Per Shri B. S. Ahuja, Judicial Member - The three appeals are by the department which pertain to the assessment years 1976-77, 1978-79 and 1977-78 respectively. The cross-objections have been filed by the assessee for the assessment years 1976-77 and 1978-79. For the sake of convenience, they are disposed of by the common order.
2. In departments appeals, the main ground 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. A few facts are necessary to make the position clear.
3. 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 the scheme of amalgamation of the undertaking in India belonging to the assessee, that is non-resident, with May & Backer (India) Ltd., an Indian company, wholly owned by the assessee, the entire undertaking of the assessed-companies 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 upto 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 Court and of the Controller of Capital Issues, the effective date from which the Indian company was to actually taken over charge of the business and necessarily to be later and that effective date was actually in 1979 when the High Court finally approved the scheme. A copy of the order of the High Court dated 13-6-1979 has been placed before us. The High Court has approved the scheme of amalgamation with effect from, 1-1-1975 and with effect from that date, the entire business and undertaking in India of the transferor-company, i.e., the assessee, including all its properties and assets disclosed in its audited Indian branches balance sheet as on 31-12-1974, remained vested in the Indian company.
4. The ITO brought to tax the income of the assessee because the parent company had supplied to the Indian company certain drugs, etc., and certain amount of profit embedded therein. The assessees case in the assessment year 1976-77 was that the profit of those sales was 2.9 per cent only as per the word ratios certified by the auditors. However, since the profit on various items sold to the Indian subsidiary and other parties in India was not given, the ITO estimated the profit mark up at 5 per cent and 50 per cent of the profits were held attributable to the operations in India and were brought to tax.
5. In assessment for the assessment year 1977-78, the profit was, however, estimated at 10 per cent and 50 per cent thereof were held to be attributable to the operation in India. In this year, the company had also made direct supplies to other Indian parties on which commission was allowed to the Indian subsidiary company. The ITO held that 5 per cent of the value of the supplies made to the Indian parties directly would be assessable in India, 50 per cent of the net income estimated on those operations at 10 per cent of the turnover.
In the assessment year 1978-79, the profit on goods sold to the Indian subsidiary was taken at 10 per cent and 50 per cent thereof was held attributable to the operations in India and was brought to tax. Similarly, in respect of the sales made to various parties directly, the income was estimated at 10 per and 50 per cent thereof was brought to tax in India.
6. the company went in appeal before the Commissioner (Appeals). The Commissioner (Appeals) discussed the matter threadbare in the appellate order for the assessment year 1977-78 and this order was followed in the remaining two years. 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 India subsidiary which 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 CBDTs Circular No. 23, dated 23-7-1960 [see Taxmanns 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 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 these sales was paid to the Indian company. Therefore, nothing further was taxable. The transactions between the parties were at arms length at prices which would be normally chargeable from the other customers. The Commissioner (Appeals), therefore, cancelled the assessments in this regard.
7. the department is aggrieved and has come up in appeal. We have heard the learned departmental representative and also the learned counsel for the assessee. We have been taken through the scheme of amalgamation, the order of the High Court, the correspondence between the IAC and the assessee-company and the other evidence along with the circular of the CBDT. the scheme of amalgamation is clear and unambiguous, and subject to the approval of the company judge and sanction or approval of the Controller of Capital Issues, the entire undertaking, assets and liabilities of the assessee-company were to vest in May & Baker (India) Ltd., with effect from the appointed date, i.e., 1-1-1975. From the appointed date till the effective date, which was bound to be later since the approval of the Court and of the Controller of capital Issues had to be obtained, the undertaking was to be carried on by the assessee but on behalf of the Indian company. No sooner the High Court gave approval to the scheme, it approved the entire scheme and made it clear that the entire undertaking vested in the Indian company with effect from 1-1-1975, i.e., the appointed date, and the question of the undertaking continuing in the ownership of the assessee after 1-1-1975 cannot, therefore, arise at all. The reference to clause 16 to the effective date is only because that date would be when, in fact, the undertaking would stand transferred to the Indian company after the approval of the High Court and that of the Controller of the Capital Issues had been obtained. It does not mean that till that date the undertaking, with its assets and liabilities, profits or losses, would continue to belong to the assessee. This is the clear meaning of the effective date and we are in doubt whatsoever that the entire undertaking vested in the Indian company with effect from 1-1-1975, and, therefore, as from that date onwards, it is the Indian company which is taxable and not the assessed-non-resident company. That the Indian company has returned the profits earned by it from 1-1-1975 onwards from this very undertaking is not disputed. Therefore, we uphold the order of the Commissioner (Appeals) in this regard. Our finding is also in line with the decision of the Bombay High Court in CIT v. Swastik Rubber Products Ltd. : 140ITR304(Bom) .
