Director Of Income Tax (It)-I, Mumbai vs. M/S. American Express Bank Ltd.

REPORTABLE
2025 INSC 1431

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 8291 OF 2015

DIRECTOR OF INCOME TAX (IT)-I, MUMBAI. …APPELLANT

VERSUS

M/S. AMERICAN EXPRESS BANK LTD. …RESPONDENT

WITH

CIVIL APPEAL NO. 4451 OF 2016


J U D G M E N T


Signature Not Verified
Digitally signed by
VISHAL ANAND
Date: 2025.12.15
15:16:08 IST
Reason:

J.B. PARDIWALA, J.

For the convenience of exposition, this judgment is divided into the
following parts:
INDEX
A. Factual Matrix ....................................................................... 2
(i) Civil Appeal No. 8291 of 2015 ........................................................ 2
(ii) Civil Appeal No. 4451 of 2016 ........................................................ 5
B. Relevant Provisions ............................................................... 8
C. Submissions on behalf of the appellant .................................. 9
D. Submissions on behalf of the respondents ........................... 14
E. Issue to be determined ........................................................ 19
F. Analysis .............................................................................. 20
(i) Basic Principles of Interpretation .................................................. 21
(ii) Interpreting Section 44C of the Act, 1961 ..................................... 28
(iii) Whether the principle of law barring exclusive expenditure under
Section 44C is approved by this Court?.............................................. 49
(iv) Application to the facts at hand ................................................ 51
G. Conclusion .......................................................................... 53








Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 1 of 55



1. Since the issues raised in the captioned appeals are the same, they
were taken up for hearing analogously and are being disposed of
by this common judgment.
2. The central issue involved in these appeals relates to the
interpretation of Section 44C of the Income Tax Act, 1961
(hereinafter referred to as “ the Act, 1961 ”), more particularly
whether it merely covers ‘common expenditure’ incurred by the
head office attributable to an assessee’s business in India or would
also include ‘exclusive expenditure’ incurred by the head office for
the Indian branches.

A. Factual Matrix



(i) Civil Appeal No. 8291 of 2015


3. M/s American Express Bank, the respondent-assessee, is a non-
resident banking company engaged in the business of providing
banking-related services. The respondent filed its income tax
return on 01.12.1997 for AY 1997-1998, declaring an income of
INR 79,45,07,110. In the said return, the respondent claimed
deductions for the following expenses under Section 37(1) of the
Act, 1961: (i) INR 6,39,13,217 incurred for solicitation of deposits
from Non-Resident Indians; and (ii) INR 13,50,87,275 incurred at
the head office directly in relation to the Indian branches.
4. The respondent vide notice dated 21.10.1999, was asked to explain
why the expenses in question should not be subjected to the ceiling
specified in Section 44C of the Act, 1961, and thus be disallowed.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 2 of 55



5. The respondent, in its reply to the notice referred to above, clarified
that the expenses in question could not have been classified as
head office expenditure for the reason that Section 44C of the Act,
1961 presupposes that at least a part of the expenditure is
attributable to the business outside India. If this presumption does
not hold true, and the entire expenditure is incurred solely for the
business in India, then clause (c) does not apply. Consequently,
Section 44C would not be applicable to such expenses.
6. The Assessing Officer, vide its Assessment Order dated 08.02.2000,
limited the deduction to 5% of the gross total income by applying
Section 44C of the Act, 1961, having regard to the view taken by
the Income Tax Appellate Tribunal in the respondent’s own case for
AY 1987-88. The decision of the Assessing Officer was also based
on the following reasons:
a) Section 44C is a non-obstante provision that begins with the
words “ notwithstanding anything to the contrary contained in
Section 28 to 43A ,” and therefore, the head office expenses
allowable to the respondent assessee are subject to the
limits set out under Section 44C.
b) The purpose of inserting Section 44C was to address the
difficulties encountered in scrutinising the books of account
maintained outside India. Therefore, the assessee could not
have claimed that the expenses incurred outside India
should have been allowed beyond the ceiling prescribed
under Section 44C. If such a plea were permitted, Section
44C would become redundant and otiose.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 3 of 55



c) The definition of head office expenditure is clear and the
same includes all kinds of expenses of any office outside
India.
7. Aggrieved by the aforesaid order of the Assessing Officer, the
respondent filed an appeal before the Commissioner of Income Tax
(Appeals) VII, Mumbai. The Commissioner vide Order dated
26.09.2000 affirmed the decision of the Assessing Officer.
8. Thereafter, the respondent filed an appeal before the Income Tax
Appellate Tribunal, Mumbai. The Income Tax Appellate Tribunal,
Mumbai, vide Order dated 08.08.2012, allowed the appeal of the
respondent by relying upon the Bombay High Court’s decision in
Commissioner of Income Tax v. Emirates Commercial Bank
Ltd. , reported in 2003 SCC OnLine Bom 1280. The relevant
observations made by the Tribunal are as follows:
“In principle, we are in full agreement with this contention that
the judgment in the case of Emirates Commercial Bank Ltd.
(supra) can operate for allowing deduction in full u/s 37(1)
where the expenditure is exclusive. In a case of allocated
expenses, the amount can be considered only u/s 44C. The
Mumbai bench of the tribunal in the case of ADIT (I.T.) Vs.
Bank of Bahrain & Kuwait (2011) 44 SOT 693 (Mum) has
canvassed similar view by holding that the exclusive expenses
incurred by the head office for Indian branch are outside the
purview of sec. 44C and only common head office expenses
are governed by this section. There can be no quarrel over this
proposition of law. But the fact of the matter is that the
expenses which are subject matter of ground nos: 1 and 2 are
exclusive and not common. It is amply borne out from the
assessment order, where the AO has reproduced the reply
filed by the assessee stating that these expenses were
exclusive. Relevant part of such contention advanced on
behalf of the assessee has been extracted verbatim in para
2.1 of this order. The AO has no where controverted this
submission. Thus, it follows that the assessee's contention of
these amounts representing exclusive head office, expenses
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 4 of 55


was accepted by the AO. Once the amount is found to be
exclusive expenditure incurred by the head office towards the
Indian branch, the same is required to be allowed in terms of
section 37(1), without clubbing it with shared head office
expenses as per sec. 44C. This, submission of the Revenue is
jettisoned as shorn of merits. Accordingly, we hold that no
adverse inference can be drawn against the assessee on this
issue and such exclusive expenses incurred by the assessee
are required to be allowed as deduction u/s 37(1) without any
reference to section 44C. These two grounds are therefore,
allowed.”
(Emphasis Supplied)
9. The appellant challenged the order passed by the Tribunal referred
to above before the Bombay High Court by way of Income Tax
Appeal No. 1294 of 2013. However, before the High Court, the
appellant’s counsel conceded that the question regarding the
application of Section 44C for the exclusive expenditure incurred
by the head office for the Indian branches had been decided against
the Revenue by a division bench of the High Court in Emirates
Commercial Bank (supra). As a result, the High Court, by way of
its impugned order dated 01.04.2015, dismissed the Revenue’s
appeal on the said issue.

10. In such circumstances referred to above, the appellant is before
this Court with the present appeal.

(ii) Civil Appeal No. 4451 of 2016


11. M/s Oman International Bank, the respondent-assessee, filed its
return of income for AY 2003-04 on 28.11.2003, declaring a loss of
INR 71,79,69,260. In the return, the respondent claimed a
deduction of INR 21,63,436 towards expenses specifically incurred
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 5 of 55


by the head office for the Indian branches. The respondent was
asked to justify such a claim for deduction.
12. The respondent vide letter dated 16.03.2006 provided the following
details with regard to the expenditure incurred by the head office
specifically for the Indian branches:

13. The respondent claimed that the travelling expenses included travel
fares, hotel charges, and other costs incurred by the head office for
staff travelling to India for various purposes, such as local advisory
board meetings, training, internal audits, staff meetings, etc.
Additionally, the certification fees were for the charges paid to
auditors for issuing certificates of expenses incurred by the head
office chargeable to the Indian branches of the bank, for the year
ending March 31, 2003.
14. The stance of the respondent was that since the expenses referred
to above were incurred specifically for the Indian branches, they
would fall outside the scope of Section 44C of the Act, 1962, and
were allowable as deductions under Section 37 of the Act, 1961. It
claimed that the deduction under Section 44C applies to common
head office expenses attributable to Indian branches.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 6 of 55



15. The Assessing Officer, vide its Order dated 20.03.2006, disagreed
with the explanation offered by the respondent and held that both
the above-mentioned expenses fell within the purview of Section
44C and thus are bound by the ceiling limit set thereunder.
16. Aggrieved by the Order of the Assessing Officer referred to above,
the respondent appealed to the Commissioner of Income Tax
(Appeals)-XXXIII, Mumbai. The Commissioner allowed the
respondent’s appeal by relying on its previous years’ decisions for
AY 2001-2002 and 2002-2003, respectively, where an identical
question was decided in favour of the respondent, consistent with
the Bombay High Court’s decision in Emirates Commercial Bank
(supra). Subsequently, the Revenue’s appeal to the Income Tax
Appellate Tribunal on the said issue also came to be dismissed
based on the decision in Emirates Commercial Bank (supra).
17. Finally, by the impugned order dated 28.07.2015, the Bombay High
Court also ruled against the Revenue on the aforementioned issue.
The pertinent extract from the impugned order states as follows:
“4.So far as question No.3 is concerned, it is agreed between
the parties that the question as arising herein stands
concluded in favour of the respondent-assessee and against
the revenue. This is so, as identical question was raised in
revenue's appeals in respect of Assessment Years 1998-99
and 1999-2000 in Income Tax Appeal Nos.1775 of 2013 and
1789 of 2013 to this Court and the same was not entertained
by. an order dated 1 July 2015. This was by following the
decision of this Court in C.I.T. v/s Emirates Commercial Bank
Ltd., reported in 262 I.T.R. 55, which covers issue in favour
of the respondent- assessee. Hence, question No.3. does not
give rise to any substantial question of law and hence not
entertained.”
18. In such circumstances referred to above, the appellant is before
this Court with the captioned appeal. In the captioned appeal, the
Revenue also raised an additional issue regarding interest received
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from the head office. However, this issue was neither pressed nor
argued before us in the captioned appeal. In such circumstances,
we have addressed ourselves to the solitary issue of ‘head office
expenditure’ under Section 44C of the Act, 1961.

