Head Office Expenditure of Non-Resident Companies in Relation to Indian Business Subject to the Deduction Cap Prescribed u/s 44C: Supreme Court

Head Office Expenditure of Non-Resident Companies in Relation to Indian Business Subject to the Deduction Cap Prescribed under Section 44C: Supreme Court

REPORTABLE

DIRECTOR OF INCOME TAX (IT)-I, MUMBAI

VERSUS

M/S. AMERICAN EXPRESS BANK LTD. 

CIVIL APPEAL NO. 8291 OF 2015

WITH

CIVIL APPEAL NO. 4451 OF 2016

DATE OF JUDGMENT- 15.12.2025

BENCH-Justice J.B. Pardiwala and Justice K.V. Viswanathan

In the matter, a bench comprising of Justice JB Pardiwala and Justice KV Viswanathan allowed the Revenue’s Appeal and set aside the Decision of Bombay High Court which upheld that the grant of full deduction for “Head Office Expenditure” incurred by the non-resident assesses outside India in relation to their business operation conducted in India.

BRIEF FACTS-

Two non resident banks—American Express Bank Ltd. and Oman International Bank—claimed deductions for expenses incurred by their foreign head offices exclusively for their Indian operations, and sought full deduction under Section 37(1) instead of being subjected to the statutory ceiling under Section 44C.

(i) Civil Appeal No. 8291 of 2015

The respondent- assessee (M/s American Express Bank) claimed deductions for the following expenses under Section 37(1) of the Act, 1961: (i) INR 6,39,13,217 incurred for solicitation of deposits from Non-Resident Indians; and (ii) INR 13,50,87,275 incurred at the head office directly in relation to the Indian branches.

The Assessing officer through its Assessment order dated 08.02.2000 limited the deduction to 5% of the gross total income by applying Section 44C of the Act, 1961, having regard to the view taken by the Income Tax Appellate Tribunal in the respondent’s own case for AY 1987-88. The decision of the Assessing Officer was also based on the following reasons: 

• Section 44C is a non-obstante provision that begins with the words “notwithstanding anything to the contrary contained in Section 28 to 43A,” and therefore, the head office expenses allowable to the respondent assessee are subject to the limits set out under Section 44C.
• The purpose of inserting Section 44C was to address the difficulties encountered in scrutinising the books of account maintained outside India. Therefore, the assessee could not have claimed that the expenses incurred outside India should have been allowed beyond the ceiling prescribed under Section 44C. If such a plea were permitted, Section 44C would become redundant and otiose.
• The definition of head office expenditure is clear and the same includes all kinds of expenses of any office outside India.

Aggrieved by the aforesaid order of the Assessing Officer, the respondent filed an appeal before the Commissioner of Income Tax (Appeals) VII, Mumbai. The Commissioner vide Order dated 26.09.2000 affirmed the decision of the Assessing Officer. Thereafter, Income tax Appellate Tribunal, Mumbai allowed the appeal of the respondent relying upon the Bombay High Court’s decision in Commissioner of Income Tax v. Emirates Commercial Bank Ltd., reported in 2003 SCC OnLine Bom 1280. The appellant challenged the order passed by the Tribunal before the Bombay High Court. As a result, the High Court, by way of its impugned order dismissed the Revenue’s appeal.

(ii) Civil Appeal No. 4451 of 2016

The Respondent-assessee claimed deductions of INR 21,63,436 towards expenses specifically incurred by the head office for the Indian branches. The assessing officer disagreed with the explanation offered by the respondent and held that expenses fell within the purview of section 44C and bound by the ceiling limit set thereunder. The Commissioner allowed the respondent’s appeal by relying on its previous years’ decisions for AY 2001-2002 and 2002-2003, respectively, where an identical question was decided in favour of the respondent, consistent with the Bombay High Court’s decision in Emirates Commercial Bank (supra). The Bombay High Court also ruled against the Revenue on the aforementioned issue. 

ISSUE FOR CONSIDERATION BEFORE 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 Act, 1961, thereby limiting the permissible deduction to the statutory ceiling specified therein?

RELEVANT PROVISIONS-

The relevant portion of Section 37 of the Act, 1961, reads as follows:
     “37. General. (1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession” […]”
The relevant portion of Section 44C of the Act, 1961, reads as follows:
     “44C. Deduction of head office expenditure in the case of non-residents. Notwithstanding anything to the contrary contained in Sections 28 to 43-A, in the case of an assessee, being a non-resident, no allowance shall be made, in computing the income chargeable under the head “Profits and gains of business or profession”, in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount computed as hereunder, namely:
             (a) an amount equal to five per cent of the adjusted total income; or (b) [* * *] (c) the amount of so much of the   expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the assessee in India: whichever is the least: Provided that in a case where the adjusted total income of the assessee is a loss, the amount under clause (a) shall be computed at the rate of five per cent of the average adjusted total income of the assessee. Explanation – For the purposes of this section,—
        (b) (iv) “head office expenditure” means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of— (a)rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession; (b) 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; (c) travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and (d) such other matters connected with execution and general administration as may be prescribed.”

JUDGEMENT-

The Court held that irrespective of whether the expenditure was ‘common’ or ‘exclusive’, the moment it is incurred by a non-resident assessee outside India and falls within the specific nature described in the Explanation, then Section 44C would come into play and become applicable. At this juncture, it is essential to consider and evaluate the respondents’ contention that an additional condition must be fulfilled for Section 44C to apply.
The summary of the legal position emerging from the aforementioned analysis is as follows:

1. Section 44C would apply only when the two primary conditions are met: the assessee is a non-resident and has incurred expenditure in the nature of head office expenditure.
2. The definition of ‘head office expenditure’ in the Explanation keeps in mind two factors: the nature of the expense (executive and general administration) and its geographic location (incurred outside India). It is entirely irrelevant whether such expenditure is common or exclusive.
3. clause (c) mandates computation on an actual basis, and the phrase “attributable to” as present in clause (c) is wide enough to encompass both the shared expenses allocated to India branches and exclusive expenses incurred for India branches.