1985 (1) TMI 88 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of income in the hands of a non-resident company for business carried on in India.
2. Assessment of profits from sales made by the non-resident company to its Indian subsidiary and other Indian parties.
3. Applicability of the CBDT Circular No. 23 dated 23-7-1969.
4. Taxability of dividend income under the Foreign Exchange Regulation Act (FERA) and the Income-tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Income in the Hands of a Non-Resident Company for Business Carried on in India:
The main ground of the department's appeals pertains to the finding of the Commissioner (Appeals) that no income is assessable in the hands of the assessee, a non-resident company, for the business carried on in India. The assessee-company was doing business in India through its branch, which was converted into an Indian company with effect from 1-1-1975 under a scheme of amalgamation with May & Baker (India) Ltd. The High Court approved the scheme of amalgamation with effect from 1-1-1975, and the entire business and undertaking in India of the transferor-company, i.e., the assessee, vested in the Indian company. The Tribunal upheld the Commissioner (Appeals)'s order, concluding that from the appointed date, the business was carried on by the assessee on behalf of the Indian company, and therefore, the income was taxable in the hands of the Indian company and not the assessee.

2. Assessment of Profits from Sales Made by the Non-Resident Company to Its Indian Subsidiary and Other Indian Parties:
The ITO brought to tax the income of the assessee from the sales made to the Indian subsidiary and other Indian parties. For the assessment years 1976-77, 1977-78, and 1978-79, the ITO estimated the profit mark-up and attributed a portion of the profits to operations in India. The Commissioner (Appeals) concluded that the transactions were on a principal-to-principal basis and at arm's length, and thus no tax liability arose in respect of the sales made to the Indian subsidiary and other parties. The Tribunal upheld this finding, noting that the transactions were at prices normally chargeable to other customers, and therefore, no income was assessable in the hands of the assessee.

3. Applicability of the CBDT Circular No. 23 dated 23-7-1969:
The Commissioner (Appeals) relied on the CBDT Circular No. 23, dated 23-7-1969, which clarified that no tax liability arises for sales made on a principal-to-principal basis between a parent company and its subsidiary. The Tribunal agreed with the Commissioner (Appeals) that the transactions were at arm's length and followed the circular's guidelines, thus exempting the assessee from tax liability on these transactions.

4. Taxability of Dividend Income under the Foreign Exchange Regulation Act (FERA) and the Income-tax Act:
The assessee contended that dividend income could not be taxed in the hands of the assessee because the dividends were not remitted to the assessee-company in England due to FERA restrictions. The Tribunal examined the provisions of section 8 of the Income-tax Act, which deems dividend income to be taxable in the year it is declared. The Tribunal found that the FERA restrictions were temporary and did not create a moratorium on the liability to pay dividends. The right to dividends accrued on the date of declaration, and the FERA did not override section 8 of the Income-tax Act. Consequently, the Tribunal dismissed the cross-objections filed by the assessee and upheld the taxability of the dividend income in the years it was declared.

Conclusion:
The Tribunal dismissed the department's appeals and the assessee's cross-objections, affirming the Commissioner (Appeals)'s orders that no income was assessable in the hands of the non-resident company for the business carried on in India and that the dividend income was taxable in the years it was declared.