The Supreme Court has ruled that Section 44C applies to all head office expenditure of non-residents, whether common or exclusive. The judgment enforces the statutory deduction cap and blocks attempts to bypass it under Section 37.
Thank you for reading this post, don't forget to subscribe!
NEW DELHI: In a landmark tax law judgment delivered on 15 December 2025, the Supreme Court of India clarified the scope of Section 44C of the Income-tax Act, 1961, specifically whether exclusive head-office expenditure could be excluded from the statutory ceiling on deductions for non-resident entities.
This decision resolves a long-standing dispute between the Director of Income Tax (Mumbai) and American Express Bank Ltd. and has significant implications for multinational enterprises operating in India. The judgment settles a controversy on whether exclusive head office expenses incurred outside India by non-resident entities can be claimed without applying the statutory ceiling prescribed under Section 44C.
This decision has major implications for foreign banks, multinational companies, and non-resident taxpayers operating in India.
ALSO READ: Income Tax Exemption Denied for Same-Sex Couples: Bombay High Court
Background of the Case
American Express Bank Ltd., a non-resident banking company, was carrying on business in India through its branches. For the relevant assessment year, the bank claimed deductions for head office expenses allegedly incurred exclusively for Indian operations.
The Assessing Officer restricted the deduction by applying Section 44C, which imposes a cap on allowable head office expenditure. However, the Income Tax Appellate Tribunal and later the High Court allowed the bank’s claim, holding that exclusive head office expenses fall outside the restriction of Section 44C.
Aggrieved by this interpretation, the Revenue approached the Supreme Court.
Submissions on Behalf of the Parties
Appellant
The appellant contended that Section 44C applies whenever the assessee is a non-resident and the expenditure claimed falls within the wide definition of “head office expenditure”. The provision imposes a mandatory ceiling, limiting deduction to the lower of five percent of the adjusted total income or the expenditure attributable to an Indian business.
This cap operates absolutely, irrespective of whether the actual expenditure is higher. Section 44C was introduced to prevent inflated and unverifiable claims of foreign head office expenses and to replace subjective allocation with an objective statutory limit. Owing to its non-obstante clause, Section 44C overrides Section 37, and once an expense qualifies as head office expenditure, it must be dealt with only under Section 44C.
Even expenditure claimed to be exclusively for Indian operations remains subject to the statutory cap. Reliance on Emirates Commercial Bank and Rupenjuli Tea was stated to be misplaced, as both decisions turned on distinct facts not applicable to the present case.
Respondents
The respondents argued that business income is computed under Sections 30 to 43D, and Section 37(1) allows deduction of all expenditure incurred wholly and exclusively for business, regardless of where it is incurred. This position is reinforced by Article 7 of the India–USA DTAA, which permits the deduction of expenses incurred outside India for a permanent establishment, subject to domestic law.
Section 44C, according to the respondents, does not grant deductions but merely restricts proportionate claims of common head office expenses. Expenditure incurred exclusively for Indian operations does not fall within Section 44C and is fully deductible under Section 37. This distinction has been recognised in Rupenjuli Tea, Emirates Commercial Bank, and approved by this Court in subsequent decisions.
Since the authorities accepted that the expenses were incurred solely for Indian operations, the statutory ceiling under Section 44C was inapplicable, and the appeals deserved dismissal.
ALSO READ: BREAKING: Supreme Court to Hear Challenge Against Sonam Wangchuk’s NSA Detention on Jan 7
Legal Issue Before the Court
The primary question before the Supreme Court was:
Whether Section 44C applies only to common head office expenses or also covers exclusive head office expenditure incurred outside India for Indian operations?
Supreme Court’s Reasoning
The Supreme Court adopted a purposive interpretation of Section 44C and rejected the distinction between “common” and “exclusive” head office expenditure.
Interpretation Principles
The Court began by emphasizing general principles of statutory interpretation: clear legislative intent must be upheld, and tax provisions should be interpreted in light of their purpose.
Scope of Section 44C
The apex court held that Section 44C applies to all head-office expenditures when calculating Indian taxable income of a non-resident, regardless of whether the expense is common or exclusive.
- Legislative Purpose: The section was meant to prevent excessive claims for deductions where verifiable documentation may not exist because accounts are maintained abroad.
- No Exemption for Exclusive Expenses: Even if an expense is exclusively incurred for Indian operations, it must still adhere to the statutory limit under Section 44C.
The Court noted that allowing exclusive head-office deductions in full would defeat the statutory ceiling and give rise to potential manipulation.
Application to the Present Case
After interpreting Section 44C in context, the Court agreed with the revenue’s position that the deductions claimed by American Express and Oman International Bank exceeded the permissible statutory limit and therefore could not be allowed in full.
Key Observations:
- The language of Section 44C does not carve out any exception for exclusive expenses.
- Allowing full deduction of exclusive head office expenditure would defeat the very objective of introducing a statutory cap.
- The legislative intent was to simplify assessments and prevent manipulation, not to create categories of expenses beyond the ceiling.
- Once an expense qualifies as “head office expenditure”, it must necessarily be governed by Section 44C.
The Court emphasized that judicial interpretation cannot add exceptions where the statute is clear.
The Supreme Court set aside the decisions of the High Court and the Tribunal and ruled in favour of the Revenue.
The Court held that all head office expenditure of a non-resident assessee, whether common or claimed to be exclusively incurred for Indian operations, is governed by Section 44C of the Income-tax Act. The statutory ceiling prescribed under the provision applies uniformly, and the deduction cannot be enlarged by classifying such expenditure as exclusive. Consequently, non-resident assessees are not entitled to bypass the mandatory cap by invoking Section 37.
Relevant Provisions
Section 37
Section 37(1) of the Income-tax Act, 1961 permits deduction of any expenditure laid out wholly and exclusively for business or profession, provided it is neither capital nor personal in nature and does not fall within Sections 30 to 36. In contrast, Section 44C is a special provision applicable to non-resident assessees, which overrides Sections 28 to 43A and restricts the deduction of head office expenditure.
Section 44C
Under Section 44C, deduction is limited to the lower of five percent of the adjusted total income or the portion of head office expenditure attributable to Indian business, with a separate mechanism where the assessee has a loss. The provision defines “head office expenditure” broadly to include executive and general administrative expenses incurred outside India, such as rent, salaries, travel, and other related administrative costs.
Case Title:
DIRECTOR OF INCOME TAX (IT)-I, MUMBAI VERSUS M/S. AMERICAN EXPRESS BANK LTD
CIVIL APPEAL NO. 8291 OF 2015
READ JUDGMENT
Click Here to Read Our Reports on Income Tax
