Recommendations of the Public Accounts Committee contained in para 5.11 of their 119th Report. - Income Tax - 1048/CBDT

INSTRUCTION NO. 1048/CBDT Dated : March 17, 1977 Section(s) Referred: 92 Statute: Income - Tax Act, 1961 Attention is invited to the recommendations of the Public Accounts Committee contained in para 5.11 of their 119th Report which reads as under:- "The Committee regard this as a typical case of avoidance of tax. By establishing a branch in a foreign country and treating it as a separate entity, the assessee firm had sought to reduce its income artificially in India and avoided tax on the foreign income. The Committee stress that the matter should be examined in all its aspects in consultation with the Ministry of Law and the loophole, if any, in the Act plugged." 2. In pursuance of the recommendations of the Committee all the Commissioners of Income-tax were requested to send a detailed report giving full facts, modus operandi adopted, applicability or otherwise of section 92 of the Income-tax Act, 1961 and the tax effect in cases similar to the one pointed out by the Public Accounts Committee. The replies received from the CsIT show that no other case of this type has come to notice which would mean that the case referred to in Audit Para 31(i) of the C AG's Report for 1971-72 is the only one of its type. This position is, however, not likely to be correct as there may be other cases where branches or subsidiaries have been opened outside India by Indian companies/ firms but the Department may not be aware of their existence/liaision offices has been obtained from the Reserve Bank of India. The list is upto the period ending 30-9-1976, except in the case of Bombay where the up-to-date list has not been supplied (CsIT, Bombay should, therefore, obtain the latest list from the Reserve Bank of India, Central Office, Exchange Control Department, Bombay.) The relevant particulars relating to your charge are indicated at Annexure 'A'. You are requested to ensure that the assessments of these Indian companies are examined properly with a view to ensuring that there is no escapement of income. Your attention in this regard is invited to section 92 of the I.T. Act, 1961 which deals with the computation of income regarding transactions between a resident and a non-resident. This section authorises the Income-tax Officer to determine the income in India relating to such transactions as may be considered reasonable by him. 3. The procedure followed by the Government of India/Reserve Bank of India for dealing with applications from Indian companies/firms for opening offices/branches abroad or for formation of subsidiaries or conversion of branches into companies abroad, is indicated below :- (i) Opening of a branch office:- All applications from private parties for opening offices abroad are dealt with by the Reserve Bank of India direct. Certain objective criteria have been laid down in this behalf to enable the Reserve Bank of India to consider such applications. In all cases, where permission is granted to open an office, the parties are advised that the profits, if any, after meeting the expenses, should be repatriated to India and they are required to submit quarterly statements of office expenses so that the Bank may satisfy itself that the foreign exchange is being properly utilised. (ii) Floatation of fresh subsidiary company or conversion of an existing branch into a company:- Before the enactment of the Foreign Exchange Regulation Act, 1973, permission for setting up a subsidiary abroad was given, on a very selective basis and only in cases where the applicants would be eligible to open an overseas office. Such applications for floatation of subsidiaries were examined by the Reserve Bank of India and referred to Government on a case-by-case basis for final decision. This position has undergone a change after the enactment of the Foreign Exchange Regulation Act, 1973, in as much as all applications for floatation of subsidiaries are statutorily required to be cleared by the Government u/s 27 of the said Act. During the last 3/4 years, no approval for setting up of any subsidiary company has been given but in cases where approval had been given in the past, necessary follow-up action is taken by the Reserve Bank as in the case of overseas branches of Indian companies/firms. Thus, approval of the Government of India is an essential pre-requisite in all cases of floatation of subsidiary companies (or conversion of branch offices into subsidiary companies) by Indian companies/firms. Applications for opening of branch offices are generally cleared by the Reserve Bank although some individual cases are at times referred to the Government on account of some special features. 3.1 Accordingly, very useful information can be collected from the offices, wherever considered necessary. 4. It has also been decided that wherever permission is given by the Reserve Bank of India for opening of a branch or an office abroad or by the Department of Economic Affairs for establishing a subsidiary abroad, necessary intimation would be sent to the Board. Such intimations would be communicated to the Commissioners of Income-tax concerned for necessary action. 5. It is requested that detailed facts of cases involving escapement of income, detected as a result of enquiries now made on the basis of present instructions, should be reported to the Board by 30-6-1977 positively.