TaxTMI 
TaxTMI 
2013 (2) TMI 219
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....arious common grounds. The grounds of appeals 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 I....
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....rs a license to receive the services from the Appellant; (i) 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 t....
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....ide R&D services to Qualcomm Global Trading Inc. ('QGT') its indirect parent. The Appellant has developed key patents 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 s....
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....('QCT') which develops and supplies CDMA based integrated circuits and Systems software for wireless voice and data communication, multi-media 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 licen....
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....e relevant article is reproduced as under:- "(b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and 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 royal....
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....ns of the assessee but also enhanced the assessment. 11. The Appellant had filed additional evidence before the CIT(A) u/s 250 of the Act read with Rule 46A of the Income Tax rules 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 havin....
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....ellant has raised an objection that its licensing in Korea has no nexus in India. When seen in the above backdrop it shall be observed that the software license to the Korean entity is for manufacture 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, S....
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....01 and AY 2001-02. 3. On the issue of reopening, the Ld. Sr. Counsel, at the outset, referred to the reasons recorded by the AO for initiating the reassessment proceedings under S.147 of the Act and submitted 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.....
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....base in India and by increasing R&D activities. A forward looking statement made in 2006 cannot form the basis for the AO to have a reason to believe that income escaped assessment for all the above AYs. e. The newspaper article 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 hav....
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....se of Ganga Saran and Sons (P) Ltd v. ITO (130 ITR 1). Reliance was also placed on Circular No.549 dated October 31, 1989. k. The reasons recorded must relate to the year for which notice was issued. There is nothing in the reasons as 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 ....
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....separate from that of an Addl.DIT and when a section vest the power to a specific authority, such powers cannot be exercised by any other authority albeit higher in rank. It was submitted that the notice under section 148 of the Act having been issued without obtaining 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 t....
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....sessments and notice u/s 148 dt. 29.3.2007 was issued. Thus the reopening of assessments for AY 2000-2001and 2001-02 fell within the limitation of 6 years and for the later years fall within the limitation of 4 years. d. The word 'reason to believe' appearing in S.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 ascerta....
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.... this information, the AO came to the conclusion that the Appellant company is earning royalty from licensing of CDMA technology. The press report dt. 15.6.2006 refers to the meeting between the Appellant with the central government and also with Reliance which supports the conclusions of the AO. Reference 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....
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....t there is no business action or PE in India is of no consequence as the reasons recorded by the AO are based on relevant material. k. Though the press report relates to the year 2006 and not to the earlier years, once it has come to the knowledge of the AO that CDMA technology is being used in India, the satisfaction 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 &....
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....ommissioner. Admission of additional evidence:- 17. The Ld. Special Counsel for the revenue Mr Srivastava filed an application for admission of additional evidence in the form of two agreements, the first being agreement entered into between Tata Tele Services Ltd. and Motorola Inc. for purchase of equipment dt. 8.12. 2007 and agreement 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 a....
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....that it falls within the Exception. Reliance was placed on the following decisions: - Parimisetti Seetharamamma v. CIT, [57 ITR 532 (SC)]; - CIT v. Rajesh Pilot, [219 CTR 403, (Delhi HC)]; and - Decca Survey Overseas Ltd., UK ,[ITA No.8506/Bom/1990]. Posing a question, the Ld.Sr. Counsel submitted that it is to be 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 i....
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.... of S.9(1)(vi)(c) and for this section to be attracted, the use of the right, property or information or utilization of the services, is to be within the knowledge of the licensee; c. When the agreements have worldwide operation, S.9(1)(vi)(c) does not apply. d. The OEMs sell the products i.e. the handsets on shipment outside India. 21. In view of the above, 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....
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....he Qualcomm has been remunerated for the services under this agreement and the entire amount received for technical services was offered to tax in India during the AY 2002-03 and AY 2003-04 under S. 9(1)(vii)(b) of the Act and under Article 12 of the DTAA. Further it was submitted that no intellectual property/patents has been licensed to Reliance under this agreement. Thus the agreement in no way demonstrates 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....
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....in the year to which it relates. Therefore the agreement cannot be relied upon. On the installation activities, it was submitted that the contention of the Revenue that the OEM (i.e. Motorola) carries on installation work for Tata and hence there is some business operations carried on by the OEM in India is belied by clause 5.7.8/page 8 of the agreement itself which provides that installation activities are to be carried out by 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 And....
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....the Revenue means at the port of shipment. On the contention that software is licensed by OEMs to Indian Carriers, it was submitted that the software licensed to Indian Carriers by the OEM, belongs to the OEM. It may be OEM generated software or OEM procured software. No software is provided as part of the licensing of Qualcomm's patents. Further, no amount of the royalty assessed by the revenue in the hands of Qualcomm is for the licensing 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 esta....
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....omestic law. He further submitted that the two limbs of S.9(1)(vi)(c) carrying on business in India and having the source of income in India are not inter dependent on each other and may operate independent of each other. 29. On the issue as to whether OEMs carrying on business in India, he submitted that:- a. Business as defined in section 2(13) of the Act, is admittedly an expression of wide import. The business is not only manufacturing or trading 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 ....
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....ch party to whom a product is sold by the manufacturer cannot be regarded as a source, it was submitted that this is of no consequence for the reason that products manufactured by the OEMs are not standard products which are sold anywhere and everywhere. Besides, one may have different source of income lying in different jurisdictions if the supplies differ in technical specifications, customization and are location specific. 31. On the issue whether the title passes in India or outside 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 ....
