2012 (12) TMI 406 - AT - Income Tax

Disallowance the share of apportionment of total expenses by HO Assessee is a branch of a foreign company as PE in India having HO in U.K manufacturing of pharmaceutical products Share of laboratory expenses incurred by HO was apportioned on the basis of sales ratio to Indian branch AO observed that since the R&D is centralized by the HO in U.K.& R&D matters are connected with executive and general administration Held that - As the assessee has also filed financial statements to show that the UK based HO has shown executive or general administration expenditure as indicated in Sec. 44C separately. Therefore, the assessee has proved beyond doubt that the expenses claimed on the laboratory expenses did not include any executive or general administration expenses. Since all these details were already filed by the assessee before the A.O. and the ld. CIT(A) and the Revenue Authorities without examining the same or without pointing out any item of disallowable nature to show that the said item of expense did not pertain to laboratory expenses. Therefore appeal decides in favour of assessee

Summary

Issues Involved:
1. Disallowance of laboratory expenses under Section 44C of the Income Tax Act, 1961.
2. Applicability of Section 37(1) of the Income Tax Act, 1961.
3. Validity of certificates from Arthur Andersen & Co.

Issue-wise Detailed Analysis:

1. Disallowance of Laboratory Expenses under Section 44C of the Income Tax Act, 1961:
The primary issue in these appeals was whether the laboratory expenses incurred by the Indian branch of a non-resident company should be treated as head office expenses under Section 44C of the Income Tax Act, 1961. The original assessment disallowed these expenses, considering them as general administrative and executive expenses. The ITAT had previously remanded the matter to the Assessing Officer (A.O.) to re-examine the issue. The A.O. maintained the disallowance, arguing that the R&D activities were centralized in the U.K. and thus fell under Section 44C. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s decision, citing the lack of evidence from the assessee to prove that the expenses were not already disallowed in the parent company's U.K. tax assessment.

2. Applicability of Section 37(1) of the Income Tax Act, 1961:
The A.O. also examined the issue under Section 37(1) of the Act, which pertains to general deductions for business expenses. He concluded that the laboratory expenses were covered by Section 44C and thus not allowable under Section 37(1). The CIT(A) agreed, stating that the expenses could only be allowed if the results of the R&D were utilized by the Indian branch, which was not proven by the assessee.

3. Validity of Certificates from Arthur Andersen & Co.:
The CIT(A) questioned the validity of the certificates provided by Arthur Andersen & Co., labeling it a tainted tax audit company. The assessee argued that the certificates were valid and that the Supreme Court of the United States had reversed a judgment against Arthur Andersen LLP, thus restoring its credibility. The assessee also provided detailed certificates and allocation statements to prove that the laboratory expenses did not include any executive or general administrative expenses as outlined in clauses (a), (b), (c), and (d) of Explanation (iv) to Section 44C.

Tribunal's Findings:
The Tribunal noted that the Revenue had accepted the apportionment of laboratory expenses based on the percentage of gross sales of the Indian branch to total gross sales by the U.K. company up to the assessment years 1975-76 and 1976-77. The Tribunal referred to a High Court judgment in the assessee's own case, which stated that laboratory expenses could be allowed if they did not include executive or general administration expenses. The Tribunal found that the assessee had provided sufficient evidence, including auditors' certificates and detailed expense statements, to prove that the laboratory expenses did not include disallowable items under Section 44C. The Tribunal concluded that the CIT(A) was not justified in sustaining the disallowance and deleted the additions for both assessment years.

Conclusion:
The Tribunal allowed the assessee's appeals, deleting the disallowance of laboratory expenses for the assessment years 1981-82 and 1982-83. The Tribunal emphasized the need for the Revenue to provide contrary material to disprove the assessee's claims, which was not done in this case.