ERICSSON TELEPHONE CORPORATION INDIA (AB) (INDIA BRANCH) vs. DDIT, CIRCLE-1(2),,

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : B : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER

ITA No.893/Del/2006 Assessment Year : 2000-01

Ericsson Telephone Corporation India Vs. DDIT, AB (India Branch), Circle-2(1), 4th Floor, Dakha House, International 18/17, WEA, Pusa Lane, Taxation, Karol Bagh, New Delhi. New Delhi. PAN: AAACE2393M (Appellant) (Respondent)

Assessee By : Shri Girish Dave, Advocate, Shri Sajit Parakh, CA, Shri Santdas Wadhwani, CA, Shri Tarun Gupta, CA. Department By : Shri Surender Pal, Sr. DR

Date of Hearing : 02.07.2018 Date of Pronouncement : 04.07.2018 ORDER PER R.S. SYAL, VP: This appeal filed by the assessee is directed against the order passed by the CIT(A) on 01.12.2005 in relation to the assessment year 2000-01.

ITA No.893/Del/2006 2. The first issue raised in this appeal is against the taxability of income

of Rs.12,72,61,294/- towards fees for technical services earned by the

assessee from Indian concerns on gross basis at 20%, being the rate of tax

prescribed u/s 115A of the Income-tax Act, 1961 (hereinafter also called

`the Act’).

Corporation India AB (Branch), being the assessee, is an entity

incorporated in Sweden with limited liability, which is a fully owned

subsidiary of M/s Telefonaktiedolaget LM Ericsson AB, Sweden. It set up

a branch office in India to carry out its business activity. The Branch

Office commenced its operations in March, 1995. The assessee is engaged

in the field of telecommunication and mobile telephony. In 1995-96, the

assessee was awarded contracts by Indian telecom companies for installing

GSM mobile telephone network. Such companies included RPG Cellular

Services Ltd., Bharti Cellular Ltd., JT Mobiles Ltd. and Birla AT&T

Communications Ltd. In 1996, the installation contracts with Indian

companies referred to hereinabove, were assigned to Ericsson

Communications Pvt. Ltd., which is an Indian company, but a wholly 2

ITA No.893/Del/2006 owned subsidiary of the parent company (LM Ericsson AB). Thereafter, all

the installation contracts concerning setting up of mobile telephone systems

were carried out by Ericsson Communications Pvt. Ltd. (ECI), now known

as Ericsson India Ltd. (EIL). The assessee filed its return declaring

business loss of Rs.3.27 crore for the year under consideration. During the

course of assessment proceedings, it was observed by the Assessing Officer

that the assessee had three streams of income, namely, gross fees for

technical services earned from Indian concerns amounting to Rs.12.72

crore; gross fees earned from foreign sources amounting to Rs.13.36 crore;

and interest income of Rs.1.17 crore. Instantly, we are concerned with the

dispute with regard to fees from technical services earned from Indian

concerns. This fee was received by the assessee from its other associated

enterprises (AEs) in India. On going through the relevant invoices raised

by the assessee on its AEs, it was observed that these pertained to supply of

technical personnel to such enterprises, who were engaged with the

installation and maintenance of mobile network systems carried out by such

AEs. The assessee made a combined Profit & Loss Account incorporating

revenues from all the streams, from which common expenses were

ITA No.893/Del/2006 deducted and net loss of Rs.3.28 crore was computed. Computation of

income was done with this figure of loss of Rs.3.28 crore as a starting

point. Certain additions and subtractions were made to/from it for

determining total income at a loss at Rs.3.27 crore for the year. The

Assessing Officer opined that gross fees earned by the assessee from Indian

concerns amounting to Rs.12.72 crore was in the nature of fees for

technical services. He considered the provisions of Article 12 of the

Double Taxation Avoidance Agreement between India and Sweden

(hereinafter also called `the DTAA’). He further took note of para 4 of

Article 12 which provides that if the assessee carries on business through a

permanent establishment (PE) in India in which fees for technical services

are arising, then, the provisions of Article 7 will apply. He then examined

the provisions of Article 7(3) to deduce that while determining the profits

of a PE, expenses and deductions shall be allowed subject to the limitations

in the tax laws of the State in which the PE is located. The assessee

contended that in terms of contract with ECI, it carried out construction,

installation and assembly of telecom networks with regard to contracts

entered into by ECI with various Indian cellular operators and was, hence,

ITA No.893/Del/2006 covered by exception carved out in Explanation 2 to section 9(1)(vii) and,

