Legal News

Foreign firms can't claim full deduction for head of- fice expenses on Indian biz: SC

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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 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 nonresident 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 longstanding 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 interoffice expenses for foreign banks and other multinational enterprises with Indian branches.

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