TaxTMI 
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2013 (2) TMI 219
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....als are many and pertain to different limbs and contentions in support of Five main issues that require our adjudication. These issues that arise in the present appeals are summarized as under: (a) Whether on the facts and circumstances of the case, the ld. CIT(A) was justified in upholding the validity of reassessment proceedings initiated under S. 148/147 of the Act; (b) Whether on the facts and circumstances of the case, the CIT(A) was justified in exercising jurisdiction under section 251 of the Act to enhance the income of the Appellant in respect of royalty income earned by the Appellant from the OEMs on network equipment; and (c) Whether on the facts and circumstances of the case, the CIT(A) was justified in upholding the taxability of royalty income earned by Qualcomm Incorporated, from the Original Equipment Manufacturers ('OEMs') of CDMA mobile handsets and network equipment, who are located outside India, under S. 9(1)(vi) (c) of the Income Tax Act; (d) Whether on the facts and circumstances of the case, the CIT(A) was justified in upholding the taxability of royalty income earned by Qualcomm Incorporated, from the Original Equipment Manufactu....
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....the Appellant has licensed software to the OEMs for manufacture of handsets; (j) the OEMs acquire a license in the software from the Appellant that enable the base station to communicate with the handsets; (k) the Appellant may have received royalty from Indian Carriers or from others providing the infrastructure and embedded technology to Indian Carriers; (l) the Appellant receives royalty with respect to the CDMA network being installed in India; (m) the right to use the patented technology is given in India. 4. The brief facts of the case as brought by the AO in his assessment order for the A.Y.2000-2001 dt. 31-12-2007 and the CIT (A) in his order dt. 29.06.2007 is extracted below:- "Qualcomm Incorporated ('Qualcomm' or 'the Appellant') is a publicly traded company on the NASDAQ under the symbol: QCOM . Qualcomm was incorporated under the General Corporation Law of the State of Delaware in the United states of America on August 15, 1991. Qualcomm engages in the design, development, manufacture, marketing and licensing of digital wireless telecommunication products and services based on Code Division Multiple Access (CDMA) tec....
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....ts to Code Division Multiple Access (CDMA), a method for transmitting simultaneous signals over a shared spectrum, most commonly applied to digital wireless technology. The Appellant has also granted a nonexclusive and nontransferable worldwide license of its patents developed on CDMA technology (the Patented Technology') to unrelated wireless Original Equipment Manufacturers ('the OEMs') to make (and have made), import, use and sell CDMA handsets and wireless equipment (the 'Products') in consideration for a royalty. The Appellant's business model in relation to grant of license of its patents is as under:- (a) The Appellant licenses its Patents to OEMs who are situated outside India are not residents of India; (b) The OEMs use the patents to manufacture the Products outside of India; (c) The OEMs sold the Products to wireless carriers worldwide; (d) Royalty is payable by the OEMs to the Appellant for use of patented technology in the manufacture of products and is determined with reference to the net selling price of the product sold to unrelated wireless carriers worldwide. The OEMs typically pay a lump sum royalty on one or m....
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....edia functions and global positioning system(GPS), products and (b) Qualcomm technology licensing ('QTL') which grants licenses to manufacturer of wireless products for the right to use portions of Qualcomm's intellectual property portfolios which include certain patent rights essential to/or useful in the manufacture and sale of certain wireless products. 7. On facts the Appellant submitted to the revenue authorities that, (a) Qualcomm did not license CDMA technology to any network equipment manufactures in India during the subject assessment years. (b) Qualcomm does not have any role in determining the cost of handsets purchased by Reliance, etc from third parties (i.e. OEMs). (c) royalty is payable by the OEM`s for the use of patents for manufacturing CDMA handsets/equipments and the royalties is quantified and becomes payable on sale. It was clarified that royalty does not accrue on sale of handsets but only on manufacture of handsets/equipments. (d) It was contended that the patented technology as licensed to the OEM`s is for "use in manufacturing" CDMA standard network equipment and CDMA standard handsets and the OEM`s pay the royalty upon the sal....
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....nd the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State." With reference to the above article the assessee has submitted that "the technology is used for manufacturing the network equipment/hand sets (i.e. products) before they are shift to India or elsewhere. Under the license agreement entered into with OEMs the obligation to pay royalties to Qualcomm arises before the products reach Indian carriers. The license agreement between Qualcomm and OEMs does not require the OEMs to enter into a licensing agreement between the OEMs and carriers for selling the products manufactured by the OEMs. Further more, since the royalty is paid by OEMs for manufacturing the equipment/hand sets which is done outside India the 'use' is outside India." The assessee's submission regarding the point at which royalty becomes payable based on the contract between the OEMs and Qualcomm cannot be relied upon since the assessee has failed to submit copy of the contracts between the OEMs an....
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....s 1962. The additional evidence consisted of redacted copies of 16 global licensing agreements between the Appellant and OEM's situated outside India. At para 7.1 pg.16 of the CIT(A)'s order it is stated as follows:- "7.1. It was submitted by the appellant that the licensing agreements contained certain commercially sensitive information and the same was redacted from the agreements to protect the competitiveness of the appellant/OEM business. The redactions were duly supported by the key to redactions and were notarized by a Notary Public - California, San Diego County and also by an affidavit by the Vice President of Tax and Trade of the Appellant that was enclosed with each of the 16 agreements submitted by the appellant. The affidavit reiterates the appellant's position on the redactions that it was essential to protect the commercially sensitive information which could inhibit the appellant's or the OEMs ability to compete effectively. The appellant has also affirmed that no information having an effect on the principle of taxability of the appellant in India has been redacted." The CIT(A) admitted the additional evidences for the reasons given at para 7.4.1 of his order, a....
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....acture the handset which been made compatible with the software provided to Indian Telecom operators for their network. If the handsets are not made compatible with the Indian network, these shall not be usable in India. It can also be seen that these handsets are sold by the Indian Telecom operator as they have in built compatibility with their network." He issued a show cause notice proposing enhancement of the assessment to bring to tax the royalty income received by the Appellant from licensing of CDMA patents to manufacture network equipment. For various reasons given in his order, the First Appellate Authority concluded that the royalty in question falls within the key provisions of S. 9(1)(vi)(c) of the Act and is also covered under Article 12 (7)(b) of the DTAA. Aggrieved by the order of the First Appellate Authority, the Appellant is in appeal in before us. 13. Shri Soli Dastur, Ld. Sr. Counsel along with Shri Nishant Thakkar appeared for the Appellant. Shri G.C. Srivastava, Special Counsel along with Ms. Preethi Bharadwaj appeared on behalf of the Revenue. 14. Assesses submissions on reopening: 1. Mr. Dastur opened his arguments by presenting the facts of ....
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....itted that the reasons are identical for AY 2000-2001 to 2004-05. He summarized the reasons recorded by the AO for AY 2004-05 (pages 1 to 6 of the Appellant's paper book) as under:- "i. Press release dt. March 23, 1999 issued by appellant in the USA shows that appellant has several patents registered in its favour. These patents are then used to earn royalties worldwide including India. ii. Newspaper article dt. June 28,2006 shows that appellant has research centres located in India. These locations constitute business connection as well as permanent establishment of appellant in India. iii. Newspaper article dt. June 15, 2006 and July 29, 2006 shows that appellant negotiates with the customers of CDMA technologies like Reliance and TATA the price of royalties to be embedded in the cost of the cell phone. This shows that the royalty payments are for handsets operational in India and the royalty is only routed through the manufacturers. iv. Appellant is earning fees from Included Services (FIS) from Reliance Communications Infrastructure Ltd. (Reliance) and Tata Tele services Ltd. (Tata)." 4. Based on the reasons recorded by the AO, Mr.....
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....rticle dt. 15th June, 2006 regarding a meeting between the CEO of the Appellant and the Chairman of Reliance was nothing but a report of a public relation exercise and cannot be a basis for arriving at a conclusion that royalty rates were directly negotiated by the Appellant with the Indian telephone providers. The meeting took place in the year 2006 has no relevance for earlier AYs. f. The inference drawn by the AO viz., that the royalty rates are being negotiated by the assessee with Telecom service providers is nothing but a surmise. Mr. Dastur vehemently contended that the proceedings under section 147 of the Act cannot be based on conjectures. In this connection, he referred to the decision of the Bombay High Court in the case of German Remedies v. DCIT (285 ITR 26) and the decision of the Gujarat High Court in the case of A. Raman & Co v. ITO which was latter affirmed by the Apex Court in 67 ITR 11 where in the High Courts have held that reopening of the assessment based on suspicion, presumption, conjectures and surmises is not permissible in law. g. That the Appellant has not earned any fee from included services from any persons in India during ....
