Case: DIT (IT)-I, Mumbai v. American Express Bank Ltd. (with CIT v. Oman International Bank)
Citation: 2025 INSC 1431
The Supreme Court has clarified the scope of Section 44C of the Income-tax Act, 1961, ruling that foreign head‑office expenses of non-resident banks—whether common or incurred exclusively for Indian operations—are subject to the statutory ceiling.
Background
American Express Bank and Oman International Bank, both non-resident banks with branches in India, sought deductions under Section 37(1) for expenses incurred at their overseas head offices exclusively for Indian branch operations (e.g., NRI deposit solicitation, travel, audits, and certifications).
Assessing Officers capped these deductions under Section 44C at 5% of adjusted total income, following previous ITAT rulings and CBDT guidance, treating them as “head office expenditure.”
While the Commissioners (Appeals), ITAT, and Bombay High Court allowed full deductions for “exclusive” India-related expenses, the Revenue challenged this interpretation.
Core Legal Issue
Does Section 44C apply only to common, allocable head-office expenses, or also to expenses incurred abroad exclusively for Indian operations? In other words, can non-resident banks bypass the 5% cap by classifying expenses as “India-specific”?
Supreme Court’s Analysis
1. Statutory Text Controls
The Court emphasized that tax statutes must be strictly construed. Words like “common” or “exclusive” cannot be read into Section 44C unless explicitly provided by Parliament.
2. Definition of Head Office Expenditure
The Court examined the Explanation to Section 44C:
- Covers executive and general administration expenses incurred outside India, including items listed in clauses (a)–(c) and any prescribed under clause (d).
- There is no distinction between expenses shared across multiple branches and those incurred exclusively for Indian operations.
- “Attributable to” Indian business naturally includes both shared and exclusive costs.
3. Purpose and Legislative Intent
Section 44C was introduced to prevent inflated or unverifiable head-office claims by non-resident entities. Allowing exclusive expenses to escape the ceiling would defeat the purpose and resurrect verification difficulties.
4. Treatment of Prior Precedents
- Rupenjuli Tea (Calcutta HC) was distinguished: there, foreign offices had no substantive business, making the case inapplicable.
- Emirates Commercial Bank (Bombay HC) was overruled to the extent it created a “common vs exclusive” exception.
Supreme Court’s Holding
- Section 44C applies to all head-office expenditure, whether common or exclusively incurred for Indian operations.
- Section 37(1) cannot override this statutory cap. Deduction is limited to 5% of adjusted total income or the amount attributable to Indian operations, whichever is lower.
- Correspondence or informal agreements cannot circumvent statutory limitations.
Remand to ITAT
The Court remanded the cases to ITAT Mumbai to examine each expense line individually, ensuring that only expenditure fitting the statutory definition of “head office expenditure” under Section 44C is subject to the cap, and non-applicable expenses can still be claimed under Section 37(1).
Practical Implications
- Non-resident banks and MNCs must consider that even India-specific administrative costs booked abroad may fall within Section 44C.
- The new focus in disputes will be characterization of expenses, not whether they are exclusive or common.
- Section 44C’s ceiling cannot be bypassed, including under treaty provisions such as Article 7(3) of the India-US DTAA.
Conclusion
The Supreme Court’s decision closes the “exclusive expenditure” loophole, reinforcing that Section 44C imposes a hard cap on foreign head-office administrative costs of non-resident assessees, while leaving room for legitimate claims only when the expense does not meet the statutory definition.
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