Income Tax Appellate Tribunal (ITAT) has ruled that foreign companies can claim tax deduction on expenses incurred in setting up a project office in India even if the mandatory approval from the Reserve Bank of India comes subsequently.

The ruling was issued in the case of Stork Engineers & Contractors of the Netherlands, which was awarded a contract by IOC in February 1998. Work on the engineering, procurement and construction project began in March 1998, but RBIs approval came only in June that year.

The company, subsequently claimed deduction on expenditure incurred before RBI approval. According to the Foreign Exchange Management Act (Fema), a foreign company can set up an office to execute a project in India, only after RBIs approval.

The I-T department was of the view that since the expenditure was incurred before the setting up of the project office in India (technically the office is set up after RBI approval), it (the expenditure) was not an allowable deduction.

However, the appellate tribunal rejected this argument. Its beyond comprehension how expenditure incurred on the project itself can be disallowed on the ground that it was incurred prior to the setting up of the project office. When computing the income of the project as a whole, including that part which relates to the period before setting up of the project office, there can be no question of not allowing such expenditure, which relates to the period prior to setting up of the project, ITAT observed in its order. If the expenditure is identifiable, it has to be allowed as a deduction from the total project value for computing the income. The matching concept requires that revenue has to be matched with the costs.