ITAT directs AO to delete disallowance of salary paid overseas to expatriates of the MUFG Bank working in India by HO under India-Japan Tax Treaty

The Income Tax Appellate Tribunal (ITAT) directed the Assessing Officer (AO) to delete the disallowance of salary paid overseas to expatriates of the MUFG Bank working in India by Head Office.

The assessee, MUFG Bank is a banking company incorporated in Japan and is a tax resident of Japan. The assessee is engaged in wholesale banking operations in India Under a license From the Reserve Bank of India and is covered by The Banking Regulation Act, 1949.

MUFG group is the holding company for Japan, Mitsubishi UJF trust and Banking Corporation (MUTB), and certain other companies from Japan. The group’s primary activities are that of administration and management of banking and other financial services provided by its group companies.

The assessee is carrying on mainly banking activities and limited to wholesale banking only. It is engaged in institutional banking, credit/lending, and other facilities to the corporate.

The AO disallowed the salary paid to overseas expatriates of the appellant working in India by the Head Office (HO) and Indian taxes paid thereon by the head office amounting to Rs.484153789.

The AO held that in respect of expenses incurred by the head office deduction of 5% of the adjusted total income of its permanent establishment in India is allowed to the assessee as per the provisions of Section 44C of the act as other income is at a be taxed at gross basis as per the provisions of the India Japan DTAA.

The assessee contended that the salary paid to expatriates is incurred wholly and exclusively for the purpose of carrying on the business of branches in India and thus, the salary paid to expatriate is deductible as an expense under section 37(1) of the Act and not covered within the scope of “head office expenditure” under section 44C of the Act.

The departmental representative vehemently supported the order of the learned assessing officer and submitted that as AO has filed Special Leave Petition before the Supreme Court to keep the issue alive the above disallowance has been made.

The two-member bench of Amit Shukla and Prashant Maharshi in the light of the Order of the High Court held that the expenses have been incurred wholly and exclusively by the Indian branch and therefore no part of these expenses can be allocated to any other branch of the HO and that there was no dispute with regard to the non-applicability of section 44C of the Act.

Therefore, the ITAT directed the learned assessing officer to delete the disallowance of salary paid overseas to the expatriates of the appellant working in India by the head office and the Indian taxes paid thereon by that office amounting to Rs.484,153,789.