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.... recorded to show that any income was earned by the Appellant during the financial year ended March 31, 2000 to March 31, 2004 had escaped assessment. The reasons must relate to the year for which the notice was issued. Reliance was placed on the decision of the Calcutta High Court in the case of Grindlays Bank Ltd. v. ITO (116 ITR 710), the decision of the Jurisdictional High Court in the case of CIT v. Mesco Laboratories Ltd. (288 ITR 219) and the decision of the Apex court in the case of ITO v. Lakhmani Mewal Das (103 ITR 437). l. That if there are multiple reasons, some relevant and other irrelevant or incorrect thus reopening must be quashed since it is unclear as to which reason the officer relied upon. Reliance was placed on the decision of the Gujarat High Court in the case of Sagar Enterprises v. ACIT (257 ITR 335). In the facts of Appellant's case, four reasons were recorded by the AO, of the four reasons, two reasons are undisputedly incorrect or wrong. Thus it was argued that the reopening must be quashed since it is unclear as to which reasons the AO relied upon. m. In the reasons recorded for reopening, jurisdiction to reopen was assumed on ....
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....taining proper sanction is void abinitio and deserves to be quashed. Reliance is placed on the decision of the Delhi Bench in the case of ITO v. Mrs. Naveen Khanna (12 DTR 222 (Del). It was further submitted that the revenue's appeal against the above decision has been dismissed by the Jurisdictional high court r. That the sanction accorded by the Addl.DIT is mechanical and without application of mind and hence the reassessment is bad in law. The reasons recorded suppress a material fact that the newspaper articles relied upon the by the AO to assume jurisdiction to issue notice under S.148 for the A.Y. 2000-01 were published in the year 2006. In view of this suppression, the Addl.DIT could not have applied her mind to whether reasons recorded have a live link with the year sought to reopened, viz A.Y. 2000-01 and A.Y. 2001-02. In absence of application of mind to the aforementioned fact, the sanction ought to be regarded as mechanical and invalid in the eyes of law. That the sanction accorded by the Addl. DIT is mechanical, is further evident from the fact that the AO had forwarded the sheet recording reasons along with the following text just below the reasons recor....
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....147 of the Act does not mean to suggest that the AO. should have made final enquiries with regard to facts and come to a final conclusion about escapement of income. The sufficiency or correctness of the material is not a thing to be considered at this stage. It is sufficient if prima facie some material on the basis of which the department could reopen the case. In support of his contention, he relied on the decisions of the Hon'ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (291 ITR 500) where in it was held that the word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Raymond Woolen Mills (236 ITR 034) and on the decision of the Delhi High Court in the case of Bawa Abhay Singh v. DCIT (253 ITR 83). The Appellate....
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....nce was also made to the difference in the rate of royalty for operators in China and those in India. Report dt. 29.6.2006 refers to the efforts of Qualcomm in negotiating the price with equipment manufacturers for the benefit of Indian operators. c. From these reports the veracity of which is not in dispute, the AO concluded that the Appellant company is earning royalties in respect of handsets operational in India and further that the price of royalty component for the use of CDMA technology is directly negotiated and licensed by the Appellant and the Indian Telecom operators in India. The AO held that the royalties to the Appellant not only arise in India but are also paid by the Indian concern indirectly. The above information was adequate to come to the belief that there was a prima facie case for the chargeability of royalty income under Section 9(1)(vi)(c) of the Act and such conclusion by the AO cannot be said to be irrational or perverse. d. Even if on merits at some stage, if it is found that S. 9(1)(vi)(c)of the Act is not applicable, then also, it would not lead to an inference that the belief formed by the Assessing Officer was not based on p....
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....tisfaction with regard to escapement of income would relate back to the point of time when technology came/used for the first time in India unless there are contrary or distinguished in facts to indicate that despite the technology being in use, there is no escapement of income in such earlier years. l. As regards sanction under S. 151, Shri. G.C. Srivastava had furnished the following documents in support of their contentions that the sanctioning authority Ms. Sumedha Verma Ojha, the Addl.DIT was authorized to sanction under S.151 (2) of the Act: i. Notification dt.14.09.2001 defining the territorial jurisdiction of the Directors and Commissioner of Income tax; ii. Order No 37 of 2003 dt. 26.03.2003 showing that Ms. Sumedha Verma Ojha was promoted on and from the date of the order to the grade of JCIT/Jt.DIT; and iii. Notification dt.11.101.2007 defining the territorial jurisdiction of the Additional directors/Joint Directors of Income tax. m. it is submitted that S.117 gives power to the Central Government to appoint such persons as it thinks fit to be Income tax authorities which are enumerated in S.116 of the Act....
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.... between Tata Tele Services Ltd. and ZTE Corporation dt. 19.02.2007 which is also an equipment purchase agreement. The Ld. Special Counsel submitted that these two agreements are neither before the AO nor the CIT (A) and these should be admitted for the reason that, it would help in understanding and demonstrating the business model followed in these cases. He emphasized that the relevance of these agreements are limited to demonstrate the business models. The Ld. Sr. Counsel for the Appellant Mr Dastur strongly objected to the admission of additional evidence on various grounds. He submitted that these agreements are not the basis for making the assessment and that they have no relevance to the case. However, later when the bench wanted to adjudicate this issue separately, before proceeding with the merits of the case, the Ld. Sr. Counsel agreed for the admission of these two documents for enabling expeditious disposal of the appeal, with a caveat that reliance should not be placed on these evidences, when there is no relevance to the case on hand and agreements in question, as these agreements have been entered into in financial years relevant to AY 2008-09 and AY 2007-08 and as....
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.... seen whether the Non Resident was paid royalty in respect of right, property or information used or services utilized 'for the purpose of business' carried on by such person in India or 'for the purpose of making or earning any income from any source in India.' He submitted that CDMA patents were used for manufacturing CDMA products outside India and that sale is a subsequent event. He pointed out that the agreements are not India's specific and the OEMs manufactured the hand sets and equipments using the patents of Qualcomm and could sell the product anywhere in the world and it is not specific to an Indian Carrier. He emphasized that technology for manufacturing products is different from product which is manufactured from the use of the technology. On the meaning of 'making or earning any income from any source in India' he submitted that ultimate use of a product manufactured by the OEMs using the patents licensed by Qualcomm, in India, cannot be said to be a source in India. Giving example he submitted that source is an overall activity carried out and a part of an activity cannot constitute a source. Giving an example he submitted that if a retailer sells 100 pens to 100 d....
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....ve, Mr. Dastur wondered how the Appellant could be said to have a 'source of income in India' when none of the OEMs were held as having 'source of income in India' and when no assessment is ought to be made of any of the OEMs. 22. He relied on the decision of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Limited v. DIT (288 ITR 408 (S.C.) and the decision in the case of DIT v. Ericson AB (246 CTR 433, Delhi) for the proposition that, if the property in the goods passes abroad, no part of the sale proceeds can be taxed in India. He submitted that the source of the OEMs, is sale and it would be a contradiction to say that the OEMs such as LG etc. have no source of income in India and to hold otherwise in the case of Qualcomm. 23. On the evidences relied by the Revenue Mr Dastur arguments on each of these documents are as follows: A. Memorandum of understanding between Qualcomm and Reliance Communications Private Limited dated 26.03.2001. Without prejudice to his contention that these documents have no relevance, the Ld. Sr. Counsel submitted that this document was relied by the Revenue to contend that Qualcomm is actively interested in the utilization ....
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....rates that the OEMs carry on business in India or that they have a source of income in India. C. Technical services agreement between Qualcomm and Tata Teleservices Limited dated 02.03.2004. In addition to the arguments raised in the case of agreement with Reliance (SUPRA), it was submitted that the technical services agreement with Tata was entered on 02.03.2004 and therefore has no relevance to the years under consideration. D. Subscriber unit license agreement between Qualcomm and Asia Telco (OEM) dated 18.04.2008. Mr. Dastur submitted that the above agreement was filed by the Appellant during the course of the assessment proceedings for the AY 2009-10. This agreement was relied by the Ld. Special Counsel to demonstrate that the agreement between Qualcomm and OEM are India specific since Qualcomm charges a different amount of fixed royalty with respect to sales made to Indian customers. However, Mr. Dastur submitted that the agreement has no relevance to the years under consideration. Further no adverse inference had been drawn either by AO or by the DRP with regard to this agreement even in the year to which it relates. Therefore the agreement cannot be relied upon. Furthe....
