Patent licensing to foreign OEMs and BREW software platform fees-held not taxable in India under s. 9(1)(vi)(c), Art. 12

The dominant issue was whether receipts characterised as royalty/fees for included services for patents licensed to OEMs abroad and amounts under a software platform operator (BREW) agreement were taxable in India under s. 9(1)(vi)(c) of the IT Act and Art. 12 of the Indo-USA DTAA. Relying on a coordinate bench ruling in the assessee's own earlier years, the Tribunal held that royalty from licensing patents to foreign OEMs for manufacture outside India was not chargeable to tax in India under s. 9(1)(vi)(c); consequently, recourse to Art. 12(7) was unnecessary, and the assessee's grounds were allowed. Applying the same legal basis, it held the BREW agreement royalty was also not taxable under s. 9(1)(vi) or Art. 12, and deleted the additions for handset/equipment royalty and BREW invoicing revenues.

---

---

Issues Involved
1. Taxability of royalty income under Section 9(1)(vi)(c) of the Income Tax Act and Article 12(7) of the India-US tax treaty.
2. Taxability of revenue from BREW Operator and BREW Carrier Agreements.
3. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.
4. Levy of interest under Section 234B of the Income Tax Act.

Detailed Analysis

1. Taxability of Royalty Income
The primary issue was whether the royalty income earned by the assessee from Original Equipment Manufacturers (OEMs) situated outside India for patents licensed to them for the manufacture of CDMA mobile handsets and network equipment outside India is taxable under Section 9(1)(vi)(c) of the Income Tax Act and Article 12(7) of the India-US tax treaty.

- Arguments of the Assessee:
- The income earned from OEMs is not taxable in India as the patents were used outside India.
- The burden of proof lies on the revenue to show that the OEMs used the patents for business carried on in India or for earning income from a source in India.
- No additional evidence was provided by the revenue to prove that OEMs were carrying on business in India for the relevant assessment years.

- Arguments of the Revenue:
- OEMs have a business presence in India and are assessed to tax in India.
- The royalty income should be taxable in India as the OEMs use the patented technology in products sold in India.

- Decision:
- The Tribunal relied on its previous decisions in the assessee’s own case for earlier years, where it was held that the royalty income from OEMs situated outside India is not taxable under Section 9(1)(vi)(c) of the Income Tax Act.
- The revenue failed to provide additional evidence to prove that the OEMs were carrying on business in India for the relevant assessment years.
- The Tribunal concluded that the royalty income earned by the assessee from OEMs is not chargeable to tax in India.

2. Taxability of Revenue from BREW Agreements
The issue was whether the revenues received by the assessee under the BREW Operator Agreement and BREW Carrier Agreement are taxable as royalty income in India under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-US tax treaty.

- Arguments of the Assessee:
- The payment for the BREW software is for a copyrighted article and not for the copyright itself.
- The rights transferred are specific to the nature of computer programs and do not constitute royalty.

- Arguments of the Revenue:
- The license fee for the right to reproduce and use the BREW Software should be considered as royalty.
- The software is licensed and not sold, and thus, the payment should be treated as royalty.

- Decision:
- The Tribunal relied on the decision of the Hon’ble Delhi High Court in the case of DIT v. Infrasoft Ltd., which held that the payment for a copyrighted article does not constitute royalty.
- The Tribunal concluded that the revenue from BREW agreements is not taxable as royalty income in India.

3. Initiation of Penalty Proceedings
The issue was whether the initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act was justified.

- Decision:
- The Tribunal held that the initiation of penalty proceedings is premature and thus, rejected the ground related to the initiation of penalty proceedings.

4. Levy of Interest under Section 234B
The issue was whether the interest under Section 234B of the Income Tax Act should be levied.

- Decision:
- As the Tribunal held that the income of the assessee is not chargeable to tax in India, the question of levy of interest under Section 234B does not arise.
- The Tribunal upheld the Dispute Resolution Panel’s direction not to levy interest under Section 234B, relying on the decision of the Hon’ble Delhi High Court in GE Package Power Inc.

Conclusion
The appeals of the assessee for the assessment years 2009-10 to 2012-13 were partly allowed, and the appeal of the revenue for the assessment year 2012-13 was dismissed. The Tribunal held that the royalty income from OEMs situated outside India and the revenue from BREW agreements are not taxable in India. The initiation of penalty proceedings was deemed premature, and the levy of interest under Section 234B was not justified.

---