consequently, the provisions of section 44D were not applicable. The

Assessing Officer took note of a Ruling rendered by the Authority for

Advance Ruling (AAR) in the assessee’s own case in which such

contentions were rejected and it was held that the Indian companies should

deduct tax @ 30% from the gross receipts payable to the assessee. The

Assessing Officer elaborately discussed the findings returned by the AAR

in its Ruling and, eventually found that the same was applicable in letter

and spirit to the facts of the instant case. This is how, he invoked the

provisions of section 44D of the Act, which prohibit any deductions to a

foreign company in computing the income by way of fees for technical

services received from Indian concerns in pursuance of an agreement made

by the foreign company with the Indian concerns after 31.03.1976. In this

backdrop of facts, the Assessing Officer held that no deduction could be

allowed from the gross fees earned by the assessee from the Indian

concerns amounting to Rs.12.72 crore. Applying the tax rate of 20% as

given u/s 115A of the Act on such fees for technical services amounting to

Rs.12.72 crore, he found out the amount of tax at Rs.2.54 crore. No relief

ITA No.893/Del/2006

was allowed in the first appeal. The assessee is aggrieved against the view

reiterated by the ld. CIT(A) on the above issue.

under consideration, have been raised:-

“1. On the facts and in the circumstances of the case and in law, the order passed by the learned Assessing Officer and the learned Commissioner of Income Tax (Appeals) have erred in not granting the benefit available to the appellant under article 25 of the ‘Convention between the Government of the Republic of India and the Government of the Kingdom of Sweden for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, 1997’, read with its Protocol. 2. That without prejudice to the other grounds of appeal, on the facts and in the circumstances of the case and in law, the order passed by the learned Assessing Officer and the learned Commissioner of Income Tax (Appeals) have erred in not granting the carry forward and set-off of losses and unabsorbed depreciation of the past years against income of the current assessment year.”

record. The AAR gave its Ruling in the assessee’s own case which has

since been reported as Ericsson Telephone Corporation vs. CIT (1997) 224

ITR 203 (AAR). In this ruling, the AAR has rejected the assessee’s

contention on the question of applicability of exception in Explanation 2 to

section 9(1)(vii) by holding that: “It seems over simplification to say that

ITA No.893/Del/2006 the applicant’s only task under the contract is the assembly of hardware

imported by the Indian companies in a knocked down condition…….the

absence of the expression ‘installation’ in the definition contained in the

Explanation as well as the omission of the word ‘assemble’ in either the

contracts between the applicant and the Indian companies or in the

statement of facts before the authority are quite eloquent.” It further held

that: “the nature of payments in the present scheme would seem, prima

facie, to fall squarely within the ambit of clause (vii) of para 2(b) of Part II

of the First Schedule to the Finance Act.” The assessee argued before the

AAR that the receipts were in the course of a business carried on by it and,

hence, the same should be treated as business profits, taxation of which

should be governed not by Article 13, but, by Article 7. It was also

contended that it ceased to be fees for technical services in view of

applicability of Article 7(3) and would not attract the provisions of section

44D and section 115A. Rejecting such contentions, the Authority held that

the receipts of the assessee were in the nature of ‘fees for technical

services’ within the meaning of Article 13 of DTAA. It further held that in

terms of Article 7(3), though the fees for technical services should be

ITA No.893/Del/2006 treated as `business profits’ and expenses incurred to earn the same are to

be deducted, but, in view of section 44D(6), no deduction could be allowed

where the agreement was entered into after 31.03.1976. It was, ergo, held

that the gross receipts, and not the net income, should be subjected to tax in

the hands of the assessee.

the AAR has attained finality inasmuch as the same was not challenged by

the assessee. In view of the fact that the decision rendered by the AAR has

become final, it assumes the character of binding nature on the assessee as

well as the Revenue in terms of section 245S(1) and the same cannot be

challenged in other appellate proceedings. However, sub-section (2) of

section 245S provides that : `The advance ruling referred to in sub-section

(1) shall be binding as aforesaid unless there is a change in law or facts on

the basis of which the advance ruling has been pronounced’. It thus

transpires that a Ruling is binding on the assessee as well as the authorities

under the Act save and except there is some change in the relevant

provisions of the Act or Treaty afterwards.