B. Relevant Provisions


19. The relevant portion of Section 37 of the Act, 1961, reads as follows:
“ 37. General. (1) Any expenditure (not being expenditure of
the nature described in Sections 30 to 36 and not being in the
nature of capital expenditure or personal expenses of the
assessee), laid out or expended wholly and exclusively for
the purposes of the business or profession shall be allowed
in computing the income chargeable under the head “Profits
and gains of business or profession” [...]”
20. The relevant portion of Section 44C of the Act, 1961, reads as
follows:
“ 44C. Deduction of head o ffi ce expenditure in the case of
non-residents. Notwithstanding anything to the contrary
contained in Sections 28 to 43-A, in the case of an assessee,
being a non-resident, no allowance shall be made, in
computing the income chargeable under the head “Profits and
gains of business or profession”, in respect of so much of the
expenditure in the nature of head o ffi ce expenditure as is in
excess of the amount computed as hereunder, namely:
(a) an amount equal to five per cent of the adjusted total
income; or
(b) [ ] *
(c) the amount of so much of the expenditure in the nature
of head o ffi ce expenditure incurred by the assessee as
is attributable to the business or profession of the
assessee in India:
whichever is the least:
Provided that in a case where the adjusted total
income of the assessee is a loss, the amount under
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clause (a) shall be computed at the rate of five per cent
of the average adjusted total income of the assessee.
Explanation – For the purposes of this section,—
[…]

(iv) “head o ffi ce expenditure” means executive and general
administration expenditure incurred by the assessee outside
India, including expenditure incurred in respect of—
(a)rent, rates, taxes, repairs or insurance of any premises
outside India used for the purposes of the business or
profession;
(b) salary, wages, annuity, pension, fees, bonus,
commission, gratuity, perquisites or profits in lieu of or in
addition to salary, whether paid or allowed to any employee
or other person employed in, or managing the a ff airs of, any
o ffi ce outside India;
(c) travelling by any employee or other person employed in,
or managing the a ff airs of, any o ffi ce outside India; and
(d) such other matters connected with execution and general
administration as may be prescribed.”


C. Submissions on behalf of the appellant



21. Mr Raghavendra P Shankar, the learned Additional Solicitor
General appearing on behalf of the appellant, submitted the
following:
Statutory Scheme and Rationale for introducing Section 44C
a) Section 44C applies when two conditions are satisfied: (i) the
assessee is a non-resident, and (ii) the deduction claimed
pertains to ‘head office expenditure’ a term defined broadly
in the Explanation to Section 44C. Under Section 44C, the
allowable deduction is strictly limited to the lower of two
amounts: a fixed cap of 5% of the ‘adjusted total income’
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 9 of 55


(clause a), or the actual expenditure specifically attributable
to the Indian business (clause c). Essentially, clause (a)
serves as an absolute ceiling on claims. While clause (c)
assesses the actual expenditure incurred that is attributable
to the Indian branches, it cannot exceed the statutory limit.
Even if the verifiable expenditure is higher, the deduction is
mandatorily restricted to the 5% cap.
b) The legislative intent behind Section 44C, as clarified by the
Memorandum to the Finance Bill, 1976, and CBDT Circular
No. 202, was to address a specific mischief concerning the
taxation of non-resident entities. Parliament observed that
foreign companies with branches in India often reduced
their domestic tax liability by inflating claims for head office
administrative expenses. Since the supporting books of
account for these claims were maintained abroad, it was
essentially impossible for Indian revenue authorities to
scrutinise or verify them. Furthermore, Parliament also
recognised that dividing a common pool of global expenses
to determine what is attributable to India involves a
significant degree of subjectivity, which is largely impossible
to verify.
c) For example, if an executive is appointed to manage the
affairs of the Asia-Pacific region of the Bank and receives a
salary from the head office located outside India, it becomes
necessary to make a normative assessment of how much of
her time she spends solely in overseeing the operations of
the Indian branches. Consequently, it needs to be
determined what percentage of her salary can be claimed by
the assessee as a head office expenditure deductible when
calculating the taxable income under the Act, 1961. The
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 10 of 55


Parliament observed that these difficulties faced by the
Revenue were being exploited by some assessees to submit
inflated claims for deductions, which were often difficult for
the Revenue to verify. In this context, the simplified
mechanism under Section 44C was introduced.
d) To cure the mischief, Section 44C replaces the need for
subjective, case-by-case verification with an objective
statutory ceiling. Consequently, the amendment sets a
mandatory limit: the deduction is capped at the lesser of the
actual attributable expenditure (under clause c) or 5% of the
adjusted total income (under clause a). This mechanism
thus serves to reduce the evidentiary burden on the
assessee and also prevents or curtails inflated deductions.
Applicability of Section 44C vis-à-vis Section 37
e) Section 44C begins with a non-obstante clause
(“notwithstanding anything to the contrary...”), which
explicitly provides it with overriding legal effect over Sections
28 to 43A, including Section 37. As a result, Section 44C
functions as a special provision governing ‘head office
expenditure’ for non-residents. Since Section 37(1) is a
general provision, it only applies to head office expenditure
not explicitly covered under Section 44C. Therefore, once an
expense qualifies as ‘head office expenditure’ under the
Explanation, it must be processed strictly under Section
44C. Otherwise, the section would be rendered meaningless.
In the present appeals, the expenditure claimed by the
respondents, incurred by the head o ffi ces located outside
India, squarely falls within the said definition, being
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 11 of 55


executive and general administrative expenditure incurred
outside India.
f) The primary contention of the respondents is that Section
44C is wholly inapplicable to expenditure incurred
exclusively for Indian branches, thereby allowing them to
claim such expenses in full under Section 37(1) without
being subject to the restrictive monetary cap under Section
44C. This claim essentially requires that the definition of
‘head office expenditure’ be read down to be limited to
expenditure incurred at the head o ffi ce overseas for the
global operations as a whole (as opposed to those expenses
stated to be exclusively for or in connection with the Indian
operations). However, this interpretation runs contrary to
the plain language of the statute, which provides an
inclusive and broad definition of ‘head office expenditure’ in
the Explanation to Section 44C.
g) Even if the respondents’ assertion was accepted, that the
expenses were incurred exclusively for the Indian branch, it
would still make no difference to the operation of the law.
Since the nature of the expense squarely falls within the
statutory definition of ‘head office expenditure’, the mere
fact that it is exclusively attributable to the Indian business
only serves to situate the claim within Section 44C(c). Any
amount calculated under clause (c) is mandatorily subject
to the overall ceiling provided in clause (a). Therefore,
proving exclusivity does not liberate the expense from
Section 44C.
h) Accepting the respondents’ assertion would reintroduce the
exact mischief Section 44C was designed to prevent. The
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 12 of 55


provision was enacted specifically to eliminate the difficult
task of verifying foreign head office expenditure claims.
Allowing the respondents to bypass the statutory cap by
proving exclusivity would defeat this purpose and simply
bring back the burden of verification. Section 44C mandates
that even expenses incurred exclusively for Indian
operations remain subject to the 5% ceiling. This cap would
be rendered meaningless if unlimited deductions were
permissible under Section 37.
Reliance on the decisions in Emirates Bank and Rupenjuli Tea is
misplaced
i) The reliance on the judgment in Emirates Commercial
Bank (supra) is completely misplaced. In Emirates
Commercial Bank (supra), the decision was based on a
concurrent finding that the head office had actually
recovered the disputed expenditure from the Indian branch
by issuing a specific debit note. As a result, the Court
considered the expense as one effectively incurred by the
Indian branch itself, thus excluding it from the scope of head
office expenditure. In stark contrast, the present appeals
involve no such financial recovery or debit note transaction.
The expenditure continues to be incurred solely at the head
office level. Therefore, the ratio of Emirates Commercial
Bank (supra) is limited strictly to its particular facts and
cannot be applied to the present case.
j) Even if Emirates Commercial Bank (supra) were to be
applied, it does not establish good law as it introduces an
artificial distinction between ‘common’ and ‘exclusive’
expenditure that is entirely absent from the plain language
of Section 44C. The definition of ‘head office expenditure’
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 13 of 55


encompasses both categories without exception. Moreover,
such an interpretation renders the insertion of Section 44C
a nullity, effectively reinstating the pre-amendment position
where unlimited deductions could be claimed under Section
37.
k) Reliance on the Calcutta High Court’s decision in Rupenjuli
Tea Co. Ltd v. Commissioner Income Tax, reported in
1989 SCC OnLine Cal 410 , is also misplaced as that
decision was based on very peculiar factual circumstances.
In that case, although the assessee had a head office in
London, its entire business operations were conducted
solely in India. The Court reasoned that Section 44C
contemplates allocating expenses between Indian and
foreign businesses. Since the specific assessee had no
business operations outside India, the concept of attribution
or allocation was impossible, rendering the section
inapplicable. In stark contrast, the respondents in the
present appeals are global entities with branches across the
world. Consequently, the logic of Rupenjuli Tea (supra)
does not apply to the respondents.

