India: Salary costs attributable to PE not treated as head office expenditure subject to domestic deductibility restriction (tribunal decision)
Domestic deductibility restriction for head office expenditure may violate non-discrimination clause of India-UK treaty depending on nature of expenditure.
The Mumbai Bench of the Income-tax Appellate Tribunal held that the salary cost of expatriates working exclusively for the India permanent establishment (PE) of a UK company was fully deductible as business expenditure and was not in the nature of executive and general administrative expenses so as to be subject to the restriction applicable to “head office expenditure.”
However, the tribunal rejected the company’s claim that it was entitled to deduct its entire head office expenditure (without any domestic law restriction) under the non-discrimination clause of the India-UK income tax treaty on the grounds that such restriction is not inherently discriminatory merely because it applies to nonresidents. The tribunal observed that Article 7 (Business Profits) of the treaty generally preserves the application of domestic law limitations for attribution of profits to an Indian PE, while the non-discrimination clause could still apply depending on the nature of the expenditure. Since the tax authority had not identified the precise nature of the head office expenditure, the matter was remanded for fresh examination.
The case is: DCIT v. Standard Chartered Bank (ITA No. 4247 & 4245/Mum/2025)
Read a July 2026 report prepared by the KPMG member firm in India