TaxTMI 
TaxTMI 
2018 (4) TMI 1362
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....d apply our decision for other years. ITA No 5353/ del/2012 A Y 2009-10 2. This appeal is filed by QUALCOMM Incorporated, appellant assessee, against the assessment order for Assessment Year 2009 - 10 dated 30/08/2012 made by The Deputy Director Of Income Tax, Circle - 2 (1), International Tax, New Delhi (hereinafter referred to as the Ld. AO) under section 143 (3) read with section 144C (13) of The Income Tax Act (hereinafter referred to as The Act) in pursuance of directions passed under section 144C (5) of The Act on 12/7/2012 of the Ld. Dispute Resolution Panel - II, New Delhi (hereinafter referred to as the Ld. DRP). The assessee has raised the following grounds of appeal:- "1. Erred in applying the provisions of section 9(l)(vi)(c) of the Incometax Act, 1961 ('the Act') and Article 12(7) of India-US tax treaty ('tax treaty') for taxing the royalty income of the Appellant earned from the Original Equipment Manufacturers ('OEMs') situated outside India for the patents licensed to the OEMs for manufacture of CDMA mobile handsets outside India. 2. Erred in applying the provisions of section 9(l)(vi)(c) of the Act and Article 12(7....
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.... (a) The payment received by the assessee under the BREW operator software (with reliance as well as Tata Tele services) qualifies as royalty as per the Indian Income Tax as well as India US DTAA. The reasons have been mentioned in detail in the assessment order for assessment year 2008 - 09 and also in the earlier assessment orders. (b) The income of the assessee from licensing of BREW software to Tata Tele Services and Reliance is taxable under section 9 (1) (vi) of the Income Tax Act and under Article 12 of Indo US DTAA. The tax payable is at the rate of 15% as per paragraph 2 of article 12. (c) Two important streams of assessee's income earned from QUALCOMM CDMA technologies (QCT) which develops and supplies CDMA-based integrated circuits and Systems software for wireless voice and data communications, multimedia functions and global positioning system products and QUALCOMM technologies licensing (QTL) which grants licences to manufacture of wireless products for the right to use QUALCOMM's intellectual property portfolio, which includes certain paid rights essential to and/or useful in the manufacture and sale of certain wireless products. In the ear....
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.... is as under:- "sold", "sale", sell" means sold, leased or otherwise transferred or put into use and sales sell be deemed to have been occurred upon firsts shipment, invoicing or putting into use, whichever shall first occur. Notwithstanding the foregoing, licensed products shall not be deemed to have been sold by .... Licensee ..... For purposes of paying the royalties to QUALCOMM under these agreement until such time as such licensed products has been (a) sold, leased, shipped or otherwise transferred to a person or entity outside of the definition of .... Licensee .... Or (b) put into use by anyone, including but limited to by ... Licensee .... Whichever shall first occur." (vi) It has been stated that the definition of sale could mean invoiced, shipped etc and sale would occur upon the first such occurrences. The fact that sale means invoiced, shipped etc by itself implies that the party has been recognized to which the goods are invoiced or shipped. In this case, unless the OEMs has raised the bill/shipped to the goods to a party in India i.e. Tata or other Indian carriers no royalty would be payable to QUALCOMM. The assessee's submission that the royalty rec....
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....CIT (A). These appeals were disposed of by the CIT (A) vide his consolidated order dated 26/6/2009 as under:- i. confirmed the taxability of royalty earned by the assessee on sale of handsets by OEMs to Indian carriers for the assessment year 2000 - 01 to assessment year 2006 - 07 ii. enhanced the total income by bringing to tax royalty earned by the assessee on sale of equipment by OEMs to Indian carriers and issued directions for quantification for assessment year 2000 - 01 to assessment year 2005 - 06 iii. granted partial relief on the number of handsets assessed to tax in India and also the royalty per handset (e) for assessment year 2008 - 09, the assessee has preferred an appeal before the ld DRP against the proposed variations in income. The DRP has confirmed the proposed variations. There is no material change in the facts of the case in the year under consideration. Hence, CIT (A) confirms the reasoning given in the earlier year's assessment order and DRP is followed in the current year. 6. Based on the above findings, the Ld. assessing officer determined the royalty income chargeable to tax in India:- a. on handset based on ....
