2019 (2) TMI 1656 - AT - Income Tax

Appeal partially allowed: BREW & Test Tools revenue not taxable as royalty. DTAA & penalty issues dismissed.

Qualcomm Technologies Inc., S.R. Batliboi & Co.,   Versus DCIT, Circle 3 (1) (1), New Delhi.

The Tribunal allowed the appeal in part, ruling that revenue from the BREW agreements and Test Tools agreements is not taxable as royalty under section ... Income accrued in India - Royalty receipt - Indo-USA DTAA - HELD THAT:- AO in the instant case, following his order for the earlier years, brought royalty from Brew Operators Agreement to tax in the hands of the assessee u/s 9(1)(vi) of the Act as well as Article 12 of the Indo-USA DTAA. CIT(A) upheld the action of the AO. We find the issue stands decided in favour of the assessee by the decision of the Tribunal in assessee’s own case from assessment year 2005-06 to 2012-13. We find the Tribunal, in the consolidated order [2018 (4) TMI 1362 - ITAT DELHI] has discussed the issue and held that the royalty from BREW Operators Agreement is not chargeable to tax in the hands of the assessee u/s 9(1)(vi) of the Act as well as Article 12 of the Indo-US DTAA. Royalty from BREW Operator Agreement is not chargeable to tax in the hands of the assessee u/s 9(1)(vi) of the IT Act as well as Article 12 of the Indo-USA DTAA. Following similar reasonings, we also hold that the CIT(A) is not justified in upholding the action of the Assessing Officer in bringing to tax the royalty from Test Tools Agreement. The grounds raised by the assessee are accordingly allowed. Issues Involved:1. Taxability of revenue received under BREW agreements.2. Taxability of revenue received under Test Tools agreements.3. Applicability of amendments in the Income Tax Act to the Indo-US DTAA.4. Initiation of penalty under section 271(1)(c) of the Income Tax Act.Issue-wise Detailed Analysis:1. Taxability of Revenue Received Under BREW Agreements:The primary issue was whether the revenue received by the assessee under the BREW Operator Agreement and BREW Carrier Agreement should be taxed as royalty income in India under section 9(1)(vi) of the Income Tax Act and Article 12 of the Indo-US DTAA. The Assessing Officer argued that the payments received under these agreements qualify as royalty, as they involve the licensing of software, which is considered a copyrighted article. The CIT(A) upheld this view, stating that the payments are taxable not only under the IT Act but also under the DTAA.However, the Tribunal referred to its earlier decisions in the assessee's own case for assessment years 2005-06 to 2012-13, where it was held that such payments are not chargeable to tax as royalty. The Tribunal noted that the payments were for a copyrighted article and not for the copyright itself, following the precedent set by the Delhi High Court's judgment in the case of DIT v. Infrasoft Ltd. The Tribunal concluded that the revenue from the BREW agreements is not taxable as royalty under section 9(1)(vi) of the IT Act or Article 12 of the Indo-US DTAA.2. Taxability of Revenue Received Under Test Tools Agreements:The second issue was whether the revenue received under the Test Tools agreements should be taxed as royalty. The Assessing Officer and CIT(A) held that the Test Tools Agreement formed part of the BREW Agreement and that the nature of the transaction was akin to the main transaction regarding the supply of the BREW system.The Tribunal, however, found that the CIT(A) was not justified in upholding the action of the Assessing Officer. It held that the revenue from the Test Tools Agreement should not be taxed as royalty, following the same reasoning applied to the BREW agreements.3. Applicability of Amendments in the Income Tax Act to the Indo-US DTAA:The assessee argued that amendments in the Income Tax Act should not be read into the DTAA. However, this ground was not pressed by the assessee's counsel and was dismissed as not pressed.4. Initiation of Penalty Under Section 271(1)(c) of the Income Tax Act:The assessee contested the initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. This ground was considered premature and was not adjudicated upon, resulting in its dismissal.Conclusion:The Tribunal allowed the appeal in part, holding that the revenue received under the BREW agreements and Test Tools agreements is not chargeable to tax as royalty under section 9(1)(vi) of the Income Tax Act or Article 12 of the Indo-US DTAA. The grounds related to the applicability of amendments in the Income Tax Act to the DTAA and the initiation of penalty proceedings were dismissed. The decision was pronounced in the open court on 12.02.2019.