TaxTMI 
TaxTMI 
2018 (4) TMI 1362
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....ppeal 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) of the tax treaty for taxing the royalty income of the Appellant earned from the OEMs situated outsid....
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....lty 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 earlier year assessment proceedings, the income from CDMA handsets and CDMA infrastructure equipments as been taxed by the AO after observing that :- (i) under th....
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....hever 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 received by QUALCOMM is independent of whether the network equipment/handsets are sold into India is therefore, incorrect and royalty clearly arises at the time of goods are sold to a particular customer, in this case cu....
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....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 amount paid by Indian carriers OEMs of Rs. 6 1860 3768/- at the rate of assumed rate of royalty @ 5% computing the taxable royalty income in India of Rs. 3 093 0188/- and levied the tax at the rate of 15% as per article 12 of Indo US DTAA amounting to Rs. 4639528/- b. on infrastructure ....
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....4C (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/- Total 35,44,47,292 5,31,67,094 Arguments of the Assessee 7. The Ld. authorized representative submitted that there are 2 issues involved in this bunch of appeals as under:- a. whether royalty income is chargeable to tax in India of the assessee according to provisions of section 9 (1) (vi) of the Income Tax Act and article 12 (7) (b) of the Double Taxation Avo....
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....usiness 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 in India and that they have used assessee'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. 11. He further submitted that the Ld. departmental representative has submitted that there are no additional evidences submitted in the impugned appeals for assessment year 2009 - 10 to assessment year 20....
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....ndset, 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 indicated that only that they had a presence in India and that said entity was making sales through its permanent establishment in India to different customers based in India. He referred to para No. 71 of the order noted that there is a major change in the facts of the case before the ITAT compared to the earlier year. It was specifically mentioned that, while there was nothing to suggest that the OEMs were subjec....
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....anent 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 for patents used in the manufacturing process but predominantly for the "use of the handsets" manufactured and on which the royalties charged on each handsets, sold or used in India. He therefore submitted that the royalty is correctly charged to tax. 17. He further referred that the earlier order of the coordinate bench was only on inability of revenue to show taxability of OEM in India and in subsequent order of th....
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....iLJ 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 to accrue or arise in India and clearly therefore an income in order to be taxed in India under section 9 need not accrue or arise in India. He further referred to para No. 52 of that decision and submitted that the clear emphasis on taxation based on usage in business rather than based on residence of the payer for taxation of royalties. Therefore he submitted that provisions of section 9 (1)(vi)(c) is also extended to the roy....
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....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 submitted that the case of the assessee is squarely covered by the first order of the coordinate bench. 28. He also stated that there is a distinction between ‗carrying on business in India' and ‗carrying on business with India'. He submitted in the second order of the coordinate bench this distinction was not taken care of. He submitted that the second limb of the provisions of section 9(1)(vi)(c) wherein the royalty has to be for t....
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....n 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 "standard product". 32. He further submitted that according to the provisions of section 9(1)(vi) (c) the royalty should have been paid for the purposes of making or earning any income from any ‗source' in India. He submitted that source is not in India. He further referred to the decision of the Hon'ble Delhi High Court in case of CIT Vs. Havells India Ltd 352 ITR 376, referred to para No. 13 of that decision, and submitted that merely because the ....
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....ng, 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 patents developed on CDMA technology to unrelated wireless original equipment manufacturers ('the OEMs') to make, 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 that it licenses its patents to OEMs who are situated outside India and are not residents of India. The OEMs use the patents to manufacture the products outside India. The OEMs sold the produ....
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....usiness 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 vi. Nokia Siemens Networks OY vii. Sony Ericsson Mobile Communication viii. Motorola Solutions Inc 69. Learned Departmental Representative has also filed a copy of the assessment order for the assessment year 2005- 06, in the case of Huawei Technologies Co. Ltd, which indicates that not only that they had a presence in India, the said entity was making sales, through its PE in India, to different customers based in India. Our attention is also invited to several decisions of the coordinate benches of this Tribunal wherein the taxability in the hands of these OEMs ha....
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....ed. 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 have paid royalty to the Qualcomm. 87. The question whether or not the payment of royalty was for intellectual property by way of patented technology, other than software, in the CDMA handsets sold in India was thus, perhaps inadvertently, left intact." 39. During the course of hearing, we have asked a query to ld AR about status of the assessment made after the order of the coordinate bench setting aside the matter to the ld. AO. The ld AR replied that assessments have been framed and matter is pending before ITAT. However, it was cautioned by him that technically while deciding this appeal the ITAT should not see that orders. However, he....
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.... 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 order of ITAT was not in consonance with the order of the Hon AP high court. Here, we cannot question the wisdom of the coordinate bench that how the decision of Hon'ble High Court should have been applied. That is for Hon'ble higher judicial forums to decide. 44. Therefore in view of above facts and circumstances, facts of impugned appeals before us are similar to the facts and issues decided by the coordinate bench in the first order for AY 2000-01 to 2004-05 dated 31/01/2013 in ITA No 3696 to 3700/Del/20109. The coordinate bench decided the issue as under :- "On merits : 127. We now proceed to dispose of the merits : Whether the 'roy....
