Foreign firms can't claim full head office expense deduction in India: SC

The Supreme Court has held that deductions claimed by foreign banks for head office expenses related to their Indian operations are subject to the restriction prescribed under Section 44C of the Income Tax Act, 1961, and cannot be claimed in full.

 

A Bench of Justices BV Nagarathna and Augustine George Masih on Monday ruled in favour of the Revenue in the case of Director of Income Tax (International Taxation) vs American Express Bank Limited, setting aside earlier findings of the Income Tax Appellate Tribunal (ITAT) and the High Court that had favoured the assessee. The Court clarified that the expenditure incurred by a foreign bank’s head office in connection with the operations of its Indian branch must comply with the ceiling imposed under Section 44C, which governs the deduction of head office administrative costs for non-resident entities. The provision limits such deductions to the lower of 5 per cent of adjusted total income or the actual amount of expenditure.

 

 

“Thus, the question of law formulated by us is squarely answered in favour of the Revenue. We hold that Section 44C applies to ‘head office expenditure’ regardless of whether it is common expenditure or expenditure incurred exclusively for the Indian branches,” the Bench said.

 

The judgment resolves a long-standing question of law on whether such expenses could alternatively be claimed under Section 37(1), which allows deductions for business expenditures incurred wholly and exclusively for business purposes. The apex court concluded that Section 44C is a specific provision that overrides the general deduction rule under Section 37(1).

 

Tax experts said the ruling brings finality to the treatment of inter-office expenses for foreign banks and other multinational enterprises with Indian branches.

 

“The Supreme Court’s ruling would provide absolute clarity on the interpretation of Section 44C by confirming that head office expenses incurred outside India are subject to the statutory limitation, irrespective of whether they are shared across group entities or incurred solely for Indian operations. For years, many foreign banks and non-resident enterprises had adopted the view that costs exclusively relating to India, though incurred overseas, should escape the restriction under Section 44C and are fully deductible under Section 37,” said Manish Garg, lead transfer pricing and litigation of tax firm AKM Global.

 

He said the Court has now put an end to this debate by holding that once an expense falls within the definition of ‘head office expenditure’, its allowability is automatically governed by the statutory cap, being the lower of the actual attributable amount or 5 per cent of adjusted total income, overriding the general deduction provisions.

 

“This ruling is particularly significant as conflicting appellate decisions had kept the issue alive for decades, adding to prolonged uncertainty and litigation,” he said.

 

The dispute arose from deductions claimed by American Express Bank for expenses incurred by its head office outside India, allocated to support its Indian branch operations. The Assessing Officer restricted the deduction based on Section 44C, but the ITAT and Bombay High Court later allowed the bank to claim such expenditure under the more general provision of Section 37(1). The Revenue challenged these decisions before the Supreme Court, arguing that Section 44C, introduced to prevent excessive allocation of global expenses to Indian operations, provides a complete code for such deductions.