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....was considered as royalty from BREW operator agreements. f. Accordingly, the Ld. assessing officer framed draft assessment order, which was received by assessee on 27/12/2011. The assessee filed its objections before the Ld. Dispute Resolution Panel on 25/1/2012 which were disposed of on 12/7/2012 under section 144C (5) of the Income Tax Act. The assessee raised for objections before the Ld. Dispute Resolution Panel, which were rejected relying on the direction for assessment year 2008 - 09 wherein on identical facts and circumstances the same were rejected. g. Consequently the Ld. Assessing Officer passed assessment order under section 143 (3 ) read with section 144C (13) of the Act on 30/8/2012 determining the total income of the assessee as under:- SR No Income taxable as per the Qualifying rates specified as per article 12 of the Indo USA double taxation avoidance agreement amount Amount Amount of royalty at the rate of 15% 1 Royalty on CDMA handsets 30930188/- 4639528/- 2 Royalty on infrastructure equipment 255668419/- 38350263/- 3 Royalty from BREW operator agreement 67848685/- 10177303/- Tot....
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.... the order of the coordinate bench which binds the coordinate bench for deciding these appeals. 9. He referred the provisions of section 9(1) (vi) (c) of the act and submitted that income by way of royalty payable by a person who is a non-resident is chargeable to tax under that section if (1) it is payable in respect of any right, property or information used or services utilized for the purpose of business carried on by such person in India or (2) for the purpose of making or earning any income from any source in India. He submitted that revenue needs to show that patents of the assessee were used by original equipment manufacturers for carrying on any business in India. He submitted that these patents are used by original equipment manufacturers in manufacturing of handset or equipments outside India. He further stated that none of the original equipment manufacturers have manufactured handsets in India. 10. He referred to the order of the coordinate bench for assessment year 2000-01 to 2004-05 dated 31/1/2013 specifically at page No. 114 (para No. 127 to 129) for this proposition. He submitted that the burden is on the revenue to prove that OEMs are carrying on business i....
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....he impugned income does not fall in the definition of royalty under section 9(1)(vi)(c) of the Income Tax Act. 13. He further referred to the decision of the coordinate bench for assessment year 2005-06 to 2008-09 dated 20/2/2015 in case of the assessee and referred paragraph No. 31. He submitted that once the lock of the telephone is broken it could be used on any other network. He submitted that the CDMA handset, if break opened then it is not specific to the service provider. He further referred to para No. 38 of the order and submitted that the ITAT agreed with the earlier order that as long as the patents are used in the manufacturing process which is taken place outside India such a royalty cannot have any tax implications in India. He further referred to para No. 68 of the order wherein in that particular year the revenue filed a list of OEMs who are assessed to tax in India and also the details about the assessing officer having jurisdiction to assess their income in India. He submitted that such an assertion is missing in the impugned appeals. He further referred para No. 69 of that order where the assessment order in case of one of the OEMs was also furnished which ind....
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.... of profits and manufacturing of these handsets. The profit so earned by the OEM has to be essentially taxed in the tax jurisdiction where the manufacturing activities are carried. However, revenue is not concerned with the taxability of those profits either. He further referred to para No. 37 of the order where the coordinate bench has specifically stated that OEMs were carrying on business in India through their permanent establishment's which are de facto projections of the OEMs in India and the CDMA handsets being service provider specific assumes significance. He further stated that the coordinate bench in that particular case held that when the product is India specific and the business of the OEM producing that product is carried on through its permanent establishment in India, the natural corollary of this position is that OEMs can be held to be "carrying on business in India" partly, if not, wholly. He further referred to para No. 39 of the order and submitted that the moot issue is the taxation of royalty in respect of "use of patents" in handsets, which are sold in India. He further stated that royalty, which has been paid by the OEM of CDMA handsets, is not only royalty....
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....of the coordinate bench to show that the decision given by the second order of the ITAT should be applied to the present appeals. He further submitted that the coordinate bench must follow the subsequent decisions. 19. He further referred to the decision of the Hon'ble Andhra Pradesh High Court Syed Asifuddin And Ors. vs The State Of Andhra Pradesh And ... on 29 July 2005 Equivalent citations: 2006 (1) ALD Cri 96, 2005 CriLJ 431, and relied heavily on the para No. 24 of the decision and submitted that handsets used in India has a copyright and CDMA phones are country specific. He stated that patents are not India specific but universal but patents are used for manufacturing of products which are India specific. 20. On the issue of portability, he referred to the paper book for assessment year 12 - 13 filed by the assessee at page No. 198 and submitted that only network parameters are to be put so it is network provider specific and everything is residing in handset and not in chip or sim. Therefore, it is a royalty attributable to handset. 21. He further referred to para No. 49 of the 2nd order of the ITAT in submitted that section 9 deals with the incomes which are deemed....