22. In the circumstances referred to above, the learned counsel prayed
that, there being merit in his appeals, they be allowed.

D. Submissions on behalf of the respondents


23. Mr. Percy Pardiwala and Mr. Aniruddha A. Joshi, the learned senior
counsel appearing for the respondents, submitted the following:
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 14 of 55



a) Under Section 29 of the Act, 1961, the income chargeable
under the head “Profits and gains from business or
profession” is to be computed in accordance with the
provisions contained in Sections 30 to 43D. None of the
aforementioned sections require that, in order to qualify as
an allowable deduction, the expenditure must be incurred
in India. Respondents have claimed a deduction under
Section 37(1) of the Act, 1961, which provides that any
expenditure laid out or expended wholly and exclusively for
the purposes of business or profession, not being in the
nature of capital expenditure or personal expenditure, shall
be allowed as a deduction in computing the income
chargeable under the head “Profits and gains from business
or profession”. Therefore, it is clear that there is no
restriction under Section 37(1) of the Act that, for an
expenditure to be deductible under it, it must be incurred in
India.
b) This position is further supported by paragraph 3 of Article
7 of the Double Taxation Avoidance Agreement between the
Governments of India and the USA, which is applicable
when dealing with respondent M/s American Express Bank,
as it is an entity incorporated in the United States of
America. Paragraph 3 of Article 7 requires that, in
determining the profits of a permanent establishment,
expenses incurred for the purposes of such an
establishment shall be allowed as a deduction, whether
incurred within the State where the establishment is
situated or elsewhere. It further states that such
expenditure must be allowed in accordance with, and
subject to, the limitations provided under the local laws of
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 15 of 55


the country in which the permanent establishment is
situated, which, in this case, is India. Therefore, even under
the Double Taxation Avoidance Agreement , the expenditure
incurred by the respondent M/s American Express Bank,
for the purposes of its Indian branches, is an allowable
deduction.
c) The reliance placed by the Revenue on Section 44C of the
Act, 1961, to restrict the deduction that is otherwise
allowable under Section 37(1) of the Act, 1961, is misplaced.
Section 44C is not a provision which grants a deduction. The
deduction must be allowed in accordance with Section 37
(1).
d) For Section 44C to apply two conditions need to be satisfied:
(i) first, the expenditure in question must necessarily fall
within the definition of the head office expenditure as
defined in clause (iv) of the Explanation below Section 44C.
and (ii) secondly, by virtue of clause (c), expenditure
incurred by the assessee should be in the nature of a
‘common’ expenditure, and only a part of it should be
attributable to the business of the assessee that is carried
on in India.
e) In the present case, a part of the expenditure incurred by
the respondents will not be in the nature of the head office
expenditure but, even assuming the entirety of the
expenditure falls within the definition of head office
expenditure, the same is not attributable to the business of
the assessee in India but, is in fact exclusively incurred for
the business operations in India. It is this distinction
between ‘expenditure attributable to business in India’ and
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 16 of 55


‘expenditure exclusively incurred for business in India’ that
is crucial.
f) This distinction between ‘attributable expenditure’ and
‘exclusive expenditure’ has been recognised and applied by
the Calcutta High Court in Rupenjuli Tea (supra) and the
Bombay High Court in Emirates Commercial Bank
(supra). Further, the distinction sought to be drawn by the
appellant between the facts in the present appeals and the
decisions in Rupenjuli Tea (supra) and Emirates
Commercial Bank is without any basis.
g) The principle enunciated by the Calcutta High Court in
Rupenjuli Tea (supra) was that if the expenditure is
incurred exclusively for Indian operations, then, the
provision of Section 44C could not be invoked to disallow a
part of the expenditure so incurred. The fact that, in the case
of the assessee therein, the business was carried on only in
India, albeit the head office was situated in the UK, was not
a distinguishing factor as sought to be made out. This is
further supported by the Delhi High Court’s decision in DIT
vs. Ravva Oil (Singapore) Private Limited, reported in
2006 SCC OnLine Del 1742 .
h) The burden is on the Revenue to prove that the expenditure
was not incurred solely for Indian operations, and therefore,
the provisions of Section 44C apply. The authorities below
have accepted that the expenditure incurred by the assessee
was exclusively for Indian operations, and accordingly, it
should be allowed in its entirety without being restricted by
the limitations provided under Section 44C of the Act, 1961.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 17 of 55



i) The Revenue proceeds based on the misconception that a
deduction is allowable under Section 44C of the Act, 1961,
the moment expenditure is incurred outside India by the
head office, and therefore its allowability is subject to the
limitations outlined in that section. This interpretation does
not align with the language or the legislative intent behind
the introduction of Section 44C. As per the Memorandum
explaining the provisions of the Finance Bill, 1976, the scope
of the provision is limited to expenditure that constitutes
head office expenses, which are claimed on a proportionate
basis, because the purpose was to address difficulties
related to the deduction of such proportionate claims.
Therefore, it must be understood that expenditure incurred
outside India solely for Indian operations is not governed by
the restrictions of Section 44C.
j) To illustrate the scope of Section 44C, consider a US
corporation employing a General Counsel. If this counsel
exclusively handles legal issues for the Indian branch, their
entire salary is deductible under Section 37(1) without the
limitations of Section 44C, as it is a direct expense for India.
Conversely, if the counsel manages legal affairs globally,
including the US office and other international branches,
and only a portion of their cost is allocated to India, this
expense falls under the ‘executive and general
administration’ definition of Section 44C. In this latter
scenario, because the counsel is managing ‘any office
outside India’ rather than solely the Indian operations, the
allocated cost is subject to the statutory cap.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 18 of 55



k) The judgment of Emirates Commercial Bank (supra),
relied upon by the Bombay High Court in the impugned
orders, was the subject matter of further appeal to this
Court in CIT vs. Emirates Commercial Bank Ltd. ( Civil
Appeal No. 1527 of 2006 ) and vide order dated 26.08.2008
the same was dismissed following the view taken by this
Court in CIT vs. Deutsche Bank A.G . ( Civil Appeal No. 1544
of 2006 ) and DIT vs. Ravva Oil (Singapore) Pvt. Ltd . ( Civil
Appeal No.5822 of 2007 ). Thus, the principle of law that
stands approved by this Court is that if expenditure is
incurred by the head office outside India, which is incurred
exclusively for the Indian operations of a non-resident
entity, then such expenditure cannot be brought within the
ambit of the term ‘head office expenditure’ provided in
Section 44C of the Act and consequently, the expenditure is
allowable in its entirety without being subjected to the
ceiling provided therein.
24. In the circumstances referred to above, the learned counsels prayed
that, there being no merit in the appeals, they be dismissed.


E. Issue to be determined



25. Having heard the learned counsels appearing for the parties and
having gone through the materials on record, the following question
falls for our consideration:
a) 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 Act, 1961, thereby
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 19 of 55


limiting the permissible deduction to the statutory ceiling
specified therein?

F. Analysis


26. Having regard to the rival contentions canvassed on either side, it
is evident that the core of the disagreement concerns the scope of
Section 44C of the Act, 1961. The appellant seeks to interpret it
more broadly, encompassing not only the expenditure incurred by
the head office attributable to various foreign branches, i.e.,
‘common’ expenditure, but also the ‘exclusive’ expenditure
incurred specifically for the Indian branches. The respondents,
however, aim to restrict the scope of Section 44C to include only
‘common’ expenditure. This is best illustrated by the example
provided by the respondents. If a general counsel is appointed by
the head office solely to handle Indian matters, it constitutes
exclusive expenditure. However, if a general counsel is appointed
by the head office to handle matters in branches across the globe
(including India), it constitutes common expenditure. The appellant
contends that Section 44C applies in both cases, whereas the
respondents argue that it is only applicable in the latter scenario.
In other words, the respondents argue that for exclusive
expenditure, Section 44C is wholly inapplicable, and therefore, the
deduction of the expenditure is not subject to the ceiling limit set
out therein.
27. Before addressing the aforementioned issue, we consider it
appropriate to first discuss certain principles that guide the
interpretation of taxing statutes.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 20 of 55



(i) Basic Principles of Interpretation


28. It is a well-established rule that taxing statutes have to be strictly
construed. In Commissioner of Income Tax, Madras v. Kasturi
& Sons Ltd , reported in (1999) 3 SCC 346, this Court was
determining the meaning of the word ‘moneys’ in the expression
‘money’s payable’ under Section 41(2) of the Act, 1961. In that
context, the Court referenced the following concerning the strict
interpretation of taxation statutes:

Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 21 of 55


ORD PJOHN
this passage L U said: ‘Fiscal measures are
not built upon any theory of taxation.’ ””

