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TMI Blog2008 (9) TMI 235X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt 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 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 the laboratory 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on expenditure incurred by the non-resident taxpayer 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 maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C very clearly defines "head office expenses" as executive and general administration expenses incurred by the assessee outside India and includes what is set out in clauses (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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inal 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 section 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 Inspecting Assistant Commissioner (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 laboratory expenditure, if not part of head office expenditure covered by section 44C is not allowable a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval of designs, tonnage admeasurements and issuance of tonnage certificate certificates, 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." 6. 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. 7. The advocate for the Revenue has reiterated the arguments advanced before the Appellate Tribunal and has 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "executive and general administration expenses" and, therefore, ceiling prescribed under section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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