Reasonable allocation of expatriate salary to a permanent establishment upheld where exact attribution could not be proved

Where salary paid abroad could not be precisely linked to the Indian permanent establishment because the same technical staff also coordinated work for Pakistan projects, a fair estimate of 50% attribution was sustained as a reasonable allocation of deductible expense. The taxpayer's debit notes and auditor certifications did not effectively rebut the Assessing Officer's finding, so full deduction was denied. The 10% disallowance of staff welfare and miscellaneous expenses was also upheld because it was an estimate based on the material on record and no convincing basis was shown to disturb it.

---

---

Issues: (i) Whether 50% of the salary paid in France to four technical staff members was reasonably allocable to the Indian permanent establishment and deductible; (ii) Whether the disallowance of 10% of staff welfare expenses and 10% of miscellaneous expenses called for interference.

Issue (i): Whether 50% of the salary paid in France to four technical staff members was reasonably allocable to the Indian permanent establishment and deductible.

Analysis: The relevant treaty provision allowed deduction of expenses, wherever incurred, if they were reasonably allocable to the permanent establishment. The assessee produced debit notes and auditor certifications, but the Assessing Officer had recorded that the same personnel were also coordinating work for projects in Pakistan. That finding was not effectively rebutted by any affidavit or comparable evidence. In such circumstances, exact allocation was not possible and the matter necessarily involved a fair estimate. The appellate authority's view that 50% of the salary should be treated as attributable to the Indian project was found to be just and reasonable.

Conclusion: The 50% allocation was upheld and the claim was not accepted in full.

Issue (ii): Whether the disallowance of 10% of staff welfare expenses and 10% of miscellaneous expenses called for interference.

Analysis: The appellate authority had adopted an estimate on the basis of the material before it, and no convincing ground was shown to disturb that estimate. The conclusion reached was treated as a reasonable exercise of judgment on the facts.

Conclusion: The disallowance was upheld.

Final Conclusion: The appellate order was sustained on all the contested points, and no relief was granted to the assessee.

Ratio Decidendi: Where expense attribution to a permanent establishment cannot be proved with precision, a fair and reasonable estimate based on the record will be sustained if the contrary case is not effectively disproved.

---