(Emphasis Supplied)
29. The principle outlined above has been articulated by this Court in
similar terms in a plethora of cases. Thus, it is clear that when
interpreting taxation statutes such as the Act, 1961, the following
aspects must be strictly observed: (i) equitable considerations,
presumptions, or assumptions should not be taken into account,
and (ii) the statute should be interpreted according to what is
clearly expressed. Thus, if the court is satisfied that a case falls
strictly within the provisions of the law, the subject can be taxed,
regardless of the consequences such a levy of tax might have [ See
A.V. Fernandez v. The State of Kerala , reported in 1957 SCC
OnLine SC 23 & Commissioner of Sales Tax, U.P v. Modi Sugar
Mills Ltd , reported in 1960 SCC OnLine SC 118 ].
30. Another fundamental rule of statutory interpretation is that when
the language of the statute is plain and unambiguous, allowing
only one meaning, then no issue of statutory construction arises as
the statute speaks for itself. The reasoning behind this principle is
that when the words are clear and plain, the courts are obliged to
accept the expressed intention of the Legislature [See State of
Uttar Pradesh & Ors v. Dr. Vijay Anand Maharaj , reported in
1962 SCC OnLine SC 12 , M.V. Joshi v. M.U. Shimpi & Anr ,
reported in 1961 SCC OnLine SC 56 & Godrej and Boyce
Manufacturing Company Limited v. Deputy Commissioner of
Income Tax, Mumbai, reported in (2017) 7 SCC 421 ].
31. While, at first glance, the principle of plain meaning, as referred to
above, may seem simple and self-contained, it is crucial to
understand the nuances involved when applying it to disputes
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 22 of 55


surrounding statutory interpretation. The same has been lucidly
spelt out in the Principles of Statutory Interpretation by Justice G.P.
Singh, fourteenth edition (2016), and reads thus:
“It may look somewhat paradoxical that plain meaning rule
is not plain and requires some explanation. The rule, that
plain words require no construction, starts with the premise
that the words are plain, which is itself a conclusion reached
after construing the words. It is not possible to decide
whether certain words are plain or ambiguous unless they
are studied in their context and construed. The rule,
therefore, in reality means that after you have construed the
words and have come to the conclusion that they can bear
only one meaning, your duty is to give effect to that meaning.
The true import of the rule is well brought out in an American
case where JUDGE PEARSON after reaching his conclusion
as to the meaning of the statutory language said: “That
seems to me a plain clear meaning of the statutory language
in its context. Of course, in so concluding I have necessarily
construed or interpreted the language It would obviously be
impossible to decide that language is 'plain' (more accurately
that a particular meaning seems plain) without first
construing it. This involves far more than picking out
dictionary definitions of words or expressions used.
Consideration of the context and setting is indispensable
properly to ascertain a meaning. In saying that a verbal
expression is plain or unambiguous, we mean little more than
that we are convinced that virtually anyone competent to
understand it and desiring fairly and impartially to ascertain
its significance would attribute to the expression in its context
a meaning such as the one we derive, rather than any other;
and would consider any different meaning by comparison,
strained, or far-fetched, or unusual or unlikely”

For a proper application of the rule to a given statute, it is
necessary, therefore, to determine first whether the language
used is plain or ambiguous. As pointed out by LORD
BUCKMASTER, "by 'any ambiguity' is meant a phrase fairly
and equally open to diverse meanings". "A provision is not
ambiguous", says LORD REID, "merely because it contains a
word which in different contexts is capable of different
meanings". LORD REID, proceeds to add: "It would be hard
to find anywhere a sentence of any length which does not
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 23 of 55


contain such a word. A provision is, in my judgment,
ambiguous only if it contains a word or phrase which in that
particular context is capable of having more than one
meaning". To decide, therefore, whether certain words are
clear and unambiguous, they must be studied in their context
[...] Unambiguous means ‘unambiguous in context’. So
ambiguity need not necessarily be grammatical ambiguity
but one of appropriateness of the meaning in a particular
context.”
(Emphasis Supplied)
32. From the above extract, the following principles regarding
statutory interpretation are evident: (i) first, deciding whether
statutory language is ‘plain’ inherently involves a process of
construction. One cannot simply declare words to be clear without
first studying them, and (ii) secondly, true unambiguity depends on
context, not just grammar. Words cannot be judged in isolation, as
most words are capable of multiple meanings. A provision is seen
as unambiguous only when, after being examined in its specific
context, almost anyone competent would assign to it a single,
appropriate meaning to the exclusion of others, i.e., the words are
unambiguous in the context of the provision in question.
33. This aspect of interpreting the words of a statute in their specific
context has also been affirmed by this Court. In Commissioner of
Gift Tax, Madras v. N.S. Getty Chettiar , reported in (1971) 2
SCC 741 , this Court examined the meaning that should be given
to words “disposition, conveyance, assignment, settlement,
delivery, payment, and alienation” appearing in Section 2(xxiv) of
the Gift Tax Act, 1958. The court observed that the true meaning
of statutory language cannot be understood merely by holding the
text in one hand and a dictionary in the other. Instead, the words
must be interpreted by considering the context in which they are
used and the purpose they are meant to serve. In Reserve Bank of
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 24 of 55


India v. Peerless General Finance and Investment Co. Ltd. &
Ors , reported in (1987) 1 SCC 424 , this Court reiterated that
interpretation depends on both the text and the context, where the
text is the texture and the context provides the colour.
34. A natural extension of both the principles discussed earlier and a
well-known principle of interpretation is that, if the language of the
enactment is clear and unambiguous, it would be unjustifiable for
the courts to add words on the ground that such additions would
better enable carrying out the legislature's presumed intentions.
This is because, in all ordinary cases, the language employed is the
determinative factor for determining legislative intention [See Sri
Ram Narain Medhi & Ors v. State of Bombay , reported in 1958
SCC OnLine SC 53, Dadi Jagannadham v. Jammulu Ramulu
& Ors , reported in (2001) 7 SCC 71 ]. Furthermore, this reluctance
to give the courts the authority to add or read words into the statute
is also based on the fact that it is not the court's duty to reframe
the legislation, as the power to ‘legislate’ has not been granted to it
[See Commissioner of Income Tax, Kerala v. Tara Agencies ,
reported in (2007) 6 SCC 429 ].
35. However, this is not a hard and fast rule, and in certain exceptional
circumstances, the court can add or read words into the statute.
The circumstances which would allow for such a departure from
the ordinary rule have been succinctly captured in Principles of
Statutory Interpretation by Justice G.P. Singh , fourteenth edition
(2016), as follows:
“As already noticed it is not allowable to read words in a
statute which are not there, but "where the alternative lies
between either supplying by implication words which appear
to have been accidentally omitted, or adopting a construction
which deprives certain existing words of all meaning, it is
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 25 of 55


permissible to supply the words" A departure from the rule of
literal construction may be legitimate so as to avoid any part
of the statute becoming meaningless. Words may also be
read to give effect to the intention of the Legislature, which is
apparent from the Act read as a whole. Application of the
mischief rule or purposive construction may also enable
reading of words by implication when there is no doubt about
the purpose which the Parliament intended to achieve. But
before any words are read to repair an omission in the Act, it
should be possible to state with certainty that these or similar
words would have been inserted by the draftsman and
approved by Parliament had their attention been drawn to
the omission before the Bill passed into law.”

36. If legislative intention is to be principally assessed based on the
language of the enactment, then under what circumstances should
the objects and purposes behind a legislation be taken into
account? This Court in Shashikant Laxman Kale v. Union of
India , reported in (1990) 4 SCC 366 , established a distinction
between the purpose or object of an enactment and the legislative
intent. It held that while the former is to provide a remedy for the
malady, the latter relates to the meaning or exposition of the
remedy as enacted. Thus, the object and purpose are elements that
are taken into account more concretely when the court is applying
the mischief rule of interpretation.

(b) The Problem (Mischief): The specific defect or issue that
the old law failed to address.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 26 of 55



(c) The Solution (Remedy): The new method Parliament
introduced to fix that problem.
(d) The Reason: The underlying logic or purpose behind this
new solution.
This rule was considered necessary to guide judges away from
subtle inventions or loopholes that might allow the mischief to
continue. The mischief rule has been widely adopted by this Court
in various scenarios.[See Bengal Immunity Company Limited v.
State of Bihar & Ors , reported in (1955) 1 SCC 763 ] &
Shashikant Laxman ( supra )]
38. As noted above, in most circumstances, the legislative intention is
to be discerned from the words used in the statute itself, and the
mischief rule of interpretation should not be invoked in an
unfettered manner. This Court has held that considering the object
and purpose is relevant only when the words in question are
ambiguous and reasonably capable of more than one meaning [See
Commissioner of Income Tax, MP v. Shrimati Sodra Devi ,
reported in 1957 SCC OnLine SC 33 & Kanai Lal Sur v.
Paramnidhi Sadhukhan, reported in 1957 SCC OnLine SC 8 ].
39. However, as recognised above, even determining the ‘plain’
meaning involves the contextual interpretation of a word, and the
object and purpose of a relevant statute are elements that form part
of that context. Yet, there is a vital distinction: while the object and
purpose may help illuminate the context, they cannot override the
text. Once the words are examined in their context, including
considerations of object and purpose, and are found to be clear,
unambiguous, and capable of only one meaning, then the plain
meaning rule prevails, and considerations of object and purpose
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 27 of 55


cannot be invoked to alter, control, or distort the clear mandate of
the statutory language.
40. A brief summary of the aforesaid discussion is as follows:
a) Taxation statutes require strict interpretation.
b) Where the words are plain and unambiguous, the court is
bound to give effect to their plain meaning.
c) The determination of whether language is ‘plain and
unambiguous’ is not a mechanical exercise, and it
necessitates interpreting words within their specific context
rather than in isolation.
d) The legislative intent is primarily to be gathered from the
specific words used by the legislature. Reference to the
object and purpose becomes crucial in those situations
where the language is ambiguous and capable of multiple
constructions.
e) Under ordinary circumstances, it is impermissible for the
Court to add or read words into the statute, especially when
the language is plain and unambiguous, on the notion that
such words would appear to better serve the legislative
object or purpose.

