The Mumbai bench of the Income Tax Appellate Tribunal (ITAT), in its July 16, 2026, ruling of Standard Chartered Bank case^[1], reiterated that merely payment by the Head Office (HO) or an overseas branch is not sufficient to warrant disallowance of expenditure related to an Indian Branch. Further, the ITAT restored the issue of deductibility of HO expenditure under Section 44C to the Assessing Officer () for verification of the nature of expenses and re-examine its deductibility in accordance with the decision of the Supreme Court in American Express Bank^[2] and the non-discrimination Article under the India-UK tax treaty (treaty).

The ITAT emphasized that the nature, purpose, business nexus of the expenses, and supporting documentation must be examined to determine its deductibility. It also distinguished between general HO expenditure covered in Section 44C and costs that are related to Indian Branch office operations.

Background and Summary of the Ruling

Standard Chartered Bank (Taxpayer), a non-resident bank operating in India through Branches, had claimed deduction, inter alia, for the following expenses in its Indian tax return:

1. Salaries paid by the HO to the expatriates deputed to the Indian Branch;
2. Direct costs allocated by the HO (London)/overseas branches (Singapore/Hong Kong) to the Indian Branch for its day-to-day operations, pertaining to consumer and corporate banking information system, technology, global account managers' and group taxation;
3. HO allocated expenses, restricted to 5% of the adjusted total income under Section 44C of the Income Tax Act, 1961. Subsequently, the Taxpayer claimed deduction of the entire HO expenditure allocated, without limitation under Section 44C, invoking the non-discrimination Article under 26(2) of the treaty;
4. Interest recorded by the Indian Branch as paid to the HO. 

The Assessing Officer (AO) disallowed the aforesaid expenses, along with certain routine items such as expenses relating to exempt income, year-end mark-to-market losses on forward contracts, etc. The Commissioner of Income-tax (Appeals) [CIT(A)] rejected the AO's findings on all issues except a portion of the direct cost allocation. In respect of this allocation, the CIT(A) affirmed the Transfer Pricing Officer’s (TPO) order determining the arm's length price (ALP) at nil (i.e., transfer pricing adjustment), citing the absence of supporting documentation and evidence. 

Both the Taxpayer and Revenue challenged the CIT(A) order, thereby resulting in cross-appeals before the ITAT.

The ITAT dismissed the Revenue’s appeals, except partially on one ground, upholding the CIT(A)’s findings, and allowed the Taxpayer’s appeal by deleting the transfer pricing adjustment made in respect of a portion of the direct cost allocation. With regard to the Taxpayer’s claim for deduction of the entire HO expenditure allocated under Article 26(2) of the treaty, the ITAT remanded the matter to the Tax Officer for factual verification of the nature of expenses and determination of the applicability of Section 44C. The AO was directed to re-examine the allowability of such expenses in light of the American Express Bank ruling and the applicability of Article 26 of the treaty.

Key Principles Emerging from the ITAT’s Ruling

The key principles emerging from the ruling on the critical issues involved are discussed below.

Salary Cost of Expatriates Deputed to the Indian Branch

• Salary cost of expatriates deputed to the Indian Branch has a direct nexus to the Indian business operations, and is therefore allowable under Section 37(1) and Article 7 of the treaty.
• Such expenditure cannot be characterized as common executive/administrative overheads covered by Section 44C, as they are not incurred for managing any office outside India.
• Applicability of Section 44C depends on the nature and character of expenditure, not merely on the place or mode of payment (i.e., expenses cannot be treated as HO expenditure merely because they were paid by HO).

The above is in line with earlier judicial precedents^[3] (relied upon in the Ruling), wherein salaries of deputed employees have generally been held tax-deductible for computing taxable income attributable to an Indian branch.

Direct Operational Costs Allocated by the Head Office/Overseas Branches

• Expenditure, duly supported by documentary evidence, certified allocation keys, and demonstrable business benefits, and which is directly linked to Indian banking operations, and not shown to be sham, fictitious or personal in nature, ought to be deductible.
• Determination of ALP at nil warrants an appropriate justification from a transfer pricing perspective. Further, once business purpose is accepted and a substantial portion of the expenses has been verified by the TPO, deduction could not be denied merely on account of non-furnishing of similar evidence for the balance amount.
• Routine managerial/administrative support, which does not satisfy the make-available requirement under the treaty, as per the principles laid down in various judicial precedents^[4], cannot be treated as fees for technical services (FTS), and outside the purview of Section 40(a)(i). .

