Income Tax--Business expenditure

Deduction of Head Office Expenditure in the Case of Non-Residents

V.K. Subramani

Where a foreign company has a branch in India, it may so happen that the Indian branch may incur expenses for managing the branch in India and also incur some expenses of the head office in India. Section 44C limits the expenditure in the nature of head office expenses by the Indian arm of the non-resident entity.

The section says the expenditure in the nature of head office expenditure shall be 5% of the adjusted total income of the branch in India or the amount of 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.

Where the assessee has incurred loss then instead of 5% of the adjusted total income the computation shall be 5% of the average adjusted total income by making reference to 3 assessment years preceding the assessment year involved.

The Supreme Court recently in Director of Income-tax (International Taxation) v. American Express Bank Ltd (2026) 484 ITR 137 (SC) has given some significant observations regarding section 44C which is worth noting.

Section 44C can be divided into 2 separate but interconnected parts. The first one is operative or substantive which outlines the conditions for applying the section and details the computation mechanism. The second one is the definitional provision in the Explanation, which clarifies the scope of the term 'head office expenditure'. The meaning given in the Explanation serves as the statutory trigger, as only when an expense falls within the ambit of this meaning, the operative framework of section 44C could come into effect.