Treaty non-discrimination overrides domestic deduction ceiling on head office expenses for a permanent establishment

Article 24(2) of the India-Canada treaty was applied to protect a Canadian non-resident's permanent establishment from less favourable tax treatment than resident enterprises carrying on the same activities. Section 44C, treated as a restrictive ceiling on head office expenditure rather than a mere estimation rule, could not override the treaty where it curtailed deduction of business expenditure otherwise allowable under section 37(1). The treaty non-discrimination clause prevailed over the domestic computation rule to the extent of inconsistency, so head office overheads fairly allocable to the permanent establishment remained deductible.

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Issues: Whether the restriction on deduction of head office expenditure under section 44C of the Income-tax Act, 1961 applies to a Canadian non-resident carrying on business in India through a permanent establishment in view of Article 24(2) of the India-Canada Double Taxation Avoidance Agreement.

Analysis: Article 24(2) of the treaty protects a permanent establishment from taxation less favourably levied than that imposed on resident enterprises carrying on the same activities. The restriction in section 44C operates as a ceiling on deduction of head office overheads and curtails deduction of legitimate business expenditure otherwise allowable under section 37(1). The treaty provision, being a specific non-discrimination clause, prevails over the general rule for computation of business profits in Article 7(3), and domestic law must yield to the treaty to the extent of inconsistency. The Court also treated section 44C as a disabling restriction rather than a mere method of estimation.

Conclusion: Section 44C could not be applied to deny or restrict deduction of head office expenditure to the extent fairly allocable to the permanent establishment, and the assessee was entitled to the benefit of the treaty non-discrimination clause.

Ratio Decidendi: A treaty-based non-discrimination clause prevails over a domestic statutory ceiling on deductions where the ceiling results in less favourable treatment of a permanent establishment than that accorded to resident enterprises carrying on the same activities.

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