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....215;use the patent' but the ‗product' that is a handset. He further stated that the quantification of the royalties only for the control purposes as the agreements are based on sale price and therefore merely because the royalty is paid by the OEMs to the assessee based on handset sold in India does not have any bearing on taxability of such royalty in India. He further submitted that it is the agreement worldwide. 26. He further submitted that for assessment year 2008-09 there is no evidences that the OEMs have "business connection" or "permanent establishment" in India and only in assessment year 2013-14 there is some reference of the business of the OEMs that too not for CDMA but for GSM. He therefore submitted that the statement of the revenue is not correct, as there is no assessment of the OEMs for assessment year 2009-10 are later years of CDMA. 27. Even otherwise, he stated that permanent establishment of the OEM are with respect to GSM and there is no reference to the CDMA and therefore there is no evidence brought on record by the revenue that there is any permanent establishment of the OEMs with respect to the sale of CDMA handset in India. He therefore submi....
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....ogy and is not customer specific. He further submitted that the royalty is paid for manufacture of products and it cannot be related with anything else. He further referred to page No. 197 of the paper book for assessment year 2012- 13 wherein the Reliance Communication Ltd has submitted that the network equipment handset running on CDMA is a "standard product" based on ITU/3rd generation partnership Project 2 stds. . It was further submitted that in that there is no India specific Basic technical feature to the best of the knowledge of that particular party. There will be India specific customer functionality such as Hindi fonts, customization for ringtones, etc which is required by operator to promote their brand in the devices. The equipment may also have added functionality to meet the specific regulatory requirements such as facility for legal interception etc. It was further submitted that the CDMA network equipment handset operating in India is a "standard product". They should be able to function in other countries also and would require loading of the operator specific network parameters only. He therefore submitted that the product is not "India specific" but is a "standa....
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....s 'QIS'-QIS provides technology to support and accelerate the convergence of the wireless data market including BREW, QChat and QPoint Products and services; Qualcomm Government Technologies 'QGOV'-QGOV provides development, hardware and analytical expertise to United States Government agencies involving wireless communications technologies; and Qualcomm Wireless Business Solutions ('QWBS')-QWBS provides satellite and terrestrial based two-way data messaging, position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. (iv) Qualcomm Strategies Initiatives 'QST'-QST manages the company's strategic investment activities, and make strategic investments to promote the worldwide adoptions of CDMA based products and services. 35. 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 non-exclusive and non-transferable worldwide license of its pa....
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....ring process" of the handsets or in the "use of the patented technology embedded in the CDMA handsets". However, as this aspect of the matter being a highly technical aspect, which may also need benefit of expert advice, for recording necessary factual findings after obtaining technical reports on the same and collecting necessary details. 38. The order of ITAT for AY 2005-06 to 2008-09, did not follow the order of the coordinate bench in assessee's own case for following reasons :- a. That whether OEMS were having any business in India, revenue filed additional evidences in that case which are dealt with by the coordinate bench as under :- "68. In the course of proceedings before us, however, learned Departmental Representative has filed a list of the OEMs who are assessed to tax in India and also the details about the Assessing Officer having jurisdiction to assess their income in India. This list, which is set out at page 530 of the paper book volume II of additional evidences, is as follows: i. Ericsson AB ii. Huawei Technology Co. Ltd. iii. ZTE Corporation, China iv. Samsung Electronics Ltd v. Nokia Corporation ....
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...., but that cannot be the only intellectual property embedded in a CDMA handset. The patented CDMA handset technology is clearly one such intellectual property. Let us not lose sight of the fact that technology for mobile communication "operating systems using CDMA technology" were invented by Qualcomm and Qualcomm owns vital patents in respect of the same. A clear corollary of Qualcomm holding such patents is that unless Qualcomm is paid royalty for such patents, which are utilized in the CDMA handsets, as also in the operating systems used by the service provider, and are owned by Qualcomm, these handsets and operating systems cannot be used. The royalty is thus for use of such patented technology while the point of its collection, as a measure of convenience and in consonance with the industry practice, is from manufacturer when the patented product is put into use by sale. While this argument of the revenue on the consideration for use of "intellectual property" was duly recorded, there is no finding in respect of the same inasmuch as there is no finding to the effect whether or not there was any use of any patented technology in the CDMA handset in respect of which the OEMs hav....
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....sue of existence of PE was taken for the first time before the coordinate bench , the coordinate bench thought it fit that matter needs to be examined in detail and therefore it was set aside to the file of the ld AO. In the present case before us, no such evidences were filed or issue is raised. 42. Further, in the appeal before us the ld AO has examined the taxability of Royalty under both the limbs of the provision of section 9(1)(vi)(c) of the act as it is evident from para no 2 (iii) of the assessment order. 43. Regarding the decision of Hon Andhra Pradesh High court in case of Syed Asifuddin And Ors. vs The State Of Andhra Pradesh And ... on 29 July, 2005 [ Equivalent citations: 2006 (1) ALD Cri 96, 2005 CriLJ 431], in the first decision of ITAT it was referred by ld DR in para No 30 of the order and in para no 31 rejoinder of the ld AR was also considered. Then coordinate bench in its reasons and decision also dealt with the decision in para no 141 and 143 of the order. Therefore, we do not agree with the contention that the decision of Hon. Andhra Pradesh High court was not at all considered. Therefore, we also do not agree with the arguments of the ld DR that first o....
