Summary
| Category | Data |
|---|---|
| Court | Supreme Court of India |
| Case Number | C.A. No.-008291-008291 – 2015 |
| Diary Number | 31487/2015 |
| Judge Name | HON’BLE MR. JUSTICE J.B. PARDIWALA |
| Bench | HON’BLE MR. JUSTICE J.B. PARDIWALA & HON’BLE MR. JUSTICE K.V. VISWANATHAN |
| Precedent Value | Binding authority |
| Overrules / Affirms | Overrules the Bombay High Court’s decision in Commissioner of Income Tax v. Emirates Commercial Bank Ltd. (2003 SCC OnLine Bom 1280) |
| Type of Law | Tax law (Income Tax Act, 1961) |
| Questions of Law | Whether expenditure incurred by the head office of a non-resident assessee exclusively for its Indian branches falls within the ambit of Section 44C of the Income Tax Act, 1961, thereby limiting the permissible deduction to the statutory ceiling specified? |
| Ratio Decidendi |
The Court held Section 44C, being a non-obstante provision, applies to all head-office expenditure incurred outside India that (i) is in the nature of executive and general administration and (ii) falls within the specific categories in the Explanation. It rejected any carve-out for “exclusive” expenses, since such expenses are inherently “attributable” to Indian operations and must therefore be subject to the statutory cap (lower of 5 % of adjusted total income or actual attributable expenditure). |
| Judgments Relied Upon |
|
| Logic / Jurisprudence / Authorities |
|
| Facts as Summarised by the Court |
Two non-resident banks (American Express Bank and Oman International Bank) claimed full deduction of head-office expenses incurred abroad exclusively for Indian branches. The Assessing Officer applied the Section 44C ceiling, but ITAT and Bombay HC allowed full deductions relying on Emirates Commercial Bank. Revenue appealed to the Supreme Court on whether “exclusive” head-office expenses fall outside Section 44C. |
Practical Impact
| Category | Impact |
|---|---|
| Binding On | All subordinate courts |
| Persuasive For | High Courts |
| Overrules | CIT v. Emirates Commercial Bank Ltd. (2003 SCC OnLine Bom 1280) |
| Distinguishes | Rupenjuli Tea Co. Ltd v. CIT (1989 SCC OnLine Cal 410) (on facts of overseas business) |
| Follows | CIT v. Kasturi & Sons Ltd. (1999 3 SCC 346) (strict interpretation of taxing statutes) |
What’s New / What Lawyers Should Note
- Exclusive head-office expenses incurred abroad for Indian branches are fully subject to the Section 44C ceiling; proof of exclusivity does not exempt them.
- “Head-office expenditure” under Section 44C requires (i) expenditure incurred outside India; (ii) in the nature of executive/general administration; and (iii) falling within clauses (a)–(c) or prescribed under clause (d).
- The term “attributable” is broad and includes both common and exclusive expenses.
- Parties cannot circumvent the 5 % statutory cap by labeling expenses as exclusively for India.
- On remand, tribunals must apply this tripartite test to verify which expenses qualify under Section 44C.
Summary of Legal Reasoning
- Taxing statutes demand strict construction; clear words admit no implied carve-outs.
- Section 44C, being non-obstante, overrides Sections 28–43A for head-office expenditure claimed by non-residents.
- Definition of “head office expenditure” is exhaustive: incurred abroad + executive/general administration + specified categories (rent, salaries, travel, etc. or prescribed).
- Clause (c) (“…expenditure…attributable to business in India”) unambiguously covers exclusive expenses as the strongest form of attribution.
- Legislative history confirms the mischief of inflated claims, not an intent to exclude exclusive expenses.
- Precedents (Rupenjuli Tea, Deutsche Bank, Emirates Bank) are distinguishable or overruled where they carved out exclusive expenses without statutory basis.
Arguments by the Parties
Petitioner
- Section 44C’s non-obstante clause supersedes Section 37; its broad Definition covers all head-office expenditure incurred abroad.
- Exclusive expenses are inherently “attributable” and must follow the statutory ceiling.
- Reliance on Emirates Bank and Rupenjuli Tea is misplaced on their facts or reasoning.
- Legislative intent was to prevent inflated offshore administrative claims, not to exempt any head-office costs.
Respondent
- Section 37(1) allows full deduction of expenses incurred exclusively for Indian branches.
- Clause (c) of Section 44C applies only to common/shared head-office expenditure; exclusive expenses escape the cap.
- Bombay and Calcutta High Courts have recognized this distinction in Emirates Bank and Rupenjuli Tea.
- DTAA Article 7(3) requires deductions for overseas costs but leaves room to follow domestic law limits.
Factual Background
M/s American Express Bank (AY 1997-98) and M/s Oman International Bank (AY 2003-04), both non-resident banks, claimed full deductions for head-office expenses incurred abroad exclusively for their Indian branches. The Assessing Officers applied the Section 44C cap; the Income Tax Appellate Tribunal and Bombay High Court allowed full deductions following Emirates Commercial Bank. The Revenue appealed to the Supreme Court on whether “exclusive” head-office expenses fall outside Section 44C’s ambit.
Statutory Analysis
- Section 37(1): allows any expenditure “wholly and exclusively” for business.
- Section 44C (non-obstante): limits head-office expenditure of non-residents to the lesser of (a) 5 % of adjusted total income or (c) actual expenditure “attributable to” Indian business.
- Explanation defines “head-office expenditure” as executive/general administration incurred abroad, including rent, salaries, travel, and other prescribed matters.
- No textual support for excluding “exclusive” expenses; “attributable” is wide.
Alert Indicators
- 🚨 Breaking Precedent – overrules Bombay HC’s exclusive-expense carve-out
- ✔ Precedent Followed – strict construction of taxing statutes (CIT v. Kasturi & Sons Ltd.)