Supreme Court rules on quantum limitation for non-resident’s HO expenses exclusively incurred for Indian operations

This Tax Alert summarizes a recent decision of the Supreme Court ^[1] (SC) (two-judge bench) in the case of DCIT (IT) v. M/s American Express Bank Ltd. ^[2] (Taxpayer), wherein the SC examined whether head office (HO) expenditure incurred by a non-resident (NR) taxpayer exclusively for its Indian branch is subject to the statutory ceiling prescribed under Section (S.) 44C of the Income-tax Act, 1961 ^[3] (ITA).

The Taxpayer contended that ceiling limit of 5% of “Adjusted Total Income” (ATI) under S.44C applies only to common or shared HO expenditure allocable on proportionate basis to Indian operations, and not to expenses incurred wholly and exclusively for Indian operations. On the other hand, the Tax Authority argued that once an expense qualifies as HO expenditure of an NR taxpayer, the statutory ceiling applies mandatorily, irrespective of whether the expenditure is common or exclusive. The Taxpayer’s position was supported by earlier Bombay High Court (HC) ruling in the case of CIT v. Emirates Commercial Bank Ltd. ^[4] (Emirates Commercial Bank ruling). 

Overruling the Emirates Commercial Bank ruling, the SC ruled in favor of the Tax Authority and held that S.44C applies equally to both common and exclusive HO expenditure. Applying the principle of strict interpretation and mischief rule, the SC held that the language of S.44C is clear, plain and unambiguous, and does not carve out any exception for expenditure incurred exclusively for Indian branches. The SC rejected the distinction sought to be made by the Taxpayer between “common” and “exclusive” HO expenditure, holding that exclusivity is merely a species of attribution and therefore, falls within the scope of S.44C.  It also held that the Taxpayer’s view was contrary to the legislative intent of introducing quantum limitation on HO expenses to address the concerns of administrative difficulty of verification of HO expenses and inflated claims by some foreign entities. It also held that the earlier two judge bench SC ruling ^[5] which dismissed Tax Authority’s appeal against Emirates Commercial Bank ruling did not lay down the principle of law that exclusive expenditure cannot be brought within the ambit of quantum limitation.

However, the SC rejected the Tax Authority’s broader interpretation of definition of HO expenditure and held that S.44C is confined to HO expenditure in the nature of Executive General and Administrative (EGA) expenditure as specifically enumerated in the definition and does not extend to all expenditure that may generally be characterized as EGA in nature. Accordingly, the SC remanded the matter back to the Income Tax Appellate Tribunal (Tribunal) for fresh factual examination whether the disputed expenditure satisfy the tripartite tests of (a) incurred outside India (b) falling within broad genus of EGA and (c) also falling within specific nature enumerated in the definition.

^{[1] The Apex Court of India
[2] [2025] 181 taxmann.com 433 (SC)
[3] Income-tax Act 1961 r.w. Income-tax Rules, 1962
[4] [2003] (262 ITR 55) (Bom)
[5] Civil Appeal No. 1527 of 2006}