As per section 44C of Income Tax Act ,deduction allowed for head office expenditure incurred outside India by NRIs (attributable to the business or profession being carried on in India) is allowable, but restricted to the following ceiling –

a)     An amount equal to 5 % of the adjusted total income , or

 

b)    Actual head office expenditure attributable to the business or profession of the assessee in India.(whichever is lower).

However, if the adjusted total income of the assessee is a loss, then the amount under clause (a) shall be computed at the rate of 5 % of the Average adjusted total income of the assessee.

Following is the statutory meaning of :

 1.     Head office expenditure – It refers to the executive and general administration expenditure being incurred by the assessee outsideIndia , including the expenditure of –

• Rent , rates , taxes , repairs of any premises outsideIndiafor business purpose
• Salary, wages annuity , pension , fees , bonus gratuity , perquisites or profits in lieu or in addition to salary ,paid or allowed to any employee engaged in managing the affairs of , any office outsideIndia
• Traveling by any employee or any other person employed in , or  engaged in managing the affairs of , any office outside India
• Such other matters connected with executive and general administration.

2.     Adjusted Total Income -  The total income computed before allowing any deduction or providing any unabsorbed depreciation or any brought forward losses .

3.     Average Adjusted Total Income – It essentially includes :

a)     In a case where the total income of an assessee is assessable for each of the three assessment years immediately preceding the relevant assessment year

1/3^rd of the aggregate amount of the adjusted total income

b)    In case where the total income of the assessee is assessable only for two of the aforesaid three assessment years

½ of the aggregate amount of the adjusted total income

c)     In a case where the adusted total income of the assessee is assessable only for one of the aforesaid three assessment years

The amount of the adjusted total income

(in respect of the previous year relevant to the highlighted period respectively)