1. Selling Establishments

Local Establishments selling in National Markets

102. When a foreign enterprise purchases goods abroad and sells them in N.E.I., it is exceedingly difficult to define what should be considered as the East Indian profit of the enterprise.

The administration prefers that goods purchased abroad be invoiced to the N.E.I. establishment at the original cost to the enterprise; the invoice price should therefore not include a part of head-office expenses or a part of the profits to be realised on sale here. The fiscal administration will determine the amount of the deduction to be allowed from the East Indian profit in respect of head-office expenses, and also the amount of the profit realised here which is to be allocated to the purchasing office as its profit.

If the invoice price is above original cost, the administration will require information as to the basis on which it is computed. Several companies send the original invoices showing the price they paid for the goods shipped to the East Indian offices, so that the examination of the book-keeping here gives a complete insight into the state of affairs. Nevertheless, there remains the problem of determining how much of the profit is to be allocated to the branch in this country.

103. It is not fair to start from the idea that all the profits are made on the selling, so that only the expenses of the establishments abroad are deducted. This conception prevailed here formerly, and found many adherents because of its simplicity in throwing the entire profit to the place of sale. Owing to a better insight into these matters, however, the principle of apportioning profits has been adopted.

As a rule, the buying of goods for importation into N.E.I. requires a good deal of experience and commercial judgment, especially when it involves an enormous variety of merchandise. A part of the profits should decidedly be allocated to this buying. For the greater number of import enterprises an allocation on the basis of 25 per cent for the buying and 75 per cent for the selling in this country may be accepted as fair and reasonable. Of course every taxpayer may prove that the circumstances of his own business justify a divergence from this standard.

When a monopoly article is involved, there is a tendency on the part of the fiscal authorities to allocate a larger part — for instance, 90 per cent — of the profits to East India. The reason for this is that, once the agency for these articles has been obtained, the buying is done more or less automatically, being limited chiefly to the passing on of orders from East India.

104. When the foreign company manufactures its own goods, the chief question is whether only a fraction of the output is sold in N.E.I. or whether the products are manufactured exclusively or primarily for sale in N.E.I. If only a part of the products are sold in N.E.I., the calculation of the “selling price” from the factory to the export department of the enterprise should be carefully examined. The price at which the export department invoices to the local sales branch is subject to the same verification as that described above in connection with an enterprise buying abroad for sale in East India. Furthermore, the authorities may request information as to the prices at which the same goods have been invoiced to dealers or branches in other countries, or, if necessary, they may make a comparison with the profits of local competitors. If a company has virtually a world monopoly of a given product which it markets itself, the taxpayer often fixes the East Indian profits at a certain percentage of the selling price, which may be accepted by the tax authorities after a careful examination of the accounts.

105. When a manufacturing company produces articles especially for N.E.I., it usually markets them here itself through a sales branch, or through a subsidiary company, which, in fact, is nothing more than a sales department of the company. In this case, the profits realised should be fixed at a fraction of the total net profits, and it seems just to allocate to each of the two parts of the enterprise one-half of the profits, although here, also, the particular nature of the business may justify a different percentage. Usually, the taxpayer will show a tendency to put a lower value on the sales profits, and a higher one on the manufacturing profits. On the contrary, the authorities are inclined to put a considerably higher value on the sales. This tendency is the result of the economic development of these recent years, during which sales have become a factor of paramount importance in view of the widespread over-production.

If the sales branch in N.E.I. markets not only goods which have been manufactured by the foreign enterprise, but also goods which have been purchased (for example, to complete its line), the authorities would attempt to segregate the two categories and allocate the profits of each in accordance with what has been said above.

Local Establishments selling abroad

106. Although the establishments referred to here are of rare occurrence, the N.E.I. administration looks upon the activities of the branch established in this country which sells its goods in a third country, where the parent company has no permanent establishment, as selling transactions carried out in this country. If the head office established abroad is able to prove that the sales in neighbouring countries should be attributed entirely or partly to its activities, the administration would take these circumstances into consideration in fixing the profits of the local branch.