Foreign Company’s Head Office Expenses For Indian Branches Subject to S. 44C Even if Incurred Exclusively: Supreme Court [Read Judgment]

In a recent ruling, the Supreme Court held that Section 44C of theIncome Tax Act, 1961 applies to head office expenditure incurred by a foreign company even if such expenditure is incurred exclusively for its Indian branches, and that the statutory deduction limit under the provision cannot be avoided on this ground.

The case arose from appeals filed by the Revenue against judgments of the Bombay High Court in matters involving American Express Bank Ltd. and another foreign banking company. The assessees had claimed full deduction of certain expenses incurred by their head offices outside India, stating that these expenses were exclusively related to their Indian branch operations.

Section 44C of the Income Tax Act (For Reference)

“Notwithstanding anything to the contrary contained in sections 28 to 43A, 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) an amount equal to the average head office expenditure; or

(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.”

During assessment proceedings, the Assessing Officer treated the expenses as “head office expenditure” and applied the ceiling prescribed under Section 44C, which limits the allowable deduction. The Commissioner (Appeals) upheld this view. The Income Tax Appellate Tribunal allowed the assessees’ claims in full, relying on earlier High Court decisions which held that exclusive expenditure incurred for Indian branches was outside the scope of Section 44C.

The Revenue challenged the Tribunal’s orders before the High Court. The High Court dismissed the appeals, following its earlier rulings and holding that Section 44C applies only to common or apportioned head office expenditure and not to expenses incurred exclusively for Indian operations.

Before the Supreme Court, the Revenue argued that Section 44C is a special provision which overrides general deduction provisions and applies to all head office expenditure incurred outside India. They argued that the statute does not distinguish between common and exclusive expenditure, and that allowing full deduction of exclusive expenses would defeat the purpose of the provision.

The assessees argued that Section 44C was intended to restrict only common administrative expenses and that exclusive expenses incurred solely for Indian branches should be fully deductible under Section 37(1) of the Act.

A Bench comprising Justice Abhay S. Oka and Justice Ujjal Bhuyan observed that the language of Section 44C does not make any distinction between common and exclusive head office expenditure. The court explained that the expression “attributable to” used in the provision is wide and would include expenditure incurred exclusively for Indian branches as well. The Court pointed out that exclusive expenditure is, in fact, directly attributable to Indian operations.

The court also observed that earlier High Court decisions had proceeded on an incorrect interpretation of the provision and did not reflect the legislative intent behind Section 44C, which was enacted to place a cap on deductions of head office expenses incurred abroad.

In view of this, the Supreme Court allowed the Revenue’s appeals and held that Section 44C applies to head office expenditure of foreign companies even if such expenditure is incurred exclusively for Indian branches. The matters were remanded to the Income Tax Appellate Tribunal for fresh consideration limited to examining whether the expenses fall within the statutory definition of head office expenditure.

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