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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O.O.C.J.
Income Tax Reference No.6 of 1992
John Wyeth and Brother Ltd.
Bombay ..Applicant
vs.
Commissioner of Income Tax
Bombay City II, Bombay ..Respondent
Mr.Poras Kaka with Mr.N.Doshi with Mr.Sameer Chitnis i/b
M/s Crawford Bayley and Co. for applicant.
Mr.Parag Vyas i/b Mr.P.S.Sahadevan for respondent.
ig Judgment Reserved on: 26.8.2008
Judgment Delivered on: 23.9.2008
CORAM: Dr.S.RADHAKRISHNAN &
S.J.KATHAWALLA JJ.
23rd September,2008
J U D G M E N T: (Per S.J.KATHAWALLA J.)
1. The Appellate Tribunal, Bombay Bench “B” has, at the
instance of the applicant (assessee) by its statement of
case dated 18th April, 1991 referred to this Court the
following questions arising out of the order of the
Tribunal dated 26th October, 1989 pertaining to Assessment
Years 1977-78 and 1978-79.
“1. Whether on the facts and in the circumstances
of the case, the Tribunal was right in holding that
the matter requires consideration as to whether the
laboratory expenses claimed include any of the
expenditure mentioned in clauses (a) to (d) of::: Downloaded on – 09/06/2013 13:53:33 :::
-2-Explanation (iv) to Section 44C of the Income Tax
Act, 1961 even though in its general meaning “Head
Office Expenditure” might not as such include thelaboratory expenses?
2. Whether on the facts and in the circumstances
of the case, the Tribunal ought to have held that
laboratory expenses of Rs.12,72,330/- were
allowable as a deduction in the computation of the
assessee’s income?
2. The facts relevant for the purpose of deciding the
present reference are as under:
a) The assessee is a branch of a foreign company which has
its Head
Office in United Kingdom. The business of the
assessee is that of manufacturing pharmaceutical products.
The assessee has a separate and independent establishment
in its branch in India including a Research Laboratory.
The Head Office of the assessee also has a Research
Laboratory at U.K. The issue involved herein pertains to
the Laboratory expenditure incurred by the Head Office at
U.K.
b) Section 44C was inserted in the Income Tax Act, 1961 by
Finance Act No.66 of 1976 with effect from 1st June 1976.
By introduction of section 44C a ceiling has been put on
the head office expenses in the case of non residents.
This has been explained by Income Tax Circular No.202
dated 5th July, 1976 in the following terms.
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“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 for the deduction of head
office expenses in computing the taxable profits in
the case of non resident tax-payers. Under this
provision, the deduction in respect of head office
expenses will be limited to –
(i) an amount equal to 5 percent of the adjusted
total income of the tax payer for the relevant
year; or
(ii) the annual average of the head office
expenditure allowed during a base period of three
previous years, namely, the previous years relevant
to the assessment years 1974-75 to 1976-77; or
(iii) the actual amount of head office expenditure
attributable to the business in India;
whichever is the least.
In cases where the adjusted total income of the
resident for the current year is a loss, the rate
of 5 percent referred to at (i) above will be
applied with reference to the average adjusted
total income of the non resident “or the three
previous years immediately preceding the relevant
assessment year.
25.2: The term “head office expenditure”, as
defined for the purposes of this provision, means
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executive and general administration expenditure
incurred by the non resident tax payer outside
India, including expenditure 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, which are paid to
any employee or other person employed in, or
managing the affairs of, any office outside India;
(c) travelling by any such employee or other person
outside India;
(d) such other matters connected with executive and
general administration as may be prescribed by the
Board.
The expression “adjusted total income”, “average
adjusted total income” and “average head office
expenditure” have been defined in the Explanation
to the new section.