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....e and the conduct of the parties go to indicate that the terms indicated in clause 14.1 do not demonstrate the true intent of the parties. The fourth preamble to the agreement on page 2 of the agreement provides that buyer has asked the supplier to supply/deliver the "equipment in full and guaranteed working condition to the full satisfaction of TTSL". This condition of the supply cannot be met if the goods are delivered on High seas. The "full satisfaction" can be reached only in India after the provisional 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 di....
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....s established through the provisional or final testing. The supplier has definite obligation to achieve this milestone and unless this is done the property cannot pass. Unlike other kinds of overseas supplies where the supplier has no other obligation beyond the point of shipment, in the present case, the obligation of the supplier extends to the geographical limits of India where he has to put the supply into a deliverable state. In CDMA technology, handsets and equipment are integral part of the wholesome technology 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....
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....... purchased by licensee from Qualcomm. From the reading of this definition of chipsets and other definition of "CDMA ASIC" appearing on page 231 clearly shows that OEMs have been given license to use chipset/ASIC purchased from Qualcomm in manufacturing equipments/handsets. The CDMA technology belonging to Qualcomm is embedded in chipsets which are used by OEMs and licensed to Indian customers for further use by them. g. There is absolutely no material to, suggest that Qualcomm has not licensed its technology/software 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 othe....
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....ve software and computer programs to transmit or receive data/signals and provide connectivity and make the network functional. This activity is possible only through the use of software which are in other words only computer programs. Handsets are dumb equipments unless software providing connectivity to the network is embedded in it so is the case with equipments. l. Therefore, when OEMs license the intellectual property for a consideration (forming part of the overall consideration) to Indian operators, they definitely have a source 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.....
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....the case of Ericsson, it was an admitted position that installation and commissioning of the equipment was done by two separate corporate entities where as in the present case it is still in dark who did the installation and commissioning of the equipments. The mere fact that the agreement does not cast obligation for installation and commissioning on the OEMs does not throw adequate light as to who else was competent to install and commission such highly technical equipment 33. In his rejoinder, Mr. Dastur refuted the aforesaid contentions and submitted as under: 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 "....
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....ation has been used by the OEM itself in the case at hand outside India. Summing up, he submitted that the case of Qualcomm does not fall within the provisions of S. 9(1)(vi)(c) of the Act since the right property or information licensed by Qualcomm to OEM has been used by the OEM itself in its business of manufacturing which is undisputedly carried on outside India. d. Regarding the contention of the Department that the OEMs carry on business in India, Mr. Dastur submitted that the Department's case is that the handset and equipment although manufactured outside India, are not off 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 handse....
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.... He further explained that even during this lock-in period, the subscriber is not barred from exiting the lock-in and exiting Reliance network provided he pays cost of handset to Reliance.(Para 4, 2nd column, Pg.4316 of the Judgement). At the time Reliance had this lock-in offer, it was also making available to its subscribers phones without a lock-in at full price. The judgment was passed in proceedings filed for quashing FIRs where the court was required to consider whether there was any prima facie case made out by the police that rewriting the ESN numbers of the phone by certain persons would 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) an....
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.... accruing in India but that in no manner establishes that a business is carried on by the OEMs in India. Unless the revenue demonstrates that the OEMs have continuous operations in India the mere passing of title in goods imported into India cannot be said to result to an inference that the OEMs carry on business in India. Reliance was placed on the decision of the Privy Council in the case of Rhodesia Metals Limited v. CIT, 9 ITR (Suppl) 45 and the jurisdictional High Court in the case of CIT v. Havells India Limited [ITA No.55/2012, ITA 57/2012] he submitted that the source is the activity that raises the 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 ....
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....decision in Ericsson's case noted above. iv. Under the 16 license agreements, what is licensed is right to manufacture "subscriber units" which is defined to mean "Complete CDMA Telephone". Chipset is only one part of the Complete CDMA phone. v. The revenue had challenged the submissions of the Appellant that there is no licensing of software involved to earn royalty under the 16 agreements and had contended that if the Appellant is disputing this very basic fact then the matter should be remanded back to the assessing officer to be examined by a technical expert since it is not possible for the 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 pa....
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.... India or (b) India should be one of the countries where the right or property must be specified as being used in India. Neither of the aforementioned conditions is satisfied in the facts of the instant case. Further, it is an admitted position that the patents of Qualcomm are used to manufacture the handsets/equipments outside India. Therefore, the royalty income cannot be regarded to have deemed to arise/accrue under the DTAA. 35. Referring to the assessment order, he submitted that except making an averment, Revenue has not discharged its primary burden as to how the royalty income is taxable under Article 12 (7)(b) of the DTAA. 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....
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....itely using the technology for their business. For the purpose of para 7 (b) one has to look to the use of the property owned by Qualcomm. There is nothing in the DTAA to suggest that the "use" of property would only mean manufacturing of a product by the use of such property as suggested by the Appellant. The word "use", not having been defined even under the domestic law, has to be given its normal connotation. 40. For the purposes of para 7(b) one has to look to the use of the property owned by Qualcomm. To understand the extent of use of CDMA technology in India one has to look to the entirety of the arrangements by which the technology is transferred 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 wirele....
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.... in India. The DTAA does not provide the manner in which the right or the property comes to be used in the contracting state. The property may come through any medium, whether embedded in hardware or otherwise. The mode of transfer of technology is of no consequence. What the treaty contemplates is the use of the property in the contracting state and not how it has been transferred. Hence, entire argument about copy right and copyrighted article is really not relevant for the determining the applicability of para 7(b). 44. The Appellant has referred to decision of High Court of Delhi in Asia Satellite Telecommunications Co. Ltd [238 ITR 233 (Del)]. The 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....