Head Office Expenditure under Section 44C

• Reiterates that Section 44C is a special computation provision governing the deduction of HO expenditure of non-residents, as laid down in the Supreme Court ruling of American Express Bank.
• Section 44C cannot, as a general proposition of law, be held to be discriminatory in every case merely because it applies only to non-resident enterprises. If the expenditure represents common executive and general administrative overheads of the overseas HO, forming part of the attribution mechanism recognized under Article 7, the application of Section 44C would ordinarily be consistent with the scheme of a tax treaty.
• Article 26 cannot be ignored, but its application depends on the exact nature of the expenditure claimed (i.e., whether it is common executive/general administrative HO overheads, cost allocated among branches, or expenditure incurred outside India exclusively for the Indian branch), and the scope of the statutory provision as envisaged under the applicable tax treaty.

In light of the above, the ITAT ultimately remanded the matter to the AO for factual verification of the nature of expenses and determination of the applicability of Section 44C, and a direction to re-examine its allowability in light of the American Express Bank ruling and the applicability of Article 26 of the treaty.

Interest Paid to the HO

• Interest recorded by the Indian Branch as paid to HO/overseas branches is merely a payment to self and therefore does not give rise to income chargeable to tax in India in the hands of the HO. Accordingly, there is no obligation on the Indian Branch to withhold tax thereon, and consequently, Section 40(a)(i) disallowance does not arise in such cases. This is following the principle laid down by the special bench of the ITAT in its ruling in Sumitomo Mitsui Banking Corporation DDIT^[5] and other judicial precedents (relied upon in the Ruling).

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A&M’s Key Takeaways

• The ruling reiterates that the applicability of Section 44C depends on the nature and character of expenditure, and not merely on the fact that the payment is made by the HO or an overseas branch.
• Expenditure relating to expatriates seconded to India, who work exclusively for Indian operations, ought to be regarded as directly attributable to the Indian business operations and outside HO expenditure covered under Section 44C.
• A clear distinction must be drawn between general and administrative head office expenses and India-specific operational costs and only the former would typically fall within the scope of Section 44C.
• The applicability of treaty non-discrimination in PE taxation cases requires a holistic evaluation of the Business Profits Article, the Non-Discrimination Article, the relevant domestic law provisions, and the nature of expenses in question.
• Transfer pricing outcomes and deductibility under other domestic provisions are distinct considerations. Determination of ALP does not, by itself, govern allowability under Section 37 or other provisions.
• Characterization of payments as royalty or FTS requires satisfaction of specific legal thresholds, including transfer of rights or “making available” technical knowledge. Routine managerial or support services would not meet this test.
• The ruling reaffirms the importance of maintaining adequate documentation, including scientific allocation keys and supporting evidence, to substantiate both the nature and the commercial rationale of cross-border cost allocations.

• Different categories of expenses, such as expatriate salary, direct costs, and HO overheads, should be evaluated and bucketed separately, given their distinct nature and tax treatment.

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Way Forward

While the ruling is favorable to taxpayers in respect of expatriate salary and direct cost allocations, it does not extend blanket relief to all head office expenses. The deductibility of such claims hinges on a clear and granular classification of costs, supported by strong evidence of their direct nexus with the Indian business operations. Taxpayers should, therefore, maintain robust documentation around secondment structures and cost allocation methodologies, coupled with a well‑articulated tax treaty position. A disciplined approach to segregating India‑specific expenses from general head office overheads will be critical to sustaining such positions in litigation.

Disclaimer: This article is based on publicly available information and the authors’ professional experience and market analysis. For questions regarding the underlying sources or analytical methodologies, please reach out to the author directly. The analysis reflects market trends and observations and is intended for general informational purposes only. It does not constitute investment, legal, or financial advice.

[1]IT Appeal Nos. 4247/Mum/2025, ITA 4275/Mum/2025 and cross objection nos. ITA 4264/Mum/2025 and 4265/Mum/2025 for AYs for AY 2004-05 and 2005-06 respectively.

[2] 181 taxmann.com 433 - For more details kindly refer to the tax alert https://www.alvarezandmarsal.com/thought-leadership/supreme-court-clarifies-the-scope-of-deduction-of-head-office-expenditure-for-non-residents-as-enshrined-under-section-44c-of-the-income-tax-act-1961

[3] CIT v. Emirates Commercial Bank Ltd [2003] 262 ITR 55 (BOM); ABN AMRO Bank NV ITA No.692/Cal/2000; British Bank of Middle East ITA No. 2297/Mum/1999; Bank of America NT&SA [2009] 27 SOT 97; Development Bank of Singapore 33 taxmann.com 300; and Sumitomo Mitsui Banking Corporation [2012] 136 ITD 66 (Mum.) (SB).

[4] Supreme Court ruling in Engineering Analysis Centre of Excellence (P.) Ltd. vs. CIT (2021) 432 ITR 471 (SC), and Karnataka High Court Ruling in the case of CIT v. De Beers India Minerals Pvt. Ltd. reported in (2012) 21 taxmann.com 214

[5] Sumitomo Mitsui Banking Corporation [136 ITD- 66]