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.... a third party appointed by the Indian Carrier (i.e. Tata).Even on a demurrer that the OEM (i.e. Motorola) carries on installation activities in India, this agreement nowhere shows that the OEM (i.e. Motorola) uses the right property or information licensed by Qualcomm to Motorola, in carrying out such installation activity. In fact Qualcomm has no right property or information with respect to installation activity and hence the question of granting a license thereof or user thereof by the OEM does not arise. Apart therefrom, there is no consideration for carrying out installation activities under the contract referred to by the Revenue, and since the installations are incidental to the sale, no attribution can be made in view of the decision of the Andhra Pradesh High Court in the case of CIT v. Hindustan Shipyard Ltd. (109 ITR 158), which has been concurred with by the jurisdictional High Court in the case of DIT v. Ericisson A.B., [246 CTR 422 @ paragraph 48, page 20 (Del HC)]. On the contention that the sale concludes in India, Mr. Dastur argued that the Revenue has once again relied on the agreement between the OEM (i.e. Motorola) and Tata dated 8.12.2007 to say that since t....
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....ing of software. The royalty that is assessed by the revenue pertains to patents licensed by Qualcomm and therefore, the reference to software licensed by OEMs to Indian Carriers is irrelevant and out of context. Qualcomm's patent license has no connection with the software, which relates to the functionality aspect of the product and not with the products capability to provide CDMA connectivity. Further, it was submitted that the software licensed is an integral part of the hardware and hence cannot be treated independent/separately from the hardware. Therefore, it must be regarded as sale in composite manner as sale of goods. It was also submitted that the OEM receives no separate consideration for the licensing of the software which establishes that the software is meant only to be used with the hardware and not independently. For this preposition, reliance was placed on the decision of the Delhi High Court in the case DIT v. Ericsson A.B.,[246 CTR 422 at paragraph 56, 57 and 60 (Del HC). F. Equipment purchase agreement between Tata Teleservices Limited and ZTE Corporation ('ZTE' or the 'OEM') dated 19.02.2007. 24. It was submitted that no separate arguments were advanced by....
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....ng but encompasses many other activities which together constitute a business. Example of MNCs was cited to prove the point that different activity of a composite business are carried out in different locations e.g. manufacturing in one jurisdiction and sales in another jurisdiction and that it cannot be said that business is done in one of the jurisdictions only. b. That handsets or equipments although manufactured outside India are not off shell products or standard product which can be sold to anyone in any location and that the sale by OEMs is India's specific. c. The entire supply of handsets/equipments by the OEMs is India Specific. This is evident from the stipulations in the agreements that OEMs will manufacture the handsets/equipments as per the design made by the OEMs and approved by a particular operator, at the technical standards and specifications and for an agreed price. d. That hand sets are manufactured with codes which are programmed to be specific to network provider. These codes are not of the kind which can be put to the handsets after these are received in India. 30. Reliance was placed in the case of Syed Asifuddin and another (AP) 200 L....
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.... India, he submitted that:- a. Section 19(1) of the Sale of Goods Act provides in a contract for the sale of goods, the property is transferred to a buyer at such time as the parties to the contract intend it to be transferred. However section 19(2) of the Act provides that for the purpose of ascertaining the intention of the parties, regard shall be had to: i. the terms of the contract; ii. the conduct of the parties; and iii. the circumstances of the case b. The contract has to be read as a whole to ascertain the intention of the parties. In the Motorola agreement, Clause 14.1 provides that the title and the risk shall pass upon delivery in accordance with the CIP Incoterms 2000 port of shipment. The word delivery has been defined on page 44 of the agreement to mean "physical delivery by the supplier of the equipment ordered by TTSL on CIP terms at airports/seaports mutually designated by the parties". CIP has been defined on the page 43 of the agreement to mean "cost, insurance paid to airport/seaport in India" as defined in Incoterms 2000. c. The definition of these terms clearly indicates tha....
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....l acceptance. Clause 2.8 of the agreement on page 3 defines the scope of the supplies and includes various task including, network planning and RF optimization. The provisional acceptance is referred to in clause 4.1 of page 16 to define the supplier's obligation and clause goes on to provide that the supplier shall manufacture, supply, deliver, all the equipment "to achieve provisional acceptance and final acceptance of the equipment in accordance with schedule A". This clause further indicates that supplies and delivery of equipments is subject to achieving provisional acceptance. One cannot pick up one part of supply obligation and contend that the title has passed with the discharge of that obligation. g. The definition of "delivery" on page 5 of the agreement stipulates "physical delivery by the supplier of the equipment ordered by TTSL on DDU terms at the site". DDU is defined on the same page to mean "site or sites in India" as defined in Incoterms 2000. The clause goes on further to state that it means the supplier fulfils his obligation "when goods had been made available at the named sites in the country of importation." The word "site" has been defined on pa....
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....ology and these cannot be viewed independently. j. In view of the above, he submitted that there is no room for any doubt that the title to the goods has passed in India despite the declaration in clause 14.1 to the contrary. In this scenario, it is not open to argue that OEMs do not carry out business in India. If one leg of the business operations is in India and other is in Korea, it cannot be said that OEMS carry business only in Korea and not in India. k. It is evident that the OEMs have used the property for the purpose of carrying out business in India and the first limb of 9(1)(vi)(c) of the Act stands satisfied. On the issue whether OEMs have source of income in India, Mr. Srivastava submitted that:- a. The agreement between the OEMs and the Indian operators demonstrate in no uncertain terms that what is sold by them is the hardware and the not the software embedded therein. b. OEMs are not only supplying the equipments but they are licensing the software, the ownership of which is not transferred to the operators in India. The software is licensed for the use of the operators. Thus, the intellectual property for which t....
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....re to OEMs. If software is not licensed then what is licensed by Qualcomm to OEMs. Clause 5.1 states that Qualcomm has guaranteed worldwide licenses under Qualcomm intellectual property to make, import, use, sell, or lease or otherwise dispose of subscriber units and (b) to make components and use and sell such components. This clause does not make any reference to what kind of intellectual property is being licensed. OEMs do not need any license to manufacture handsets/equipments unless there is an intellectual property belonging to Qualcomm which is going to be used by OEMs. This intellectual property cannot be anything other than chipsets or some other software going to be embedded in the handsets/equipments. h. If this basic proposition is under dispute and suggestion is made that software licensed by OEMs is not the property of Qualcomm then, the matter needs a more critical examination by someone who understands CDMA technology with all its technicalities. Reliance was placed on the decision of the Hon'ble Supreme Court in the case C.I.T., Delhi v. M/S. Bharti Cellular Ltd (330 ITR 239 (SC). He urged that if the Hon'ble bench finds itself in agreement with the ap....
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....ce of income in India. m. Reliance was placed on the decision of the Privy Council in the case of Rhodesia Metals Limited reported 9 ITR 45 (Sup) where the Privy Council held the view that the source does not mean a legal concept but something which a practical man would regard as a real source of income. It is not in doubt that in commercial parlance, OEMs definitely have a source of income in India in the given facts and circumstances and all technical argument about the nature of use etc. is really of no consequence. 32. Further, on the applicability of the Jurisdiction High Court decision in the case of Ericsson A.B. [246 CTR 422 (Del)], he submitted that the same is totally inapplicable to the facts of the present case . That in the case of Ericsson, the issues under consideration were : (i) Whether Foreign Company has any business connection in India or-not? (ii) Whether Foreign Company has PE in India or not? (iii) Whether the income from the supply contract can be treated as 'royalty' under section 9(1)(vi)? In this case it was held that the Foreign co. has no business connection in India and it was also held that if the assessee did not ....
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....nbsp;a. Section 9(1)(vi)(c) of the Act has two limbs, i.e. it provides that the royalty paid by a non-resident shall be taxable in India if such royalty is paid in respect of: i. "right property or information used for the purposes of a business or profession carried on by such person in India"; or ii. "right property or information used for the purposes of making or earning any income from any source in India" He pointed that it is undisputed that limb ii. covers cases where royalty is paid for use of right information or property for the purposes of making or earning any "income from any source in India". He questioned that if the phrase "income from any source in India" is very wide and must include income from a business carried on in India then why then have limb i.? That Limb i. must necessarily mean something more than merely covering cases where royalty is paid for use if right property or business carried on in India, or else limb i. will be rendered otiose. It was submitted that Limb i. covers cases where the right property or information has been used by the non-resident payer (OEM) itself and is so used in a business carried on by OEM....
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....ff the shelf products or standard products. The entire supply of the products is India specific. It has been admitted by the Ld. Counsel for the Department during the course of the hearing that handsets embody two technologies- (a) technology with respect to the functionality of the handset and (b) technology with respect to CDMA connectivity. All the customization such as inclusion of Hindi language in the handset, default ringtones in the handsets, etc. is customization concerning the functionality of the handset and has nothing to do with the CDMA connectivity. In other words a CDMA handset will carry across conversation in Hindi as well as it carries conversation in English. There is no customization of handset qua the CDMA connectivity. A handset operational on 800 MHz frequency operates anywhere in the world where CDMA is operated on 800 MHz. In fact there are 60 other countries in the world where CDMA technology works on 800MHz frequency band. In support of his contention, he had submitted the list of countries where CDMA technology operates at 800 MHz. Further he also submitted that the locking of handsets to a particular network operator is a requirement of the network o....