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.... their purpose. 48. Mr G.C. Srivastava also submitted that there was a transfer of CDMA technology under the composite agreement by way of a separate MOU. CDMA technology cannot be broken down into handsets and equipments as there is no utility of one without the other. The royalty on handsets/equipment is only a measure of degree of commercial exploitation of wholesome CDMA technology. More handsets mean more business for the Indian operator, hence, what QCOM is charging is a return depending on the growth of CDMA technology in India. This was precisely the reason why Central Government believed that it was necessary for Qualcomm to reduce its rate of royalty on Indian 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,....
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....2 (with Reliance) and Para4/Pg193 (with Tata)]. Hence to say that the right or property for which Qualcomm earns royalty is the CDMA technology is not correct. The phrase "right or property" referred to in the paragraph 7(b) refers to the right or property belonging to Qualcomm, which are the patents that it owns and the royalty earned by it, is earned from the licensing of such patents to OEMs. d. He also submitted that the right or property is the patents owned by Qualcomm in the field of CDMA technology. These patents have been licensed to the OEMs to enable them to manufacture the products. In order to be concerned under paragraph 7(b) the patents, i.e. the right to manufacture, 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 ar....
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....d by the Delhi High Court cannot be urged before, far less accepted by, Tribunal sitting in Delhi. Hence, all the 3 decisions relied upon by the revenue to demonstrate that a user of software article in India would amount to user of the copyright in the software and thereby suggest that the use of the patented products in India amongst the use of patents in India, must fall. 53. Regarding the insertion of Explanation 4 is concerned, he submitted that the Explanation deals with the definition of "royalty" under the Act and the Delhi High Court in the case of Ericisson A.B at paragraph 60 held that the definition of royalty under the Act is wider than that under the DTAA and that the distinction under the 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....
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....he matter for a hearing on 12th October, 2012 for submission of the Nokia Ruling. The case was once again heard and both parties sought time to file written submissions. The Ld. Counsel for the Appellant, submitted that in addition to the Ericsson ruling, the Appellant wishes to place reliance on the above decision in support of the following arguments put forth for taxability of royalty income received by Qualcomm under S. 9(1)(vi)(c) of the Act and under Article 12(7)(b) of the DTAA: a. Software integral to hardware cannot be treated independent of the hardware and has to be treated as supply of goods; b. The language of the 'royalty' definition under the DTAA differs from the amended definition 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 applica....
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....ight (as in the case of Nokia/Ericsson) is not being even remotely suggested. 66. He also drew the attention of this Bench to the Patents Act 1970 , unlike Copyright Act, the Patents Act 1970 (relevant extracts filed before the Hon'ble Bench) defines not only "patent" but also "patented article" and "patented process" to mean respectively an article or process in respect of which a patent is in force. (sub-clause (o) of section 2). A computer programmer per se is not patentable (clause (k) of section 3). The rights of patentees are explained in section 48 as the right to prevent third parties from act of making, using, selling, or importing those products or processes without the consent of the licensor. 67. Qualcomm's "Chipset" and "ASIC" 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 ....
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....oyalty is paid but the fact is that royalty is paid for the use of such technology. Handsets and equipments are not two different sources of income. Both form part of same source of income i.e. use of CDMA technology. Hence, when CIT Appeal gave direction to tax the royalty from sale of equipment together with that of handsets, he was not referring to a new source of income but to the same source of income. Some part of income from that source was taxed by the AO while the other part of the income relating to the same source was left to be taxed. Handsets and equipments are not the independent sources of income. These cannot generate any income de hors the overall technology of which these are integral parts. The cases relied upon by the appellant are therefore, 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 Jur....
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....Ys is that, the AO reopened the assessments merely on surmises and conjectures and that there was no material available to enable the AO to form a belief that the income of the Appellant has escaped assessment. The Revenue contends that there was prima facie some material on the basis of which the AO has formed a belief that the income of the Appellant has escaped assessment. 80. Before we proceed, we extract S.147 of the Income Tax Act, 1961 for ready reference. "Section 147. Income escaping assessment.- If the Assessing Officer, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped 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....
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....e fact remains that for the AYs 2002- 03 and 2003-04 there was income from FTS derived by the Appellant which was subject to tax at source and that no return of income was filed. 82. We now consider a condition that the AO should have some prima facie material which could lead to formation of a belief that the Appellant had income which has escaped assessment for the impugned AYs. At this stage we deem it appropriate to extract reasons recorded by the AO for ready reference. 83. Reasons for issuance of notice u/s 148 of Income Tax Act, 1961 "The assessee is a company incorporated in USA and is in the business of developing, manufacturing, marketing, licensing and operating advanced communication systems and products world wide. The assessee company is owner of the patented CDMA technology. CDMA systems are 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 co....
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....ving high capacity in such CDMA systems. More than 60 major manufacturers of telecommunications equipment have taken royalty-bearing licenses under Qualcomm's patent portfolio. Qualcomm Incorporated (Nasdaq: QCOM) is a leader in developing and delivering innovative digital wireless communications products and services based on the Company's CDMA digital technology. The Company's major business areas include CDMA phones; integrated CDMA chipsets and system software; wireless infrastructure; technology licensing; and satellite-based systems including OmniTRACS and portions of the Globalstar system. Qualcomm is headquartered in San Diego, Calif. Qualcomm's fiscal 1998 revenues exceeded U.S. $3 billion. For more information, please visit the Company's web site at http://www.qualcomm.com. Except for the historical information contained herein, 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 conditio....
