Mobile Phone Ruling Delivers Clarity Over India's Permanent Establishment Rules

by Lorys Charalambous, for LawAndTax-News.com, Cyprus

13 July 2005

Ruling late last month on the tax affairs of mobile phone firms, Ericsson, Motorola and Nokia, the Income Tax Appellate Tribunal Delhi Special Bench provided guidance to multinational firms with operations in India.

The Indian tax authorities had argued that all three firms had permanent establishments in the country, and that therefore, profits from the sale of software and digital network equipment to Indian telecoms firms through their subsidiaries, should be taxable.

However, the tribunal ruled that this was only true in the case of Nokia, as its subsidiary had reached installation, service and technical support agreements with its customers, suggesting that Nokia had access to a permanent establishment in India, and had full control over its subsidiary's activities.

With regard to Ericsson, the ruling stated that the contracts between the subsidiary and the telecoms firms were independent of the parent organisation.

Meanwhile, in the case of Motorola, although the US parent received certain services from its Indian operation, the tribunal stated that they were "preparatory and auxiliary in nature", meaning that under the terms of the US-India tax treaty, no permanent establishment could have been said to be created.

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