25.3: The aforesaid amendments have come into
force with effect from 1st June, 1976 and will
apply in relation to the assessment year 1977-78
and subsequent years. (Section 10(Part) of the
Finance Act).”
c) According to the assessee, prior to Assessment Years
1977-78 the assessee was claiming the laboratory expenses
incurred in respect of the laboratory maintained at the
head office in United Kingdom in proportion of Indian
sales to world sales and was accepted and allowed by the
Tax Authorities.
d) Section 44C which came into effect from 1st June, 1976
became applicable for the period 1st July, 1976 to 30th
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September, 1976 in respect of the Assessment Year 1977-78.
However, the assessee has in the said assessment year
1977-78 as well as in the subsequent assessment year i.e.
1978-79 after already claiming head office expenses at 5%
of the total income being expenses referred to under
section 44C, have further claimed sums of Rs.12,72,330/-
and Rs.27,95,207/- respectively being proportionate
expenses incurred towards laboratory expenses at U.K. on
the ground that these expenses are not covered by section
44C of the Act and the assessee is entitled to a deduction
in
respect of the entire amount claimed under section 37
of the Income Tax Act. The Assessing Officer did not
accept the contention of the assessee viz. that the head
office expenses as per section 44C means executive and
general administration expenditure and that the laboratory
expenses are not covered by section 44C of the Income Tax
Act, 1961. The view of the Assessing Officer as set out
in his order dated 30th December, 1980 for the Assessment
Year 1978-79 is reproduced hereunder.
“6……….The assessee may have incurred
laboratory expenses and this would form part of the
executive and general administration expensesincurred by the assessee outside India and it
cannot be said that the laboratory expenses are not
covered by Section 44C. There is no dispute that
the expenditure had been incurred outside India.
The assessee has in fact clubbed this expenditure
under the head H.O. expenditure in the computation
of income filed with the return. The purpose of
sec.44C was to put a limit on the expenditure which::: Downloaded on – 09/06/2013 13:53:34 :::
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assessment in India as explained in para 25.1 of
C.B.D.T’s Circular No.202 dated 5th July, 1976.
The expenditure is of the nature which falls under
sec.44C of the Act and, therefore, restricted to
the limits prescribed therein.”
e) Being aggrieved by the stand taken by the Assessing
Officer, the assessee preferred Appeals before the
Commissioner of Income Tax (Appeals). The assessee argued
before the CIT(A) that section 44C very clearly defines
“head office expenses” as executive and general
administration
India and
expenses incurred by the assessee
includes what is set out in sub-clauses
outside
(a),
(b), (c) and (d) of the said section. It was argued that
the assessee had given the most conservative claim which
are in proportion of Indian sales to world sales and which
percentage comes to only at 17.7% of the world sales. It
was argued that even allocation of expenditure has been
much less in India in the matter of laboratory expenditure
and, therefore, the claim of the assessee ought to have
been allowed without being challenged in respect of the
arithmetical methods thereon. It was emphasised by the
assessee that in principle the laboratory expenses are
allowable even if the Board’s circular dated 5th July,
1976 is taken into account as it nowhere says that
executive’s salaries referred to therein referred to the
salaries of scientists employed in the laboratory. The
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assessee, therefore, submitted before CIT(A) that the
laboratory expenses are entirely allowable.
f) The CIT(A) by his order dated 13th July, 1982 decided
in favour of the assessee. The CIT(A) took the view that
there is nothing to indicate in the Income Tax Circular
dated 5th July, 1976 that the laboratory expenses which
are spent on research and development are covered by the
provisions of section 44C. CIT(A) also held that the
expenditure covered by sec.44C is obviously of the
administrative
nature and refers to the rent, taxes,
salaries, wages etc. which are in connection with
executive and general administration. CIT(A) has recorded
that the assessee has categorically stated before him that
the research and development expenditure claimed does not
include the expenditure of the nature as discussed above.