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.... cut in royalty payments to Qualcomm. Reliance has even proposed to shift to the rival GSM technology. Mr. Jacobs is expected to meet Mr. Anil Ambani on Thursday in Mumbai. (Source: Hindu Business Line) Thus it is seen that the assessee company, which is undisputedly into the Business of earning royalties from patenting the technological innovations in the field of communication technology, is undertaking its core business of research and development from the centers located in India. Therefore these locations in India constitute the business connection as well as permanent establishment of the assessee in India. It is also observed that the assessee company is directly negotiating with the customers of CDMA technologies like Reliance for the price of royalties to be embedded in the cost of cell phone. Cellphones compatible to the use of CDMA technology are 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 count....
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.... in the country. Qualcomm, Reliance meet ends in stalemate Our Bureau Another meet likely on Tuesday Mumbai, July 29 A marathon eight-hour meeting on Thursday between the Qualcomm delegation headed by its CEO, Mr. Paul Jacobs, and Reliance Communications in Mumbai ended in a stalemate, according to sources. "In fact postures hardened on both sides," said one of them. The issue of disagreement between the two is the royalty charged by Qualcomm on Code Division Multiple Access (CDMA) handsets, which Reliance Communications wants decreased. In fact to show that it meant business, the telephony operator had, in a surprise move recently, applied for spectrum for the rival GSM technology in the prime circles of Mumbai and Delhi, saying that it was merely doing this to offer its customers the best choice available. Sources said that neither party made any headway during Thursday's discussions. 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 s....
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.... 85. Thus the short question before us is whether the AO could have reason to believe, on the basis of the aforesaid material that the Appellant had income which escaped from tax for the impugned AYs 86. The Hon'ble Supreme Court in the case of Raymond Woollen Mills Ltd. v. ITO and others, (236 ITR 434) laid down that what has to be seen, is whether there was prima facie material on the basis of which the department could reopen the case. The sufficiency of correctness of the material is not a thing to be considered at this stage. 87. In the case of ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd. (291 ITR 500), the Hon'ble Supreme Court held as follows:- "16. Section 147 authorizes and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. 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 O....
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....son has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued." (Emphasis ours) 88. As laid down by the Hon'ble Supreme Court, the test that has to be applied is whether there is information (and not evidence) and whether based on such information, the AO prima facie has a justification for having a reason to believe that income of the assessee has escaped assessment. In 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, i....
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....supra) and Sikkim Subba Associates v. UOI and others (supra). In the case of M/s Namit Verma v. UOI (supra) the Hon'ble Delhi High Court was considering a Public Interest Litigation (PIL) wherein the intervention of the Court was sought to redress the grievance resulting from alleged inaction of the government. The petitioner placed reliance on some newspaper reports. The Hon'ble High Court dismissed the petition and in this context, the Delhi High Court observed that on the basis of material placed before the Court, an inference cannot be drawn that the government authorities are not acting according to law. The Hon'ble Court held that newspaper reports do not constitute evidence. This proposition cannot be interpreted to mean that newspaper reports do not constitute information or material. In our considered view, newspaper reports can constitute information/material, which can form the basis for the AO to form a reason to believe that income liable 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 Cour....
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....reasons recorded show that any income was earned by the Appellant during the F.Y. ended 31st March, 2000 to 31st March, 2004. Reliance was placed on the following decisions:- i. Kelvinator of India Ltd. (supra) ii. Lakhmani Mewal Das (supra) iii. Ganga Saran and Sons P. Ltd. (supra) iv. Grindlays Bank Ltd. (supra) v. Mesco Labs Ltd. (supra) Reliance was also placed on the CBDT Circular no.549 dt. 31st October, 1989. 96. A perusal of the reasons and the material demonstrate that the Appellant is the owner of patents pertaining to CDMA technology and that the Appellant earns royalty from such patents and that CDMA mobile services/technology has been launched and used in India. This information and material, in our considered opinion is sufficient, prima facie, to come to a conclusion that the Appellant has earned certain income in India. The information by way of press releases, newspaper articles etc. 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 b....
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.... world including India and that certain Indian companies are providing CDMA wireless network services and for this purpose the Indian companies are paying to the Appellant company royalty as part of the price of the hand set purchased from the OEMs outside India. The newspaper reports definitely indicate that the Appellant was negotiating with the OEMs for the benefit of Indian operators and users of CDMA technology. These facts indicate that in recording his belief the AO has acted in a bonafide manner and that he was in possession of relevant material to enable him to form a prima facie belief that the Appellant was having income taxable in India for the impugned Assessment Years. 101. Further, the Appellant has not chosen to file a return of income in India though it had taxable income at least for two A.Ys. 102. Coming to the contention of the Ld. Sr. Counsel that when there are multiple reasons, some relevant and others irrelevant or incorrect then the reopening must be 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 I....
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.... in the form of Royalties, Fees from included services or business profits. But there is no error in his finding that the appellant has income from the patents. Therefore, we do not find force in the contention of the appellant that the reasons recorded are not clear or irrelevant and therefore we are unable to quash the reopening of the assessments on this score. 105. In this regard, we draw strength from the case of Inductotherm (India) Private Limited (Formerly Inductotherm India) v. M. Gopalan, DCIT in Special Civil Application NO.858 of 2006 as the facts are much nearer to the facts in the case of the appellant. In this case, the assessing officer reopened the assessment for four reasons. The Hon'ble Gujarat High court was of the view that reopening could not have been done in respect of two reasons. However, they upheld the validity of notice issued u/s 148 as they found that the reopening in respect of the other two reasons was validly done. The findings of the Hon'ble Gujarat high court are 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 ....