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....ue that the income falls under cl. (c) to sub-cl. (vi) of sec. 9(1) the burden is on the Revenue to prove the same. 130. Thus to tax the royalty income earned by Qualcomm from OEM's located outside India, under the deeming provision of sec. 9(l)(vi)(c) of the Act, the burden is on the Revenue to prove that the OEMs carry on business in India and that they have used Qualcomm's patents for the purposes of such business in India; or that they have used Qualcomm's patents for the purpose of making or earning income from a source in India. Thus we agree with the arguments of the learned counsel for the appellant that the burden of proof when it falls within the exceptions to sec. 9(l)(vi)(b) is on the assessee and on the contrary the burden is on the Revenue when they chose to invoke sec. 9(l)(vi)(c). This proposition was also accepted by the Revenue. 131. The learned special counsel for the Revenue submitted that the language employed in sec. 9(l)(vi)(c) is "used for the purpose of" in contradistinguished from "utilized in the business" used in sec. 9(l)(vii)(c). Relying on the language employed in both the sections, he submitted that the situs of the use ....
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....agreements would have been entered into by the India Telecom operators with the OEMs for purchase of network equipment, cannot be accepted as it would be a conjecture and surmise. 137. The AO as well as the CIT(A)'s order are based on 16 license agreements entered into by Qualcomm with OEMs. Redacted copies of the license agreements were filed before us. The appellant during the course of the hearing filed an affidavit disclosing the names of the OEMs along with the dates of execution of the license agreements. Admittedly these agreements were entered into on 13th Aug., 1993 and certain other dates. Majority of the agreements were executed prior to year 2000 i.e. before CDMA services were launched in India. We are basically concerned with these agreements only. For ready reference we extract relevant clauses from the following agreements : i. Subscriber Unit License agreement by and between Qualcomm and the OEM; ii. Subscriber unit and infrastructure equipment license agreement between Qualcomm and the OEM; iii. We also extract the clauses relied upon by the Revenue in the following agreements to consider the without prejudice argume....
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....elephone, a cordless base station and/or a CDMA subscriber knockdown kit and 'subscriber units' means a complete CDMA telephone, a cordless base station and CDMA subscriber knockdown kits. Components (page No. 233 of the paper book) : Components' means application specific integrated circuits ('ASIC's'), electronic devices, integrated circuits, including firmware thereon and accompanying software, and or families of devices for use in wireless subscriber equipment. CDMA ASIC (page No. 231) : 'CDMA ASIC' means Qualcomm's mobile station modem (MSM) CDMA application specific integrated circuit, and any revision, generation, modifications or integration to or of the MSM, purchased by licensee from Qualcomm. (ii) Subscriber unit and infrastructure equipment license agreement between Qualcomm and licensee (i.e. OEM). (Agreement reference-page No. 264 to page No. 316 of the appellant's' paper book) Extract of relevant clauses from the agreement in relation to grant of license Clause 4.1- Grant of license from Qualcomm (page No. 279) : Subject to the terms and condit....
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....Qualcomm's later patents or Qualcomm's other patents, as the case may be. Subscriber unit (page No. 278) : 'Subscriber unit' means a complete CDMA and/or multi-mode CDMA user terminal, including but not limited to mobile, transportable, and portable telephones, which can be used, without any additional equipment or components being attached thereto, to transmit and/or receive transmissions for wireless applications. Radiomodule (page No. 277) : 'Radiomodule' means an electronics sub-assembly for wireless applications which (i) includes, at a minimum, a printed circuit board, multiple individually packaged integrated circuits mounted on the printed circuit board, a CDMA component, and any embedded software, and (ii) provides RF/analog and digital and baseband processing necessary to implement the functions of a CDMA subscriber unit such as to initiate and/or receive wireless telecommunications transmissions; provided that a Radiomodule shall not be capable of initiating and/or receiving wireless telecommunication transmissions without being incorporated into or attached to the product of which it is intended to be a sub-ass....
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.... Clause 14.1- Title and risk of loss (page No. 14): 'Without prejudice to TTSL's right to reject as set forth in art. 6.4 of this agreement, the title and the risk of loss to the hardware portion of all Equipment sold hereunder shall pass from supplier to TTSL upon delivery in accordance with CIP Incoterms 2000 port of shipment.' 139. Based on the above, we now proceed to answer the first question as to whether the OEMs have carried on the business in India and that they have used the appellants for the purpose of carrying on such business in India. 140. What is licensed in these 16 agreements is the use of "intellectual property" owned and patented by Qualcomm for the purpose of manufacture of subscriber units and infrastructure equipment. These agreements were entered much before CDMA, technology- was introduced in India. A perusal of these agreements does not demonstrate that these are India specific. In fact they are not specific to any particular country. The OEMs manufactured products outside India and sold them to not only service providers in India but also to number of others in other countries. The license to manufacture pro....