CIT(A), therefore, took a view that the expenditure
connected to laboratory expenses was not connected with
the general and administrative expenditure covered by
clauses (a), (b), (c) and (d) of explanation (iv) of
section 44C. CIT(A), therefore, directed the Assessing
Officer to allow the claim of the assessee and also
clarified that the expenditure towards laboratory expenses
would be in addition to 5% of the allowable expenses as
per provisions of section 44C in respect of other
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expenditure incurred.
g) In the appeal filed by the Revenue before the Appellate
Tribunal, the Tribunal by its order dated 26th October,
1989, after considering the orders passed by the Assessing
Officer as well as CIT(A) and after hearing the
submissions of the revenue as well as assessee found some
force in the contention of the revenue that when the
assessee is maintaining the laboratory outside India, it
must be having an establishment of its own and/or
supporting staff
ig therefor and that the claim of
expenditure must be on salary and other items enumerated
in clauses (a) to (d) of explanation (iv) to section 44C
included in the definition of “head office expenditure”.
The Tribunal has also noted the fact that the assessee’s
statement that the laboratory expenses will not include
any expenditure stated in the sub-clauses of the
explanation appeared to have been accepted by the CIT (A)
without verification and calling for the details of the
laboratory expenses. The Tribunal, therefore, took a view
that the matter required consideration as to whether the
laboratory expenses include any of the expenditure
mentioned in clauses (a), (b), (c) and (d) though in its
general meaning “Head Office Expenditure” might not
include the laboratory expenses.
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h) The Tribunal in its original order dated 26th October,
1989 made the following observations/directions.
“In the fresh disposal of the appeal, the CIT(A)
may look into this aspect as to whether the payment
was made with any specific purpose and decide the
matter accordingly as to whether such specific
payment would also be covered by the provisions of
Sec.44C of the Act. If on verification he finds
that
the payment was not for a specific purpose of
the assessee’s business in India, then, in our
opinion, the order of the IAC (Assessment)
considering the same as part of the Head Office
expenditure is unassailable.”
Pursuant to the assessee’s Miscellaneous Application
No.70/Bom/1990 the Appellate Tribunal by its order dated
14th November, 1990 expunged the above
observations/directions. The Tribunal has, therefore, not
reached any conclusion as to whether section 44C applies
to laboratory expenses or not, but has come to a finding
that the expenses claimed needs
consideration/verification. The Tribunal has also
categorically rejected the argument of Revenue that the
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laboratory expenditure, if not part of head office
expenditure covered by section 44C is not allowable at
all.
i) Since the assessee was aggrieved by the order of the
Appellate Tribunal, at the instance of the assessee the
Appellate Tribunal referred the questions set out in
paragraph 1 above for the opinion of this Court under
section 256(1) of the Income Tax Act, 1961.
3.
We have heard the arguments advanced by the Advocates
for the assessee as well as the revenue at some length.
The Advocate for the assessee has reiterated what is
argued by the assessee before the CIT(A) and the Tribunal
and has strongly relied on the reasoning given by the
CIT(A) in favour of the assessee.
4. The learned Advocate for the assessee has in support
of his contention that section 44C applies only to
executive and general administration expenditure and that
laboratory expenses would not fall under the category of
executive and general administration expenses, cited a
decision in the case of Commissioner of Income Tax Vs.
Emirates Commercial Bank Ltd. reported on 2003(262) ITR
55 (Bom). That was a case where the expenditure was
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exclusively incurred for the branch office in India.
There was a concurrent finding of fact recorded by the
Commissioner (Appeals) as well as the Tribunal that the
officer came from the head office at Abu-dhabi to Mumbai
to attend to the work of Mumbai branch and in connection
with that work the expense was incurred and that expense
was initially incurred by the head office and was
recovered by the head office from the branch in India by
raising a debit note. It was, therefore, held that the
expense was incurred for the branch office in India and,
therefore, section 44C had no application. In view of the
aforesaid facts, we are of the view that the said decision
does not lend any assistance to the present case of the
assessee.
