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(c) APPORTIONMENT BETWEEN BRANCH AND PARENT ENTERPRISE

1. Apportionment of Gross Profits of Local Branch to Real Centre of Management abroad

91. The mere fact that the management of a business is not established in N.E.I., whereas the business itself is carried on entirely in N.E.I., cannot be considered of sufficient importance to justify holding that part of the profits have been made in the country where the management is situated. This standpoint is due to the fact that the enterprises in N.E.I. are primarily agricultural and mining enterprises. The former might be called agricultural-industrial concerns, because they turn the raw material into the product fit for the international market in their own factories on their own estates. For staple produce (sugar, tea, coffee, pepper, copra, tin and rubber), world market prices exist, and many of these products are sold by tender or sealed bids.1 Consequently, the work of the directors with regard to the selling is of very little importance in the making of profits. Moreover, the fact that a corporation is established outside of the N.E.I. is often of a purely formal nature.

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92. Sometimes the management abroad performs services to which part of the profits may be attributed; but, in principle, no special part of the profits is to be apportioned to the management as such. Practice will, no doubt, reveal that, in many concerns, it is impossible to keep strictly separate the management as such and its activities with regard to the making of profit.

2. Apportionment of Expenses of Real Centre of Management to Branch

Interest Charges

93. When only the real centre of management is established outside N.E.I., while the entire business of the foreign enterprise is carried on in this country, the total interest carried by the centre of management on behalf of the enterprise will be charged to the account of the profits taxable in this country. When, on the other hand, the foreign company has several branches, the interest will have to be divided among them. We take, for example, an English rubber company operating exclusively in Sumatra. One day it decides to open rubber estates in Liberia. For the financing of the latter, it is compelled to negotiate a loan. In such case the interest on the loan will not be charged against the East Indian profits. When, however, an import firm has branches in different countries, it will be pretty well impossible to assign loans to any particular branch, and the apportionment of the interest charged will be made according to the degree of importance of each branch in the business complex. As a rule, the turnover figure may be taken as a basis of apportionment.

General Overhead

94. A similar reasoning is applied for the overhead expenses, on the understanding that, for these expenses, the importance of the branch in the business complex is always the basis for the apportionment. When the enterprise in India is the only business of the foreign company, so that only the management has its seat outside this country (a form which is found very generally in agricultural and mining enterprises), the overhead expenses are, as a general rule, deducted from the profits. Then the profits are put down in total as N.E.I. profits.

95. Some concerns contend that the charges, commissions, etc., made for services to the branch should be deducted from the East Indian profits, but the Court of Tax Appeals has confirmed the opinion of the administration that such deductions should not be allowed. Although it might be fair to allow such deductions in the case of banks and import and export enterprises, it will never be easy in their case to settle the question directly in figures.

3. Apportionment of Net Profits

96. It is impossible to lay down a general rule in connection with the apportionment of part of the net profits of the branch to the deficitary parent, or vice versa.

When an enterprise operates at a total loss, no profit will be allocated to the Indian branch if, for instance, the enterprise consists only of a buying establishment outside N.E.I., and a selling organisation in this country. If, however, there is only one buying establishment outside this country, but several selling establishments in N.E.I. and various other countries, it is quite possible that some profits will be allocated to the East Indian branch, even when the whole enterprise has been working at a loss. This is perfectly logical in view of the fact that possibilities for making profits vary considerably in the different markets. In cases like these, the only way to arrive at satisfactory conclusions is to make an exhaustive analysis of the business itself and a careful comparison with similar enterprises carrying on their business in this country. The above problem is still in its initial stages of development.

97. When the enterprises concerned possess only a wholesale buying organisation within N.E.I., whose profit is calculated by considering a certain commission on the buying as East Indian profit because a more reliable method is lacking, it is conceivable that a certain amount of profit is assessed as having been realised in this country, while the total result of the enterprise would be negative. This gives an example of the undesirable consequences to which this system may lead.

98. With regard to foreign enterprises carrying on agricultural or mining activities in this country, which manufacture the raw products into finished articles and sell them in foreign countries, the East Indian profit can justly be taxed where the business in its entirety is working at a total loss on account of losses sustained in the manufacture abroad of the raw material, or in the sale abroad of the finished product. The East Indian profit would be delimited by the price obtainable for the raw product in the world markets.

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