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....amount to a violation of the Copyright Laws and the Information Technology Laws. Therefore, he submitted that the judgment is of no assistance to the issue/controversy involved in the present case. f. On the contention of the Department that the sale of the products is concluded in India, Mr. Dastur submitted that this fact has been established to be incorrect on a reading of the very agreements relied upon by the Department. Having submitted so, Mr. Dastur drew the attention of this Bench to clause no 14.1 of the agreement between Tata and the OEMs ( ie ZTE and Motorola) and submitted that the fact that the risk to the equipment shall pass on provisional acceptance is not relevant for determining where the title in the equipment passes, which in this case is clearly outside India. In support of his argument, Mr. Dastur relied on the decision of the Delhi High Court in the case of Ericsson AB and explained that on identical facts, the Hon'ble Delhi High Court held that acceptance test is not a material event for passing of the title and risk in the equipment supplied. g. He referred to the relevant provisions of the Sale of Goods Act 1930 and submitted tha....
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....he income. In the present case, the right property or information licensed to OEMs relates to the manufacture of the products and hence the source of royalty is the activity of manufacturing. Though cited by the Revenue, Rhodesia entirely supports the Appellant's case. j. Alternatively, he also submitted that assuming whilst totally denying, that the sale is concluded in India, even then since the source of royalty, as explained above, is manufacturing of handsets/network equipment, and such manufacturing activity is undisputedly outside India, the source is outside India. Placing reliance on the decision of the Bombay High Court in the case of Kusumben. D. Mahdevia v. CIT (47 ITR 214), he submitted that the place of source of income and the place of accrual of income can be different. Therefore, the submission of the Revenue is devoid of any merits. k. On the contentions of the Department that the OEMs have a source in India since the OEM has licensed software to Indian carriers, he submitted as under: i. Neither of the agreements entered into by Tata are relevant to decide the issue with respect to the year under consideration. It would be ....
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....e handset and network equipment to connect with each other without there being some software involved. vi. The prayer of the Revenue is based on a misunderstanding of the Appellant's case. The very basis on which the remand is sought is factually misplaced, it is not the Appellant's case the there is no software involved in the working of the CDMA network. All that has been submitted is that there is no licensing of software under the 16 patent license agreements, which is evident from the fact that these 16 patent license agreements deal with licensing of patents and not copyright. It is income under the said 16 patents license agreements which are the subject matter of assessment and the present controversy before the Bench. There is software involved and Qualcomm does develop software; but the software developed is it part of the chipsets installed in the products, which chipsets are sold to the OEM. The developing of software and the selling of chipsets is a part of a separate business carried on by Qualcomm known as the QCT Division. That this is in fact the position that has been recognized by the AO in page 1, last paragraph of page 2 and first paragraph of page 5 of ....
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....A. Referring to the order of the CIT(A) he submitted that the Hon'ble Delhi High Court has reversed the decision of the Delhi Tribunal in the case of Asia Satellite ( 238 CTR Delhi 233). That the tests applicable are different under the Act and under the DTAA. For attracting S.9(1)(vi)(C), what is required is utilization of the license patented by the OEMs in India and were as under Artcile.12(7)(b) there should be use of or the right to use of the patent in India. He disputed the finding of the CIT(A) that there is transfer of technology as incorrect. He submitted that the CIT (A) in his order on wrong premises held that technology is embedded in this case. 36. The Ld. Counsel for the revenue Mr. G.C. Srivastava submitted that under the DTAA with the United States of America , Article 12 para 1 gives the primary right of taxation to the resident state. However para 2 provided that such royalties may also be taxed in the source state in which they arise according to the Laws of that state. Further, Para 7(b) of the Article provides that where royalties do not arise in one of the contracting states in terms of Para 7(a) and the royalties relate to the use or the right to use the r....
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....ransferred to India which includes the arrangement between Reliance/Tata and Qualcomm, Qualcomm and OEMs, OEMs and Reliance/Tata. The MOU entered into between Reliance and Qualcomm states in the preamble that Reliance and Qualcomm propose to enter into "an strategic alliance to promote the utilization of CDMA technology for provision of basic wireless services in India". Clause 1 of the MOU uses several expressions like "through the use of CDMA technology" and "utilization and penetration of CDMA technology", "CDMA technology based wireless technology in India". On page 2 of MOU it is stated that both parties agree that price competitiveness of CDMA handsets is a critical requirement to increase the penetration of CDMA technology telecommunication services in India. Exhibit A to the MOU lists various services which Qualcomm would render to Reliance for setting up CDMA based networks in India. Reliance was placed on the technical service agreement between Qualcomm and Reliance and it was submitted that the agreement was intended to promote CDMA technology in India and that the network planning is done by Qualcomm and training was also given by Qualcomm to various persons in India fo....
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....aforesaid decision is clearly distinguishable on facts. In the said case, the High Court observed that the telecasting companies have neither any control over the satellite nor have they access to the same. In the present case, the operators in India have full access to the CDMA technology and have also control over it, in the sense that they can use the way it is useful to them. The only undertaking given is that the use will be for their own business. 45. In support of his argument that CDMA technology in the form of software embedded in handsets/equipments is the property of Qualcomm and is being used in India in terms of DTAA, he placed reliance on the following decisions: - Millennium IT Software Ltd [338 ITR 391, (AAR)]; - Citrix System Asia Pacific Pty. Ltd, In Re [342 ITR 1, (AAR)]; - Samsung Electronics Co. Ltd [245 CTR 481, (Kar)] 46. He also relied on the clarificatory amendment contained in Explanation 4 introduced by the Finance Act of 2012 and submitted that the same would also apply in the context of treaty for the reason that the source state has the right of taxation under para 2 of Article 12 "according to the laws of th....
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....ian handsets to make it affordable and why the Reliance threatened to exit from CDMA technology if Qualcomm did not agree to reduce its royalty rate. 49. The license given to Indian operator by OEMs for the use of property (software) is contemplated to last till the network exists or till the agreement survives. Nothing else is needed to demonstrate that the royalty is paid in relation to the use of property in India and also to demonstrate the fact the OEMs have source of income in India. In view of the above, he concluded by submitting that it is evident that royalties relate to the use of right/property owned by Qualcomm by the Indian Operators and it would, therefore, be deemed to arise in India in terms of para 7(b) of Article 12 of the DTAA and would be chargeable to tax under para (2) thereof. 50. In his reply, Mr. Dastur refuted the contentions of the Departmental Counsel and submitted that, as per the Revenue since, the right or property "used in India" by Reliance is the "CDMA technology", the royalty earned by the Appellant albeit from third parties is taxable in India under Article 12(7)(b). Revenue argues that the CDMA technology cannot be broken up into handsets an....
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....facture, must be exploited in India or there must be right to exploit the right to manufacture in India. e. On the facts of the case at hand and insofar as is relevant, ought to read thus: Where under sub-paragraph (a) royalties do not arise in India or United States of America, and the royalties relate to the use of, or the right to use, the right to manufacture in India, the royalties shall be deemed to arise in India; or (b) Where under sub-paragraph (a) royalties do not arise in India or United States of America, and the royalties relate to the use of, or the right to use, the patent, the royalties shall be deemed to arise in India. f. It is an admitted position that the patents of Qualcomm are used to manufacture the products and all the manufacturing activities are carried on outside India. g. For the royalty to relate to the use of or right to use the right or property in India the agreement between Qualcomm and the OEM should either (a) be confined to India or (b) India should be one of the countries where the right or property must be specified as being. Neither of the aforementioned conditions are satisfied in the facts of the case....
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....e Act between use of a copyrighted article and that of copyright urged by the Revenue, if there be any, has no merit in the context of the DTAA. 54. He also submitted that the Explanation is of no relevance in the facts of the present case inasmuch as the present controversy deals with the taxability of patents and not with the taxability of computer software. Further, Explanation 4 is relevant for clause (v) of section 9(1)(vi), the case of the royalty earned by QCOM is covered by clauses (i) and (iii) of Explanation 2 to section 9(1)(vi) and not clause (v) and there is no such Explanation for use of patents covered under clauses (i) and (iii). Hence, Explanation 4 has no impact on the facts of the case at hand. 55. Further he argued that on a more general level, the Revenue has argued that Qualcomm gives technology to Reliance/Tata to set-up network; CDMA is a wholesome technology and it cannot be broken into handset and network; Qualcomm's involvement is extensive; in totality Qualcomm is providing technology and earning royalty (albeit from third party); royalty is not on account of sale but its income from deployment of technology by looking at it on a wholesome basis; hence....