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....dia and sale to India without any operations being carried out in India would amount to business with India and not business in India. For the business to be carried out in India there should be some activity carried out in India. Thus the argument that if manufacturing is done in one jurisdiction and sales in the other jurisdiction, then there is business in another jurisdiction is devoid of merit. Further on the facts of the case, for the reasons given later in this order, even the sale cannot be said to have been done in India. The contention of the Revenue that OEMs (i.e. Motorola and ZTE) carries out installation work for Tata and hence there is some business activity being carried by the OEM in India is factually incorrect and contrary' to the clauses in the equipment purchase agreement which clearly states that installation of the equipment is carried out by a third party appointed by the purchaser (i.e. Tata) in consultation with the supplier. Even presuming for a moment that the installation of the equipment is done by the OEMs in India, the Revenue has failed to demonstrate/prove that the patents licensed by Qualcomm are used by Motorola/ZTE for carr....
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....ate on any CDMA telecom network, which is evident from the fact that once the network lock is broken the handset can operate on any network. This fact is also supported by the decision of the Andhra Pradesh High Court in the case of Asifuddin (supra). Hence it cannot be concluded that CDMA technology was service provider specific. Network locks are requested by network service providers to keep the subscribers with them for an extended period. There is no dispute that the locked handset is capable of working anywhere in the world. This is evident from the scheme on international roaming using CDMA handsets downloaded from the website of Reliance Communications. Further there is also no dispute that all telecom operators permit International roaming. Though handsets that may have been purchased under certain terms are locked with a particular network service provider, the handset is capable of working in any country of the world with which that particular network service provider has commercial understanding. This clearly demonstrates that the CDMA connectivity of the phone is in no manner connected with the locking of the phone with a network service provider. Hence, in ou....
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....is no finding that the OEMs have carried on business in India much less that a part of the sale consideration is attributable to any sale or licensing of software carried out in India. When OEMs itself are not brought to tax, to hold that Qualcomm is taxable is not correct. This is not a case of the OEMs being not taxed due to a lapse of the officer concerned or being let off by the Revenue by mistake or oversight. It is not brought to our notice that the OEMs have been brought to tax in any of the subsequent years. Thus the argument that two wrongs do not make a right does not apply to the situation on hand. 145. Regarding passing of the title in the equipment, there is no evidence with the Revenue, for any assessment years before us that the title passed in India and that certain further activity was done by the OEMs in India after the sale. As already stated the burden is on Revenue to prove that business is carried on in India by the OEMs. Arguments have been made without the support-of any-document or evidence pertaining to these years. The Revenue contended that the title in the goods passed to Tata at the port of destination i.e. India based on agreements of-2007. T....
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....t the terms of contract make it clear that acceptance test is not a material event for passing of the title and risk in the equipment supplied. It is because of the reason that even if such test found out that the system did not conform to the contractive parameters, as per art. 21.1 of the supply contract, the only consequence would be that the cellular operator would be entitled to call upon the assessee to cure the defect by repairing or replacing the defective part .If there was delay caused due to the acceptance test not being complied with, art. 19 of the supply contract provided for damages. Thus, the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test was not determinative of this factor. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. In Skoda Export (supra), the Andhra Pradesh High Court dealt with this issue in the following manner. 'We may also mention that learned standing counsel for the Department challenged the finding of the Tribunal that the sale of machinery was completed outside India. Acc....
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....g, transportation, carriage, freight, unloading charges, insurance and any other cost of any nature at any time prior to delivery. 151. It is the submission of the Revenue that entire risk is borne by Motorola and the carriage, insurance is paid till the delivery at seaports/airports in India. Hence, the sale concludes in India. The reference by the appellant to CIP Incoterms 2000 does not alter the situation because the expression by its very definition in the agreement means obligation to bear carriage and insurance charges upto airports/seaports in India. 152. At this stage, we find it relevant to extract the definition of CIP from Incoterms 2000 : CIP "carriage and insurance paid to means that the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This means that the buyer bears all risks and any additional costs occurring after the goods have been so delivered. However, in CIP the seller also has to procure insurance against the buyer's risk of loss or damage to the goods during the carriage. "Carrier" means any person w....
