Deduction limits apply to head offices of foreign companies in India, the Supreme Court has ruled, citing section 44C of the Income Tax Act, 1961.
The ruling came in the judgment of and has put to rest the question of full deduction claims in India.
In this case, American Express Bank is a non-resident assessee for the purposes of the law as it is the Indian operations of a foreign bank. The bank had claimed deductions for solicitation of deposits from non-resident Indians and expenses by the head office for the operations of Indian branches under section 37(1) of the act.
Section 37(1) allows for certain expenses to be computed against the chargeable income of “profits and gains of a business or profession” if they have been made solely for the business.
When authorities asked how the deduction fell under section 37(1) of the act and not section 44C, the bank said section 44C presupposed a part of the expenses claimed to have been incurred outside India, but their expenses were all India-based operations.
However, the authorities disagreed and, based on the outcome in a previous assessment involving the bank, said the deductions should be limited as per section 44C.
This was challenged in the Income Tax Appellate Tribunal (ITAT) in Mumbai, which allowed the bank’s appeal. Relying on Bombay High Court’s decision in Commissioner of Income Tax v Emirates Commercial Bank Ltd (2003), the ITAT held that where the expense was found to be exclusively for the Indian branch, it would fall under section 37(1) and not be clubbed with shared head office expenses under section 44C.
The Bombay High Court upheld the decision of the ITAT.
In the Supreme Court, the main question was whether section 44C covered only “common expenditure” or included “exclusive expenditure”. This question was raised in another case before the court where the Oman International Bank was claiming travel expenses for its head office staff travelling to India for business purposes and certification fees paid to auditors under section 37(1).
The court then clubbed the same question in the two cases and decided on both.
The tax authorities argued before the court that section 44C was enacted to address the specific mischief of foreign companies inflating their Indian enterprise’s numbers by including data associated with foreign work, the books of which were not accessible as they were maintained outside India.
They also argued that to accept the bank’s argument would reintroduce the mischief that section 44C intended to prevent.
The bank argued that it was important to distinguish between “expenditure attributable to business in India” and “expenditure exclusively incurred for business in India”, with the former referring to business itself and the latter on carrying out business operations in India. They also argued that the distinction between “attributable expenditure” and “exclusive expenditure” established in the Emirates case was in their favour.
The court ruling observed that “it does not matter whether the expense was a common expense or an expense exclusively for the Indian branch, so long as the expense incurred is for the business or profession. The text provides no indication that the expenditure must be of a common or shared nature”.
The court added that “irrespective of whether the expenditure was ‘common’ or ‘exclusive’, the moment it was incurred by a non-resident assessee outside India and falls within the specific nature described in the Explanation, then section 44C would come into play and become applicable”.
The court also held that the view of the Bombay High Court in the Emirates case on the applicability of section 44C was incorrect.