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....inition of 'royalty' under the Act. The distinction between use of a copyrighted article and that of copyright still holds merit in the context of DTAA; and c. The determinative factor in a transaction of sale of goods is where the property of goods passes. If the title of the property manufactured outside India passes outside India, no part of the sale proceeds would be taxable in India. 60. In his reply, Mr. G.C. Srivastava disputed the applicability of the Nokia ruling to the facts of the present case and submitted that the Question raised before Hon'ble High Court of Delhi as reproduced on Page 12, Para 7 of the judgment were: - Questions 1 and 2 on whether Nokia has any business connection and/or PE in India. - Question no.3 on whether the amount was Taxable as royalty. 61. The Hon'ble High Court observed on Page 16 (Para 9) that the Liaison Office cannot be regarded as PE. After coming to this finding once again in Para 22 (Page 26), the High Court proceeded to discuss the recent amendments cannot be read into the Treaty. Questions No 1 and 2 were accordingly decided in favour of the assessee. The Hon'ble High Court proceeded to disc....
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...." which contain the core patented technology are sold to OEMs which get embedded in the handsets and equipments manufactured by them and, in turn, sold to India. OEMs cannot use these chipsets and ASIC without the consent of Qualcomm which is given under agreements with OEMs. 68. Tata/Reliance also can use these patented technology or patented articles without the consent of Qualcomm and OEMs and that is the reason these find place in the agreement by the use of the expression "licensing of software". "Software" is defined in the agreement between Tata and OEM to mean man and machine readable instruction including firmware. Firmware is also defined to mean a combination of hardware and software. The "Equipment" is also defined to mean and include CDMA Equipment. Thus, the network operators in India are given the right to use the patented products and processes of Qualcomm through OEMs. 69. Referring to the definition of CDMA "ASIC" and "chipset" from the agreement between Qualcomm and OEM (Page 230 of A's PB), he submitted that they all are patented products or processes. Hence, it is highly illogical for the appellant to rely on cases pertaining to software and draw distinction ....
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....e, out of context and inapplicable to the facts of the present case. 72. On ground no 9, relating to levy of interest under S. 234(A) of the Act, Mr. Dastur submitted that the levy of interest is consequential and did not press for the same. 73. On ground no 10, relating to levy of interest under S. 234(B) of the Act , he submitted that the issue is already settled in the favor of the Appellant by the decision of the Jurisdictional High Court in the case of DIT v. Jacabs Civil Incorporated and Mitsubishi Corpn. And Ors (330 ITR 578). Relying of the provisions of the Act and the above judgement, he submitted that if the royalty income is liable to tax under S.9(1)(vi)(c) of the Act, it was the duty of the OEMs to deduct the tax at source under S.195 of the Act, on the failure of the OEMs to do so, no interest could be imposed upon the Appellant under S.234B of the Act. 74. He also placed reliance on the decision of the Hon'ble Supreme Court in the case of DIT v. General Electric Inc [2010] 323 ITR (ST) 46. Where in the Hon'ble Supreme Court dismissed the Department's special leave petition against the judgement dated June 22, 2009 of the Bombay High Court in ITA No 890 of 2009, w....
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.... assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. Explanation 1.-Production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within....
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....utilized in India by various telecom operators viz., Reliance, Tata Indicom etc. Apart from the said patent, the company is into filing and securing patents of a number of technological advancements in telecommunication sector. These patents are then utilized for the purpose of earning royalties world wide including India. The technological patenting profile of the company can be ascertained from the following press release of the assessee:- Press Release Qualcomm Incorporated www.qualcomm.com 5775 Morehouse Drive San Diego, CA 92121-1714 (858) 587-1121 United States Patent Office Reaffirms the Validity of Important Qualcomm CDMA Patent March 23, 1999 - SAN DIEGO -- March 23, 1999 -- Qualcomm Incorporated (Nasdaq: QCOM) today announced that the validity of one of its key Code Division Multiple Access (CDMA) patents has been reaffirmed. Qualcomm has received notice that the United States Patent and Trademark Office will issue a Reexamination Certificate confirming the patentability of all 49 claims of U.S. Patent 5, 103,459 with minor amendments and allowing 19 additional claims. The patent, which was issued in April 1992, had been the subject of two requests for reexaminati....
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....n, this news release contains forward-looking statements that are subject to risks and uncertainties, including timely product development, the Company's ability to successfully manufacture significant quantities of CDMA or other equipment on a timely and profitable basis, and those related to performance guarantees, change in economic conditions of the various markets the company serves, as well as the other risks detailed from time to time in the company's SEC reports, including the report on Form 10-K for the year ended September 27, 1998, and most recent Form 10-Q. Qualcomm and OmniTRACS are registered trade marks of Qualcomm Incorporated. Globalstar is a trade mark of Loral Qualcomm Satellite Services, Incorporated. The assessee is having full fledged 'research and development centres' in India. Many of the technological developments are undertaken at these development centres located in India. These products are patented by the assessee, and are exploited commercially worldwide including in India. These facts can be ascertained from the following news clippings:- New Delhi, June 28 Qualcomm Inc has told the Union Communications and IT Minister, Mr Dayanidhi Maran, that th....
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....manufactured by the companies like LG, Samsung, Nokia etc., but cost of royalties is to be determined and negotiated directly by the telecom operators, who purchase such handsets in bulk for distribution among their customers. The royalties to be charged by the assessee in respect of handsets, differs from country to country. For example the assessee charges at the rate of 2% in china while it charges at the rate of 7% in respect of handsets sold to Indian telecom operators. This is further evident from the newspaper reports on the dispute between Reliance and the assessee regarding the cost of royalties embedded in the handset price. Some of the reports are extracted below:- Royalty issue: Qualcomm CEO likely to visit India Tata Teleservices not considering GSM roll-out for now New Delhi, June 15 Under pressure from the industry and the Communication Ministry to lower its royalty, rates, the US based CDMA technology promoter firm Qualcomm's world wide CEO, Mr. Paul Jacob, is likely to visit India next week. Mr. Jacob is expected to meet the Communication and IT Minister, Mr. Dayanidhi Maran, and CDMA operators as well. The move comes after India's largest CDMA payer Reliance....
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....sions. However, the Qualcomm CEO and Mr. Anil Ambani, who heads Reliance Communications were scheduled to meet over dinner again on Tuesday, possibly to continue the discussions. Qualcomm, while being unrelenting on royalty charges, appeared to show some willingness to offer some concessions, which would be a variable of the volumes that Reliance can generate, said sources. They said that Qualcomm said it might agree to negotiate with equipment manufacturers and look at lowering the cost element of handset prices based on volumes. Reliance Communications was also equally unrelenting in its stance, said sources. Its bargaining confidence probably comes from the fact that it is the largest mobile telephony service operator in India, the fastest growing telephony market in the world, said analysts. They added that the relative silence of the other CDMA operator Tata Teleservices on the royalty issue could strengthen Qualcomm's case in a small way. (Source: Hindu Business Line) From the observations made above, it is seen that the assessee company is Earning royalties in respect of handsets operational in India. These handsets. Though are got manufactured by the Indian Telecom Ope....
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....ation. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at....
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.... our opinion in the facts and circumstances of this case, the AO had a bonafide belief that the income chargeable to tax escaped assessment based on material, which in our opinion, reasonably supports such belief. The opinion formed, to a mind, is one which a rational man would have come to such conclusion on this material. We hold so because the information is that Qualcomm is a world leader in holding patents relating to CDMA technology and that Reliance and Tata Telecommunications are introducing CDMA technology into India and the information that negotiations have taken place between the Government and the Representative of Qualcomm on the subject and that discussions were held by the assessee with Reliance on the issue of royalty charged on handsets, would lead any reasonable person to a conclusion that Qualcomm might have earned income in India and that such income would have escaped assessment. The satisfaction in question is the subjective satisfaction of the AO at that point of time. It cannot be said that there is no nexus between the material and the belief of escapement of income. It also cannot be said that the material in possession of the AO does not enable him to dr....
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....iable to tax has escaped assessment. It is not the case of the assessee that the newspaper reports are false or inaccurate. 92. Coming to the decision in the case of Sikkim Subba Associates v. UOI and others (supra) the Hon'ble High Court of Sikkim found fault with the initiation of search under Section 132 of the Act on the basis of CAG report obtained even before it was laid before the house and on the basis of certain magazine reports, which were subsequently found to be fake and fabricated magazine. This decision was rendered by the Hon'ble High Court on the peculiar set of facts and in the context of initiation of search under Section 132 of the Income Tax Act, 1961. In our considered view, this decision is not applicable to the facts of the case. In this case the assessee does not allege that the reports are false or fabricated. Newspaper reports are relevant material and it is open to the assessee to challenge the veracity of the reports. Newspapers give information and this can be relevant material. On obtaining copy of the reasons the assessee can always state his objections. Hence we do not agree with this argument. 93. The second contention of the Appellant is that the....
