TMI Blog2012 (12) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... of expense did not pertain to laboratory expenses. Therefore appeal decides in favour of assessee - I.T.A. No. 6772 & 6773/Mum/2002 - - - Dated:- 25-7-2012 - SHRI DINESH KUMAR AGARWAL AND SHRI P.M. JAGTAP, JJ. Appellant by Shri Porus Kaka and Shri Divesh Chawla Respondent by : Shri Shishir Srivastava ORDER PER DINESH KUMAR AGARWAL, J.M.: These two appeals preferred by the assessee are directed against the common order dtd. 30-9-2002 passed by the ld. CIT(A) for the assessment years 1981-82 and 1982-83. Since facts are identical and issue involved is common, both these appeals are disposed of by this common order for the sake of convenience. 2. Briefly stated facts of the case extracted from ITA No. 6772/Mum/2002 for A.Y. 1981-82 are that the assessee is a non-resident company, being only a branch of a foreign company with Head Office in U.K. Its business both in U.K. and in India is that of manufacturing pharmaceutical products. It has a separate and independent establishment for its branch business in India. The original assessment was completed on 16-11-1983 on an assessed income of Rs. 1,34,34,300/- as against the income returned of Rs. 69 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the ld. CIT(A) vide his common order observed that it is well known that Arthur Andersen Co. is a tainted tax audit company and its certificate cannot be taken for granted particularly when this certificate was also available before the Tribunal. He further observed that the R D expenditure has been incurred by the Head Office in U.K. and accordingly a portion of the expenditure is allowable in computing the appellant s income only if the result of the R D has been utilized by the branch office in India. He further observed that it is not the case that the Indian branch has incurred any such expenditure on his own in the U.K. He further observed that the appellant has failed to produce the books of accounts, the relevant documents and particularly the evidence that this expenditure had not been allowed or proportionately disallowed in case of the parent company in U.K. Income Tax assessment and accordingly he upheld the disallowance made by the A.O. for both the assessment years. 4. Being aggrieved by the order of the ld. CIT(A) the assessee is in appeal before us challenging in the common grounds for the assessment years 1981- 82 and 1982-83 the sustenance of disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the A.O. following the Tribunal order for the A.Y. 1979-80. He further submits that against the order passed by the Tribunal for the assessment years 1980-81 and 1981-82, the Hon ble jurisdictional High Court in John Wyeth Brother Ltd. vs. CIT (2008) 220 CTR (Bom) 416 : (2009) 312 ITR 80 (Bom) has examined the issue of applicability of laboratory expenses in the light of the provisions of clauses (a), (b), (c) and (d) of Explanation (iv) to section 44C of the Act. Their Lordships while upholding the order of the Tribunal in remanding the matter to the file of the A.O. for disposal afresh held that if the assessee were to satisfy that the expenses incurred towards laboratory expenditure did not include any executive or general administration expenditure indicated in clauses (a), (b), (c) and (d) of Explanation (iv) to section 44C of the Act, the expenditure claimed would be allowable. In the light of the above, the ld. counsel for the assessee referred to the following certificate/statements:- 1. Certificate from Arthur Andersen Co. re. Laboratory expenses assessment year 1981-82 (page No. 21-24 of paper book). 2. Allocation Statement of London Overheads assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the relevant assessment order of the parent company, therefore, the ld. CIT(A) was fully justified in upholding the disallowance made by the A.O. He further submits that even as per the judgment of the Hon ble jurisdictional High Court, the assessee is required to prove as to whether the expenses claimed by the assessee did or did not include any executive and general administration expenditure as indicated in clauses (a), (b), (c) and (d) of Explanation (iv) to section 44C of the Act and since the assessee has failed to produce the relevant documents in this regard, the A.O. was justified in rejecting the claim of the assessee. He, therefore, submits that the order passed by the A.O. and confirmed by the ld. CIT(A) be upheld. 7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that the Revenue upto the assessment years 1975-76 1976-77 has accepted apportionment of laboratory expenses based on the percentage of gross sales of the Indian Branch to total gross sales of Head Office in U.K. However, in the assessment years under conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44C was introduced in the Act because it was becoming very difficult to scrutinise and verify claims in respect of general and administrative expenses incurred by the foreign head offices in so far as such expenses were related to their business or profession in India, particularly in the absence of account books of the head office which are kept outside India. Foreign companies operating through branches in India some times tried to reduce the incidence of tax in India by inflating their claims in respect of the head office expenses. We have noted the fact that the Assessing Officer has without calling for any documents pertaining to the laboratory expenses come to the conclusion that the laboratory expenses would fall under the category of " executive and general administration expenses" and, therefore, ceiling prescribed under section 44C would apply to such expenses. On the other hand, the Commissioner of Incometax (Appeals) 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 laborator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in mind the principle laid down by Their Lordships, we find that the assessee has filed auditors certificate dtd. 27-1-1984 and 25-1-1985 for the year ended on 31-10-1980 and 31-10-1981 respectively along with relevant details appearing at page 21 to 43 of the assessee s paper book. The relevant paras of the certificate of the Chartered Accountant dtd. 27-11-1984 for the A.Y. 1981-82 read as under:- We confirm that total laboratory expenses of Pound 2,792,275 were incurred by John Wyeth Brother Limited and are incorporated in the statutory accounts of John Wyeth Brother Limited at 31 October 1980 upon which our firm gave an unqualified audit report. We also confirm that the detailed analysis of this expenditure as shown on Schedule 1 (document two above) is in agreement with the accounting records of the Company which formed the basis of the statutory accounts referred to in the preceding paragraph. We confirm that laboratory expenses incurred directly by the Indian branch, Pound 13,803 is in agreement with the financial statements of the Indian branch as received by the Company in the United Kingdom and incorporated into the statutory accounts for the year ended 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 260,368 2,776,222 3380,757 Wyeth International Division 2,250 6,587 India Branch 13,803 16,789 Pounds 2,792,275 3,404,133 We further find that the assessee has also filed the details of apportionment of the expenses based on the percentage of gross sales of the Indian Branch to total gross sales by the U.K. Company which is as under:- A.Y. 1981-82 (In Pounds) A.Y. 1982-83 (In Pounds) 1. Total World Sales 37,135,803 45,460,463 2. Direct sales to India 4,839,181.14 5,605,548 3. Percentage 13% 12.331% 4. Laboratory expenses: (i) Total World 2,792,275.08 3,404,133 (ii) Direct to India 13,802.79 16,789 5. Amount claimed 362,063 417,693 6. Conversion rate Rs. 18.48 Rs. 16.34 7. Amount claimed (in Rupees) Rs. 66,90,924/- Rs.68,25,104/- We further find that the assessee has also filed financial statements to show that the U.K. Company has shown executive or general administration expenditure as indicated in clauses (a), (b), (c) and (d) of Explanation (iv) to section 44C of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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