepted in principle as allowable deduction in computing the profits of the PE. This is, however, with the rider that such payment is not taken into account in working out the deduction under section 44C.