5. The Advocate for the assessee has also cited before us
a decision of ITAT, Bombay Bench (A) in American Bureau of
Shipping Vs. Income Tax Officer reported in (1986) 19 ITD
793 and has laid strong emphasis on a portion of paragraph
11 of the said order which is reproduced hereunder.
“11…………As regards plan approval,
engineering expenses of Rs.3,10,112/- we have gone
through the details filed. These expenses were
incurred for specific technical services of the
nature of approval of the plan for ships being
constructed in India, reviewing survey reports,
covering ships being constructed at Indian
shipyards, approval of designs, tonnage
admeasurements and issuance of tonnage certificate::: Downloaded on – 09/06/2013 13:53:34 :::
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expenses were incurred not only at head office in
New York but also in other offices like London,Geneva, Hamburg. We, therefore, confirm the order
of the Commissioner (Appeals) holding that these
expenses were not head office expenses for thepurpose of section 44C.”
In our view the aforesaid quoted portion, makes it amply
clear that the assessee had filed the details of expenses
which the Tribunal had gone through and thereupon came to
the conclusion that the said expenses were not head office
expenses for the purpose of section 44C. This decision in
fact supports the decision of the Appellate Tribunal which
forms the subject matter of the above reference.
6. The Advocate for the revenue has reiterated the
arguments advanced before the Appellate Tribunal and have
supported the reasoning given in the orders of the
Assessing Officer as well as the Appellate Tribunal. The
Advocate for the revenue has also contended, in our view
wrongly, that the expenses set out in clauses (a), (b),
(c) and (d) in Explanation (iv) to section 44C need not be
in the nature of executive and general administration
expenditure.
7. The definition of “head office expenditure” given in
explanation (iv) to section 44C is once again reproduced
hereunder.
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“(iv) “head office 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 affairs of, any office outside
India.
(c) travelling by any employee or other person
employed in, or managing the affairs of, any office
outside India; and
(d) such other matters connected with executive and
general administration as may be prescribed.”
8. From the above definition it is clear that the Head
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Office Expenditure means “executive and general
administration expenditure”. The definition of Head
Office expenditure also states that it includes
expenditure incurred in respect of sub-clauses (a), (b),
(c) and (d) under explanation (iv). It, therefore, cannot
be doubted that the expenditure on sub-clauses (a), (b),
(c) and (d) has necessarily to be of the nature of
executive and general administration expenditure. The
contention of the Advocate for the Revenue to the contrary
is, therefore, rejected.
9. The Income Tax Circular No.202 dated 5th July, 1976
makes it extremely clear that section 44C was introduced
in the Act because it was becoming very difficult to
scrutinise and verify claims in respect of general and
administrative expenses incurred by the foreign head
offices in so far as such expenses were related to their
business or profession in India, particularly in the
absence of account books of the head office which are kept
outside India. Foreign companies operating through
branches in India some times tried to reduce the incidence
of tax in India by inflating their claims in respect of
the head office expenses.
10. We have noted the fact that the Assessing Officer has
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without calling for any documents pertaining to the
laboratory expenses come to the conclusion that the
laboratory expenses would fall under the category of
“executive and general administration expenses” and,
therefore, ceiling prescribed under sec.44C would apply to
such expenses. On the other hand, the CIT(A) without any
verification by merely relying on the assessee’s statement
that the research and development expenditure claimed does
not include the expenditure in the nature of rents, rates,
taxes, salaries etc. reached the conclusion that the
laboratory
expenditure was not connected with the general
and administrative expenditure covered by clauses (a),
(b), (c) and (d) of explanation (iv) of section 44C. We
are of the view that the Tribunal in the absence of any
evidence has not reached a final conclusion whether
laboratory expenses are covered under section 44C or not
and has taken a very reasonable and rational view namely
that the matter requires consideration as to whether the
laboratory expenses include any of the expenditure
mentioned in clauses (a), (b), (c) and (d) of explanation
(iv) to section 44C of Income Tax Act, 1961. We see merit
in the suggestion of the Tribunal that the
establishment/supporting staff may exist in connection
with maintaining of the laboratory and that could be the
expenditure in the nature of that indicated in clauses (a)
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to (d) for such establishment/supporting staff. This is
all the more required because as recorded by the Assessing
Officer the assessee had in fact clubbed this expenditure
with the head office expenditure in the computation of
income filed with the return. We agree that an
examination as to whether the expenses claimed did or did
not include any executive and general administration
expenditure as indicated in clauses (a) to (d) of section
44C is required instead of accepting the assessee’s bare
statement without an iota of evidence that such
expenditure did
not include the expenses set out in
clauses (a) to (d) without any verification. If mere
statement of the assessee is accepted without any
verification as is done in the instant case by CIT(A), the
object of introducing section 44C would get frustrated.
