Section 44C of ITA, 1961 : Section 44C: Deduction Of Head Office Expenditure In The Case Of Non-Residents

Explanation using Example

Imagine a company based in the United States, ABC International, which operates a subsidiary in India. The Indian subsidiary earns profits from its operations, but also incurs some expenses that are managed by the head office in the US, such as global executive salaries, international travel expenses for executives, and the global head office's rent and insurance.

Under Section 44C of the Income-tax Act, 1961, when ABC International's Indian subsidiary calculates its taxable income in India, it cannot claim a deduction for all of the head office expenses it incurs. Instead, the deduction is limited to the lesser of:

• 5% of its adjusted total income (which excludes certain types of allowances and deductions), or
• The actual amount of head office expenses attributable to the Indian operations.

If the subsidiary's adjusted total income for the year is INR 10 million, then the maximum allowance for head office expenses would be INR 500,000 (which is 5% of INR 10 million).

If the actual head office expenses attributable to the Indian operations are INR 600,000, the subsidiary can only deduct INR 500,000, as this is the lesser amount as per Section 44C.

This limitation on the deduction helps to ensure that the profits taxed in India are not excessively reduced by expenses incurred for the benefit of the global operations of the non-resident company.