(ii) Interpreting Section 44C of the Act, 1961


41. With the foregoing principles of statutory interpretation as our
guide, we now proceed to examine the specific language of Section
44C of the Act, 1961, to determine whether the provision, in its true
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 28 of 55


scope, contemplates a distinction between ‘common’ and ‘exclusive’
head office expenditure.
42. For our analysis, Section 44C of the Act, 1961 can be divided into
two separate but interconnected parts. The first is the operative or
substantive provision, which outlines the conditions for applying
the section and details the computation mechanism. The second is
the definitional provision in the Explanation, which clarifies the
scope of the term ‘head office expenditure’. The meaning given
under the Explanation serves as the statutory trigger, as only when
an expense falls within the ambit of this meaning does the operative
framework of Section 44C come into effect.
43. Let us first examine the operative part of Section 44C. For clarity,
the operative part of Section 44C can be divided into the following
distinct components:
a) Section 44C applies specifically to non-resident assessees.
b) Section 44C governs the computation of income chargeable
under the specific head “Profits and gains of business or
profession”.

c) Section 44C mandates that no allowance under the
aforementioned head shall be made in respect of ‘head office
expenditure’ to the extent that such expenditure is in excess
of the lesser of the following two amounts: (a) an amount
equal to five per cent of the adjusted total income; or (b) the
amount of head office expenditure attributable to the
business or profession of the assessee in India.
d) Section 44C is a non-obstante provision as it starts with a
phrase: notwithstanding anything to the contrary contained
in Sections 28 to 43A . Consequently, it has an overriding
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 29 of 55


effect on Sections 28 to 43A for the specific purpose of
computing head office expenditure of a non-resident
assessee.
44. We have no doubt that for an expense to be governed by the tenets
of Section 44C of the Act, 1961, two conditions must be fulfilled: (i)
the assessee should be a non-resident, and (ii) the expenditure
should be a ‘head office expenditure’. If both conditions are met,
then Section 44C, being a non-obstante provision, will apply
regardless of whether its principles contravene Sections 28 to 43A
respectively.
45. The respondents may be correct in stating that for an expenditure
to be deductible under Section 37(1), it does not necessarily have
to have been incurred in India. Furthermore, they are also correct
in stating that Section 44C only seeks to put a ceiling on the ‘head
office expenditure’ that can be allowed as a deduction. However,
their argument that Section 44C cannot restrict deductions that
are otherwise allowable under Section 37(1) is misplaced. If the
expenditures meet the above two conditions, Section 44C governs
the quantum of allowable deduction. This means that even if such
head office expenditure can be allowed as a deduction under
Section 37(1), it would not be permitted if it exceeds the ceiling limit
set under Section 44C. To decide otherwise would be to overlook
the non-obstante nature of Section 44C.
46. It is prudent to closely examine & understand the meaning
attributed to the term ‘head office expenditure’ under Section 44C.
This is because, in the context of the question before us today, if
the meaning assigned to ‘head office expenditure’ under Section
44C is taken to suggest that it only includes common expenditure
incurred by the head office, then the issue would stand resolved in
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 30 of 55


favour of the respondents. Consequently, as contended by the
respondents, for exclusive expenditure incurred by the head office
for the Indian branches, Section 44C would not apply, and a
deduction could be claimed under other sections, including Section
37, without adhering to the ceiling limits set under Section 44C.
47. Upon close analysis of the meaning assigned to the words ‘head
office expenditure’ under Section 44C of the Act, 1961, it does not
appear that the legislature has limited the scope to cover only
common expenditure incurred by the head office for the benefit of
various branches, including those in India. In fact, the Explanation
is unambiguous in stating that for an expenditure to be considered
as head office expenditure, it must meet two conditions only: (i) it
has to be incurred outside India by the assessee, (ii) it must be
expenditure of a nature related to executive and general
administrative expenses, including those specified in clauses (a) to
(d), respectively, of the Explanation.
48. Thus, the Explanation focuses solely on two aspects: where the
expense was incurred and the nature of that expense. 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.
Therefore, the meaning of the Explanation is clear, straightforward,
and unambiguous. If we were to accept the respondents’
contention, we would be forced to add words to the statute that
simply do not exist. As noted above, adding words is generally not
permissible, especially when the plain meaning of the statute is
unambiguous. To illustrate, the table below depicts the words that
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 31 of 55


would need to be added to the Explanation if the respondents’
contention were to be accepted:

49. The necessary corollary of the aforesaid discussion is that,
irrespective of whether the expenditure was ‘common’ or ‘exclusive’,
the moment it is 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. At
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 32 of 55


this juncture, it is essential to consider and evaluate the
respondents' contention that an additional condition must be
fulfilled for Section 44C to apply.
50. According to the respondents, by virtue of clause (c) of Section 44C
of the Act, 1961, only when the expenditure is of a common nature,
and not exclusive expenditure incurred for the Indian branches,
would the section become applicable. They rely on the Calcutta
High Court’s decision in Rupenjuli Tea (supra) to support their
argument.
51. In Rupenjuli Tea (supra), the assessee was a company with its
head office in the United Kingdom. However, all of its business
operations were conducted in India, with only statutory functions
being performed from the head office in the United Kingdom.
During the assessment year in question, the assessee incurred
expenditure of INR 4,70,074 at its head office on account of
secretarial remuneration, warehouse charges, brokerage, director’s
fees, and emoluments. The assessee claimed the entire amount as
business expenditure in computing its total income chargeable to
tax in India under the Act, 1961. However, the below authorities
held that the allowance of the head office expenditure was subject
to the limits prescribed under Section 44C and accordingly
disallowed the sum of INR 21,441. Before the High Court, the
assessee argued that Section 44C was inapplicable to the facts and
circumstances of the case because the company had no business
operations outside India, and its London head office was solely
attending to statutory functions. Therefore, the expenses incurred
at the head office were entirely connected with its business
operations in India. The Calcutta High Court, after taking into
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 33 of 55


account the object and purpose behind inserting Section 44C, held
as follows:
“On a combined reading of the said Explanatory
Memorandum as well as the said circular issued by the
Central Board of Direct Taxes, it is clear that this section is
intended to be made applicable only in the cases of those
non-residents who carry on businesses in India through their
branches. It has been made very clear that the said section
was introduced with a view to getting over difficulties in
scrutinising and verifying claims in respect of general
administrative expenses incurred by the foreign head offices
in so far as such expenses can be related to their business or
profession in India having regard to the fact that foreign
companies operating through branches in India sometimes
try to reduce the incidence of tax in India by inflating their
claims in respect of head office expenses. The objective
behind the aforesaid legislation is also clear from a bare
perusal of the earlier portion of the said section which
provides, inter alia, the manner in which the disallowable
amount is to be computed. The expenditure to be disallowed
is the difference between the expenditure in the nature of
head office expenditure and the least of the following three
computations:

(a) an amount equal to 5 per cent. of the adjusted total
income;
(b) an amount equal to the average head office expenditure;

(c) the amount of so much of the expenditure in the nature of
head office expenditure incurred by the assessee as is
attributable to the business or profession of the assessee in
India.

The language of clause (c) clearly postulates that the
expenditure in question should be incurred not only in
connection with the business in India, but also business
outside India. In other words, a part of the expenditure at
least must not be attributable to the business operations
carried on in India. Where an assessee does not have any
business overseas and the entire operations are carried out
by it in this country only, the question of allocating a part of
the expenditure in question to the business carried on in
India cannot arise.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 34 of 55



In CIT v. B. C. Srinivasa Setty (1981] 128 ITR 294, the
Supreme Court held that the charging section and the
computation provisions together constitute an integrated
code. When there is a case to which the computation
provisions cannot apply at all, it is evident that such a case
was not intended to fall within the charging section. Referring
to section 48(ii), the Supreme Court further observed that this
section contemplated an asset in the acquisition of which it
was possible to envisage a cost. None of the provisions
pertaining to the head "Capital gains" suggests that they
include an asset in the acquisition of which no cost at all can
be conceived. Further, the date of acquisition of the asset was
a material factor in applying the computation provisions
pertaining to capital gain; but, in the case of goodwill
generated in a new business, it was not possible to
determine the date when it came into existence. In view of
these observations of the Supreme Court, we are inclined to
hold that if any one or more of the base figures forming part
of computations under clauses (a), (b) or (c) of section 44C are
not conceivable in a particular case, it must be held that the
non obstante provisions contemplating disallowance of "head
office expenditure" under section 44C would not apply. On a
fair reading of clause (c), it appears that the expression "so
much of the expenditure ...as is attributable to business.... in
India" contemplated that at least a part of the expenditure is
referable to a business outside India. In the case before us,
it is an admitted position that the assessee-company did not
have any business operations outside India and the entire
expenditure incurred at its London head office was wholly
attributable to its business activities in this country. If that
be so, it is clear that clause (c) cannot have any application
in this case and, therefore, no disallowance can be made
under section 44C in the facts and circumstances of this
case.

That section 44C applies only when a foreign company
operates through its branches in India is made clear even in
the explanatory note appended to the Finance Bill, 1976. [...]

The difficulties of the nature as stated in the said
memorandum as well as in the said circular of the Central
Board of Direct Taxes cannot exist in a case where the entire
head office expenditure is for the purpose of business in
India. It is, therefore, clear that the provisions of section 44C
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 35 of 55


have been introduced to cover cases where a non-resident
assessee was incurring expenditure abroad and the
business activities of such non-resident assessee were not
only confined to India but were also being carried on
overseas.

In this view of the matter, we answer the question in the
negative and in favour of the assessee.”

