According to Ashok Wadhwa, taxation advisor to Ericsson, notices to this effect were sent on March 31 by the IT department to three cellular equipment manufacturers: Motorola, Nokia and Ericsson. The exact amount payable by each company is not known. The companies, when contacted, refused to comment.

The equipment manufacturers are now planning to file appeals with the Income Tax Commissioner challenging the whole process, which, according to them, is contrary to the well-laid-out conditions of the double taxation treaties.India has signed double taxation treaties with Sweden (in the case of Ericsson), Finland (Nokia), and the USA (Motorola), says Wadhwa.

Under these treaties, the right to tax the profits accruing from the sale of equipment lies with the exporting countries and not with the importing countries, since the business risk lies with the exporter, according to industry experts.

This means that, if a US company is exporting equipment to India, then the company pays the income tax to the US government and not to India. By now asking the US company to pay tax to the Indian government the IT department is thus violating the spirit of the double taxation treaty, says Wadhwa.

Industry experts add that by sending these notices, the IT authorities have apparently disregarded the basic principle that equipment manufacturers face the prospect of double taxation -- once in their home countries and again in India -- since the tax authorities in their home countries are not likely to give credit for taxes paid in India and adjust the amount against the income which is rightfully taxable in the exporting country.

However, the IT department feels that since the equipment is sold to Indian cellular operators they fall under the income tax net. And this has raised questions on whether equipment supplied by the companies to India is not subject to tax in India, adds Wadhwa.

Many offshore manufacturers supply equipment to Indian cellular operators. While such manufacturers are represented by local subsidiaries here, these subsidiaries are only involved in booking orders on behalf on the parent company, installation work, etc. Currently, the subsidiaries pay tax on the income earned as commission for providing these services, to the Indian IT authorities.

The offshore parent company on its part supplies equipment directly to the operators and pays the tax on the income thus generated to the country where the original equipment manufacturing took place.