The Supreme Court on Monday held that head office expenditure incurred by non-resident banks in connection with their Indian branch operations is subject to restrictions contained in Section 44C of the Income Tax Act.
If any foreign company operating in India incurs any expenses outside India but that is also related to Indian business, Section 44C allows the deduction for that expense, but it is subject to the restriction provided in the provision. The restriction limits the expense to the tune of 5% of adjusted total income of the Indian business, it said.
This decision will have major implications for foreign banks, multinational companies, and non-resident taxpayers operating in India.
Ruling in favour of revenue on the question of law, a bench led by Justice JB Pardiwala held that Section 44C applies to 'head office expenditure' regardless of whether it is common expenditure or expenditure incurred exclusively for the Indian branches.
The apex court clarified that once an expense qualifies as 'head office expenditure' under the Act, its deductibility is mandatorily restricted to the lower of actual attributable expenditure or 5% of adjusted total income.
Once the conditions are met, "the operative part of Section 44C gets triggered. Consequently, the allowable deduction is restricted to the least of the two amounts-an amount equal to 5% of the adjusted total income or the amount of head office expenditure specifically attributable to the business or profession of the assessee in India", it said.
Many foreign banks and other non-resident companies operating in India through branches have been taking a position that the expenditure incurred outside India by head office exclusively for Indian operations is not subject to the restriction mentioned in Section 44C.
The judges rejected the stand of the banks that exclusive expenditure falls outside the purview of this section, holding that Section 44C does not create a distinction between common and exclusive head office expenditure.
Welcoming the judgment, Amit Maheshwari, tax partner at tax and consulting firm AKM Global, said the "landmark" SC ruling "settles a long-standing controversy on the scope of Section 44C by amicably holding that all head office expenditure incurred outside India whether 'common' or 'exclusive' to Indian operations falls within the statutory cap".
"The judgment would bring much needed clarity as this issue has been subject of litigation since long and divergent views of various tribunals have also added to the backlog of cases at the appeal level," he said.
The bench said "The statutory definition is broad and inclusive, containing no indication that 'exclusive expenditure' is to be excluded from its ambit. Furthermore, the term 'attributable' in clause (c) does not create a statutory distinction between 'common' and 'exclusive' expenditure".
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