(Emphasis Supplied)
52. Based on the extracts above, it is evident that the Calcutta High
Court’s decision was primarily based on the following:
a) Section 44C applies when non-residents conduct business
in India through their branches, but not when the entire
business activity is carried out in India with the head office
outside India, merely performing statutory functions.

b) In situations where the entire business operation is in India
and the head office outside India does not undertake any
business operations itself, clause (c) would not be
applicable. This is because clause (c) envisages that a
portion of the expenditure is attributable to the business or
profession of the assessee outside India. The phrase “ so
much of the expenditure ... as is attributable to business.... in
India” in clause (c) clearly indicates this. If there are no
business operations outside India, then there is no question
of attribution or allocation.
c) Whenever clause (c) becomes inapplicable to a specific
expenditure, Section 44C as a whole will also not apply.
Consequently, such expenditure will no longer fall under
Section 44C.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 36 of 55



53. The Bombay High Court, in Commissioner of Income Tax v.
Deutsche Bank A.G. , reported in 2003 SCC OnLine Bom 1286 ,
had the occasion to address a similar issue. The question before
the court was if one of the three parameters listed in clauses (a),
(b), and (c) of Section 44C, respectively, fails, then whether the
Revenue can ignore the said parameter and grant an allowance
based solely on the remaining two parameters. In this case, clause
(b) was not fulfilled, and thus, the department considered clauses
(a) and (c) of Section 44C, respectively, limiting the deduction to the
least of the two. The Bombay High Court concurred with the
decision of the Calcutta High Court in Rupenjuli Tea (supra) and
held that, if one of the three parameters is inapplicable, the entire
section becomes non-operational and must be ruled out. The
relevant observation made by the court is as follows:
“6. [...] Now, in the present case, Explanation (iii) which
defines average head office expenditure is not applicable
because under clause (b) read with Explanation (iii), as it
stood at the relevant time, deduction in respect of head office
expenses was limited to the annual average of head office
expenditure allowed during a base period of three previous
years relevant to the assessment years 1974-75, 1975-76
and 1976-77. In the present case, the assessee commenced
its business operations only in October 1980. Therefore,
clause (b) of section 44C was not attracted. This position is
not disputed by the Department. The only argument
advanced on behalf of the Department was that since clause
(b) was not attracted, it may be ignored and the least of the
deductions under clauses (a) and (c) of section 44C be
granted. We do not find any merit in the arguments advanced
on behalf of the Department. As stated above, section 44C
begins with a non obstante clause. It restricts deduction to
the least of the three parameters mentioned in clauses (a), (b)
and (c) of section 44C. Section 44C begins by a non obstante
clause which states that notwithstanding anything to the
contrary contained in sections 28 to 43A, deduction in respect
of head office expenditure shall be restricted to the least of
the three deductions mentioned in clauses (a), (b) and (c).
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 37 of 55


Therefore, section 44C overrides the provisions of sections 29
to 37 of the Income-tax Act. Section 44C is not conferring
deductions on the assessee. It is restricting the deduction
under section 37(1) of the Act by virtue of the overriding
provisions contemplated by section 44C. Therefore, when the
working of section 44C fails, the entire section 44C becomes
non-workable and consequently, the assessee would become
entitled to the full deduction under section 37(1) of the Act.
Section 44C restricts the head office expenditure. Section 44C
provides for three parameters in the matter of computing
deduction for head office expenditure incurred by a non-
resident. Section 44C specifically states that deduction for
the head office expenditure should be restricted to the least
of the three parameters. The expression used in section 44C
is “whichever is the least”. This expression shows that the
least of the three parameters should be taken into account
for computing allowance under section 44C for head office
expenditure incurred by the non-resident. Therefore, in the
absence of one of the parameters out of the three parameters,
the entire section becomes non-workable. Hence, the entire
section 44C stands ruled out. This is the ratio of the judgment
of the Calcutta High Court also in the case reported in
Rupenjuli Tea Co. Ltd. v. CIT [1990] 186 ITR 301 with which
we respectfully agree. [...]”

(Emphasis Supplied)
54. It should be noted that in both Rupenjuli Tea (supra) and
Deutsche Bank (supra), respectively, the courts applied the
unamended Section 44C, which contained three parameters:
clauses (a), (b), and (c). However, through the Finance Act, 1993,
clause (b) was omitted. Nonetheless, the removal of clause (b) does
not affect the principle established in Rupenjuli Tea (supra) and
Deutsche Bank (supra), and the same principles remain relevant
in relation to clauses (a) and (c) of Section 44C.

55. In Ravva Oil (supra), the Delhi High Court addressed a case similar
to Rupenjuli Tea (supra), where the assessee did not conduct any
business outside India. Accordingly, the Delhi High Court relied on
the decisions in Rupenjuli Tea (supra) and Emirates Commercial
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 38 of 55


Bank (supra) and concluded that, since these decisions had settled
the matter, no substantial question of law was involved in the
appeals, and accordingly dismissed them.
56. The respondents have also relied on the Bombay High Court’s
decision in Emirates Commercial Bank (supra). In this case, the
Bombay High Court examined whether the travelling expenses
incurred by the staff members of the head office on their visit to the
assessee's branch office in India are deductible under Section 44C.
The Court held as follows:
“Section 44C is applicable only in the cases of those non-
residents, who carry on business in India through their
branches. The said section was introduced to get over
difficulties in scrutinising claims in respect of general
administrative expenses incurred by the foreign head office
in so far as such expenses stand related to their business or
profession in India having regard to the fact that foreign
companies operating through branches in India sometimes
try to reduce incidence of tax in India by inflating their claims
in respect of the head office expenses. In other words, section
44C seeks to impose a ceiling/ restriction on head office
expenses. However, section 44C contemplates allocation of
expenses amongst various entities. That, the expenditure
which is covered by section 44C is of a common nature,
which is incurred for the various branches or which is
incurred for the head office and the branch. However, in this
case, we are concerned with the expenditure exclusively
incurred for the branch. In this case, there is a concurrent
finding of fact recorded by the Commissioner (Appeals) as
well as the Tribunal stating that the officers came from the
head office at Abu Dhabi to Bombay to attend to the work of
the Bombay branch and, in connection with that work, the
expense was incurred. That, the expense was initially
incurred by the head office which was recovered by the head
office from the branch in India by raising a debit note.
Therefore, the expense was incurred for the branch office in
India. These are concurrent findings of fact. We do not wish
to interfere with those findings. Hence, section 44C has no
application.”
(Emphasis Supplied)
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 39 of 55



57. A close examination of the rulings in Rupenjuli Tea (supra) and
Emirates Commercial Bank (supra), respectively, reveal that,
while both held that Section 44C was not applicable to their facts,
their reasoning differed significantly. For the Calcutta High Court
in Rupenjuli Tea (supra), the decisive factor was the absence of
any business operations outside India by the non-resident
assessee, including at its head office in London. On the other hand,
the Bombay High Court in Emirates Commercial Bank (supra)
proceeded on the premise that Section 44C covers only common
expenditure and not expenditure incurred exclusively for the
Indian branches.
58. The decision in Rupenjuli Tea (supra) does not support the
contention raised by the respondents in any way. The respondents’
argument is that clause (c) only covers common expenditure and
not expenditure exclusively incurred for Indian branches.
Consequently, they contend that clause (c) does not come into play
with respect to such expenditure, Section 44C as a whole would
also not apply, and thereby, the deduction of such expenditure
would not be governed by the ceiling limits set under Section 44C.
However, in Rupenjuli Tea (supra), clause (c) and subsequently
Section 44C as a whole were held to be inapplicable, not because
the expenditure was exclusively for Indian operations, but because
the business operations were confined to India. In other words, the
deciding factor with respect to non-application of clause (c) was
rooted not in the nature of expenditure, but rather in the nature of
business operations of the assessee. However, the observation
made by the Bombay High Court in Emirates Commercial Bank
(supra) does create a distinction between common and exclusive
expenditure. Thus, it could be argued that it paves way for
accepting the respondents’ contention.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 40 of 55



59. The Bombay High Court in Emirates Commercial Bank (supra)
provides no basis whatsoever as to how it concluded that the
expenditure which is covered by Section 44C is of a common
nature, incurred for the various branches or for the head office and
the branch. As discussed above, this conclusion is not supported
by the meaning attached to the term ‘head office expenditure’ under
the Explanation in Section 44C. Is it the case that the language
employed in clause (c) indicates that there is a distinction between
‘common’ and ‘exclusive’ expenditure?
60. Clause (c) of Section 44C allows for the computation of head office
expenditure on an actual basis, wherein all the head office
expenditure that is attributable to the business in India is taken
into account. A plain reading of the clause in no way indicates that
the legislature envisaged taking into account only ‘common’ head
office expenditure while excluding ‘exclusive’ head office
expenditure under the clause. The text of the provision is broad
and unqualified. It employs the phrase “ head office expenditure
incurred by the assessee as is attributable to the business or
profession of the assessee in India, ” without carving out any
exception for expenses incurred exclusively for Indian branches.