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....a company incorporated in Sweden. It was engaged in the business of supply of hardware and software. It entered into an agreement with 10 cellular operators in India for supply of telecommunication systems. These were installed and commissioned in India by two sister concerns of Ericsson, one being a branch of non-resident group company, and the other being resident company of the same group. There was an overall agreement with the operators for supply and installation of GSM systems. The supply of equipment was made on continuous basis. The supply had to satisfy the acceptance test. The issue before the Court was the taxability of such supplies in respect of which title and risk in the goods passed to the customers before the goods were delivered in India. The AO held that the assessee company had a business connection under domestic law and that it had a PE under the DTAA between India and Sweden. Business profits were estimated. Entire consideration for supply of software was brought to tax. Income from hardware was estimated at 26 per cent of the billed supplies of hardware. The Hon'ble High Court held that: The title in the goods passed to the buyer before the goo....
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....unication systems and equipment (GSM equipment), which were used in fixed and mobile phone networks. During the previous years, the assessee maintained a LO and also had a subsidiary in India, known as, Nokia India (P.) Ltd. (NIPL). Its activities involved supply of hardware and software as well as installation and commissioning and also after sale services. It entered into agreements with various Indian telecom/cellular operators and entered into three contracts with them, namely, (1) overall agreement, (2) supply agreement and (3) installation agreement. The assessee supplied GSM equipment, i.e. both hardware and software manufactured in Finland to Indian telecom operators from outside India on a principal to principal basis under independent buyer/seller arrangements. Installation activities were undertaken by NIPL under its independent contracts with Indian telecom operators. The AO held that the assessee was carrying on business in India through a PE. Both the LO and NIPL constituted a PE of the assessee in India. 70 per cent of the total equipment revenue attributed to sale of hardware. The remaining 30 per cent of the equipment revenue attributed towards supply of software a....
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.... by CBDT by virtue of Circular No. 7 of 2008 (sic-of 2009), dt. 22nd Oct.. 2009 [(2009) 226 CTR (St) 57]. The place of negotiation, the place of signing of agreement, or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances as the transaction relates to the sale of goods and the relevant factor and determinating factor would be as to where the property in the goods passes. In the instant case the property passed on the high seas. Even if it is a case of a composite contract, the supply has to be segregated from the installation and only then the question of apportionment would arise. That the amendment to sec. 9 vide Finance Act, 2012 wherein Explns. IV, V and VI have been added to s. 9 seeking to clarify the scope of cl. (vi) of sub-sec. (1) of sec. 9, it was held that the amendment cannot be read into the treaty. The reasoning given in Ericsson A.B.'s case (supra) would apply to Nokia Net Work OY. 156. In the facts of the present case, Motorola and ZTE are OEMs Supplying CDMA equipment to the Tata an Indian telecom operator. Their business model and supply contract for CDMA equipment is similar to ....
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....f 2007, it was submitted that the two agreements between Indian operators and OEMs make a distinction between sale of equipment and licensing of software embedded in the firmware. It was submitted that Indian operators have agreed to purchase the equipment and take licenses for the software. In addition, the Revenue has also contended that Indian operators constitute a source of income for the OEMs in India. 162. Reliance was placed on cl. 19.5 of the agreement with ZTE dt. 19th Dec. 2007, wherein it is recorded that all licensed material are the property ol the supplier of its suppliers. Hence it is argued that the supplier of OEMs is Qualcomm which supplied the intellectual property to be used under license for manufacturing of handsets/equipment. It was further submitted that the agreement between Qualcomm and the OEMs, which was the basis for the AO to assess the income, states in the preamble that OEMs desired to obtain licenses of Qualcomm's intellectual property to manufacture and sell subscriber units. 163. Reliance was placed on the definition of the term 'chip sets' in the agreement, as well as other definitions such as "CDMA, ASIC" and it wa....
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.... of Qualcomm patents. ii. The software embedded in the hardware sold to Indian Carriers by the OEMs belong to the OEMs. The software may have been selfgenerated or procured by the OEMs. iii. None of the 16 agreements between Qualcomm and OEMs which form the basis for assessment in these cases, refer to licensing of software. Thus to argue that software is licensed by Qualcomm to OEMs and which are in turn sub-licensed to the Indian Carriers is contrary' to the facts of the case. The software which is licensed at best relates to the functionality aspect of the product and has nothing to do with the capability to provide CDMA connectivity. 168. The Revenue for the first time before the Tribunal argued that chipsets are purchased by OEMs from Qualcomm and these chipsets which have embedded software and help in function of the hardwares. This is not the basis on which either the AO or the CIT(A) proceeded to tax in this case. 169. It is not necessary for the OEMs to purchase chipsets from Qualcomm only. The OEMs can also purchase the chipsets from a third party other than Qualcomm. In fact, the AO in his assessment order had specifically held tha....
