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TMI Blog1985 (1) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... ee-company's branch in India was to be taken over by the Indian company with effect from 1-1-1975, which was designated as the appointed date. It was provided that with effect from 1-1-1975, the assessee, i.e., the parent non-resident company, shall be deemed to have been carrying on the business activity of the said undertaking for and on account of May Baker (India) Ltd. until the effective date, as defined in clause 16 of the scheme. It was made clear in clause 4 of the scheme that the income, profits or losses in the business carried on by the assessee with effect from the appointed date up to the effective date shall be treated as income, profits or losses of the Indian company. Clause 16 reads as follows: "This scheme, although operative from the appointed date, shall take effect finally upon and from the date on which the aforesaid sanctions or approvals or orders shall be last obtained, which shall be the effective date for the purpose of this scheme." While the appointed date was an agreed date from which the scheme was to be effective. since it was necessary to obtain the permission of the High Court and of the Controller of Capital Issues, the effective date from w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Commissioner (Appeals) went through the details of the articles supplied by the assessee to the Indian subsidiary which were mainly raw materials and some engineering materials. But, it was stated that the engineering materials were supplied to the Indian company at cost. The Commissioner (Appeals) went through the correspondence between the ITO and the assessee and also the CBDT's Circular No. 23, dated 23-7-1969 [see Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., p. 36] and came to the conclusion on the facts of the case, that the transactions were on principal to principal basis between the assessee and the Indian company ; that in view of the circular, no tax liability arose in respect of the sales made to the Indian subsidiary and to other parties in view of paragraph 3(2)(i) and (ii) of the circular. The sales to other parties were about Rs. 9 lakhs and the commission on those sales was paid to the Indian company. Therefore, nothing further was taxable. The transactions between the parties were at arm's length at prices which would be normally chargeable from the other customers. The Commissioner (Appeals), therefore, cancelled the assessments in this regard. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company with effect from 1-1-1975, however, the assessee could have continued to earn income from its dealings with the Indian company and others and the next question for decision is whether or not it earned any such income and, if so, what is the extent thereof. Reliance has been placed on the circular of the CBDT, which has been referred to in detail by the Commissioner (Appeals) in his order for the assessment year 1977-78. The assessee supplied raw materials, engineering materials, etc., to the Indian company during the years relevant to the accounting periods and also supplied goods to other parties in India. The contention of the assessee was that so far as the goods supplied to the Indian company and other customers were concerned, the orders were placed on them in England and they were supplying the goods against valid import licences. The sale proceeds were received in UK and the property in the goods passed outside India as the documents of the title were received in India duly endorsed in favour of the respective Indian parties Therefore, the entire transactions took place outside India and no income accrued in India. It was also urged that the transactions between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which the earnings are remitted to the assessee-company in England. The contention of the assessee is that the assessee which is a non-resident, gets a right to dividend only when the Reserve Bank of India gives permission to remit the same. The dividend assessed in the hands of the assessee in these two years was remitted to the assessee-company in the accounting period relevant to the assessment year 1982-83, but it was stated on enquiry that since the dividend income had been brought to tax in the two years under appeal, the assessee-company did not return the dividend income on the basis of the actual payment. The learned counsel for the assessee made a statement at the bar that the assessee was prepared to be assessed on this income in the assessment year 1982-83. Developing his arguments, it was stated on behalf of the assessee that the declaration of dividend gave a right to recover the same to the shareholder, that in fact, it gives rise to a debt. But sections 9(1)(c), 19(1)(a) and (b) of the FERA prohibit a resident in India from creating or acknowledging a debt to a non-resident and the assessee-company being a non-resident, it cannot be paid dividend in Indian rupee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the said ruling and facts of the case. That case related to a finding under section 4A(c) of the Indian Income-tax Act, 1922 that the assessee was a non-resident since its income from outside taxable territories exceeded its income in India. The assessee-company based in UK and a subsidiary of a USA company had purchased debentures of a Brazilian company. Interest was payable on the debentures on 30th June and 31st December every year. The Brazilian company was in involved circumstances and failed to pay interest up to 1949. The Brazilian Government had also imposed exchange restrictions on remittance of pound sterling from 1946 to 1950 and these restrictions prevented conversion of Brazilian currency to that of another country. The case of the assessee-company was that (i) because of such restrictions and (ii) otherwise due to the fact that the Brazilian company was not possessed of pound sterling, interest due during 1950 could not be paid. A deed of arrangement dated 20-4-1950 altering the obligations was then entered into by which the rate of interest was reduced and the Brazilian company agreed to hand over all its surplus cash in pound sterling to Barclays Bank, London, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign exchange in every developing country and even in developed countries, but that does not mean that the effect of declaration of dividends is altered thereby. Section 9(1)(c) bars any person in India from acknowledging any debt so that a right to receive a payment is created or transferred in favour of any person resident outside India. This applies to voluntary acknowledgements but it would be preposterous to say that it bars an Indian company from declaring dividend merely because some shareholders are non-residents. 15. Security is defined in section 9(5) to include coupons or warrants representing dividends or interest. However, the security is not mentioned in section 9(1)(c) but only in section 9(1)(g) which bars it from drawings, issuing or negotiating. Section 19(1)(a), (b) and (c) prohibit transfer of any security outside India, but this has no effect on the question when the dividends are taxable. 16. We, therefore, find no merit in the arguments of Shri Dastur that the dividend was assessable not in those years but in the year 1982-83. The right to dividends both accrued and arose on the date of declaration. The FERA does not override section 8 of the 1961 Act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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