61. The respondents’ contention proceeds on a misplaced
understanding that there is a stark conceptual difference between
‘attributable’ expenditure and ‘exclusive’ expenditure. Such a
contention is, however, not sustainable. ‘Attributability’ is a genus
of which ‘exclusivity’ is merely a species. Expenditure that is
incurred exclusively for the business in India is, by its very nature,
attributable to the business in India. In fact, exclusive expenditure
represents the strongest form of attribution, as there is a direct and
undivided nexus between the expense and the Indian operations.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 41 of 55


Therefore, exclusive expenditure, without contrary legislative
intent, which is absent in clause (c), must necessarily be treated as
part of attributable expenditure. When the statute uses the term
‘attributable’, it brings into its fold all things concerned with the
Indian business, whether they are common expenses allocated to
India or expenses incurred exclusively for India.
62. In income tax disputes, this Court has often been called upon to
interpret the phrase ‘attributable to’, particularly in
contradistinction to the narrower phrase ‘derived from’. This Court
has consistently held that the expression ‘attributable to’ is of a
much wider import than the expression ‘derived from’. While
‘derived from’ envisages a direct nexus, ‘attributable to’ also covers
an indirect nexus. Thus, there is no doubt that the words
‘attributable to’ in the context of clause (c) would include both
common and exclusive expenditure. [See Commissioner of Income
Tax v. Meghalaya Steels Limited , reported in (2016) 6 SCC 747 ]
63. Further, if the Parliament had intended to restrict the scope of
clause (c) only to common or shared expenses, it would have
employed specific language to that effect. In the absence of such
words of limitation, if we accept the respondents’ contention, it
would tantamount to reading a qualification into clause (c) and
thereby rewriting the statute.
64. Both parties have resorted to the legislative history and
background to support their contentions. The legislative history
and background behind Section 44C were set forth by the parties
vide the Memorandum explaining the provisions in the Finance
Bill, 1976 and the CBDT Circular No. 202 dated 05.07.1976. It is
important to note that these materials cannot be used to determine
the meaning of the provision, but merely to look at what mischief
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 42 of 55


was sought to be remedied. Furthermore, based on the principles
discussed above, it is essential to determine whether the meaning
of Section 44C is plain and unambiguous, even when read in the
context of its legislative object and purpose.
65. Section 44C was inserted into the Act, 1961, by the Finance Bill,
1976. The relevant portion from the Memorandum explaining the
provisions in the Finance Bill, 1976, is as follows:
“In the case of foreign companies operating in India through
branches, a proportion of the general administrative
expenses incurred by the foreign head office is claimed as a
deduction in the computation of taxable profits. It is
extremely difficult to scrutinise and verify such claims,
particularly in the absence of account books of the head
office which are kept outside India. Foreign companies
operating through branches in India sometimes try to reduce
the incidence of tax in India by inflating their claims in
respect of head office expenses. With a view to getting over
these difficulties, it is proposed to lay down certain ceiling
limits for the deduction of head office expenses in computing
the taxable profits in the case of non-resident taxpayers.[...]”
66. The relevant portions of CBDT Circular No. 202 dated 5.7.1976
read thus:
“Ceiling expenses in respect of head office case of non-
residents-New section 44C.
25.1 Non-residents carrying on any business or profession
in India through their branches are entitled to a deduction,
in computing the taxable profits, in respect of general
administrative expenses incurred by the foreign head
offices in so far as such expenses can be related to their
business or profession in India. It is extremely difficult to
scrutinise and verify claims in respect of such expenses,
particularly in the absence of account books of the head
office which are kept outside India. Foreign companies
operating through branches in India sometimes try to reduce
the incidence of tax in India by inflating their claims in
respect of head office expenses. With a view to getting over
these difficulties, the Finance Act has inserted a new section
44C in the Income-tax Act laying down certain ceiling limits
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 43 of 55


for the, deduction of head office expenses in computing the
taxable profits in the case of non-resident taxpayers. [...]”
(Emphasis Supplied)
67. The respondents have relied on the phrase “ a proportion of the
general administrative expenses” used in the memorandum to
argue that the legislative intent was to cover only head office
expenses that are claimed on a proportionate basis, and therefore,
it must be inferred that ‘exclusive expenditure’ is not subject to
Section 44C. However, we disagree with the respondents'
contention as the word ‘proportion’ in the memorandum was only
used in the context of describing the quantum attributed to the
Indian branches out of the total expenditure of the head office. It
was not employed to exclude ‘exclusive’ expenditure, but to
highlight the mischief that foreign entities sometimes were
arbitrarily inflating the ‘proportion’ or share of head office expenses
attributed to India, whether such expenses were common expenses
or expenses exclusively incurred for the Indian branches.
68. Having regard to the memorandum and circular referred to above,
it is by no means evident that the primary legislative object was to
enact Section 44C solely for ‘common’ expenditure. In fact, the
specific nature of the expenditure does not appear to be the focal
point of the legislative concern. Rather, the concern was mainly
with respect to the ‘inflating’ of expenses by some foreign
companies, who attributed excessive expenditure to their Indian
branches, and the inherent difficulty faced by the Revenue in
scrutinising and verifying such claims. In such a scenario, the
legislative history does not further the respondents’ contention in
the slightest. On the contrary, it merely reinforces the conclusion
that the plain and unambiguous meaning of Section 44C must be
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 44 of 55


given full effect to remedy the very mischief the legislature sought
to address.
69. Respondent M/s American Bank Express has also placed reliance
on paragraph 3 of Article 7 of the Double Taxation Avoidance
Agreement between the Governments of India and the USA.
Paragraph 3 of Article 7 reads as follows:
“3. In the determination of the profits of a permanent
establishment, there shall be allowed as deductions expenses
which are incurred for the purposes of the business of the
permanent establishment, including a reasonable allocation of
executive and general administrative expenses, research and
development expenses, interest, and other expenses incurred for
the purposes of the enterprise as a whole (or the part thereof
which includes the permanent establishment), whether incurred
in the State in which the permanent establishment is situated or
elsewhere, in accordance with the provisions of and subject to
the limitations of the taxation laws of that State. However, no
such deduction shall be allowed in respect of amounts, if any,
paid (otherwise than towards reimbursement of actual
expenses) by the permanent establishment to the head office of
the enterprise or any of its other offices, by way of royalties, fees
or other similar payments in return for the use of patents, know-
how or other rights, or by way of commission or other charges
for specific services performed or for management, or, except in
the case of a banking enterprises, by way of interest on moneys
lent to the permanent establishment. Likewise, no account shall
be taken, in the determination of the profits of a permanent
establishment, for amounts charged (otherwise than toward
reimbursement of actual expenses), by the permanent
establishment to the head office of the enterprise or any of its
other offices, by way of royalties, fees or other similar payments
in return for the use of patents, know-how or other rights, or by
way of commission or other charges for specific services
performed or for management, or, except in the case of a banking
enterprise, by way of interest on moneys lent to the head office
of the enterprise or any of its other offices.”
(Emphasis Supplied)
On perusal of paragraph 3 of Article 7, it is evident that, while
deductions are allowed for expenses incurred for the purposes of
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 45 of 55


the permanent establishment in India, irrespective of whether they
are incurred within or outside India, the same are subject to the
limitations of the taxation laws of India. That invariably leads to the
conclusion that, under the said agreement, the deduction for head
office expenditure of the permanent establishment is to be governed
by the limits set out under Section 44C. Thus, the reliance placed
on paragraph 3 of Article 7 does not further the case of the
respondents in any manner.
70. The summary of the legal position emerging from the
aforementioned analysis is as follows:
a) First, Section 44C would apply only when the two primary
conditions are met: the assessee is a non-resident and has
incurred expenditure in the nature of head office
expenditure.
b) Secondly, the definition of ‘head office expenditure’ in the
Explanation keeps in mind two factors: the nature of the
expense (executive and general administration) and its
geographic location (incurred outside India). It is entirely
irrelevant whether such expenditure is common or
exclusive.

c) Thirdly, clause (c) mandates computation on an actual
basis, and the phrase “attributable to” as present in clause
(c) is wide enough to encompass both the shared expenses
allocated to India branches and exclusive expenses incurred
for India branches.
71. Thus, after examining the issue from all angles, we have no doubt
that Section 44C does not create a distinction between common
and exclusive head office expenditure. We, therefore, find no merit
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 46 of 55


in the contention of the respondents that exclusive expenditure
falls outside the purview of this section. Consequently, we hold that
the view expressed by the Bombay High Court in Emirates
Commercial Bank (supra) regarding the applicability of Section
44C is incorrect and does not declare the position of law correctly.
72. Before we proceed further, we would like to address a brief ancillary
issue. The appellant claims that the definition of ‘head office
expenditure’ in the Explanation to Section 44C is inclusive and has
a wide scope and illustratively includes rent, taxes, repairs or
insurance of premises abroad; salaries and other emoluments of
staff employed abroad; travel by such staff; and other matters
connected with executive and general administration.
73. To simplify the issue, we must view it through the lens of genus
and species. The term ‘executive and general administration’
expenditure represents the broad genus. Within this broad
category, the specific items enumerated in clauses (a), (b), and (c),
as well as those prescribed under clause (d), constitute the distinct
species. The appellant’s argument is that the definition is wide and
merely illustrative, and consequently, so long as an expenditure
satisfies the broad test of the genus (i.e., it is administrative in
nature), it should be covered. In essence, they argue that one needs
to only satisfy that the expenditure falls under the genus of
‘executive and general administration’ expenditure, and not
necessarily satisfy that within the broad genus they fall under the
distinct species, specified or prescribed under clauses (a) to (d) of
the Explanation.
74. Such an interpretation is impermissible as the appellant has failed
to consider clause (d) of the Explanation in its entirety. Clause (d)
to the Explanation reads as follows: “ such other matters connected
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 47 of 55


with executive and general administration as may be prescribed ”.
Thus, clause (d) stands as a clear statutory indicator that the
Explanation would cover ‘executive and general administration’
expenditure only of the kind mentioned in clause (a), (b) and (c) or
of the kind prescribed under (d). If the Explanation were to be
interpreted as broadly inclusive, covering all kinds of executive and
general administration expenses without restriction, it would
render the words “as may be prescribed” in clause (d) otiose and
redundant.
75. In other words, for an expenditure to qualify as ‘head office
expenditure’ within the meaning of the Explanation to Section 44C,
the assessing officer has to be satisfied of the following three
ingredients:
a) First, the expenditure must be incurred outside India.
b) Secondly, the expenditure must be in the nature of executive
and general administration, i.e., a broad genus.
c) Thirdly, the said executive and general administration
expenditure must fall within the specific species
enumerated in clauses (a), (b), and (c), or expressly
prescribed under clause (d).

