TaxTMI 
TaxTMI 
2023 (6) TMI 966
X X X X Extracts X X X X
X X X X Extracts X X X X
....the facts involved in both the appeals are common, for the sake of brevity, we will discuss the facts as involved in ITA No. 7894/Del/2017 for the assessment year 2014-15. 3. Briefly, the facts are, the assessee is a non-resident corporate entity incorporated in United States of America (USA) and tax resident of USA. As stated by the Assessing Officer, the assessee is a world leader in 3G/4G and next generation wireless technologies. The assessee holds a number of patents in the field of manufacture of subscriber units and network equipments capable of operating on Code Division Multiple Access (CDMA) technology. Basically, the assessee earns revenue from two divisions operated by it, viz., Qualcomm CDMA Technology (QCT) division, which develops and supplies CDMA based integrated circuits and systems software for wireless voice and data communication, multimedia functions and global positioning system products and Qualcomm Technologies Licensing (QTL) division, which grants license to manufactures of wireless products for the right to use qualcomm's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of cer....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in which CDMA technology is embedded, are utilized in India. He observed that handsets or equipments by themselves will be of no use unless the network service provider installs the infrastructure equipment. Further, he observed that in assessment years 2005-06 to 2008-09, the royalty paid by the OEMs to assessee was determined as royalty income at the hands of the assessee accruing and arising in India. The Assessing Officer observed, while deciding assessee's appeals on the issue, the Tribunal had restored the matter back to the Assessing Officer for reexamination after obtaining opinion of technical experts. He observed, in pursuance to the directions of the Tribunal, the Assessing Officer has obtained opinion of the technical experts, wherein, the technical experts have observed that OEMs are utilizing the CDMA technology by acquiring the chip set from the assessee and incorporating them in handsets manufactured by them. They further observed that technology is being used in India by the service providers for the benefit of the Indian customers. Thus, based on the assessment order passed for the assessment year 2012-13, the Tribunal's order for assessment years 2005-06 to 2008....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ents. He submitted, except in the case of OEMs who carry on business in India through PE, in respect of OEMs located outside India, the activity relating to accrual of royalty on the manufacture of subscriber units or network equipment, happens outside India. He submitted, royalty is payable by the OEMs to the assessee irrespective of whether OEMs receive the sale consideration. He submitted, royalty is payable to assessee even in cases where OEMs use the manufactured subscriber units and network equipments for their own use. Thus, the receipt of royalty by the assessee is independent of the recovery of sale proceeds by OEMs. He submitted, pay ability of royalty based on sale price is merely a measure of royalty and nothing more. 6. He submitted, the patents held by the assessee in the field of manufacture of subscriber units and network equipments are generic in nature, in the sense that, the subscriber units and network equipments can be used anywhere in the world and are not India-specific. He submitted, even the license agreement entered with foreign OEMs are not geography specific and foreign OEMs could sell the products anywhere in the world. Further, he submitted, the fun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as recorded that the enquiry is relevant only for the assessment year 2010-11 since, thereafter the locking of subscriber units stopped and the subscriber units available were open market handsets, which are not locked to any specific service provider. He submitted, the Assessing Officer has plainly placed reliance on the opinion of the technical experts without realising that the expert opinion was for the period 2010-11, after which open market handsets were launched in India discarding the old system of locking of subscriber units to any network carrier. Thus, he submitted, the report of the technical experts is of no consequence in so far as the present assessment years are concerned. 9. Without prejudice, he submitted, the technical opinions nowhere suggests that the locking of the subscriber units to the carrier has any connection with the patents of the assessee. Therefore, he submitted, the entire technical opinion analyses the technology that goes into manufacture of a chipset. He submitted, the chipsets are manufactured by the assessee and sold by OEMs. No license to manufacture chipsets is granted to any of the foreign OEMs, which are the subject matter of assessment.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....harge. Further, he submitted, in case of GVK Industries, Hon'ble Supreme Court has held that for the fees to be taxable in India, the services should be utilized in India. He submitted, in assessee's case, the patents were utilized in the manufacturing activities undertaken outside India by the OEMs and no evidence has been brought on record by the Revenue to prove otherwise. Thus, he submitted, since the issue is squarely covered by the decisions of the Tribunal in assessee's own cases, the additions should be deleted. 