ERICSSON TELEPHONE CORPORATION INDIA AB Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is an application by Ericsson Telephone Corporation India AB, a company incorporated in Stockholm, Sweden, under Section 245Q(1) of the Income -tax Act, 1961 ("the Act").

(2.) THE relevant facts as stated in the annexure to the application are very few. The applicant -company has been established with the objects of "marketing, sale, hire, procurement and other distribution of products and services within radio and telecommunication and the carrying on of other activities compatible with or related to these objects.". It has entered into contracts with RPG Cellular Services Ltd. of Madras, Motorola of Bombay, and Bharti Cellular Ltd. of New Delhi, for introduction of the cellular system of telecommunication in India. It has undertaken, for a stated consideration, the installation of GSM mobile telephone system with the hardware belonging to, and the software licensed to, these companies and provision of related services. For this purpose, it has also opened branch offices in India at New Delhi, Bombay and Madras with the permission of the Reserve Bank of India.

(3.) THE Indian companies have informed the applicant that, while making payments to it under the contract, they will withhold income -tax at 55 per cent as prescribed under paragraph 2(b)(ix) of Part II of the First Schedule to the Finance Act, 1995. The applicant, however, does not expect its net profits on the contracts in question to be more than ten per cent of the total gross receipts from the Indian companies. According to a profit and loss account and the balance -sheet prepared for the calendar year, 1995 (unaudited), the applicant's gross receipts from the Indian contracts during the period were Rs. 13,84,70,250 and the net profits were Rs. 35,27,289 which works out to even less than three per cent The case of the applicant, therefore, is that there is no justification to deduct tax at source on the entire payments made to it by the Indian companies at 55 per cent The tax deduction should not, according to the applicant, exceed 5.5 per cent of the total gross payments and even this is a very liberal estimate of the applicant's profits for this purpose. The applicant has, therefore, made this application seeking the ruling of this Authority on the following question : "Whether the tax withholding by the Indian companies on amounts payable to the foreign company should be at the rate of 55 per cent - as provided under the First Schedule, Part II(2)(b)(ix) of the Finance Act, 1995, or at the estimated net profits from the local operations of the foreign company. This is in view of the fact that the foreign company estimates that the net profits from the Indian operations will not be more than ten per cent of the amount received on installation of cellular systems from the Indian companies."