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.... 20. In view of the above discussion, we do not find that the notice for reopening is invalid or lacks jurisdiction. The petition is, accordingly, dismissed. Rule is discharged. Interim relief granted earlier stands vacated." 106. We also draw strength from the judgment of the Hon'ble Calcutta High Court in the case of CIT v. Anand & Co. (191 ITR 82) wherein it is held as follows:- "If the Assessing Officer, initially proceeded to reopen the assessment for several items of income believed to have escaped assessment and if it is ultimately found that only one such item has escaped assessment, that will not vitiate the proceedings. All the reasons given by the Assessing Officer for reopening the assessment might not be tenable, but even if one of the grounds is such that it would lead prima facie to a reasonable belief that the income escaped assessment, the jurisdiction of the ITO to initiate proceedings cannot be successfully questioned". 107. The next contention of the Ld. Sr. Counsel is that the AO stated 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 ....
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....am Singh [2008] 306 ITR 343 would not be affected by the amendment brought in by the insertion of Explanation 3 to section 147. Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment of reassessment on grounds other than those on the basis of which a notice was issued under Section 148. Setting out the reasons, for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the Assessing Officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Explanation 3 by the Finance (No.2) Act of 2009. However, Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. An Explanation to a statutory provision is intended to 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 r....
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....s, which contradict the basis on which belief was formed, cannot vitiate the reassessment proceedings. 110. The next contention of the Ld. Sr. Counsel is that for the A.Y 2000-2001 reasons for reopening are furnished after the expiry of six years from the end of the Assessment Year and hence the reassessment proceedings are barred by limitation. The provisions of the Act permit reopening of assessment within a period of six years from the end of the A.Y. Thus the AO can record reasons and issue a notice under S.148 on or before 31st march, 2007. In the case before us, notice under S.148 of the Act was issued on 29th March, 2007. It is not stipulated under the Act that the AO has to furnish reasons for reopening along with the notice under S.148 of the Act. In the case of DKN Drive Shafts India Ltd. 259 ITR 19 (SC), the Hon'ble Apex Court held that, the proper course of action when a notice is issued under S.148 is that, the assessee is required to file the return of income and if he desires can seek a copy of the reasons 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 fi....
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....ublic policy. The CIT initiated suo motu proceedings under Section 263 of the Income Tax Act, 1961 in respect of the assessee's assessments. During the pendency of the proceedings, the assessee preferred appeals against the assessment orders passed by the Assessing Officer which were closed as having become infructuous. On appeals preferred by the assessees against the orders passed by the CIT under Section 263 of the Income Tax Act, 1961 as well as the appeals filed against the orders holding the assessment orders as infructuous, the Tribunal held that under Section 158 BC of the Income Tax Act, 1961, the assessments in block cases were to be finalized by an officer not below the rank of an ACIT and the initial orders of assessments under appeals having been passed by the incumbent while holding the post of an ITO were null and void. On appeals: Held, allowing the appeals, that the CIT had made the officiating arrangement in 1999 by vesting the powers of the ACIT in the Assessing Officer. The AO was regularly promoted to the 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 ....
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....(i) that reasons are the link between the material placed on record and the conclusion reached by an authority in respect of an issue, since they help in discerning the manner in which the conclusion is reached by the concerned authority. It was a case where literally a mere stamp was affixed and was signed by an Under Secretary underneath a stamped "yes" against the column which queried as to whether the approval of the Board had been taken. Rubber stamping of underlying material suggested that the decision was taken in a mechanical manner. Thus, a proper application of mind had not taken place." 116. In the case on hand, the Addl. DIT's findings are typed and the signature is made below this. Just because the findings of the Addl. DIT are typed, it cannot be concluded that these are not the thought process of the Addl. DIT. Hence these case laws are not applicable to the facts of the case. 117. Coming to the decision in the case of Mesco Labs (supra), we find that the assessment for the A.Y. 1995-96 was reopened for the reasons that the assessee 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....
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....me would not mean source in the sense of head of income as used in the Income-Tax Act but would mean a specific source from which a particular income spank or arose. It was clarified that:- ".......If a particular source or item of income had been considered by the Income-tax Officer and had been subjected to the process of assessment, then even though the assessee may not have appealed against that particular source or item, one once the appeal was before the Appellate Assistant Commissioner his power extended not merely to the subject-matter of the appeal, but to the whole subject-matter of assessment. What gave the power to the Appellate Assistant Commissioner was the fact that a particular item or source had been subjected to the process of assessment. Now, the process of assessment would include, not only the subjecting of an item or source to tax, but equally holding that the particular source or item was not subjected to tax." We are of the opinion that the aforesaid item or source had been subjected to the process of assessment. Merely because the ultimate order passed by the Assessing Officer is silent about this item and there is no discussion thereupon would not me....
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.... Even assuming for a moment that the argument of Mr. Dastur that each agreement would constitute a new source of income and therefore, the royalty earned from OEMs on network equipments would tantamount to new source is accepted. It is pertinent to note that for the AYs under appeal, there is no separate network equipment license agreement entered by Qualcomm with the OEMs. All the 16 license agreements filed by the Appellant relates to either subscriber units (i.e handsets) or Subscriber units and infrastructure network equipment. Hence, in our view, the enhancement of royalty income from network equipment by the CIT(A) emanates from the same source but from a different product manufactured under the same license agreement. Therefore, this contention is rejected. 126. In view of the above discussions, we hold that the CIT(A) has rightly exercised his jurisdiction under section 251 to enhance income of the Appellant. 127. On Merits :- We now proceed to dispose of the merits: Whether the 'royalty' income earned by Qualcomm from OEMs is taxable under S.9(1)(vi)(c) of the Income Tax Act 1961: The issue in question is whether the said "royalty" is taxable under Sec.9(1)(vi)....
