TaxTMI 
TaxTMI 
2008 (9) TMI 235
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.... "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 also has a research laboratory at U.K. The issue involved herein pertains to the Laboratory expenditure incurred by the head office at U. K. (b) Section 44C was inserted in the Income-tax Act, 1961, by the Finance Act No.66 of 1976 with effect from 1st June 1976. By introduction of section 44C a ceiling has been put on the head office expenses in the case of non-residents. This has been explained by Income-tax Circular No. 202 dated 5th July, 1976 in the following terms ([1976] 105 ITR ....
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....; (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 maintained at the head office in United Kingdom in proportion of Indian sales to world sales and was accepted and allowed by the Tax Authorities. (d) Section 44C which came into effect from 1st June, 1976, became applicable for the period 1st July, 1976 to 30^th September, 1976 in respect of the assessment year 1977-78. However, the assessee has in the said assessment year 1977-78 as well as in the subsequent assessment year i.e., 1978-79 after already claiming the head offi....
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....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 indicate in the Income-tax Circular dated 5th July, 1976 that the laboratory expenses which are spent on research and development are covered by the provisions of section 44C. The CIT (A) also held that the expenditure covered by section 44C is obviously of the administrative nature and refers to the rent, taxes, salaries, wages etc. which are in connection with executive and general administration. The CIT (A) has recorded that the assessee has categorically stated be....
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....en, 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 at all. (i) Since the assessee was aggrieved by the order of the Appellate Tribunal, at the instance of the assessee the Appellate Tribunal referred the questions set out in paragraph 1 above for the opinion of this court under section 256(1) of the Income Tax Act, 1961. 3. We have heard the arguments advanced by the advocates for the assessee as well as the Revenue at some length. The advocate for the assessee has reiterated what is argued by the assessee befo....
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....essee 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 the nature of executive and general administration expenditure. 8. The definition of "head office expenditure" given in explanation (iv) to section 44C is once again reproduced hereunder. "(iv) "head office expenditure" means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of - (a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business....
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....e 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 of that indicated in clauses (a) to (d) for such establishment /supporting staff. This is all the more required because as recorded by the Assessing Officer the assessee had in fact clubbed this expenditure with the head office expenditure in the computation of income filed with the return. We agree that an examination as to whether the expenses claimed did or did not include any executive and general administration expenditure as indicated in clauses (a) to (d) of Explanati....