10. Learned Departmental Representative, in addition to the submissions made at the time of hearing, has furnished a written submission, which reads as under : "4. REVENUE SUBMISSION 4.1 It could be seen that the assessee mostly reiterated before the Hon'ble Bench the arguments as taken before AO/DRP, and also largely relied on the ruling of the Coordinate Bench for AY 2004-05 etc . However, based on the arguments of the Revenue in the same case during the course of hearing for I.T.A. Nos.: 3701 and 3702/Del/2009, 5343/Del/2010 and 4608/Del/ll Assessment years: 2005-06, 2006-07, 2007-08 and 2008-09 dated 20.02.2015 , a number of observations have ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and should not, take away our right, as indeed the corresponding duty, to ascertain the true facts in a comprehensive manner at this final fact finding forum. (ii) Observations of Hon'ble ITAT on Chargeabilitv of Use of patents as Royalty : Para-38. As the coordinate bench has very rightly held, and we are in full and considered agreement with the coordinate bench on that issue, as long as patents are used in the manufacturing process which has taken place outside India, such a royalty cannot have tax implications in India. Para-39. However, that is not the point here. As a careful analysis of facts before us would show, the subject matter of dispute, in our humble understanding, is the taxation of royalty in respect of use of patents in handsets which have been sold in India. It appears that the royalty which has been paid by the OEM of CDMA handsets is not only royalty for patents used in the manufacturing process, even if any, but predominantly, even if not wholly, for the use of the handsets so manufactured. That aspect of the matter is even more glaring when we realize that the royalty is charged on each handset sold or used and not each handset ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, the taxation should be in the tax jurisdiction in which manufacturing activity is carried on rather in the tax jurisdiction in which ultimate consumer of product is located. However, if the patent is used by the end consumer and the manufacturer of a product is only a conduit for collection of such a consideration for use by the end consumer, the taxation would be warranted in the end use jurisdiction. Para-58. It is in this light of the scheme of taxation of royalties as provided in Section 9(l)(vi)(c ), that we have to examine the contextual connotation of payment of royalties for any right, property or information used or service utilized use 'for the purpose of business or profession carried on' by a non-resident in India and 'for the purposes of making or earning any income from any source" by a non-resident in India. Para-71. We find that there is major change in the facts of the case before the coordinate bench vis-a-vis the facts of the case as before us. While there was nothing to suggest that the OEMs were subjected to tax in India in respect of their business income, and this was, as we have noted from the extracts reproduced earlier in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rged, and, to that extent, the case of the revenue authorities cannot be improved, there is no bar on examining all the related factual and legal aspects of the subject matter of issue before the Tribunal. The subject matter of dispute before us is taxability of royalty paid by the OEM to Qualcomm in respect of CDMA handsets sold in India. Whether this income is taxable under first limb of Section 9(l)(vi)(c) or in second limb of Section 9(l)(vi)(c), in our humble understanding, does not make much of a material difference so far as scope of proceedings before us is concerned. As the Assessing Officer held that the said royalty income was taxable under the first limb, he may not have seen any need to examine the application of the second limb of the same clause- though ideally he should have examined that aspect of the matter as well, but then, even if we are to hold that the said income is not taxable in the first limb, it would indeed be appropriate for us to examine remaining limbs of the same legal provision. In support of this proposition, we may refer to the following observations made by a Special Bench of this Tribunal in the case of Tata Communications Limited Vs JCIT [ (20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndia leading to their taxability in India. Directions in Para-75- However, in all fairness, as the issue regarding existence of the permanent establishments, in India, of the OEMs has been taken up for the first time before us, this aspect of the matter needs to be examined in detail, after giving assessee a reasonable opportunity of hearing and after confronting the assessee with all the material that the revenue authorities may gather in support of their claim, at the assessment stage. On this aspect of the matter also, the matter deserves to be remitted to the file of the Assessing Officer. Directions in Para-76- As we part with this issue, we may mention that the