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....t, including but not limited to the hardware, the software, the firmware, the licensed material, and parts thereof and related spares to be supplied by the supplier to Tata under the agreement. vi. Further firmware and software have, been defined in the agreements as under : "Firmware" shall mean a combination of hardware and software represented by a pattern of bits contained in such hardware. "Software" shall mean a set of man and machine readable instructions on magnetic or other appropriate media, including firmware, which is necessary for the control, operation and performance of the equipment in accordance with the requirements of the specification contained in the agreement. 173. In view of the specific clauses in the agreement, it is clear that the software does not have an independent use and is an integral part of the hardware without which the hardware cannot function. The software supplied was a copyrighted article and not a copyright right. 174. Applying the propositions laid down by the jurisdictional High Court in the case of Ericsson (supra), Nokia (supra) the income from embedded software cannot be taxed in India. The so....
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....tion that Indian telecom operators would constitute source of income for the OEMs. 177. Coming to the insertion of Expln. 4 to sec. 9(l)(vi) of the Act, we find that the amendment has no effect in the present case as the controversy in this case is taxability of royalty on patents relating to intellectual property for manufacture of CDMA handsets and equipment and does not relate to royalty on licensing of any computer software. The OEMs received no income from licensing in computer software. The OEMs sell handsets/equipments to the service providers, outside India and hence the OEMs have no source of income in India. 178. Thus, for all these reasons, we are of the considered opinion that the assessee was right in his argument that the Revenue has not proved that the OEMs have carried on the business in India and that they have used Qualcomm's patents for carrying on such business in India nor the Revenue has proved that the OEMs have used Qualcomm's patents for the purpose of making/earning income from a source in India. Thus we hold that the royalty in question cannot be brought to tax under sec. 9(1)(vi) (c) of the Act. 179. The next issue is w....
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....nication applications. Qualcomm was joined by US network operators Nynx and Ameritch to develop the first generation of CDMA telecommunication system. Later this team was joined by Motorola and AT&T. As a result of this it was possible to start writing of specification for CDMA in 1990. It was then a standard group was set up with the support of Cellular Telecommunications Industry Association (CTIA) and the Telecommunication Industry Association (TIA). This group then published the standard of first CDMA system in the form of IS 95 resulting in the formal publication of IS 95A in 1995 (Source: Wikepedia). The first GDMA system was launched in September, 1995 by Hutchson Telephone Co. Ltd. in Hong Kong and SA Telecommunications in Korea soon to be followed along with the networks in the USA. Later CDMA 2000 series of standards were developed. The standards for CDMA are specified by 3GPP2. (Source: http://www.radio-elecironies.com/info/rftechnologydesign/ cdma/what-is-cdma-basics tutorial.php, http://webopedia.com/TERM/C/CDMA.html) A look at Wikipedia discloses the following : "3GPP2 is the standardization group for CDMA 2000, they set 3G standard based on earlier ....
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....e words a mobile phone or a cellphone is a wireless data communication device which work on wireless technology, while phone is a device that can make and receive telephone calls over a radio link while moving around a wide geographic area. It does so by connecting to the cellular network provided by a mobile telephone operator. This would allow access to the public telephone network. In addition to voice data transmission modern mobile phones also support a wide variety of other services such as text messaging, MMS, e-mail, internet access, short range wireless communication, blue tooth, business applications, gaming and photography. Such mobile phones are also referred to as 'smart phones'. The other forms of wireless data communication technologies currently in use are WiFi, global positioning system (GPS), blue tooth, gig B. satellite television, wireless USB etc. From the above it is clear that there are many digital technologies used to transmit data in wireless form. Hence the argument that CDMA is a wholesome technology and that Qualcomm is the exclusive owner of such technology cannot be accepted. 186. There are a number of simple wireless technologies tha....
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....as royalty income in India under section 9(1)(vi) of the Act and Article 12 of the India-USA tax treaty. The assessee contends that in doing so, the AO has failed to appreciate that the provision of BREW software to Tata and Tata Teleservices (Maharashtra) Limited and Reliance Communications Infrastructure Limited results in sale of 'Copyrighted Article' and not licensing of a 'Copyright'. 103. So far as this grievance of the assessee is concerned, only a few facts are required to be taken note of. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has invoiced an amount of Rs. 2,52,70.569 to Tata Teleservices Limited under BREW (Binary Runtime Environment for Wireless) agreement. It was noted that it is an application development platform, developed by Qualcomm, for mobile phones that enables users to download and run applications for playing games, sending messages and sharing photos etc. It was also noted that this platform runs between the application and wireless device's chip operating system so that programmers can develop applications for wireless device without the code for system interface or underst....