ITA No.893/Del/2006 7. The ld. AR submitted that the Ruling was delivered by the AAR on

20.06.1996. Such a Ruling was given by considering the provisions of

DTAA between India and Sweden, which got notified on 27.03.1989. He

stated that such DTAA between India and Sweden has undergone a change

and the new Treaty has been notified on 17.12.1997, which governs the

year under consideration. A copy of such DTAA has been placed on

record. It is found that the definition of ‘fees for technical services’ given

under Article 12 of the new Treaty is similar to the definition of `fees for

technical services’ given under Article 13 of the old Treaty notified on

27.03.1989, to the extent it is applicable to the facts of the instant case.

The ld. AR fairly admitted this position. He, however, stated that the

Protocol dated 24.06.1997 appended to the new Treaty has brought in

material changes in so far as the issue under consideration is concerned. He

relied on paras 2, 3 and 4 of the Protocol to put forth his point of view,

which read as under:-

“2. With reference to Article 7: In respect of paragraphs (1) and (2) of Article 7, where an enterprise of one of the Contracting States sells goods or merchandise or carries on business in the other Contracting State through a permanent establishment situated therein, the profits of that permanent establishment shall not be determined on the 9

ITA No.893/Del/2006

basis of the total amount received by the enterprise, but shall be determined only on the basis of the remuneration which is attributable to the actual activity of the permanent establishment for such sales or business. Especially, in the case of contracts for the survey, supply, installation or construction of industrial, commercial or scientific equipment or premises or of public works, when the enterprise has a permanent establishment, the profits of such permanent establishment shall not be determined on the basis of the total amount of the contract, but shall be determined only on the basis of that part of the contract which is effectively carried out by the permanent establishment in the Contracting state where the permanent establishment is situated. 3. With reference to Articles 10, 11 and 12: In respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties and fees for technical services), if under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD, India limits tax taxation at source on dividends, interest, royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention. 4. With reference to Article 25: The taxation in India of permanent establishments of Swedish companies, shall in no case differ more from the taxation of similar Indian companies than is provided by the Indian law on the date of signature of this Convention.”

(MFN) clause is concerned, it has been graphically set out that it also

applies on Article 12 dealing, inter alia, with fees for technical services as

is the case under consideration. It provides that if India has entered into a

Convention etc. with a third country, which is a member of the OECD,

ITA No.893/Del/2006 and in such Convention etc., India has limited its taxation rights in terms of

rate or scope, which are more beneficial than that provided in the

Convention with Sweden, then such lower rate or scope shall apply in

preference to the rate and scope of fees for technical services encapsuled in

the DTAA with Sweden. The ld. AR submitted that India has entered into

DTAA with Finland, which is a Member of the OECD. Article 3 of the

DTAA with Finland deals with `Royalties and fees for technical services’

and para 4 of Article 3 contains ‘make available’ clause, which is absent in

the DTAA with Sweden. He further submitted that the scope of non-

discrimination clause in Article 25 has also been expanded in the Protocol.

new DTAA between India and Sweden notified on 17.12.1997 was not in

vogue as it came into existence only after the Ruling. The assessment year

under consideration is 2000-01. As per the ld. AR, the Protocol under the

DTAA of 1998 has the effect of changing the complexion of the case as has

been decided by the authorities below. This argument was countered by the

ld. DR on a preliminary issue, who submitted that the Protocol will have no

ITA No.893/Del/2006 application as it can be resorted only if there is some dispute on the terms

of the DTAA.