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....by the Revenue. 131. The Ld. Special Counsel for the revenue, submitted that the language employed in S.9(1)(vi) (c ) is "used for the purpose of" in contradistinguished from "utilized in the business" used in S.9(1)(vii)( c). Relying on the language employed in both the sections, he submitted that the situs of the use intellectual property is not material. It may be used anywhere (in or outside India). He submitted that what is material is the purpose of the use of the property, whether it is used for the purpose of business carried on in India or for the purpose of earning income from a source in India, then S.9(1)(vi)(c) of the Act is attracted. 132. In our view what is important is not whether right to property is used "in" or "for the purpose of" a business, but to determine whether such business is "carried on by such person in India". 133. The other issue is whether the Indian carriers constitute a source of income for the OEMs in India and whether licensing the patented intellectual property to the OEMs, has resulted in making available the patented IP's to the Indian telecom operators for commercially exploiting the CDMA technology in India. In our view neither th....
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....he OEM; ii. Subscriber Unit and Infrastructure Equipment License Agreement between QUALCOMM and the OEM; We also extract the clauses relied upon by the revenue in the fallowing agreements to consider the without prejudice arguments of the assessee. iii. Equipment purchase agreement between the Tata Tele Services and Motorola Inc. dt. 8.12.2007; iv. Equipment purchased agreement between the Tata Tele Services and ZTE Corporation dt. 19.2.2007. 138. In addition, certain clauses from the following two agreements are also extracted as reliance was placed on the same. i. MOU dt. 26.03.2001 by and between Reliance and Qualcomm (Revenue paper book dt.29.06.2012) ii. Technical services agreement between Qualcomm and Reliance dt.16.10.2001. Subscriber Unit License Agreement between Qualcomm and the OEMs for manufacture of CDMA handsets [Agreement reference page no 226 to Page no 263 of the Appellant's paper book] Extract of relevant clauses from the Agreement in relation to grant of license. Clause 5.1 Grant of license "Subject to the terms and conditions of this Agreement, including but not limited to time....
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....nd conditions of this Agreement, including but not limited to timely payment of the license fees and royalties set forth herein, on the Effective Date, "QUALCOMM hereby grants to Licensee, solely for Wireless Applications, a personal, non transferable, worldwide and nonexclusive license (without the right to sublicense) (1) under QUALCOMM's Applicable Subscriber Patents to (a) make (and have made), import, use, sell, offer to sell, lease or otherwise dispose of Subscriber Units and Radiomodules and (b) to make (and have made) Components and import, use, sell, offer to sell, lease and otherwise dispose of Components but only if such Components are included as part of and Sold within Licensee Subscriber Units or Licensee Radiomodules (or as replacement parts for Subscriber Units or Radiomodules previously Sold by Licensee) and (2) under QUALCOMM's Applicable Infrastructure Patents to (a) make (and have made), import, use, sell, offer to sell, lease or otherwise dispose of Infrastructure Equipment and (b) to make (and have made) Components and import, use, sell, offer to sell, lease and otherwise dispose of Components but only if such Components are included as part of and Sold within....
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....multi-chip modules, integrated circuits and/or families of devices, including firmware thereon and software associated therewith, for use in Wireless Applications. QUALCOMM's Applicable Infrastructure Patents (Page no 275): "QUALCOMM's Applicable Infrastructure Patents" means (i) every patent issued or to be issued to QUALCOMM in any country of the world which claims priority from a patent application filed anywhere in the world on or prior to the Effective Date and (ii) every patent issued or to be issued to QUALCOMM in any country of the world which (a) claims priority from a patent application filed anywhere in the world during the life of the applicable CDMA Wireless standard and (b) are technically necessary to use, make and/or sell Infrastructure Equipment compliant with such standard. Infrastructure Equipment (Page no 272): "Infrastructure Equipment" means network equipment for use as a part of any land mobile radio-telephone system for Wireless Applications, including but not limited to BTSs, BSCs and System Switches (and equipment and software for incorporation therein), but the term does not include, by way of example and not by way of limitation, Components, Sub....
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....ily relied on the equipment purchase agreement entered by Tata with Motorola and ZTE to prove that the OEMs carry on business in India and that they have used the Qualcomm patents for the purpose of carrying on such business in India. His contention that the OEMs carry on business in India is mainly based on the following: a. The word "business" defined under the Act is of wide import and encompasses a host of activities. He contended that if manufacturing is done in one jurisdiction and sale in the other, it cannot be said that business is done in one and not in the other jurisdiction. b. OEMs carry out installation of equipment in India for the Indian Telecom operators; c. The entire supply of handsets and equipments though manufactured outside India are India specific and not off the shelf products which can be sold to anyone in any location. The technology is used by the OEMs to manufacture India specific supplies. Hence there is a certain degree of use of the property for the purpose of carrying on business in India; d. Placing reliance on the decision of the Hon'ble AP High Court in the case of Syed Asiffudin and oth....