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.... 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 of 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 sec. 9(l)(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 ....
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....ference 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 arguments of the assessee. iv. Equipment purchase agreement between the Tata Tele Services and Motorola Inc. dt. 8th Dec, 2007; v. Equipment purchase agreement between the Tata Tele Services and ZTE Corporation dt. 19th Feb., 2007. 138. In addition, certain clauses from the following two agreements are also extracted as reliance was placed on the same : i. MoU dt. 26th March, 2001 by and between Reliance and Qualcomm (Revenue paper book dt. 29th June, 2012) ii. Technical services agreement between Qualcomm and Reliance dt. 16th Oct., 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....
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....4 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 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, l....
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....diomodule 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-assembly. Components (page No. 271): 'Components' means application specific integrated circuits (ASIC's), electronic devices, 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 (p....
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....ervice providers in India but also to number of others in other countries. The license to manufacture products by using the patented intellectual property of the assessee has not been used in India as the products are manufactured outside India and when such products are sold to parties in India it cannot be said that OEMs have done business in India. 141. The Revenue heavily 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 : 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. OEMs carry out installation of equipment in India for the Indian Telecom operators; The entire supply of handsets and equipments though manufactured outside India are India specific and not off the shelf products which ca....
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....by Qualcomm are used by Motorola/ZTE for carrying out such installation activities in India. The next contention of the Revenue (is) that the patented technology is used by the OEMs to manufacture India specific products and that the handsets are customized and programmed to include a code 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 argument cannot be accepted for the following reasons : During the course of hearing it is admitted that handsets in question embody two technologies (a) technology with respect to the functionality of the handsets and technology with respect to CDMA connectivity. 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. The patents in question, on which royalty is sought to be taxed, have nothing to do with the functionality of the handsets. Functionality of the handsets may be customer specific or operator specific or India specific but technology with respect t....
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....iew the decision of the Andhra Pradesh High Court in the case Syed Asifuddin (supra) is not relevant. 144. Even otherwise, we are unable to understand as to how sale of India specific handsets can be a basis of coming to the conclusion that the OEMs are carrying on business in India. There are numerous patented IPRs belonging to not only 'Qualcomm- but also to a number of other parties, as well as the OEM's themselves and all these patented IPRs are used for manufacturing certain products which are sold to parties in India. The purchaser may have the option to choose 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. Technology for manufacturing products is different from products which are manufactured from the use of the technology for which Qu....
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....uments have no relevance for the years under consideration, on a perusal of these 2007 agreements we find that there there is no clause in both the agreements to support the contention of the Revenue that 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 art. 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 passed, 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 decisio....
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.... inasmuch as the assessee was entitled to and satisfy itself about the quality and standard of the machinery supplied. We do not see any substance in this contention. The various clauses in the agreement referred to above make it clear that the sale of machinery was FOB, 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....
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....ir, sea, inland waterway or by a combination of such modes. "Delivery" - The seller must deliver the goods to the carrier contracted in accordance with the contract of carriage or, if there are subsequent carriers to the first carrier, 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 Ineoterms-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 upto 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 i....
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.... The fact that the contract itself is signed in India or that the freight charges are borne by the importer would make no difference to the inference as was pointed out by the Hon'ble Andhra Pradesh High Court in the case of Addl. CIT v. Skoda Exports. The fact that the insurance risk was with the supplier before landing does not alter the situation. Acceptance test cannot also lead to a different conclusion as it was meant for ensuring that the supply conforms to the contract parameters. 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. Since the installation was also not undertaken by the assessee company, no income therefrom can be brought to tax. The issue whether the assessee had a PE in India during the year is academic in the light of the fact that the assessee has no business connection. 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. The decision of the Hon'ble Supreme....
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.... as follows : if supply agreement is taken as a standalone agreement, the property in the goods passes to the buyer outside India and hence not taxable in India. Sec. 19 of the Sale of 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 art. 13 of the supply contract/and provisions of art. 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 art. 13 have been given a go by. 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. 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 assessee had entered ....
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....s supplying CDMA handsets and equipment. 157. Applying these principles laid down in Ericsson's case (supra), 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 Incoterms 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 OEMs 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 learned senior 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 OEMs in India. Limb....
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....position is 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 Expln. IV to sec. 9(1)(vi) has been inserted. It was submitted that the argument that OEM sell copyrighted article or thing and the argument that they do not give any right in the copyright, 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. ....
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....ed in the chipsets. 170. Regarding the request made by the Revenue for remand of the case or 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 he 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 chipset and is an integral part of the chipset. Further, the chipset is embedded in the handset/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, decompile or disassemble the software furnished as object c....
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....s 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 chipset is only one part". Hence the argument 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 Ltd. (supra) and the jurisdictional High Court in the case of Havells India Ltd. (supra) have laid down that the source is the activity that gives rise 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 (supra) 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 directing power of the company was situated in England, the contracts of purchase and sale of the mining ....
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.... in later years i.e. in the financial years 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 JDMA technology. Revenue submitted that CDMA 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 following 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 thwart German wire interference. CDMA history can be directly linked back to the 1940s when this form of transmission was first envisaged. This technology has been used in many communication systems, including....