76. Such a restrictive interpretation of the term ‘head office
expenditure’ is also supported on the basis of legislative intent. On
this aspect, the Memorandum Regarding Delegated Legislation,
which is part of the Notes on Clauses for Finance Bill, 1976, reads
thus:
“Clause 10 of the Bill seeks, inter alia, to insert a new
section 44C in the Income-tax Act. The new section provides
for a ceiling limit in respect of deduction to be allowed on
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 48 of 55


account of expenditure in the nature of head office
expenditure in computing the profits and gains of a non-
resident. Clause (iv) of the Explanation to the new section
which defines the expression "head office expenditure"
empowers the Central Board of Direct Taxes to prescribe by
rules the items of expenditure which may be deemed to be
head office expenditure. The clause enumerates expressly,
as far as practicable, all the items of head office
expenditure. The power to specify other items of head office
expenditure is being taken only by way of abundant caution
to cover items of such expenditure which cannot be easily
visualised now.”
(Emphasis Supplied)

(iii) Whether the principle of law barring exclusive
expenditure under Section 44C is approved by this Court?


77. Lastly, it was argued on behalf of the respondents that the Bombay
High Court’s decision in Emirates Commercial Bank (supra) was
challenged by way of appeal to this Court in CIT vs. Emirates
Commercial Bank Ltd. ( Civil Appeal No. 1527 of 2006 ) and this
Court by its judgment dated 26.08.2008 had dismissed the appeal
following the view taken by it in the case of CIT vs. Deutsche Bank
A.G. ( Civil Appeal No. 1544 of 2006 ). Consequently, the principle of
law that stands approved by this Court is that if expenditure is
incurred by the head office outside India, which is incurred
exclusively for the Indian operations of a non-resident entity, then
such expenditure cannot be brought within the ambit of the term
‘head office expenditure’ provided in Section 44C of the Act.
78. In the case of CIT vs. Deutsche Bank A.G. ( Civil Appeal No. 1544
of 2006 ), the decision of the Bombay High Court in Deutsche Bank
(supra) was in appeal before this Court. This Court vide order dated
26.08.2008 dismissed the said appeal on the question of
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 49 of 55


applicability of Section 44C on the following basis: (i) the decision
of the High Court and the tribunal was based on the decision of the
Calcutta High Court’s decision in Rupenjuli Tea (supra), (ii) the
Revenue had not filed any appeal against the Calcutta High Court’s
decision in Rupenjuli Tea (supra) nor any material was adduced
to make good its case that its decision not to appeal was due to the
fact that revenue involved in Rupenjuli Tea (supra) was meagre
and (iii) therefore it was assumed that the Revenue had accepted
the ratio in Rupenjuli Tea (supra) and accordingly the question of
applicability of Section 44C was answered against the Revenue.
79. In CIT vs. Emirates Commercial Bank Ltd. ( Civil Appeal No.
), this Court, on the issue of applicability of Section
1527 of 2006
44C, had held as follows:
Question No.(4) stands concluded against the Revenue and in
favour of the assessee in view of our order of even date in
C.A.No.1544 of 2006 etc.
80. From the above, it could be inferred that this Court’s decision in
CIT vs. Emirates Commercial Bank Ltd. ( Civil Appeal No. 1527
of 2006) was also based on the reasoning that the Revenue had
accepted the decision in Rupenjuli Tea (supra).
81. However, we have made ourselves very clear in the preceding
paragraphs that the facts and reasoning governing the decisions in
Rupenjuli Tea (supra) and Emirates Commercial Bank (supra),
respectively, are starkly different. In fact, unlike in Deutsche Bank
(supra), the Bombay High Court in Emirates Commercial Bank
(supra) made no reference to the decision in Rupenjuli Tea (supra).
Consequently, it could in no manner be stated that this Court had
accepted the principle of law that exclusive expenditure cannot be
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 50 of 55


brought within the ambit of the term ‘head office expenditure’
provided in Section 44C of the Act, 1961.
82. The aforesaid orders of this Court could in no manner be said to
lay down and operate as a binding precedent on the principle of law
that exclusive expenditure cannot be brought within the ambit of
Section 44C of the Act, 1961. The said orders, however, are
indicative of one aspect only: the decision in Rupenjuli Tea (supra)
stood finalised and accepted by the Revenue.

(iv) Application to the facts at hand


83. The pivotal question involved in these appeals has been answered
in favour of the Revenue. However, it remains to be seen whether,
on merits, the entire expenditure that the respondents claim as
deductible under Section 37 would fall within the ambit of Section
44C. There is no dispute that the respondents are non-residents
and the expenditure was incurred outside India. However, there
seems to be disagreement with regard to the fact whether or not
certain expenditures could be of an ‘executive and general’ nature
as specifically enumerated in the Explanation. In fact, the
respondents have contended that a part of the expenditure
incurred by them would not be in the nature of head office

expenditure as described under Section 44C.
84. From a bare perusal of the orders of the lower authorities, it is not
clear whether the nature of these expenditures was subjected to
the rigorous scrutiny required to conclusively place them within the
definition of ‘head office expenditure’ under the Explanation. Even
when the nature of the expenditure was being discussed, the
authorities proceeded on the notion that the definition was
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 51 of 55


inclusive and its scope was broad. We have held above that such a
reading of the Explanation is incorrect.
85. As established, for an expense to be categorized as ‘head office
expenditure’, the Assessing Officer must be satisfied on three
distinct fronts: (i) the expenditure must have been incurred outside
India; (ii) it must be in the nature of ‘executive and general
administration’ expenditure; and (iii) the said executive and general
administration expenditure must fall within the specific categories
enumerated in clauses (a), (b), or (c) respectively of the Explanation,
or prescribed under clause (d). This Court, while exercising
appellate jurisdiction, is not the appropriate forum to undertake
this granular factual verification. Accordingly, we deem it
appropriate to remand these matters to the Income Tax Appellate
Tribunal, Mumbai, on this limited issue. The Tribunal is directed
to examine the expenses afresh in light of the legal principles
enunciated herein, more particularly to verify whether the disputed
expenditures satisfy the tripartite test necessary to qualify as ‘head
office expenditure’ under the Explanation to Section 44C. With
respect to the expenditure which the respondents do not wish to
dispute, the same would fall under the ambit of Section 44C, and
thereby their deduction will be governed by the limits set out
therein.





Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 52 of 55



G. Conclusion

86. A conspectus of our legal discussion regarding Section 44C of the
Act, 1961, is as under:
a) Section 44C is a special provision that exclusively governs
the quantum of allowable deduction for any expenditure
incurred by a non-resident assessee that qualifies as ‘head
office expenditure’.
b) For an expenditure to be brought within the ambit of Section
44C, two broad conditions must be satisfied: (i) The assessee
claiming the deduction must be a non-resident; and (ii) The
expenditure in question must strictly fall within the
definition of ‘head office expenditure’ as provided in the
Explanation to the Section.
c) The Explanation prescribes a tripartite test to determine if
an expense qualifies as ‘head office expenditure’ - (i) The
expenditure was incurred outside India; (ii) The expenditure
is in the nature of ‘executive and general administration’
expenses; and (iii) The said executive and general
administration expenditure is of the specific kind
enumerated in clauses (a), (b), or (c) respectively of the
Explanation, or is of the kind prescribed under clause (d).
d) Once the conditions in (b) referred to above are met, the
operative part of Section 44C gets triggered. Consequently,
the allowable deduction is restricted to the least of the
following two amounts: (i) an amount equal to 5% of the
adjusted total income; or (ii) the amount of head office
expenditure specifically attributable to the business or
profession of the assessee in India.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 53 of 55



87. Based on the aforesaid discussion, it is manifest that the plain
language of Section 44C, when viewed against the backdrop of the
specific mischief it sought to curtail, is unambiguous. 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.
88. Thus, the question of law formulated by us is squarely answered in
favour of the Revenue. We hold that Section 44C applies to ‘head
office expenditure’ regardless of whether it is common expenditure
or expenditure incurred exclusively for the Indian branches.
89. On the specific facts at hand in these appeals, a bare perusal of the
records of the authority below reveals that the authorities have not
satisfactorily dealt with the question whether the impugned
expenditure actually constitutes ‘head office expenditure’ as
defined in the statute. It also appears that the authorities below
conceived the meaning of ‘head office expenditure’ in a broad and
inclusive sense, which we have held is not a correct reading of the
exhaustive definition provided in the Explanation. In other words,
there is no factual finding on whether the expenses fulfil the three
specific criteria we have elucidated in this judgment.
90. As an appellate court, we should not embark upon such a fact-
finding exercise. Consequently, we remand the matters to the
Income Tax Appellate Tribunal, Mumbai, for the limited purpose of
verifying whether the disputed expenditures satisfy the tripartite
test necessary to qualify as ‘head office expenditure’ under the
Explanation to Section 44C of the Act, 1961.
Civil Appeal Nos 8291 of 2015 & 4451 of 2016 Page 54 of 55



91. For all the foregoing reasons, the appeals succeed and are hereby
allowed.

….………………………….…. J.
(J.B. PARDIWALA)



….………………………….…. J.
(K.V.VISWANATHAN)

NEW DELHI;
DECEMBER 15, 2025.
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