11. We are, therefore, of the view that the Tribunal is
right in remanding the matter back to the file of CIT(A)
for disposal afresh. We make it clear that the assessee
would be free to show the expenses incurred towards
laboratory expenditure and satisfy the CIT(A) that they
did not include any Executive and General Administration
expenditure indicated in clauses (a) to (d) of the
explanation (iv) to section 44C of the Income Tax Act,
1961. Needless to add that if the assessee succeeds in
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satisfying the CIT(A) to the effect set out above, the
expenditure claimed by it would be allowable.
12. In view of the above, we answer question no.1 in
affirmative. As regards answer to question no.2 is
concerned, if the assessee succeeds in satisfying the
CIT(A) as set out above, the assessee would certainly be
entitled to the said deduction.
13. The above reference is accordingly disposed of.
(S.J.KATHAWALLA J.) (Dr.S.RADHAKRISHNAN J.)
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4. The learned Advocate for the assessee has in support
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of his contention that section 44C applies only to
executive and general administration expenditure and that
laboratory expenses would not fall under the category of
executive and general administration expenses, cited a
decision in the case of Commissioner of Income Tax Vs.
Emirates Commercial Bank Ltd. reported on 2003(262) ITR
55 (Bom). That was a case where the expenditure was
exclusively incurred for the branch office in India.
There was a concurrent finding of fact recorded by the
Commissioner (Appeals) as well as the Tribunal that the
officer
came from the head office at Abu-dhabi to Mumbai
to attend to the work of Mumbai branch and in connection
with that work the expense was incurred and that expense
was initially incurred by the head office and was
recovered by the head office from the branch in India by
raising a debit note. It was, therefore, held that the
expense was incurred for the branch office in India and,
therefore, section 44C had no application. In view of the
aforesaid facts, we are of the view that the said decision
does not lend any assistance to the present case of the
assessee.
5. The Advocate for the assessee has also cited before us
a decision of ITAT, Bombay Bench (A) in American Bureau of
Shipping Vs. Income Tax Officer reported in (1986) 19 ITD
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793 and has laid strong emphasis on a portion of paragraph
11 of the said order which is reproduced hereunder.
“11…………As regards plan approval,
engineering expenses of Rs.3,10,112/- we have gone
through the details filed. These expenses were
incurred for specific technical services of thenature of approval of the plan for ships being
constructed in India, reviewing survey reports,
covering ships being constructed at Indian
shipyards, approval of designs, tonnage
admeasurements and issuance of tonnage certificatecertificates, reviewing test reports etc. These
expenses were incurred not only at head office in
New York but also in other offices like London,Geneva, Hamburg. We, therefore, confirm the order
of the Commissioner (Appeals) holding that these
expenses were not head office expenses for the
purpose of section 44C.”
. In our view the aforesaid quoted portion, makes it
amply clear that the assessee had filed the details of
expenses which the Tribunal had gone through and thereupon
came to the conclusion that the said expenses were not
head office expenses for the purpose of section 44C. This
decision in fact supports the decision of the Appellate
Tribunal which forms the subject matter of the above
reference.
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