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

Briefly stated, the facts of the case are that Ericson Telephone 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 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 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, 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 was allowed in the first appeal. The assessee is aggrieved against the view reiterated by the ld. CIT(A) on the above issue.

We have heard both the sides and perused the relevant material on 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 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 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.

On a pertinent query, the ld. AR admitted that the Ruling rendered by 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.

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.

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.”

In so far as para 3 of the Protocol having the most favoured nation (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, 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.

Indisputably, when the Hon'ble AAR rendered its Ruling in 1996, the 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 of the DTAA.

We are not convinced with the contention put forth on behalf of the 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.

Reverting to the facts of the extant case, it is seen that the authorities 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 discussed supra. In such circumstances, the prescription of section 245S(2)

The next issue raised in this appeal is against allocation of expenses.

We have heard both the sides and perused the relevant material on 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 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.

No other issue was argued before us.

In the result, the appeal is allowed for statistical purposes.