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....c. could lead any reasonable person to believe at that the Appellant who owns several patents pertaining to CDMA technology would have income, as such, technology is used in India. In our opinion the AO had an honest belief, and has come to a conclusion, as a rational man would, based on the material that income chargeable to tax has escaped assessment. The satisfaction in question is that of the AO at that point of time. It cannot be said that the AO had no cause or justification to suppose that income has escaped assessment. The phrase 'reason to believe' cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. Whether the material would conclusively prove the escapement of income is not the concern at this stage. 97. The argument that the material relied upon by the AO has to be specific to a particular year is neither supported by any provision of the Income Tax Act, 1961 nor by any case laws. Newspaper article published in 2006, can be a basis for formation of belief that income chargeable to tax has escaped assessment during the years prior to such publication when the CDMA mobile services were available in India. The notic....
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....e quashed since it is unclear as to which reason the AO has relied upon and his reliance in the case of Sagar Enterprises v. ACIT we hold as follows:- 103. In the case of Sagar Enterprises v. ACIT, 257 ITR 335 (supra) the facts are as under:- "(i) vide reasons recorded on 18th August, 1997 the case of the assessee partnership firm was reopened for the A.y. 1991-92. (ii) In the reasons recorded, the assessing officer placed heavy reliance on the fact that the partnership firm did not file the Return of income for the A.Y. 1991-92, while the high court found that the return of income was actually filed on 28th August, 1991 itself. (iii) The undisclosed income sought to be assessed for A.Y. 1991-92 was already assessed in the A.Y. 1992-93 on a protective basis. (iv) When the addition made in the protective assessment was deleted by the CIT(A) vide his order dt.26th January, 1996, the assessing officer sought to reopen the assessment for A.Y. 1991-92 to make the very same addition on a substantive basis. On these facts, the Hon'ble High Court held as under: "From the facts that have come on record, protective assessment for asst. yr. 1992-93 was carried in appe....
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.... as under: "18. Reverting to the facts of the present case, we notice that in two out of four reasons recorded by the Assessing Officer for reopening the assessment, he stated that he need to verify the claims. In the second ground, he had recorded that admissibility of the bad debts written off required to be verified. In the fourth ground also, he had recorded that admissibility of royalty claim was required to be verified. We are in agreement with the contention of the counsel for the petitioner that for mere verification of the claim, power for reopening of assessment could not be exercised. The Assessing Officer in guise of power to reopen an assessment, cannot seek to undertake a fishing or roving inquiry and seek to verify the claims as if it were a scrutiny assessment. 19. With respect to other two grounds, however, we find that the Assessing Officer had some material at his command to form a belief that income chargeable to tax had escaped assessment. Ground NO.1 pertained to the claim of deduction under section 80HHC of the Act and the Assessing Officer was of the opinion that the Central as well as the State Sales Tax and other income in the net profit would not qualif....
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....ated that the Appellant is having a P.E./Business Connection in India and whereas in the assessment order royalty income was taxed on gross basis under Article 12(vii)(b) of the DTAA and not under Article 12(7)(a) of the DTAA and since the foundation of the reassessment was something and the actual reassessment was something else, the proceedings have to be quashed. Reliance was placed on the decision in the case of CIT v. Jet Airways India Ltd. (supra) and Ranbaxy Laboratories Ltd. (supra). We have perused both these decisions. In the case of CIT v. Jet Airways India Ltd. 331 ITR 236 (Bom.) (supra) at para 21 and 22 it is held as follows:- "20. Parliament, when it enacted the Expln. (3) to s. 147 by the Finance (No. 2) Act, 2009 clearly had before it both the lines of precedent on the subject. The precedent dealt with two separate questions. When it effected the amendment by bringing in Expln. 3 to s. 147, Parliament stepped in to correct what it regarded as an interpretational error in the view which was taken by certain Courts that the AO has to restrict the assessment or reassessment proceedings only to the issues in respect of which reasons were recorded for reopening the ass....
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....explain its contents and cannot be construed to override it or render the substance and core nugatory. S.147 has this effect that the Assessing Officer has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice under Section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under Section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee." (emphasis ours) 108. Applying the above ratio, the Hon'ble Delhi High Court in the case of Ranbaxy India (supra) allowed the Appellant's appeal. In this case reopening was made for making the addition towards club fees, gifts and presents and in the final assessment the AO reworked ....
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....ons recorded and then the AO has to furnish the same within a reasonable period. Thus the duty of the AO to furnish the reasons is triggered only on the assessee filing the return of income in response to a notice under S.148 of the Act. If we accept the argument of the Ld. Sr. Counsel, then this would defeat the provisions of the Act. We draw strength from the decision of the Jurisdictional High Court in the case of AG Holdings P. Ltd. v. ITO [2012] 72 DTR (Delhi) 346. Hence this argument is not accepted. 111. The next contention of the Ld. Sr. Counsel with specific reference to 2000-2001 and 2001-2002 is that the notice under Section 148 was issued without the sanction of the appropriate authority. The pith and substance of the arguments of the Ld. Sr. Counsel is that notice under Sec.148 should be issued only after the JCIT is satisfied on the reasons recorded by the AO that it is a fit case for the issue of such notice. The case of the assessee is that sanction for issue of notice under Section 148 was given by the Addl. DIT whereas the sanction ought to have been given only by the JCIT as mandated by the provisions of S.151 of the Act. Since the notice was issued without sanc....
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....e post of the ACIT in 2001 and had exercised the powers of the ACIT for over a period of two years. Therefore, the Assessing Officer was competent in law to make the initial block assessments and the orders of the Tribunal overlooking the materials available on record were not sustainable. (The matters were remanded to the Tribunal for fresh disposal)." Hence we are unable to accept this argument of the Ld. Counsel for the Appellant. 113. Yet another contention of the Ld. Sr. Counsel was that the sanction was issued by the Additional Director of Income Tax is mechanical without proper application of mind. Reliance was placed on the following judgements: (a) Chugmal Rajpal v. SP Chaliah (Supra) (b) Central India Electrical Supply Company Ltd. v. ITO (Supra) (c) CIT v. Mesco Laboratories Ltd. (Supra). 114. On a perusal of these case laws, we find that in the case of Chugmal Rajpal (supra) the AO did not mention in the report seeking sanction the material available before him on the basis of which he had reason to believe that income has escaped assessment. He further specifically mentioned therein that reassessment proceedings were initiated to conduct furthe....
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....moved the Settlement Commission for the A.Y.s 1989-90 to 1994-95. The reopening was quashed for the reason that there was no nexus between the reasons recorded and the belief formed in as much as there was no such application before the Settlement Commission for the Assessment Year 1995-96. No such facts exist in this case. In our opinion, we do not find any material, to agree with the submissions of the Ld. Sr. Counsel that the sanction in this case has been accorded by the Additional Director of Income tax without application of mind. 118. In view of the detailed reasons cited above, we uphold the reopening of assessments for all the AYs under appeal. Accordingly, the notice issued under S.148 of the Act is held to be valid. 119. Enhancement of income by the C.I.T(A):- 119. On the issue of the enhancement of income, we are unable to agree with the contention of Mr. Dastur that the CIT (A) cannot enhance the income on the facts and circumstances of this case. The Hon'ble Supreme Court in the case of Jute Corporation (187 ITR 688 at page 693) and in CIT v. Kanpur Syndicate (53 ITR 225 at page 229) held that the power of the Appellate Assistant Commissioner is coterminous with th....
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....rder passed by the Assessing Officer is silent about this item and there is no discussion thereupon would not mean that the Assessing officer had not considered the same. It is trite law that the Assessing Officer is not supposed to frame the assessment order like a judgment of the Court and would discuss each and every item and aspects specifically. It is clear from the record that import and impact of every document seized including page No. 21 was considered by the Assessing Officer; he went into the matter by issuing a questionnaire; calling upon the assessee to give reply and reply/clarification was received from the assessee. It is thereafter only that addition on the basis of page No. 21 was not made in respect of the properties in question. 24. We thus answer question No. 2 in favour of the Revenue and against the assessee holding that on the facts of this case, the CIT (A) rightly exercised his powers under Section 251(1) of the Act." 122. In the present case, the fact that the Appellant also earns royalty income from network equipment was before the AO. This fact was also discussed by the AO in her assessment order. The AO enquired into the matter by issuing a questionn....
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....Act 1961: The issue in question is whether the said "royalty" is taxable under Sec.9(1)(vi)(c) of the Act. For ready reference S.9(1)(vi) of the Act is extracted below. S.9(1)(vi): "(vi) income by way of royalty payable by - (a) The Government; or (b) a person who is a resident except where the royalty is payable in respect of any right, property or Information used or services utilised or the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident where the royalty is payable in respect of any right, property or Information used or services utilised or the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India;" 128. Section 9(1)(vi)(c) is a deeming provision and has to be construed strictly. A plain reading of this section shows that any income by way of royalty is taxable in India, if such royalty is payable by a non-resident in respect of any right, property or information used or services util....