coordinate bench in assessee's own case had observed as follows: "A sale to India without any operations being carried out in India would amount to business with India and not business in India. For the business to be carried out in India there should be some activity carried out in India. Thus the argument that if manufacturing is done in one jurisdiction and sales in the other jurisdiction, then there is business in another jurisdiction is devoid of merit". We are in complete agreement with the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee with all such material as he may use against the assessee, by way of a speaking order. Directions in Para-97- As evident from a plain reading of Article 13(7)(b), in a situation in which the income of royalty does not arise under Article 13(7)(a) but "the royalties relate to the use of, or the right to use, the right or property, ..............in one of the Contracting States", the taxability of royalty in the source jurisdiction, i.e. the jurisdiction in which the property is ordinarily used, may arise. However, the taxability under this clause will essentially depend on whether the property, including intellectual property such as patent, design or model etc, for the use of which the royalty arises is actually in respect of the use in handsets and equipment or in respect of use in the manufacturing process. As we have already remitted the matter in respect of factual findings on this aspect we see no need to deal with this aspect of the matter any further at this stage. Directions in Para-98- It is in this backdrop that we decline to deal with, at this stage and in the light of the limited facts on record, the taxability of impugned royalties in terms of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dsets /equipments, (c) Where the technology is actually used, whether by the OEMs or by the Reliance or Tata being the end user, (d) Whether the handsets as made available by Reliance/ Tata in those years were India specific or these could be used in any other network globally. (e) Whether the CDMA Technology as developed by the Qualcomm is Whole-some technology and whether it can be broken down into the handsets and equipments. (f) Whether it can be said that Qualcomm had no role to play in the transfer of technology to India." Para 7.2 (Pg 31) Keeping in view of the Technical opinion and facts of the case for A.Y 2005-06 to 2008-09, the Royalty received by assessee from OEM's was treated as taxable as provisions of Section 9(l)(vi)(c) of the IT Act as well as Article 12(7) (b) of DTAA between India and USA. 4.4.2 (Ref. Assessment order Pas 43 to 951 Para-9 ............. In case of Huawei Technology Company Ltd China, Hon'ble ITAT in it's order dated 21.03.2014 in ITA No. 5253 to 5256/Del/2011 for A.Y 200506 to 2008-09 has categorically confirmed the existence of PE in India. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....For the Indian income tax assessment of the assessee we are only concerned with the revenues of QTL that to the extent they are sourced in India. Para-11.2 As per the business model adopted by the assessee "licensees typically pay a nonrefundable license fee in one or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property." Para-11.3 To determine the taxability of assessee's receipts under this revenue stream first thing which is required to be examined is the nature of receipts. The assessee enters into various types of agreements with the OEMs which enables the OEMs to use the Qualcomm's worldwide patents and I PR portfolio for the purposes of their business of manufacturing and selling various types of CDMA equipments, handsets and other smart phones based on Qualcomm's technology. The assessee has never submitted these agreements during assessment proceedings. However redacted versions of some of these agreements were submitted during appellate proceedings. Relevant portions of some of these agreements are reproduced hereunder:- DS-CDMA Technology Agreement ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....espect to any LICENSED PRODUCT which is sold or leased by such grantee to such customer, rights to use and resell such LICENSED PRODUCT as sold or leased by such grantee (whether or not as part of a longer combination); provided, however, that no rights maybe conveyed to customers with respect to any invention which is directed to(iv) a combination of such Licensed Product (as sold or leased) with any other product, (v) a method or process which is other than the inherent use of such Licensed Product itself (as sold or leased), or (vi) a method or process involving the use of a Licensed Product to manufacture (including associated testing) any other product. Notwithstanding anything to contrary contained above, (1) to the extent that Corporation's Patents are incorporated in the transceiver, Licensee may not have made any transceiver (in which Corporation's Patents are incorporated) unless (i) such transceiver is of Licensee design and specification (which design and specification is engineered by or on behalf of Licensee or (ii) Licensee has such transceiver made by a manufacturer licensed under the DSCDMA TA and (2) to the extent that Licensee Patents are incorporated in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cense