Salaries paid by foreign companies to their employees are deemed to be treated as deductible expenses in case the company is taxed on presumptive basis under section 44D read with Section 115A of the Income Tax Act. This was held by the Authority for Advance Rulings (AAR) while deciding an application made by a foreign company DHV Consultants BV. The applicant sent its employees from Netherlands to India to work on various projects and they were paid their salaries in Netherlands. The applicant sought an advance ruling from the AAR on the issue of applicability of sub-clause (c) of clause 2 of Article 15 of the DTAA between India and Netherlands, which grants exemption to employees of a foreign company from payment of tax if the remuneration is borne by the permanent establishment or the fixed base of the foreign company in India.

The AAR did not agree with the proposition of the applicant that the salary paid by it to its employees should not be treated as deductible expenses merely because the assessment is made on presumptive basis. It held that that though the sections outline a statutory basis for assessment, what is being assessed is ‘profits of the business’, an expression which has to be understood in the commercial sense. The AAR held that in the computation of profits, all proper outgoings have to be allowed as deductions to the extent permitted under the Income Tax Act. Salaries paid to employees and indeed all revenue expenses incurred for running the permanent establishment will have to be taken into account in determining its profits in India and in the scheme of sections 44D and 115A, expenses would be deemed to have been treated as deductible.

While interpreting the provisions of section 44D and 115A, the AAR relied on the decision of Supreme Court of India in K.P. Varghese v. ITO (AIR 1981 SC 1922) and held that section 44D and section 115A cannot be read as treating gross receipts of fees for technical services taxable without allowing deduction on account of expenses incurred for earning the same as income, as defined under section 2(24) of the Act.