ITAT Hyderabad: Head Office Project Support Costs and TDS Liability Under Scrutiny — Sheladia Associates INC vs ADIT
Background and Overview
A US-based professional consultancy firm, operating in India through a branch office and five project offices constituting a Permanent Establishment ("PE"), found itself at the center of a significant tax dispute before the Hyderabad Bench of the Income Tax Appellate Tribunal ("ITAT"). The core controversy revolved around whether certain costs reimbursed to the firm's American Head Office could be classified as direct project expenses — and thus fully deductible — or whether they fell within the restrictive framework of Section 44C of the Income-tax Act, 1961. Simultaneously, the Tribunal was called upon to adjudicate whether the failure to deduct tax at source on such reimbursements attracted disallowance under Section 40(a)(i).
The appeal was directed against the final assessment order dated 22/01/2026, passed under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961, for Assessment Year 2023-24, following directions issued by the Dispute Resolution Panel ("DRP"), Bengaluru, vide its order dated 29/12/2025 under Section 144C(5).
Nature of Business and Disputed Expenditure
The assessee is a foreign company incorporated in the United States, engaged in rendering professional consultancy services spanning engineering, design, project management, feasibility analysis, contract management, and rural development projects. For AY 2023-24, the assessee filed its original return of income on 27/09/2023 (later revised on 29/12/2023), declaring a total income of Rs. 2,75,66,277/-.
During assessment proceedings, the Assessing Officer ("AO") examined expenses aggregating to Rs. 3,61,92,920/- claimed by the assessee, which included:
- Allocated Head Office Overheads: Rs. 1,09,56,680/-
- Backstopping Expenses Technical Support: Rs. 1,68,80,151/-
- Business Development Expenses: Rs. 64,15,569/-
- Other Residuary Project Expenses: Rs. 15,08,394/-
The assessee had voluntarily classified the allocated head office overheads under Section 44C, claiming the permissible 5% deduction of Rs. 14,50,856/- on adjusted gross total income. However, the assessee maintained that the Backstopping Technical Support Expenses and Business Development Expenses were categorically different — they represented reimbursements of salary costs paid by the Head Office to a dedicated team of employees exclusively engaged in Indian project operations, and therefore fell outside the scope of Section 44C entirely.
The Assessee's Position
The assessee contended that its Head Office had designated specific personnel — including individuals such as Jan Twarowski, Manish D Kothari, Anil Anumarlapudi, Ahmed Majdiyar, Almas Tasawar, Safi Ahmad, and others — based in the USA, whose work was entirely directed toward Indian operations. These personnel were responsible for:
- Identifying and evaluating eligible projects
- Participating in the bidding process
- Providing technical design and direction
- Supervising, coordinating, and monitoring project execution in India
The assessee characterized the reimbursement of their salary costs as direct project expenses, not administrative or executive overheads. In support, the assessee submitted detailed employee timesheets, monthly salary records, employee profiles, and other documentary evidence before the AO.
On the TDS question, the assessee argued that since the reimbursements were made strictly on a cost-to-cost basis without any markup, no income element arose or accrued in the hands of the Head Office in India. Consequently, there was no occasion to deduct tax at source under Section 195 of the Act. In the alternative, the assessee contended that the "make available" clause under Article 12 of the India-US DTAA was not satisfied, and therefore the payments could not be treated as Fees for Technical Services ("FTS") attracting withholding tax.