Case Law Details
RELEVANT PARAGRAPH
13. After hearing both the parties, we do not find merit in the appeal of the revenue on this issue for the reasons given hereafter. The question for adjudication is whether the sum of Rs. 42,09,874/-represen ting the payment of salary to the engineers at Head Office in respect of the work done by them vis-a-vis the Halida Project in India can be considered as head office expenses for the purpose of section 44C of the Act. The stand of the learned Departmental Representative is that the provisions of sec.44C would apply wherever there is allocation of expenses incurred by the Head Office vis-a-vis project in India. He also drew our attention to Explanation (iv) to section 44C of the Act which defines the expression “Head Office Expenses”. According to him, such expenses would include payment of salary by the Head Office to its employees. It has also been stated that there is no basis for allocation of the expenses by the Head Office. On the other hand, the learned counsel for the assessee has supported the order of the CIT (A) and also relied on the decision of the Hon’ble Bombay High Court in the case of Emirates Commercial Bank Ltd., 262 ITR 55 as well as the decision of the Tribunal in the case of American Bureau Shipping vs. ITO, 6 ITD 373 (Bom).
14. We have gone through the provisions of section 44C of the Act. The relevant portion of the same is extracted below:
Section 44C- Deduction of head office expenditure in the case of non-residents.
“Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, no allowance shall be made, in computing the income chargeable under the head “Profits and gains of business or profession”, in respect of so much of the expenditure in the nature of head office expenditure as in excess of the amount computed as hereunder, namely –
(a)
(b)…
(c)……… ..
Explanation – For the purposes of this section –
(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 or profession;
(b) salary/ wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing 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.”
At this stage, it would be appropriate to refer to the decision of the Hon’ble Bombay High Court in the case of Emirates Commercial Bank Ltd. (supra) wherein the scope of the above provisions was explained as under:-
“Section 44C is applicable only in the cases of those non-residents, who carry on business in India through their branches. The said section was introduced to get over difficulties scrutinizing claims in respect of general administrative expenses incurred by the foreign head office in so far as such expenses stand related to their business or profession in India having, regard to the fact that foreign companies operating through branches in India sometimes try to reduce incidence of tax in India by inflating their claims in respect of the head office expenses. 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 Commissioner (Appeals) as well as the Tribunal stating that the officers came from the head office at Abu Dhabi to Bombay to attend to the work of the Bombay branch and, in connection with that work, the expenses was incurred. That, the expenses was initially incurred by the head office which was recovered by the head office from the branch in India by raising a debit note. Therefore, the expense was incurred for the branch office in India. These are concurrent findings of fact. We do not wish to interfere with those findings. Hence, section 44C has no application. “
The perusal of the above judgment shows that – (i) section 44C contemplates allocation of expenses amongst various entities; (ii) The expenditure covered by this section is of a common nature which is incurred both for Head Office and the Branch and (iii) the expenditure exclusively incurred for branch in India would not be covered by this section. In the present case, undisputedly, the payment was made” to those employees who worked in the Head Office. It is also not the case of the assessee that such employees exclusively worked for the branch in India . The material placed on record also shows that the allocation of expenses is based on the man hours engaged towards the work of the Indian project. This fact itself shows that such employees worked for head office as well as for Indian project. Otherwise, there was no need of quantifying the salary cost on the basis of man hours. So, it is a case of allocation of expenses and therefore, such expenses could not be excluded from the scope of section 44C of the Acton the ground that allocation was made on the basis of work done for Indian project. The decision of the Hon’ble Bombay High Court is distinguishable on facts since in that case the employees of Head Office visited India and the expenditure was incurred on traveling by such employees in India . The entire traveling was for Indian branch and therefore, no expenses could be attributed for any other work. It was not a case of allocation of expenses. Hence, the said decision cannot be applied on the facts of the present case since the employees of assessee in the Head Office not only worked for Indian project but also for other work of Head Office.
15. However, we are in agreement with the finding of the CIT(A) that expenses disallowed don’t fall within the ambit of the expression “Head office expenses” as defined in Explanation (iv) to section 44C. According to this definition. Head Office expenses are restricted to executive and general administration expenses only. The section 44C does not apply in respect of each and every expenses incurred by the Head Office. The CIT(A) has given a finding that out of the expenditure of Rs. 42,12,180/- only the sum of Rs. 4,12,220/- represented had office expenses while the rest of the expenditure represented the salary paid for technical job done by the engineers for Indian project. Accordingly, it has been held by him that such expenditure could not be treated as Head Office expenses. The question for our consideration is whether expenses incurred in relation to technical job done by the engineers can be described as Head Office expenses. As already noted, Head Office expenses are restricted to executive and general administration expenses. It is admitted by the learned Departmental Representative that such expenses cannot be said to general administration expenses. However, it is pleaded that such expenditure can be said to be in the nature of executive expenses. We are unable to accept such contention. The word “executive” has been defined in the various dictionaries as under:
As per Webster’s Unabridged Dictionary :
‘Executive’ – 1 – A person or group of persons having administrative or supervisory authority in company. 2. The person or persons in whom the supreme executive power of a post is vested, 3. Pertaining to or suited for carrying out plans, duties, etc.
Oxford Dictionary :
‘Executive’ – A person or body with managerial or administrative responsibility in a business organization.
16. The above definitions reveal that the word ‘executive’ refers to ‘managerial’ . The technical job done by the engineers, in our opinion, cannot be said to be in the nature of executive job since no managerial act is involved in such work. Accordingly, we uphold the finding of the CIT(A) that the salary paid to the engineers would not fall within the ambit of the expression ‘Head Office expenses’ as defined in Explanation (iv) to section 44C. The order of the CIT(A) is, therefore, upheld on this issue though for different reason.