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....ly exploiting the CDMA technology in India. In our view neither the AO nor the CIT(A)'s have demonstrated, that for the years under appeal, the OEMs have used Qualcomm's right/information/property (i.e. patents) for the purpose of carrying on business in India or the for the purpose of making or earning income from a source in India. 134. The ld A.O. as well as the Ld. C.I.T.(A) have based there findings only on the 16 licensing agreements between OEM's and the assessee. The Ld. Spl. Counsel. Mr. G.C. Srivastava for the first time before this tribunal filed the following agreements as additional evidence to substantiate the case of Revenue to tax that the royalty income earned by Qualcomm under S. 9(1)(vi) (c) of the Act:- i. Equipment purchase agreement between the Tata Tele Services and Motorola Inc. dt. 8.12.2007; ii. Equipment purchased agreement between the Tata Tele Services and ZTE Corporation dt. 19.2.2007. 135. We agree with Mr. Dastur, that cognizance cannot be taken of these agreements as they relate to the F.Y.2006-07 relevant to AY 2007-08 and AY 2007-08 and have no relevance to the case on hand. The ld Spl council sought to make out a new ....
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....ng but not limited to timely payment of the royalties set forth herein, QUALCOMM hereby grants to LICENSEE a personal, nontransferable, worldwide and non-exclusive license under QUALCOMM's Intellectual Property solely for Wireless Applications to (a) make (and have made), import, use and sell, lease or otherwise dispose of Subscriber Units, and (b) to make (and have made) Components (provided such Components have been exclusively designed by LICENSEE and which design is owned and used exclusively by LICENSEE) and import, use and sell, lease and otherwise dispose of Components but only if such Components are included as part of and within Subscriber Units Sold by LICENSEE (or as replacement parts for Subscriber Units previously sold by LICENSEE). No other, further or different license is hereby granted or implied. QUALCOMM's Intellectual Property (page no 236 of the paper book) "QUALCOMM's Intellectual Property" means QUALCOMM's Technically Necessary IPR and QUALCOMM's Included Commercially Necessary IPR and Company 3 Patents; provided that, notwithstanding the foregoing, the term "QUALCOMM's Intellectual Property" shall not include any intellectual property, including but not limi....
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....thin Licensee Infrastructure Equipment (or as replacement parts for Infrastructure Equipment previously Sold by Licensee). No other, further or different license is hereby granted or implied. Notwithstanding the foregoing, Licensee, may exercise its "have made" rights above with respect to Components not designed by or for Licensee (according to specifications provided by Licensee) only to the extent that the third party benefiting from such "have made" rights does not Assert, through itself or its affiliated entities, patent infringement litigation against QUALCOMM or Licensee and QUALCOMM agrees that it will not charge royalties to any third party with respect to the sale by such third party of Components to Licensee to the extent that such third party is making such sale under Licensee "have made" rights and is not using or otherwise infringing upon any of QUALCOMM's patents not the subject of such "have made" rights." QUALCOMM's Applicable Subscriber Patents (Page no 275): "QUALCOMM's Applicable Subscriber Patents" means QUALCOMM's Early Patents and, only if Licensee elects under Section 4.4.6, either QUALCOMM's Later Patents or QUALCOMM's Other Patents, as the case may be. ....
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....iomodules or any other subscriber equipment. 2. Agreement between Tata Teleservices Limited and ZTE Corporation for supply of CDMA Equipment [reference - Agreement 2 filed by the Revenue as additional evidence] Extract of relevant clauses from the agreement on transfer of title and risk of the equipment Clause 14.1 - Title and risk of loss (Page no 33): "Without prejudice to TTSL's right to reject as set forth in Article 6.4 of this Agreement, the title of all Equipment sold hereunder shall pass form the Supplier to TTSL in high seas before arrival In India and the risk of loss to the Hardware portion of all Equipment shall pass from Supplier to TTSL upon Provisional Acceptance." 3. Agreement between Tata Teleservices Limited and Motorola Inc for supply of equipment [ Agreement 1 filed by the Revenue] Extract of relevant clauses from the agreement in relation to transfer of title and risk of the equipment Clause 14.1 - Title and risk of loss (Page no 14): "Without prejudice to TTSL's right to reject as set forth in Article 6.4 of this Agreement, the title and the risk of loss to the Hardware portion of all Equipment sold hereunder shall pass from Supplier to TTSL upon Delive....
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....e specifically designed and programmed for Reliance. e. Relying on various clauses in the equipment purchase agreement entered by Tata with ZTE and Motorola, he contended that despite the declaration in clause 14.1 to the agreements, the agreement has to be read as a whole to ascertain the intent of the parties. He submitted that if the agreement is read as a whole, the intent of the parties is amply clear that the title of the equipment passes in India at the site where the deliveries are made or in a worst scenario at the airport/seaports in India. 142. We are unable to agree with the contention of the Ld. Spl. Counsel for the following reasons: a. Accepting such a proposition would lead to a situation where every purchase and sale of goods made by any party in India with any party in other countries would be considered as if those parties are doing business in India. A sale to India without any operations being carried out in India would amount to business with India and not business in India. For the business to be carried out in India there should be some activity carried out in India. Thus the argument that if manufacturing is done in one jurisdicti....
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....alculator, music, ring tones, browsers and numerous other features are no way connected with patents of Qualcomm in these 16 agreements which are for manufacture of CDMA handsets and equipments. In fact in each hand set a number of patented technologies other than patents with respect to CDMA connectivity are also used. Hence the argument that patents relating to CDMA technology are customer specific, service provider specific or country specific is factually incorrect. There is no customization of hand set qua the CDMA connectivity. v. Coming to the argument that hand set are programmed to a particular network service provider and hence it is India specific is not tenable. As rightly pointed out by Mr. Dastur locking of a handset to network is a requirement of the network service provider depending upon its business plans and exigencies and does not affect the ability of the handset to operate on any CDMA telecom network, which is evident from the fact that once the network lock is broken the handset can operate on any network. This fact is also supported by the decision of the AP High court in the case of Asifuddin and others (Supra).Hence it cannot be concluded that CDMA ....
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....e and shipment under these 16 agreements. For the OEM's it is a sale of a product which is the end of the activity. The revenues are generated on sale only. There are no revenues either to the OEM's or to Qualcomm after the sale of the products. The sale is of a chattel as a chattel. The product is a combination of Hardware, integrated circuits, designs, multiple application software, CDMA components, chipsets with embedded software etc. The revenues attempt to break down the sale into various components is not supported by the terms of the agreements and the facts of this case. It cannot be said that every item other than software was sold and that software which is embedded has been separately licensed. It is not the case of the revenue that the OEM's have income in India from these sales or that they have income from licensing of software in these products which is assessable to tax. There is no finding that the OEM's have carried on business in India much less that a part of the sale consideration is attributable to any sale or licensing of software carried out in India. When OEM's itself are not brought to tax, to hold that Qualcomm is taxable in not correct. This is not a cas....
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....rseas; installation was carried out by their respective affiliates in India. Along with hardware, perpetual license was granted by all the three companies for use of software . Software was inseparable and integral part of hardware, without which hardware could not function. Significant restrictions were placed on the Indian telecom operators on use of software. (The Indian telecom operators could not onward sell the software independently without sale of the hardware, etc). there were distinct agreements with an overall agreement for supply and installation of GSM Systems, through split into separate agreements , one for supply and the other for installation which was left to the subsidiaries. The facts of this case are similar to the facts of the case of Ericsson AB. The Hon'ble Delhi High Court held as under: Para 41. "We find that the terms of contract make it clear that acceptance test is not a material event for passing of the title and risk in the equipment supplied. It is because of the reason that even if such test found out that the system did not conform to the contractive parameters, as per art. 21.1 of the supply contract, the only consequence would be that the cellu....
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.....1 - Title and risk of loss (Page no 14): "Without prejudice to TTSL's right to reject as set forth in Article 6.4 of this Agreement, the title and the risk of loss to the Hardware portion of all Equipment sold hereunder shall pass from Supplier to TTSL upon Delivery in accordance with CIP Incoterms 2000 port of shipment." Delivery (Page no 44) is defined to mean -"Delivery" or "Delivered" or "Deliveries" shall mean the physical delivery by the Supplier, of the Equipment ordered by TTSL on CIP terms (as defined above), at airports/seaports mutually designated by the Parties. CIP (Page no 43): "CIP" means "Cost, Insurance Paid" to airport/seaport in India as defined in Incoterms 2000. It means that supplier shall pay and bear the cost of packing/loading/unloading, transportation, carriage, freight, unloading charges, insurance and any other cost or any nature at any time prior to Delivery. 151. It is the submission of the Revenue that entire risk is borne by Motorola and the carriage, insurance is paid till the delivery at seaports/airports in India. Hence, the sale concludes in India. The reference by the Appellant to CIP Incoterms 2000 does not alter the situation because the ....
