Head Office Expenditure of Non-residents under Section 60

Understand Head Office Expenditure of Non-residents (Section 60)

Key rules to remember

Cap when adjusted total income is positive

Maximum deduction = 5% × adjusted total income

Section 60(2)(b), the case 'any other case'. Allowed deduction is the lower of actual attributable expenditure and this cap.

Cap when adjusted total income is a loss

Maximum deduction = 5% × average adjusted total income

Section 60(2)(a). The average is taken over the three immediately preceding tax years.

Average adjusted total income

Sum of adjusted total income of the years ÷ number of years assessable (3, 2 or 1)

Use three years if assessable in all three, two if assessable in only two, and one if assessable in only one.

Allowable deduction

Lower of (head office expenditure attributable to India) and (cap)

The expenditure must be attributable to the business or profession in India.

Adjusted total income

Total income computed without the section 60 and section 33(11) allowances, section 32(i)(A) deduction, carried forward losses (sections 111(1), 112(1), 113(2), 115(2)) and Chapter VIII deductions

Add these back to the normal total income before taking 5%.

How to solve Head Office Expenditure of Non-residents (Section 60) questions

1. 1Confirm the assessee is a non-resident and that the expenditure is incurred outside India for executive and general administration.
2. 2Identify the part of the expenditure attributable to the Indian business. Ignore the part relating to other countries.
3. 3Compute total income without giving effect to the section 60 allowance, so the claim is not deducted yet.
4. 4Add back the other items listed in the definition: section 33(11) allowance, section 32(i)(A) deduction, carried forward losses and Chapter VIII deductions. This gives adjusted total income.
5. 5If adjusted total income is positive, the cap is 5% of it. If it is a loss, the cap is 5% of the average adjusted total income of the preceding three tax years (or two, or one, as assessable).
6. 6Allow the lower of the attributable expenditure and the cap.
7. 7Deduct the allowed amount in computing business income, and finish the total income computation.
8. 8State the disallowed excess clearly, since it is not allowed under this section.

Quickest way: Cap first, then compare

Common mistakes in Head Office Expenditure of Non-residents (Section 60)

• Taking 5% of total income after the head office deduction and other deductions.

  Students use the normal total income and forget the add-back rules.

  Fix: Always compute adjusted total income first, without the section 60 allowance and the other listed items such as Chapter VIII deductions and carried forward losses.

• Claiming the whole head office expenditure of the company.

  The question gives one big figure and students do not look at what is attributable to India.

  Fix: Only expenditure attributable to the Indian business qualifies. Then apply the 5% cap to that amount.

• Using 5% of a loss, or of the current year, when adjusted total income is a loss.

  Students apply the general rule without reading the loss condition.

  Fix: For a loss, use 5% of the average adjusted total income of the three preceding tax years.

• Dividing by three when the assessee was assessable in fewer years.

  Three years is the headline rule.

  Fix: Divide by the number of years the assessee was actually assessable, out of the three preceding years.

• Treating the cap as the allowable amount even when actual expenditure is lower.

  5% is seen as an entitlement.

  Fix: The cap is an upper limit. Allow the lower of actual attributable expenditure and the cap.

Worked examples