Revenue. A Protocol to the DTAA is, for all practical purposes, to be

considered as its part and parcel. There is no question of resorting to it only

if some clarity is wanting in the DTAA. In fact, a Protocol completes the

DTAA. If a particular benefit is being conferred, expanded or reduced by

the Protocol, which is absent in the DTAA, then the provisions of the

Protocol shall apply pro tanto. A Protocol cannot be viewed as a document

independent of the DTAA and has to be considered as its addendum. We,

therefore, do not approve the preliminary contention advanced on behalf of

the Revenue.

below have decided the issue of taxability of the amount of fees received by

the assessee from technical services earned from Indian concerns simply on

the basis of the Ruling given by the AAR. The fact of the matter is that the

DTAA, under which such Ruling was rendered, has been substituted as

ITA No.893/Del/2006 discussed supra. In such circumstances, the prescription of section 245S(2)

gets attracted, which requires consideration of the arguments of the

assessee in the light of the substituted DTAA along with its Protocol to the

facts of the instant case. Such new DTAA and the Protocol have not been

considered by the Assessing Officer, who has simply gone by the Ruling

rendered by the AAR. As such, we are of the considered opinion that the

ends of justice would meet adequately if the impugned order on this score

is set aside and the matter is remitted to the file of Assessing Officer. We

order accordingly and direct him to decide the issue afresh by considering

the effect of alterations, introduced in the new DTAA of 1998 along with

the Protocol, if any, on the Ruling given by the AAR in the assessee’s own

case. In other words, if the new DTAA and the Protocol really impact the

ruling given by the AAR against the assessee on the issue, then, the Ruling

should be applied in the light of such amendments. The decision on issues

decided by the Authority, which remain unaltered by the DTAA of 1998 or

the Protocol, will have to be applied as such. It is made clear that discussion

of the new DTAA or the Protocol above should not be construed as

reflection of our opinion on its applicability or otherwise to the facts of the

ITA No.893/Del/2006 instant case. The AO should decide its implications independently on

merits. Needless to say, the assessee will be allowed a reasonable

opportunity of hearing in such fresh proceedings.

The Assessing Officer found that some of the expenses made by the

assessee were not in accordance with the arm’s length principle. The

assessee shared the General and Administration (G&A) expenses borne by

Ericsson Communication Pvt. Ltd. (ECI), an associated enterprise, in a

ratio which had no relation with their turnovers and activities in India. The

Assessing Officer took into consideration the Cost sharing agreement dated

01.10.1998. It was found that out of total expenses incurred (before

sharing) amounted to Rs.31.89 crore and the assessee was allocated

expenses of Rs.5.01 crore, which was claimed by it to be on the basis of

head-count. The assessee was called upon to furnish final accounts of ECI

for the year 1999-2000. The assessee furnished accounts pertaining to the

period 01.04.1999 to 31.12.1999, the gross revenue of ECI during which

period amounted to Rs.297.93 crore. The assessee’s gross revenue for the

corresponding nine months period was to the tune of Rs.27 crore. As the 14

ITA No.893/Del/2006 assessee could not explain the mismatch between the turnover ratio and

cost allocation ratio, the Assessing Officer adopted the assessee’s share in

such expenses at 7%, which came to Rs.2.23 crore. Apart from G&A

expenses, the assessee also paid Rs.1.26 crore as lease rental to ECI. Such

expense was also found not to have been properly apportioned. In this

backdrop of facts, the Assessing Officer determined the assessee’s share in

common expenses at Rs.2.23 crore. Such expenses were allocated against

the gross fees earned from foreign sources in the ratio of gross fees earned

from Indian sources vis-à-vis foreign sources. That is how, income earned

from foreign sources was determined after allowing deduction of such

apportioned expenses. The ld. CIT(A) did not change the fortune of the

assessee on this point, against which the assessee has come up in appeal

before the Tribunal.

record. It is observed that the assessee booked proportionately more

expenses as its share in ECI’s expenses. When the Assessing Officer

required the assessee to produce final accounts of ECI for the year, the

assessee failed to comply with the same and gave figures only for a period 15

ITA No.893/Del/2006 of nine months. Other necessary details as called for were also not fully

provided. This led to the allocation of expenses on the basis of turnover. It

is, but, natural that in the absence of any worthwhile details furnished by

the assessee, the Assessing Officer could have no other rational basis to

apportion the expenses. The ld. AR submitted that the assessee has got

necessary details which can be produced before the authorities below.

Taking a holistic view of the matter, we set aside the impugned order on

this score and remit the matter to the file of Assessing Officer for deciding

this issue afresh as per law, after allowing a reasonable opportunity of

being heard to the assessee.

The order pronounced in the open court on 04.07.2018.

Sd/- Sd/-

[K. NARASIMHA CHARY] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT Dated, 04th July, 2018. dk 16

ITA No.893/Del/2006 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT

AR, ITAT, NEW DELHI.