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....ode assigned to a specific operator. Hence there is a certain degree of use of the property for the purpose of carrying on business in India. 143. This arguments cannot be accepted for the following reasons:- i. During the course of hearing it is admitted that handsets in question embody two technologies (a) technology with respect to the functionality of the hand sets and (b) technology with respect to CDMA connectivity. ii. The patents of Qualcomm are admittedly for manufacture of handsets and infrastructure equipment which are sold worldwide. There are no patents of Qualcomm which are used for customization of handset with respect to CDMA connectivity. iii. The patents in question, on which royalty is sought to be taxed, have nothing to do with the functionality of the hand sets. Functionality of the handsets may be customer specific or operator specific or India specific but technology with respect to CDMA connectivity, is a universal technology and is not customer specific. iv. Customisation such as locking the handset to enable operation only with a specific operator and other operators with whom reciprocal or other arrangeme....
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.... the conclusion that the OEMs are carrying on business in India. There are numerous patented IPR's belonging to not only Qualcomm but also to a number of other parties, as well as the OEM's themselves and all these patented IPR's are used for manufacturing certain products which are sold to parties in India. The purchaser may have the option to chose the technologies available or even specify certain additional requirements. Sale of such customised products by no stretch of imagination can be considered as business being done in India. A buyer of a product may specify his requirements and when the product is manufactured to such specification it does not tantamount to carrying on business in India. It does not cease to be a sale of a product. No such allegation was made with respect to network equipment being India specific has been made. Technology for manufacturing products is different from products which are manufactured from the use of the technology for which Qualcomm has patents. The role of Qualcomm ends when it licensed its patents on IPR's pertaining to CDMA products for manufacture and when it collects royalty from OEM's on these products, when they are shipped out of th....
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....t the title in the goods passes at the "port of destination". Clause 14.1 of the agreement between Tata and ZTE read as under. "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 from the supplier to the TTSL in high seas before arrival in India and the risk to loss to the Hardware portion of all equipment shall pass from supplier to TTSL upon provisional acceptance". 146. From the above clause, it is evident that title of the equipment has passed to Tata in high seas before arrival in India. 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 as per the specific understanding of the parties. The plea to infer otherwise is to be rejected as it is against the express intent of the parties. 147. In our view this issue stands covered by the decision of the Hon'ble Delhi High Court in the case of Ericsson AB (Supra) . Ericsson and Nokia's was the case of the OEM's who are into supply of GSM equipment to Indian telecom operators for use in fixed/....
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....ke it clear that the sale of machinery was F.O.B., European port, and the time of fulfilment of delivery was prescribed as the date of the bills of lading. The payment was also to be made outside India. The agreement further makes it clear that the insurance risk during the course of the journey was that of the assessee and it paid for the same: even the freight charges from the European port to the place of destination were paid by the assessee. Thus, judged from any angle, the sale of machinery, which are 'goods' within the meaning of the Sale of Goods Act, was completely outside India. A mere provision in the agreement that the assessee is entitled to satisfy itself about the quality and standard of the machinery in India cannot, in the circumstances of this case, detract from the fundamental position that the sale took place outside India. In such a situation, one has to apply the test of predominance and decide where the sale took place ? On a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India." 149. We would discuss the propositions laid down in this case in greater detail later in this order 150. C....
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....er, for transport to the agreed point at the named place on the date or within the agreed period. 153. On conjoint reading of the agreement with the definitions from Incoterms 2000, it is very clear that the title and risk of loss passes to the buyer, on the physical delivery of the equipment by the OEM to the carrier, at the port of shipment. The term "port of shipment" is definitely not a port in India. CIP Inco terms 2000 provides that the delivery from the seller to the buyer concludes at the port of shipment upon delivery to the carrier. The obligation on Motorola to bear the cost of delivery up to the port of destination (i.e. India) is irrelevant to decide where the title passes. This is merely a contractual term between the parties to clarify who is to bear the cost of transshipment, insurance etc. The argument that the contract has to be read as whole to ascertain the intention of the parties as to when the title and the risk passed in goods is devoid of merit in the present case as the agreement itself are very specific as to when the title and the risk where to pass. 153A. As already stated under identical facts in the case of Ericsson A.B., the Delhi Special Bench....
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.....P. High Court in the case of Addl. CIT v. Skoda Exports. (c) The fact that the insurance risk was with the supplier before landing does not alter the situation. (d) Acceptance test cannot also lead to a different conclusion as it was meant for ensuring that the supply conforms to the contract para meters. (e) The right to get back the goods after landing, if the importer does not take delivery for whatever reason, could also make no difference since the title has passed to the buyer before landing. (f) Since the installation was also not undertaken by the assessee company, no income therefrom can be brought to tax. (g) The issue whether the assessee had a Permanent Establishment in India during the year is academic in the light of the fact that the assessee has no business connection. (h) That since software is loaded on the hardware in terms of contract, it did not have any independent existence, so as to justify the inference that there has been supply of software. (i) The decision of the Hon'ble Supreme Court in the case of Tata Consultancy Services v. State of A.P. making a distinction between assignment of "copyri....
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....y agreement is taken as a stand alone agreement, the property in the goods passes to the buyer outside India and hence not taxable in India. (b) S.19 of the Sale of the Goods Act, 1930 makes it clear that property in the goods passes when the parties intend it to pass. The intention of the parties is manifest in Article 13 of the Supply Contract and provisions of Article 15 in no manner militate against such intention. There is nothing in the conduct of the parties, which would suggest that the express provision of Article 13 have been given a go by. (c) The fact that the supply contract was signed in India does not change the circumstance. Acceptance test, which was performed in India, is not a relevant circumstance for determining as to whether income has accrued in India. Acceptance test is not material even for passing of title and risk in the equipment supplied. (d) The submission of the revenue that the three agreements, namely, overall agreement, supply agreement and installation agreement, are to be taken to form an integrated business arrangement between the parties which was governed by the overall agreement proceeded on the basis that the asses....
