remittance of head-office expenses - Income Tax - 876/CBDT

INSTRUCTION NO. 876/CBDT Dated : September 6, 1975 Section(s) Referred: 37 Statute: Income - Tax Act, 1961 Attention is invited to Board's Instruction No. 846* (F.No. 491/8/74-FTD dated 16th June, 1975) on the subject mentioned above. 2. Recently, the Reserve Bank of India has issued instruction that the Bank would not henceforth allow any remittance of head-office expenses separately from the current surplus of the foreign companies, including banks. In other words, remittances will be allowed only on the current surplus (i.e., income less expenses) after deduction of the Indian income-tax at the appropriate rate on the whole of such surplus, if any, that may be claimed for purposes of deduction in the computation of taxable income. If after the income-tax assessment is completed, the bank/company comes up with a request for a further remittance on account of the acceptance by the income-tax authorities of a certain sum as head-office expenses appropriately allocable to the Indian operations and, therefore, not taxable, such remittance will be allowed only on submission of the income-tax assessment order showing the amount of head-office expenses allowed as a deduction by the Income-tax Officer and the total tax actually payable. 3. As this revised procedure has come into effect immediately, it is all the more necessary for the Income-tax Officers to exercise greater vigilance in the matter of scrutiny of claims for head-office expenses. 4. During the course of inter-Ministerial meetings which had taken place proceedings the issue of this directive by the Reserve Bank the following decisions were taken in respect of remittance by oil companies and tea companies. 5. Oil Companies: With regard to pending applications made prior to 1-1-1973 (and which involved claims amounting to about Rs. 1.5 crores annually) on account of (a) engineering and technical services, (b) royalties and licence fees. (c) office expenses abroad and (d)n sundries, the Ministry of Petroleum and Chemicals were to negotiate these remittances with the foreign oil companies keeping in view the extent of services rendered by them. In respect of all future remittances after 1-1-1973, prior permission of the Government would be necessary and in this regard the companies will have to ensure that advice or technical assistance is really required to sustain or improve their existing activities in India and that such advice or technical assistance is not indigenously available. With regard to third-party risk insurance, in future the oil companies would discontinue, the arrangement under which they obtain air travel accident insurance cover abroad on account of their staff members travelling outside India against passages booked in India or whenever they travel within the country and that insurance for such purposes may be had with the insurance companies in India. Regarding the pending insurance claims, these will be negotiated by the Ministry of Petroleum and Chemicals with oil companies. It will be observed that from 1-1-1973 the remittances have been linked to the prior approval being taken from the Petroleum Chemicals Ministry on the basis of the essentially of the service and its non-availability in India. Apart from the claims on account of head-office expenses, technical and engineering service fee and royalties or licence fees, the oil companies have also been making claims on account of certain miscellaneous charges which are grouped under the head "sundries". These charges are generally based on actuals and the pending clams will be considered and allowed on merits. The Reserve Bank of India was required to submit these cases individually to the Ministry of Petroleum Chemicals for their scrutiny and recommendation. 6. Tea Companies : It has been the practice over the past several years that the sterling tea companies operating in India pay to their overseas secretaries, commission with reference to sales of tea effected by them not only in the United Kingdom and a other countries but also on the sales effected in India. Although no special services are rendered by the U.K. Secretaries is charged on such sales because they are said to have exercised general supervision for their operation of their estates and rendered certain other services. The agreements under which the commission is paid can be broadly classified into the following three components:- (i) For rendering of secretarial assistance by performing the functions of such duties as ordinarily pertain to the office of the Secretary of a company; (ii) For rendering any other service (e.g., acting as technical advisers or consultants) and/or advising on purchase of machinery in the United Kingdom; and (iii) For payment of commission in connection with sale of tea. It was felt that in the case of agreements of the types mentioned in items (i) and (ii) above, the remuneration should not be linked with the sales; and in the case of the type in item (iii) above, the commission should be with reference to U.K. sales only. It was observed that there was no justification for allowing a commission on Indian sales to be remitted towards the maintenance of U.K. office though it was recognised that a reasonable amount for the maintenance of U.K. office has to be allowed to be remitted. In view of this position the tea companies are being requested by the Reserve Bank of India to furnish a statement showing the actual expenses incurred by them for the year 1974, duly certified by the auditors, towards the maintenance of U.K. office and the remittances are to be allowed on the basis that the actual amount to be remitted for 1974 is not in excess of what was allowed for the year 1973. Similarly, the Reserve Bank of India has advised the sterling tea companies that the present basis of payment of commission on Indian sales should be discontinued with effect from 1-1-1975. They have been advised to obtain prior permission of the Reserve Bank of India for meeting such expenses indicating separately the remittances required for each of the three classifications mentioned in items (i), (ii) and (iii) above. It will, therefore, be noticed that the earlier arrangements have come to an end as on 31-12-1974 and the payment of commission will after that date be governed by the new agreements which may be entered into with the approval of the Reserve Bank of India. 7. These instructions may please be brought to the notice of the Income-tax Officers in your charge. The Income-tax Officers should, while handling the cases of oil companies and sterling tea companies, ask the assessee concerned to produce the certificate/ approval letter of the Reserve Bank of India/Ministry of Petroleum and Chemicals in regard to the expenses which have been considered as reasonable and take this into consideration in deciding the admissibility of such expenses.