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TMI Blog2018 (6) TMI 1267X X X X Extracts X X X X X X X X Extracts X X X X ..... l 2008 vide order no.FE.CO.FID/10.83.137/2007- 08 to provide professional services to its parent and other member firms of Ernst & Young Global. The Branch provides Professional services which may be in the nature of technical assistance / advice in relation to expatriate tax and business tax compliance services including technical review and approval of income tax returns and other related work products, advice and technical assistance with respect to the production of income tax returns and other related work products; knowledge transfer on engagement specific matters to the Global Shared Services (GSS) personal working in the back office operations where US and UK returns are processed. The Branch is also engaged in providing professional services in the nature of on the job training and consultancy services to other EY network firms. 3. During the course of assessment proceedings, the Assessing Officer observed that the assessee has filed the computation of income vide submission dated 05.01.2016. On perusal of the same, the Assessing Officer noted that the assessee has claimed a deduction of Rs. 24,86,617/- u/s 44C of the I.T. Act. He, therefore, asked the assessee to explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the profit & loss account of the BO, the same have been claimed as deductible in accordance with and within the limits prescribed under section 44C of the Act. The provisions of section 44C were brought to the notice of Assessing Officer. It was submitted that during the year the HO had incurred a total general administrative expenditure of GBP 118,834 (which is approximately INR 11,883,400 as on current rate of exchange) outside India with respect to administrative matters of the Indian BO. However, the assessee has limited its claim for deduction of such expenses only to the extent of cap limit prescribed u/s 44C, i.e. 5% of the adjusted total income which comes to Rs. 24,86,617/-. Copy of certificate issued by the HO in this regard was enclosed as Annexure 2. It was reiterated that section 44C is applicable only on the expenses in the nature of 'general & administrative expenditure' incurred outside India. Other expenses which are incurred in India and attributable wholly for the purpose of business in India, are fully allowable as deduction under normal provisions of the Act (i.e. section 37(1) of the Act). The decision of the Kolkata Bench of the Tribunal in the case of Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 24,86,617/- on account of disallowance of deduction u/s 44C of the I.T. Act. The assessee approached the DRP but without any success. The Assessing Officer thereafter in the order passed u/s 144C(3) r.w.s. 143(3) determined the total income of the assessee at Rs. 5,18,71,340/- by making the above two additions. 7. Aggrieved with such order of the ld. CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds of appeal :- "Based on the facts and circumstances of the case, Ernst & Young Limited - India Branch Office (hereinafter referred to as 'the Appellant') respectfully craves to prefer an appeal against the assessment order issued by the Assistant Commissioner of Income-tax, Circle 1(2)(2), International Taxation, New Delhi (hereinafter referred to as 'Assessing Officer') under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ('Act') on the following grounds: 1. Based on the facts and circumstances of the case, the Hon'ble Dispute Resolution Panel -I, New Delhi ('Hon'ble DRP') and the learned Assessing Officer ('Ld. AO') have erred in law and in facts in computing the to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appeal. Any consequential relief, to which the Appellant may be entitled under the law in pursuance of the aforesaid grounds of appeal, or otherwise, may be thus granted." 8. The ld. counsel for the assessee referring to the provisions of section 44C submitted that as per the said provision, in the case of an assessee being a nonresident, an amount equal to 5% of the adjusted total income is allowable as expenditure in nature of Head Office (HO) Expenses. Referring to para 5 of the assessment order, he submitted that the Head Office had incurred an amount of Rs. 1,18,83,400/- towards general administrative expenditure outside India with respect to the administrative matters of the Indian Branch Office. However, the assessee has limited its claim for deduction of such expenses only to the extent of the gap limit prescribed in section 44C i.e. 5% of the adjusted total income which comes to Rs. 24,86,617/-. Referring to the copy of the order of the DRP, he drew the attention of the Bench to page 4 of the order where the DRP has observed as under:- "The DRP observes that the submissions of the taxpayer do not have merit since the AO has not doubted the genuineness of the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he attention of the Bench to the following observation :- "As far as the question of expenditure not being debited in the books of account of India operations is concerned, this is not really relevant in the light of law laid down by the Hon'ble Supreme Court in the case of Kedarnath Jute Mills Co. Ltd. [1971] 82 ITR 363. As long as the expenditure is really incurred and is otherwise deductible, the deduction cannot be declined on the ground that it has not been debited in the books of account. We have also noted that as noted in the Assessing Officer's order itself, the requisite details were duly furnished by the assessee. Keeping all these factors in mind, as also entirely of the case, we deem it fit and proper to delete the impugned disallowance of Rs. 86,75,496/-. The assessee gets relief accordingly." 11. Referring to the decision of the Hon'ble Supreme Court in the case of CIT vs. Excel Industries Ltd. reported in 13 SSC 459, he drew the attention of the Bench to the following observations :- "Income tax cannot be levied on hypothetical income. It is a levy on income. The Income Tax Act takes into account two points of time at which the liability to tax is attracted vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also his submission that no income has accrued to the assessee on account of Head Office and income, if any, that accrues to the Head Office has to be accounted for by the Head Office only. Therefore, the Assessing Officer was not justified in making the addition on account of undisclosed markup on the cost incurred by the Head Officer in UK. 15. We find some force in the above arguments advanced by the ld. counsel for the assessee. 16. So far as addition of Rs. 21,39,012/- made by the Assessing Officer on account of undisclosed markup on the cost incurred by the Head Office in UK is concerned, we are of the opinion that the income, if any that accrues on account of expenditure incurred by the Head Office, it will be the income of the Head Office and not the Indian Branch Office in view of the decision of the Delhi Bench of the Tribunal in the case of Education Australia Limited (supra), the finding of which has already been reproduced at para 9 of this order. 17. So far as disallowance of Rs. 24,86,617/- claimed by the assessee on account of section 44C is concerned, we are of the opinion that the Assessing Officer is not justified in making the addition. No doubt, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income of the appellant for the year at Rs. 53,486,438/- as against returned income of Rs. 48,296,518/-. 2. Based on the facts and circumstances of the case, the Hon'ble DRP has erred on facts and in law in failing to appreciate that the General & Administrative expenses incurred outside India by the Head Office of the Appellant and not charged to the Branch are not in the nature of 'reimbursement of expenses' and cannot be to be considered as a part of 'cost base' while applying mark-up of 18% on costs incurred in India, and consequently in making an addition of Rs. 2,647,998/- to the returned income. 3. Based on the facts and circumstances of the case, the Hon'ble DRP has also erred on facts and in law in denying the allowance claimed under section 44C of the Act amounting to Rs. 2,541,922/- on the incorrect averment of the Ld. AO that 100% deduction for the expense has been allowed while adding the same to the cost base for computing mark-up, and while doing so, the Hon'ble DRP has failed to appreciate the fact that the general & administrative expenses are incurred outside India by the head office of the Appellant and are not charged or deb ..... X X X X Extracts X X X X X X X X Extracts X X X X
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