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TMI Blog2011 (1) TMI 923X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred exclusively for the Indian branch - It is in this context that the report of the TPO is relevant, which has elaborated on the correctness of the allocation of these expenses. The TPO was verifying whether the allocated costs claimed by the assessee were really incurred for its business and whether these were backed by some relevant evidence - It cannot be the converse situation to argue that the existence of the primary evidence should be presumed from such report, which is again not specific - Even if such remittance is proved in the succeeding year, the inclusion of such amount in the overall limit for sec. 44C will be justified The next two items of allocation of which have not been allowed by the TPO are out of allocation of general and administration costs, being Advertising at BD 3,390 and Others at BD 6,641 - It is not a case where the Head Office did not raise any invoice or debit note in respect of such expenses - It is made clear that the AO will work out the amount deductible u/s 44C afresh as per law by considering sum total of items (‘B’) and (‘C’) and shall not restrict himself only to the claim originally made by the assessee in the return - Appeal are all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010) 328 ITR 81 (Bom.), in which it has been held that disallowance of expenses is called for u/s.14A in such circumstances. However, the manner of computation of such disallowance has been restored to the file of AO for making on some reasonable basis. It has further been held in this case the provisions of Rule 8D are prospective. Respectfully following the precedent, we set aside the impugned order and direct the AO to compute disallowance u/s.14A in accordance with the ratio laid down by the Hon ble jurisdictional High Court in the aforenoted case of Godrej Boyce Ltd. 7. Main issue in these appeals is ground no. 4 of the Department against the deletion of addition made on account of Head Office expenses and NRI desk expenses and the only grievance of the assessee in its appeal is against the deductibility of expenses u/s.44C. 8. The facts of these ground are that the assessee in the original computation of income, a copy of which is placed at page 11 of paper book, worked out the figure of profit, after certain additions and reductions from the amount of Net profit as per Profit and loss account, at Rs. 1,48,24,908/-. Thereafter, a sum of Rs.2,18,99,306/- towards NRI De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs and allocation of indirect costs. A chart has been prepared on page 28 of the impugned order, as under : Sr. No. (I) Nature of Expenses (II) Allocated by appellant (III) Allocated by TPO (IV) 1. Direct staff costs 81,192 81,192 2. Travel and communication 17,866 17,866 3. Allocated staff costs incurred by OBD and various other Head office support centers (a) Office of the Head of OBD (b) Financial control (c) Information technology (d) Human Resource (e) Operations (f) Internal Audit 13,307 5,320 5,213 4,782 4,762 2,226 Nil 5,320 5,213 4,782 4,762 2,226 4. Allocated General and administration costs (a) rent and maintenance (b) Depreciation (c) Advertising (d) Other 14,767 9,719 3,390 6,641 14,767 9,719 Nil Nil Total 1,69,185 1,45,848 (Figures in the above table are in BD. Rate of conversion of BD into Indian Rupees has been uncontrovertedly adopted by the TPO as 1 BD = INR 129.44) 10. In p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aging 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. 12. A bare perusal of the above provision transpires that this section, allowing deduction of head office expenditure in the case of non-residents, opens with a non-obstante clause. It then proceeds with by providing that the Head Office expenditure, as explained in Explanation (iv), can be allowed as deduction only to the extent provided herein. It has two limbs, first, being an amount equal to five percent of the adjusted total income and second, being the amount of so much of the 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. Lower of these two amounts is deductible u/s 44C. The rationale behind the insertion of sec. 44C is to obviate the hardship faced by the Assessing Officers, in verifying the veracity of the proportionate common Head Office expenditure as claimed by the assessee. It is quite possible that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eductible as per the regular provisions and are in addition to the common expenditure for which restrictive limit has been enshrined in sec. 44C. From here it follows that whereas common head office expenses as per the Expl. (iv) are governed by sec. 44C, the exclusive head office expenses are deductible separately as per the regular provisions of the Act. The Hon ble jurisdictional High Court in CIT v. Emirates Commercial Bank Ltd. (2003) 262 ITR 55 (Bom) has held that sec. 44C has no application to the expenses exclusively incurred by the Branch Office in India. It has been specifically laid down : In other words, section 44C seeks to impose a ceiling/restriction on Head Office expenses. However, section 44C contemplates allocation of expenses amongst various entities. That, the expenditure which is covered by section 44C is of a common nature, which