Fate Of Chinese Firms in India In Doldrums After ZTE Tax Case

The Delhi High Court raised key legal questions about a tax case between ZTE Corp, a telecom equipment supplier, and the Income Tax Department. This could have implications for similar tax cases that are being pursued against other Chinese companies. Last December, ZTE appealed against the findings of the tax department and an order by an appellate authority in its favour.

The high court asked if taxable income could possibly be attributed to a permanent subsidiary of a Chinese firm in India due to supplies from the foreign parent. It asked what the rate of profit attribution could be if this was possible. The court also wanted to know if a Chinese firm was entitled to adjust the expenses against payment to an Indian entity for marketing services.

The High Court asked the tax assessor if he was justified in using different rates of attribution to profit in a 2017 appeal in another tax case. Indian agencies are currently investigating several companies, including ZTE rival Huawei and handset makers Vivo. These cases include transfer pricing and royalty payments to Chinese parents.

ZTE Corp had challenged two assessment orders issued by the income tax department for financial years 2016-17 and 2017-18. After the Income Tax Appellate Tribunal (ITAT), although the court had granted the challenge to the company in part (June 2013), it went to the highest court. In 2017, the company filed an earlier appeal regarding assessment years 2004-05 through 2009-10. These appeals have yet to be heard in regular hearings.

During the assessment years 2016-17, and 2017-18, it supplied telecommunication equipment to Indian telecom operators - terminal equipment, network equipment, and software. ZTE Telecom India Pvt Ltd was its subsidiary and provided testing, installation, and commissioning services for equipment supplied by China. For both assessment years, the tax assessing officer sent show-cause notices and relied on a 2009 survey by the department at the Indian subsidiary offices in Gurgaon and Mumbai.