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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.

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