No Escape from Statutory Ceiling: Exclusive Expenditure by Foreign Head Offices Also Attracts Section 44C Income Tax: Supreme Court

“Attributability Is a Genus, Exclusivity Is Its Strongest Species”—Supreme Court Ends Judicial Divergence on Interpretation of Section 44C of the Income Tax Act.  In a watershed ruling on December 15, 2025, the Supreme Court in Director of Income Tax (IT)-I, Mumbai v. American Express Bank Ltd. & Oman International Bank, settled a long-standing legal controversy by holding that head office expenditure incurred by non-resident entities outside India—whether common or exclusively for Indian branches—is subject to the statutory cap under Section 44C of the Income Tax Act, 1961.

The Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan, delivering a reportable judgment, ruled in favour of the Revenue, decisively overruling earlier High Court decisions, and clarified that:

“Attributability is a genus of which exclusivity is a species. Exclusive expenditure represents the strongest form of attribution and squarely falls within clause (c) of Section 44C.”

This verdict not only overrules the Bombay High Court’s widely followed decision in Emirates Commercial Bank Ltd., but also rejects the proposition that Section 44C applies only to ‘common’ head office expenses, thereby bringing much-needed clarity for tax administration and multinational corporations operating in India through branches.

“No Carve-Out for Exclusive Expenses in the Statute—Adding Such Words Would Be Judicial Legislation”

The central issue arose from two connected appeals involving M/s. American Express Bank Ltd. and M/s. Oman International Bank, where both assessees—being foreign banking corporations—had claimed full deduction under Section 37(1) for expenses incurred by their foreign head offices exclusively for the Indian branches.

The Revenue, however, invoked Section 44C, a special provision with a non-obstante clause, which limits allowable deductions for “head office expenditure” to the lower of two figures—5% of adjusted total income or the amount attributable to Indian business.

Assessees argued that Section 44C applies only to proportionate or common expenses and not to those incurred solely for Indian operations, which must be allowed fully under Section 37.

Rejecting this argument, the Court firmly held:

“The plain language of Section 44C is unambiguous and covers any head office expenditure incurred outside India by a non-resident, regardless of whether such expenses are shared or exclusive.”

Referring to the Explanation to Section 44C, the Court emphasized that the definition is exhaustive, governed by a tripartite test:

1. Expenditure incurred outside India;
2. Must be in the nature of executive and general administration;
3. Must fall within clauses (a) to (c) or be prescribed under clause (d).

“Section 44C Is a Shield Against Inflated Deductions—It Cannot Be Circumvented by Labeling Expenses as ‘Exclusive’”

Tracing the legislative intent, the Court observed that Section 44C was introduced by the Finance Act, 1976, to curb inflated and unverifiable claims of deductions by non-residents, given the inaccessibility of foreign books of accounts to Indian tax authorities.

The Court cited the Finance Ministry’s Memorandum and the CBDT Circular No. 202 to underline the mischief Parliament intended to remedy:

“The legislative object was not to distinguish between common and exclusive expenses, but to create an objective cap to prevent inflated deductions which are otherwise difficult to verify.”

It further held that:

“If exclusive expenditure were allowed outside the ceiling, the very mischief Section 44C was enacted to cure would resurface.”

Emirates Commercial Bank Overruled; High Courts’ Understanding of Section 44C Found Legally Flawed

The Supreme Court explicitly overruled the Bombay High Court’s view in Emirates Commercial Bank Ltd., which had held that exclusive expenses incurred by foreign head offices for Indian branches fell outside the purview of Section 44C and were fully deductible under Section 37.

Dismissing the Emirates reasoning as unsupported by statutory text, the Court declared:

“There is no statutory basis for creating a distinction between common and exclusive expenditure. Accepting such a distinction would amount to judicial legislation and nullify the express language of Section 44C.”

The Court also clarified that earlier dismissals of Revenue appeals by the Supreme Court in Emirates and Deutsche Bank cases did not amount to binding precedents on this point, as those dismissals were based on Revenue’s acceptance of the High Court rulings or absence of appeal against Rupenjuli Tea Co..

“Statutory Interpretation Must Be Text-Based, Not Equity-Based—No Space for ‘Reading Down’ When Language Is Clear”

Emphasising classic canons of strict interpretation in taxation, the Court reiterated that:

“In a taxing statute, there is no equity, no intendment. Nothing is to be implied. One must look merely at what is clearly said.”

The Court rejected the respondent's argument that Section 44C should be construed narrowly in light of its object:

“Object and purpose are relevant only when statutory language is ambiguous. But where the language is clear, it must prevail.”

The ruling is significant for its rigorous restatement of interpretative discipline in tax law, ensuring that courts do not override text with perceived legislative intent.

Remand to Tribunal For Factual Verification: Tripartite Test To Be Applied

While deciding the legal issue in favour of the Revenue, the Court remanded the matters back to the Income Tax Appellate Tribunal, Mumbai, directing it to:

“Scrutinise whether the impugned expenditures actually satisfy the tripartite test laid out in the Explanation to Section 44C—namely place of incurrence, nature, and enumerated category.”

The Tribunal is required to distinguish between qualifying and non-qualifying expenditures, but must apply Section 44C ceiling where applicable.

Foreign Entities Must Brace for Stricter Limits on Indian Deductions

This decision is likely to impact all non-resident entities operating in India through branches, particularly banks, insurance companies, and financial institutions. Expenses claimed by foreign head offices—whether exclusive or common—will now universally be subject to Section 44C ceilings, unless they fall outside the definition of ‘head office expenditure’ entirely.

The ruling also serves as a clear message to High Courts and Tribunals to avoid judicially carving out exceptions not supported by statutory language.

SC Imposes Uniform Rule on Head Office Deductions to Safeguard Indian Tax Base

The Supreme Court has unequivocally ruled that Section 44C applies across the board to all qualifying head office expenses, regardless of whether such expenses are shared across jurisdictions or incurred solely for Indian operations.

This judgment, by closing interpretive loopholes and reasserting fiscal discipline, is expected to enhance consistency in international tax litigation, and reinforce the integrity of India’s taxing rights under domestic law.

Date of Decision: 15 December 2025