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....n the copyright (without the transferor fully alienating the copyrights) will represent a royalty, where the consideration is for granting of rights to use the program in a manner, that would without such licenses constitute the infringement of copyrights." Under the laws of the country, if the software owned by the assessee is used without licenses, it becomes infringement of the copyright. Therefore arguments of the assessee regarding applicability of OECD commentary fail on this count as well 104. The assessee did raise a grievance before the DRP but without any success. The assessee is not satisfied and is in appeal before us. 105. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 106. We find that the payment in question is admittedly the payment is for a software which is for a copyrighted article and not the copyright itself. There is nothing on record to suggest that the payment is for the copyright itself. In this view of the matter, the issue is clearly covered, in favour of the assessee, by Hon'ble Delhi High Court's judgment in the ca....
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....e Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of suc....
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....e software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facilit....
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....ty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. 95. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof f or the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted m....
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..... Ground No 4 is regarding initiation of penalty proceedings u/s 271 (1) (c) of the act , which is premature and hence rejected. 49. Accordingly, appeal of the assessee in ITA no 5353/Del/2012 for AY 2009-10 filed by assessee is partly allowed. ITA No. 1241/Del/2014 Assessment Year 2010-11 50. We now move to the ITA No. 1241/del/2014 i.e. assessee's appeal against the order dated 30/01/2014 in the matter of assessment for AY 2010-11 under section 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 where in following grounds of appeal are raised. "1. Erred in applying the provisions of section 9(l)(vi)(c) of the Incometax Act, 1961 ('the Act') and Article 12(7) of India-US tax treaty ('tax treaty') for taxing the royalty income of the Appellant earned from the Original Equipment Manufacturers ('OEMs') situated outside India for the patents licensed to the OEMs for manufacture of CDMA mobile handsets outside India. 2. Erred in applying the provisions of section 9(l)(vi)(c) of the Act and Article 12(7) of the tax treaty for taxing the royalty income of the Appellant earned from the OEMs situated outside India for the patents li....
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....10. Erred in law on initiation of penalty proceedings u/s 271(1)(c) of the Act." 51. Learned parties fairly agreed that whatever is decided for the assessment year 2009-10 will equally apply for this assessment year as well as all the material facts and circumstances of the case, as grievance of the assessee, are the same. 52. In view of the above position, and following our decision for the assessment year 2009-10 , we hold that the observations made in the order for the said year will apply mutatis mutandis to this assessment year as well. The taxation of royalty in respect of the CDMA handsets and equipment and the addition in respect of invoicing the revenues under the BREW agreement thus stand deleted. Accordingly, Ground no 1 to 8 of the appeal of the assessee are allowed. 53. Ground no 9 is regarding charging of interest u/s 234B of the act, which does not survive as we have already deleted that income of the assessee charged to tax by the ld AO. Hence, this ground is dismissed. 54. Ground No 10 is regarding initiation of penalty proceedings u/s 271 (1) (c) of the act, which is premature and hence rejected. 55. In the result, the appeal for the assessment year....
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....ant is for license of CDMA patents for manufacture of CDMA handsets and equipments and not for installation and commissioning of the equipment. Thus to hold that the OEMs use Appellant's technology very much in India where these equipments are installed is grossly incorrect. 7. Erred in making certain incorrect factual observations/ statements for taxing the royalty income of the Appellant earned from the OEMs situated outside under the deeming provisions of section 9(l)(vi)(c) of the Act. The incorrect factual observations / statements are brought out in the annexure enclosed to the grounds of appeals. 8. Erred in holding that the revenues received by the Appellant under the BREW Operator Agreement and BREW Carrier Agreement is taxable as royalty income in India under section 9(l)(vi) of the Act and under Article 12 of the India-USA tax treaty. 9. Erred in levying interest under section 234B of the Act. 10. Erred in law on initiation of penalty proceedings u/s 271(1)(c) of the Act." 57. Learned parties fairly agreed that whatever is decided for the assessment year 2009-10 will equally apply for this assessment year as well as all the mate....
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....ing any distishiguishable facts on record is untenable and bad in law. 4. Failed to appreciate that the information/ replies received from the assessing officers of the eight OEMs (a) Clearly states that these OEMs are into manufacture and supply of GSM equipment. Hence, to hold that the sale of handsets and equipments in which Qualcomm's patented technology is used is directly attributable to the Permanent Establishments ('PE') of these OEMs is grossly incorrect. (b) Does not establish that the OEMs have used Qualcomm's CDMA patents for the purpose of carrying on business in India or for the purpose of earning income from any source in India. (c) In violating the principles of natural justice, whilst placing reliance on the information obtained from the AOs of certain OEMs on the presence of a Permanent Establishment ('PE') of the OEMs in India. 5. Erred in making certain incorrect observations/ factual misstatements for taxing the royalty income of the Appellant earned from the OEMs situated outside under the deeming provisions of section 9(l)(vi)(c) of the Act. The incorrect factual observations / statements ar....