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....ating 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 CDMA 2000 and its enhancements." 185. In view of the above, it would be incorrect to say that Qualcomm is the owner of CDMA technology. What Qualcomm....
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....t is sale of the equipment is as a "chattel", the title of which gets transferred. The software is embedded in the chipset and the chipset is part of the equipment. Hence this argument is devoid of merit and hence cannot be accepted. 187. In the result this issue of taxability of the "royalty" paid by OEMs to the assessee is decided in favour of the assessee. Hence these grounds are allowed." (underline supported by us to show the various arguments covered by the bench.) 45. Therefore respectfully following the decision of the coordinate bench in assessee's own case for Ay 2000-01 to 2004-05, that royalty income of the appellant earned from OEMs situated outside India for the patents licensed to OEMS for manufacture of CDMA Network outside India we hold that same is not chargeable to tax u/s 9 (1) (vi)(c) of the ACT. [As the revenue is not chargeable to tax in India as per Income tax Act 1961 requirement of looking at the provision of article 12 (7) of Indo USA DTAA is futile. Accordingly, we allow ground No 1 and 2 of the appeal of the assessee. 46. Now we come to ground No. 3 of the appeal of the assessee with respect to revenue received by appellant under BREW operator a....
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....e cannot be anything else but royalty. There is a distinction between sale and license since in a sale no agreement is entered into between buyer and seller, however in case of licensing of software an agreement is entered into between copyright holder and the user. Grant of license is granting the user a right to use the software. The assessee's submission that in cases where rights acquired are limited and necessary only to enable the user to operate the program and allow the user to copy the program on the user's computer hard drive, payments would not be treated as towards royalty but as towards business income is not acceptable. The assessee itself agrees that payment is made for only the right to use the software and no other title or interest in the software is transferred to the payer. There is no transfer of ownership rights. Various decisions of the Supreme Courts and High Courts clarify that sales constitutes out and out transfer, whereas in license there is only right to use. Some of these decision are at 69 ITR 692 (SC), 236 ITR 314 (ASC), 811 ITR 243, 671 ITR 227. Thus this reasoning of the assessee has no legal or factual basis. In this case, the user o....
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....risation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence 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. 86. The Licensing Agreement shows that the license is nonexclusive, non- transferable and the software has to be uses in accordance with the agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only on....
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.... by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non -exclusive and non-transferable licence enabling the use of a copyrighted pro....
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....old/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub -licence or transfer the copy of software to any third party without the consent of Infrasoft. 93. The licensee has been prohibited from copying, de - compiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft. 94. The incorporeal right to ....
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.... The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software. 99. In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income.' 107. Learned Departmental Representative, even as he vehemently relied upon and supported the stand of the authorities below, could not point out any distinguishing feature in this case. 108. In view of the above discussions, and respectfully following the esteemed views of Hon'ble jurisdictional High Court, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned addition of Rs. 2,52,70.569. The assessee gets the relief accordingly." 47. Theref....
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.... (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. 6. Failed to appreciate that the royalty income earned by the Appellant 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 ho....
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....ide India for the patents licensed to the OEMs for manufacture of CDMA network equipment outside India. 3. Erred in framing the assessment order on the same set of arguments that have been considered in detail and adjudicated by the Hon'ble Tribunal in Appellant's own case for AY 2000-01 to AY 2004-05. Thus, the action of the Ld.AO in not following the order of the Hon'ble Tribunal without bringing any distishiguishable facts on record is untenable and bad in law. 4. Erred in holding that the OEMs like Alcatel, Nokia, Huawei, ZTE, LG, Samsung etc. have obtained license from the Appellant for their own business in India and the tax the royalty income of the Appellant under the deeming provisions of section 9(l)(vi)(c) of the Act. 5. 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 t....
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....wed. ITA No. 189/Del/2016 Assessment Year 2012-13 62. We now move to the ITA No. 189/del/2016 i.e. assessee's appeal against the order dated 29/10/2015 for AY 2012-13 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 bringing to tax, the royalty income received by the Appellant from the non-resident Original Equipment Manufacturers ('OEMs') under the Subscriber Unit License Agreement with the non-resident OEMs. 2. 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 bringing to tax, the royalty income received by the Appellant from the non-resident Original Equipment Manufacturers ('OEMs') under the Infrastructure Equipment License Agreement with the non-resident OEMs. 3. Erred in framing the assessment order on the same set of arguments that have been considered in detail and adjudicated by the Ho....
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....er 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 also grievance of the assessee, are the same. 64. 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 7 of the appeal of the assessee are allowed. 65. Ground No 8 is regarding initiation of penalty proceedings u/s 271 (1) (c) of the act, which is premature and hence rejected. 66. Ground no 9 of the appeal of assessee is that ld. DRP and the Ld. AO fell in error of violating the principles of natural justice by framing the assessment order without considering the Appellant's request for a detailed examination of facts/ technical aspects as directed by the Hon'ble Tribunal vide its order dated February 20, 2015. We dismiss this ground of appeal for the reason that f....