8. In spite of the undertaking having been transferred to the Indian 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 Indian 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 assessee and the foreign subsidiary were on principal to principal basis and Circular No. 23 dated 23-7-1969 made it clear that merely because the sales were by the parent company to the subsidiary, it could not be assumed that the transactions were not at arms length. There is no factual challenge by the department to the finding of the Commissioner (Appeals) that the transaction were on principal to principal basis and were at arms length, i.e., at the prices which the assessee-company charged from other customers. Therefore, no tax liability would arise to the assessee-company on the sales made to Indian subsidiary. So far as the sales to outside parties are concerned, the assessee-company having paid the commission to the Indian subsidiary at 5 per cent and 10 per cent on different types of goods exported and the certified world profit ratio being 2,36, 9.69 and 5.23 per cent in the respective three years, it would be reasonable to hold that the entire margin of profit earned from those parties was paid to the Indian subsidiary and, therefore, nothing was to be assessed in the hands of the assessee. We, therefore, uphold the orders of the Commissioner (Appeals) that no income was assessable in the hands of the assessee in respect of the supplies made to the Indian subsidiary and supplies made to the third parties. In view of our finding on the first ground, ground Nos. 2 and 3 pertaining to the Commissioner (Appeals) entertaining the assessed-companies ground of appeal against the levy of interest under sections 139(8) and 215 of the Income-tax Act, 1961 (the Act) become redundant because there will be no interest required to be paid since the only other income is from dividends on which the tax is deducted at source. We, therefore, uphold the order of the Commissioner (Appeals) in this regard also. In the result, the departments appeals for all the three years are dismissed.
9. There are two cross-objections by the assessee-company in which the contention raised is that both in assessment years 1976-77 and 1978-79, dividend income could not be taxed in the hands of the assessee, because having regard to the provisions of the Foreign Exchange Regulation Act, 1978 (the FERA) the dividend incomes were not remitted to the assessee-company in England and cannot, therefore, be brought to tax. The contention is that they would be taxed only in the year 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 the 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 rupees. Reliance was placed on E. D. Sassoon & Co. Ltd., v. CIT : 26ITR27(SC) , CIT v. Public Utilities Investment Trust Ltd. (No. 1) : 143ITR236(Bom) . and J. Dalmia v. CIT : 53ITR83(SC) for the proposition in support of the claim made by the assessee.
On behalf of the department reliance was placed on sections 5 and 8 of the Act, for the proposition that the dividend income had to be assessed in the year in which the dividend is declared and, therefore, the arguments that the dividend income should be taxed only when it is actually paid in foreign currency to a non-resident holds to ground.
10. We have considered the rival contentions. the assessee-company which is a non-resident, received dividends from an Indian company. The authorities below have taxed the same in the years in which the dividend was declared. Obviously, they applied section 8. the assessee contends that, since the amount of dividend cannot be remitted to and received by the assessee unless the RBI gives permission to remit the same in pound sterling and that permission was not given in the two years under appeal but in the assessment year 1982-83, the dividend income was not taxable in the years in which it was declared. We have to decide whether this stand taken by the assessee is correct.
11. Section 8(a) lays down that any dividend declared by a company or distributed or paid by it within the meaning of section 2(22) (a), (b), (c), (d) and (e) of the Act shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. This section would, on the face of it, apply to every declaration of dividend and the revenue would, thus be correct in assessing it in the assessment years 1976-77 and 1978-79. It is not disputed by the counsel for the assessee that declaration of dividend in the annual general meeting gives rise to a debt in favour of the assessee which the assessee was entitled to enforce. But the argument is that since the FERA bars any resident from creating or acknowledging a debt to a non-resident, except with the approval of the RBI. it should be held that no debt arose till the RBI permitted the Indian company to remit the dividends in pounding sterling.
12. strong reliance is placed on the Bombay High Court ruling in Public Utilities Investment Trust Ltd. (No. 1)s case (supra). We have carefully gone through 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 the interest suspense account for payment of interest on debentures. the interest due in 1950 was, thus, paid in 1951 and the question arose whether that was the income of the assessee for 1951 or for 1950. The High Court held that it was the income for 1951 for the following reasons :
(i) The place of payment of interest agreed to was London in pound sterling.
(ii) Where by reason of subsequent alteration of an agreement or contract or by reason of intervening supervening legislation, performance of contract in the agreed manner is rendered uncertain, the original agreed due date for performance becomes irrelevant. In that case, altered agreed terms for payment, entered into on 20-4-1950 showed that interest payment had to be made by remittance by debtor company in pound sterling to the credit of interest suspense account which was to be the ownership of trustees of the debenture trust deed. Up to 1950, payment was rendered impossible due to legislative restrictions on remittances in pound sterling.
Therefore, though interest became due on 30-6-1950 and 31-12-1950 it was not payable in those dates due to supervening legislation.
13. We may point out that the facts of the case before us are entirely different. The dividends declared by an Indian Company are payable in rupees in India and not in pound sterling, while in the case relied upon, the interest was payable as per contract by the Brazilian company in London and in pound sterling. This distinction on facts is sufficient to reject this plea.
14. We may also point out that the FERA restrictions are temporary ones and they do not create a moratorium of the liability to pay dividends to non-residents. When this was pointed out on behalf of the department before the High Court; their Lordships observed on page 251 that these are strong arguments but they held in favour of the assessee on account of the altered agreed terms for payment as recorded in the agreement dated 20-4-1950. There are no such facts in the case before us. Merely because the assessee, who owns those shares is a non-resident, and has to receive the dividends in pound sterling with the prior permission of the RBI does not mean that on declaration of dividends, a debt which arose, on fact and in law, in favour of every shareholder did not so arise only in the case of the assessee. Indeed, there are restrictions on remittances in 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 acknowledgments but it would be preposterous to say that it bars an Indian company from declaring dividend merely because some shares holders 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. It only restricts the right to remit the dividends to England. That does not affect the taxability of the dividends from accrual to actual payment on receipt by the assessee. We, therefore, dismiss the cross-objections in both the years.
17. In the result, the appeals filed by the department and the cross-objections filed by the assessee are dismissed.