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.... taxability of OEM's supplying CDMA handsets and equipment.. 157. Applying these principles laid down in Erricson's case, to the facts of the case on hand we have to hold that the title in the goods in this case has passed outside India as per the clauses in the agreement when read with CIP Inco Terms 2000. 158. Even otherwise mere passing of title in goods imported into India, in India, at the port of destination cannot lead to a conclusion that the OEM's carry on business in India. It is business with India and not business in India. The mere passing of the title with no other activity does not result in any income being attributable in India. 159. For all aforesaid reasons, we uphold the arguments of Shri. Soli Dastur, the Ld. Sr. Counsel, that OEMs have not carried on business in India, and that the OEMs cannot be said to have used Qualcomm patents for the purpose of such business in India. 160. Before we come to the second limb of argument, we agree with the argument of Mr Dastur 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's in India. Lim....
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.... under dispute, relying on the decision of the Hon'ble Supreme Court he submitted that the matter needs a more critical examination by someone who understands CDMA technology. 164. Clause 5.1 of the license agreement is relied upon and it is pointed out that Qualcomm has granted worldwide licenses under Qualcomm's Intellectual Property to make, import, use, sell or lease or otherwise dispose of subscriber units and to make components and use and sell such components and hence it is only software that was licensed by Qualcomm to OEMs. It was further contended that intellectual property cannot be anything other than chip sets or some other software going to be embedded in the handsets/equipment. 165. Reliance was also placed on Finance Act, 2012 wherein Explanation IV to S.9(1)((vi) has been inserted. It was submitted that the argument that OEM sell copyrighted article or thing and the argument and that they do not give any right in the copy right, is of no consequence post this amendment as the transfer of any rights in an intellectual property includes transfer of any right to use of a computer software irrespective of the medium through which it is transferred. 166. In a ....
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....earned on software embedded in the chip sets. 170. Regarding the request made by the revenue for remand of the case for examination by a technical expert, We do not find it necessary at this stage as there is no dispute that the software is embedded in the chipset and the same is installed in the CDMA equipment. Selling of the chipsets is a part of Appellant's QCT division activity and what is brought to tax by the AO is the income of QTL division. 171. Even otherwise, the software is embedded in the chip set and is an integral part of the chipset. Further, the chip set is embedded in the hand set/equipment and these are sold outside India. Further , the total price is fixed for the equipment as a whole and there is no separate consideration for the licensed material . 172. Clause 19 of both the agreements which deals with provisions applicable to licensed materials places significant restrictions (listed below) on Tata for use of the licensed material. i. The object code version of the software and related documentation could only be used along with the equipment; ii. Tata has no right to sell or sub license the licensed materials or modify,....
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....-down into different components. 175. Under the 16 licensed agreements between Qualcomm and the OEM which is the basis for the AO as well as the CIT(A) to raise a demand, what is licensed is the right to manufacture "subscriber units". Under these agreements subscriber unit is defined as "complete CDMA telephone of which chip set is only one part". Hence the arguments of the revenue is devoid of merit. 176. Coming to the argument that the Indian telecom operators in India constitute a source for the OEMs, the Privy Council in the case of Rhodesia Metals Limited v. CIT (Supra) and the jurisdictional High Court in the case of CIT v. Havells India Limited [ITA No.55/2012, ITA 57/2012] have laid down that the source is the activity that gives raise to 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 Metals in our view entirely supports the Appellant's case. In that case, Rhodesia Metals Ltd. carried on the business of developing mines in Southern Rhodesia and then selling rights therein. The head seat and....
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....enue in his effort to support the order of the AO as well as the CIT(A) brought in agreements entered into by Tata in later years i.e. in the F.Y. 2006-07 and 2007-08. It further widened the grounds of assessment by bringing in not only new material but fresh submissions like licensing of software, chip sets etc. Further, it also brought in a fresh argument that CDMA is a wholesome technology and that Qualcomm is the exclusive owner of the CDMA technology. He submitted that CDMS technology works on certain scientific principles and cannot be broken into handsets and network and this technology is provided by Qualcomm to Reliance/Tata for earning royalty from third party. 182. On the issue as to whether the CDMA technology is a wholesome technology and whether Qualcomm per se is the exclusive owner of this technology we find the fallowing from the information gathered by us. . 183. CDMA is a channel access method used by various radio communication technologies. It is a method of wireless data communication that was originally invented during world war II in England to thawart German wire interference. CDMA history can be directly linked back to the 1940s when this form of tra....
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....pan) These SDOs are known as the Project's Organizational Partners. 3GPP2 requires that a participating individual member company be affiliated with at least one of the Organizational Partners. In addition, the Project has welcomed Market Representation Partners (MRPs) who offer market advice to 3GPP2 and bring a consensus view of market requirements (e.g., services, features and functionality) falling within the 3GPP2 scope. They are: The CDMA Development Group (CDG) IPv6 Forum and Femto Forum The work of producing 3GPP2's specifications resides in the Project's four Technical Specification Groups (TSGs) comprised of representatives from the Project's Individual Member companies. The TSGs are: TSG-A (Access Network Interfaces) TSG-C (cdma2000ilil) TSG-S (Services and Systems Aspects) TSG-X (Core Networks) Each TSG meets, on average, ten times a year to produce technical specifications and reports. Since 3GPP2 has no legal status, ownership and copyright of these output documents is shared between the Organizational Partners. The documents cover all areas of the Project's charter, including cdma2000 and its enhancements." 185. In view of the above, it ....