is incurred for the various Branches or which is incurred for the Head Office and the Branch. However, in this case, we are concerned with the expenditure exclusively incurred for the Branch. In this case, there is a concurrent finding of fact recorded by the CIT(Appeals) as well as the Tribunal stating that the Officers came from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed deduction u/s.44C at Rs.24,64,413/. It was, of course, done after adding back Adjustments made by the Transfer Pricing Officer amounting to Rs.2,66,55,813/-, which figure comprises of direct and allocated expenses of NRI Desk (A and B above) at Rs.2,18,89,306 and other allocated expenses (C above). The effect of this addition by the AO and thereafter granting deduction u/s.44C at Rs.24.64 lakhs is that the above three categories of expenses i.e. A, B and C stood considered as part of the head office expenses covered u/s.44C. However, the ld. CIT(A) came to hold that a sum of Rs.2,18,89,306 (representing A and B) was to be allowed in full, independent of sec. 44C, and for the remaining expenses (representing C), deduction was to be allowed at Rs.24.64 lakhs u/s 44C as claimed by the assessee itself. The grievance of the ld. D.R. is that the CIT(A) was not justified in taking out Rs.2,18,89,306 (A and B) from common pool of expenses covered u/s.44C and thus allowing deduction in full, detaching them from the ambit of sec. 44C. In the opposition, the assessee is aggrieved for restricting the deduction u/s.44C to Rs.24.64 lakhs instead of Rs.47.17 lakhs. 17. Insofar as expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve costs of NRI Desk. Inviting our attention towards the TPO s report, it was put forth that the TPO accepted the allocation of such expenses at serial nos.3 and 4 of the above table except three items viz. 3(a) - office of the Head of OBD BD 13,307, 4(c) - advertising BD 3,390 and 4(d) others BD 6,641. In this view of the matter, it was argued that the allocation of expenses by the TPO in respect of other items should be considered as allowed by him. Per contra, the ld. D.R. argued that such allocated expenses are part and parcel of the total expenses covered u/s.44C and no separate deduction is permissible. 20. We are unable to countenance the view canvassed by the ld. AR that the allocated expenses of the NRI Desk should also assume the character of exclusive head office expenses and be dealt with accordingly. It is important to appreciate that the sole criteria for considering the inclusion of head office expenses within the scope of sec. 44C or the general provisions is their exclusive or non-exclusive nature. If these are shared/allocated/apportioned/non-exclusive head office expenses, then they will find their residence in the overall limit u/s 44C. On the other hand, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of items 3(a), 4(c) and 4(d) of the Table above , as these were not proved to have been incurred at all. He was dealing with the question of allocation of staff costs and general administration costs to the assessee (steps i and ii above) and not on granting of deduction u/s. 44C (step iii). The TPO can simply accept or reject the allocation of expenses to the Indian branch but can t adjudicate on their deductibility as per the provisions of the I.T. Act, which falls in the sole jurisdiction of the AO. The acceptance of allocation by TPO in respect of items, other than 3(a), 4(c) and 4(d), meant that he gave a green signal about the head office having actually incurred such expenses for the NRI Desk. The dispute on allocation of expenses between the assessee and TPO arose only in respect of three items i.e. 3(a) i.e. Office of the Head of Overseas Business Division (OBD) amounting to BD 13,307; 4(c) Advertising amounting to BD 3,390; and 4(d) Others amounting to BD 6,641. 22. The first disputed item is allocated staff costs incurred by the OBD and various other HO support centres at BD 13,307. The TPO did not accept any allocation of this expenditure to the assessee as per pages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenses. If any expenditure is booked in the accounts without any evidence, the same cannot be allowed as deduction. The incurring of the expenditure is naturally a pre-condition for its deductibility. In all such circumstances, the onus is always on the assessee to prove that such expenditure was actually incurred by it. This onus can be discharged by leading some reliable evidence to demonstrate that a liability for such expenditure was fastened on the assessee, which was accepted by it. It is noted that the assessee claimed deduction for BD 13,307 without any invoice or debit note issued by the Head Office. The ld. A.R. is relying on the report of the Auditors for claiming deduction. Primarily, this report does not mention any amount as claimed by the assessee. Notwithstanding that, the job of the auditor is to examine the evidence and then certify about its correctness. Auditor s Report is prepared from the examination of primary evidence. It cannot be the converse situation to argue that the existence of the primary evidence should be presumed from such report, which is again not specific. It, therefore, becomes crystal clear that if there is no evidence for the incurring ..... 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