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....the Delhi Special Bench decision in the case of Ericsson was latter affirmed by the Delhi High Court in DIT v. Ericsson A.B. (Supra). Regarding the applicability of Ericsson and Nokia ruling, we are unable to appreciate the argument that the propositions in these judgments would not be applicable to the facts of the present case. To tax the royalty income earned by Qualcomm, the Revenue must show that the OEMs have used Qualcomm's patents for a business carried on in India or for making or earning income from a source in India, which leads to the taxability of the OEMs. Therefore, the taxability of Qualcomm directly depends on the OEMs taxability in India. 154. Ericsson was a company incorporated in Sweden. It was engaged in the business of supply of hardware and software. It entered into an agreement with 10 Cellular operators in India for supply of telecommunication systems. These were installed and commissioned in India by two sister concerns of Ericsson, one being a branch of Non-Resident group company, and the other being Resident company of the same group. There was an overall agreement with the operators for supply and installation of GSM systems. The supply of equipment wa....
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....e software was unloaded from dumb C.D. from the computer, usable only when it is activated, it does not cease to be goods. (k) The payment to the assessee cannot be split up as between supply and royalty/technical fees. (l) There is no assignment of any copy right in the facts of the case, in the sense contemplated under Section 14 of the Copy Rights Act, 1957 as a consequence of either the overall agreement or the supply contract. (m) The difference between acquisition of a "copyright right" and a "copy righted product" was pointed out. 155. In the case of Director of Income Tax v. Nokia Networks O.Y. 212 Taxman 618, the relevant facts are:- The assessee, a company incorporated under the laws of Finland, was a leading manufacturer of advanced telecommunication systems and equipment (GSM equipment), which were used in fixed and mobile phone networks. During the Previous years, the assessee maintained a LO and also had a subsidiary in India, known as, Nokia India P.Ltd.(NIPL). Its activities involved supply of hardware and software as well as installation and commissioning and also after sale services. It entered into agreements with various Indian telecom/cell....
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....y the assessee, and the installation thereof was also overseen by the assessee, who was to ensure that it was carried out to the satisfaction of Indian buyers in accordance with the terms of the contract. This was also considered by the Court and it was held that the taxable event took place outside India with the passing of the property from seller to buyer. (e) The decision might have been different if the buyer had the right to reject the equipment on failure of acceptance test. (f) The overall agreement does not result in the income accruing in India. The execution of the overall agreement is prompted by pure commercial considerations. (g) Board Instruction No. 1829 dt. 29.1.1989 must continue to govern the assessment for the relevant years, despite withdrawal of this Instruction by CBDT by virtue of Circular no. 7/2008 dt. 22.10.2009. (h) The place of negotiation, the place of signing of agreement or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances as the transaction relates to the sale of goods and the relevant factor and determinating factor would be as to where the property in the goods passes. In t....
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....mation has been dealt with in such a manner as would result in earning or making income from a source in India. Any other interpretation to our mind would not be harmonious, as it would make limb(i) otiose. 161. Now we come to the second limb of the issue that is, whether the OEMs have used Qualcomm's patents for the purpose of making or earning income from a source in India. The Revenue once again heavily relied on the CDMA equipment purchase agreement between Tata and ZTE and Tata and Motorola to demonstrate that OEMs have used the Qualcomm's patents for the purpose of making or earning income from a source in India. On the basis of the equipment purchase agreement of 2007, it was submitted that the two agreements between Indian operators and OEMs make a distinction between sale of equipment and licensing of software embedded in the firm ware. It was submitted that Indian operators have agreed to purchase the equipment and take licenses for the software. In addition, the Revenue has also contended that Indian operators constitute a source of income for the OEMs in India. 162. Reliance was placed on Clause 19.5 of the agreement with ZTE dt. 19th December, 2007, wherein it is re....
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....have inserted these chip sets into the handsets/network equipment manufactured by them and that these in turn have been licensed to Indian operators for which OEMs have received a consideration and hence they have a source of income in India. 167. These arguments of the Revenue are in our view not acceptable for the following reasons: a. The AO assessed the royalty arising from licensing of CDMA patents by Qualcomm to OEMs. The royalty which is brought to tax by the AO does not refer to any software being provided. It is not demonstrated by the Revenue that the software is provided as part of the licensing of Qualcomm patents. b. The software embedded in the hardware sold to Indian carriers by the OEMs belong to the OEMs. The software may have been self generated or procured by the OEM's. c. None of the 16 agreements between Qualcomm and OEMs which form the basis for assessment in these cases, refer to licensing of software. Thus to argue that software is licensed from by Qualcomm to OEMs and which are in turn sub licensed to the Indian Carriers is contrary to the facts of the case. The software which is licensed at best relates to the functi....
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....and shall not, without Motorola and ZTE's consent, disclose, provide or otherwise make available, in whole or in part, any licensed material to anyone, excepts to its employees having a need -to-know. Tata shall not copy software embodied in the firmware. iv. Tata is obligated to return all copies of the licensed materials to Motorola and ZTE when the licensed materials are no longer needed by Tata or if Tata's license in respect thereof is cancelled or terminated by the Supplier. v. Further, equipment has been defined under the agreement to mean and include certain CDMA equipment, including but not limited to the hardware, the software, the firmware, the licensed material, and parts thereof and related spares to be supplied by the supplier to Tata under the agreement. vi. Further firmware and software have been defined in the agreements as under: "Firmware" shall mean a combination of hardware and software represented by a pattern of bits contained in such hardware. "Software" shall mean a set of man and machine readable instructions on magnetic or other appropriate media, including firmware, which is necessary for the control, operation and performanc....
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.... 50 of the order). Despite all this, the Privy Council upheld the contention of the company that the amount earned on sale of such mining rights was not chargeable to tax in England since the source of income was the development of the mines, which activity was carried out in Southern Rhodesia. Applying this principle to the facts of the case at hand, it becomes clear that the source of the royalty is the place where patent (right property or information) is exploited, viz. where the manufacturing activity takes place, which is outside India. Hence, we are unable to accept the contention that Indian telecom operators would constitute source of income for the OEMs. 177. Coming to the insertion of Explanation IV to S.9(1)(vi)of the Act, we find that the amendment has no effect in the present case as a controversy in this case is taxability of royalty on patents relating to intellectual property for manufacture of CDMA handsets and equipment and does not relate to royalty on licensing of any computer software. The OEMs received no income from licensing in computer software. The OEMs sells handsets/equipments to the service providers, outside India and hence the OEMs have no source of....
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....Frequency division multiple access (FDMA) and Time Division Multiple access (TDMA). TDMA is the primary commercial form of GSM phones (Source: Wikepedia, http://www.radio-electronics.com/info/rf-technology-design/cdma/what-is-cdma-basics-tutorial.php) 184. Qualcomm was the first company to commercialize this technology in OmniTracs (a fleet management system). Qualcomm publicly introduced the concept that CDMA a digital communication technique method could be commercially successful in cellular wireless communication applications. Qualcomm was joined by US network operators Nynx and Ameritch to develop the first generation of CDMA telecommunication system. Later this team was joined by Motorola and AT&T. As a result of this it was possible to start writing of specification for CDMA in 1990. It was then a standard groups was set up with the support of cellular telecommunications industry Association (CTIA) and the telecommunication Industry Association (TIA). This group then published the standard of first CDMA system in the form of IS 95 resulting in the formal publication of IS 95A in 1995. (Source: Wikepedia, The first CDMA system was launched in September, 1995 by Hutchson Tele....
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....ows that Qualcomm itself obtains licenses from certain third parties to use their CDMA patents.(page 247 and 292 of the paper book filed by the Appellant). Thus the argument that CDMA is a technology owned by Qualcomm is devoid of merit. All that Qualcomm owns is essential patented intellectual properties developed under CDMA technology. To put it in simple words a mobile phone or a cell phone is a wireless data communication device which works on wireless technology, while phone is a device that can make and receive telephone calls over a radio link while moving around a wide geographic area. It does so by connecting to the cellular network provided by a mobile telephone operator. This would allow access to the public telephone network. In addition to voice data transmission modern mobile phones also support a wide variety of other services such as text messaging, MMS, e-mail, inter-net access, short range wireless communication, blue tooth, business applications, gaming and photography. Such mobile phones are also referred to as a 'smart phones'. The other forms of wireless data communication technologies currently in use are WiFi, global positioning system (GPS), blue tooth, gig....