Introduction
The Hon’ble Supreme Court, in Director of Income Tax (IT)-I, Mumbai v. M/s American Express Bank Ltd[1] (Civil Appeal Nos. 8291 of 2015), has authoritatively settled the long‑standing controversy regarding the scope and applicability of Section 44C of the Income-tax Act, 1961 (“the Act”).
The core issue before the Hon’ble Supreme Court was whether expenditure incurred by the head office of a non‑resident assessee exclusively for its Indian branches can be allowed in full under Section 37(1) or whether such expenditure is mandatorily subject to the restrictive ceiling prescribed under Section 44C. This decision has significant implications for foreign banks and multinational enterprises operating in India through branches or permanent establishments.
Facts
- M/s American Express Bank Ltd.(“Assessee”), is a non-resident banking company carrying on banking operations in India through its branch offices.
- For Assessment Year (AY) 1997–98, the Assessee filed its return of income declaring taxable income after claiming deduction under Section 37(1) in respect of certain expenses incurred by its overseas head office.
- The expenses claimed included expenditure incurred for solicitation of deposits from Non-Resident Indians; and expenditure incurred by the head office outside India which, according to the Assessee, was directly and exclusively relatable to the Indian branches.
- The Assessing Officer issued a show-cause notice proposing to apply Section 44C and restrict the deduction of such head office expenses to the statutory ceiling prescribed therein.
- The Assessee contended that Section 44C applied only to common or apportioned head office expenses, and not to expenditure incurred exclusively for Indian operations.
- Rejecting the Assessee’s contention, the Assessing Officer passed the assessment order applying Section 44C and restricted the allowable deduction to 5% of the adjusted total income.
- The order of the Assessing Officer was upheld by the Commissioner of Income Tax (Appeals).
- On further appeal, the Income Tax Appellate Tribunal allowed the Assessee’s claim by holding that exclusive head office expenditure incurred for Indian branches fell outside the scope of Section 44C and was allowable in full under Section 37(1).
- The Bombay High Court dismissed Revenue’s appeal by following its earlier decision in CIT v. Emirates Commercial Bank Ltd[2]
- Aggrieved by the consistent judicial view taken in favour of the Assessee, Revenue preferred appeals before the Supreme Court, raising a common question of law regarding the scope and applicability of Section 44C of the Act.
Judgements referred
- Commissioner of Income Tax v. Emirates Commercial Bank Ltd2
- Rupenjuli Tea Co. Ltd. v. Commissioner of Income Tax[3]
Assessee’s Contention
- The assessee contended, inter alia, that, Section 37(1) allows deduction of any expenditure incurred wholly and exclusively for business purposes, irrespective of whether such expenditure is incurred in India or abroad.
- Section 44C is not a charging or deduction‑granting provision but merely prescribes a method of limiting deductions in respect of common head office expenses.
- Expenditure incurred exclusively for Indian operations does not require any allocation or attribution and therefore falls outside Section 44C.
- Clause (c) of Section 44C presupposes the existence of business both in India and outside India, requiring apportionment.
- Earlier judicial precedents had consistently recognised the distinction between common and exclusive expenditure, which stood approved by higher courts.
- The assessee also placed reliance on paragraph 3 of Article 7 of the Double Taxation Avoidance Agreement (DTAA) between the Governments of India and the United States of America.
Revenue’s Contention
- The Revenue argued that Section 44C is a special provision with a non‑obstante clause overriding Sections 28 to Section 43A, including Section 37.
- The definition of “head office expenditure” under the Explanation to Section 44C is wide and covers all executive and administrative expenditure incurred outside India, without distinguishing between common or exclusive expenses.
- Once expenditure qualifies as head office expenditure and is incurred by a non‑resident, the statutory ceiling under Section 44C mandatorily applies.
- Allowing Assessee to bypass Section 44C by proving “exclusive” nexus with Indian branches would defeat the legislative intent behind introducing the provision, namely to curb inflated and unverifiable claims.
- The High Court decisions relied upon by the Assessee were either fact‑specific or incorrectly interpreted the statutory scheme.
Issues raised before the Supreme Court
Whether expenditure incurred by the head office of a non‑resident Assessee exclusively for its Indian branches falls within the ambit of Section 44C of the Income-tax Act, 1961, thereby restricting the allowable deduction to the statutory ceiling prescribed therein?
Decision of the Supreme Court
The Supreme Court answered the question in favour of the Revenue and held that:
- Section 44C applies to all head office expenditure incurred by a non-resident, provided a tripartite test is satisfied, namely: (i) the expenditure is incurred outside India; (ii) it is in the nature of executive and general administrative expenditure; and (iii) such executive and general administrative expenditure falls within the specific categories enumerated in clauses (a), (b) or (c) of the Explanation to Section 44C, or is of the nature prescribed under clause (d) thereof.
- As per the Explanation to Section 44C “head office expenses” includes expenditure incurred in respect of
- rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession
- salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India
- travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and
- such other matters connected with executive and general administration as may be prescribed.
- The Explanation to Section 44C is clear and unambiguous and focuses only on the place where the expenditure is incurred (outside India), and the nature of the expenditure (executive and general administrative).
- The statute does not recognise any distinction between common expenditure and exclusive expenditure incurred for Indian branches.
- Clause (c) of Section 44C does not exclude exclusive expenditure but merely provides one of the computational parameters, subject to the overall ceiling.
- Reading a “common vs. exclusive” distinction into the provision would amount to impermissibly adding words to the statute.
- Earlier High Court decisions to the contrary do not lay down correct law.
- A perusal of paragraph 3 of Article 7 of the DTAA shows that although expenses incurred for the Indian permanent establishment are deductible irrespective of where they are incurred, such deduction remains subject to the limitations of Indian tax law, accordingly, reliance on paragraph 3 of Article 7 is of no assistance to the assessee.
Accordingly, the Supreme Court allowed the Revenue’s appeals and held that even exclusive head office expenditure incurred for Indian branches is subject to the limitation under Section 44C. Supreme Court remanded the matter to ITAT for the limited purpose of verifying whether disputed expenditures satisfy the Tripartite test necessary to qualify as “Head office expenditure” under the explanation to Section 44C of the Act, 1961.
Conclusion
This landmark ruling conclusively clarifies the scope of Section 44C and brings certainty to the tax treatment of head office expenditure of non‑resident entities. The Supreme Court has reinforced a strict and literal interpretation of taxing statutes and underscored the overriding nature of Section 44C.
Non‑resident taxpayers operating in India must now evaluate all head office expenses incurred outside India whether common or exclusive through the lens of Section 44C and ensure compliance with the prescribed ceiling.
The decision may necessitate revisiting existing tax positions, pending litigations, and transfer pricing or cost allocation policies adopted by multinational enterprises.
[1] American Express Bank Ltd [1655-SC-2025]
[2] Emirates Commercial Bank Ltd., [2003]262ITR55(BOM)
[3] Rupenjuli Tea Co. Ltd. [1990] 186 ITR 301(CAL)