from QUALCOMM to make and sell Subscriber Units and Infrastructure Equipment; WHEREAS, LICENSEE desired to obtain from QUALCOMM a license to use QUALCOMM's Intellectual Property (as defined below) and technical assistance necessary for the manufacture and sell Subscriber Units and Infrastructure Equipment (as defined below) and QUALCOMM desired to provide LICENSEE WITH SUCH license and technical assistance in exchange for the license fees, royalties and other provisions hereof, each in accordance with the terms and conditions set forth in this Agreement; and Definition of CDMA Enabling Infrastructure Equipment on Page No'QC000500 CDMA Enabling Infrastructure Equipment" shall mean the (i) CDMA selector associated with the vocoder bank (or other special implementation, including a switch implementation, of hard or soft handoff) which incorporates all or any part of QUALCOMM Intellectual Property, (ii) the CDMA controller, whether or not such CDMA controller is separate from or incorporated as part of the main Base Station controller, (Hi) distributed': antenna, meaning a multi-node antenna system and related circuitry (excluding the fair v....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... accordance with this Agreement and which are commercially necessary to use, make and/or sell Subscriber Units, Cordless Base Stations, Channel Units and/or CDMA Enabling Infrastructure Equipment, and any Improvements to any of such Commercially Necessary IPR developed or acquired during the Improvement Period; but the term QUALCOMM'S Commercially necessary IPR does not include any trade name, trademark, service mark or similar symbols, abbreviations, contractions or simulations identifying QUALCOMM (except as set forth in Section 9). "QUALCOMM's Technology Necessary IPR" means the following intellectual property of QUALCOMM: QUALCOMM's (and its Affiliate's) patents and patent applications (including divisions, reissues, renewals, continuations and continuations-in-part), copyrights, other intellectual property rights, trade secrets, know-how and technical information, including but not limited to that intellectual properly that is incorporated into the CAI, which QUALCOMM (or its Affiliates) has acquired and is in possession of as of the Effective Date, which QUALCOMM (or its Affiliates) has the right to license to LICENSEE in accordance with this Agreemen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... such license in accordance with the terms and conditions set forth in this Agreement. Definition on Page no QC000537 Channel Units means a Base station module(s) implementing any of Qualcomm's Intellectual Property with or without radio baseband functions and having one or more voice or data channels for communication between a Base Station and Subscriber Units. Common Air Interface or CAI means the technical description of Qualcomm's CDMA digital an interface specification for communication between cell site or other Base Station transceivers and Subscriber Units as may become adopted as a standard by the Telecommunications Industry Association (TIA) and other international standard bodies. Components means application specific integrated circuits (ASICs), electronic devices, integrated circuits, including firmware thereon, and/or families of devices intended for use in Subscriber Units and/or Infrastructure Equipment for Wireless Applications. Cordless Base Station means a residential device that provides wireless receive and/or transmit functionality to and/or from Subscriber Units, which incorporates all or any part of Qualc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the term QUALCOMM's Technically Necessary IPR does not include and trade name trademark, service mark or similar symbols, abbreviations contractions or simulations identifying QUALCOMM (except as set forth in Section 9). On Page QC000541 "Subscriber Unit License" means a complete CDMA and/or Dual Mode CDMA telephone, including but not limited to mobile, transportable and portable telephones, which incorporates all or any part of QUALCOMM Intellectual Property and can be used, without any additional equipment or components being attached thereto, to initiate and receive Wireless telecommunications transmissions. Clause 5 on Page QC000545 on Qualcomm License - Subscriber Unit and Cordless Base Station License. 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, QUALCOMM, on behalf of itself and its Affiliates, hereby grants to LICENSEE a personal, no transferable, worldwide and nonexclusive license (without the right to sublicense, except to Affiliates of LICENSEE as permitted in Section 5.3) to use QUALCOMM's Intellectual Property solely for Wireless Applicati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er units and infrastructure equipment. Standards Compliance Testing. LICENSEE represents and warrants that the Subscriber units and Infrastructure Equipment that it makes or has made will adhere with and conform to, in all respects, the specifications contained in the CAI and/or the standard for Wireless Applications adopted in the applicable country that such Subscriber Units and Infrastructure Equipment are being sold for use in and that LICENSEE shall comply with the rules, regulations or other requirements set by such authorized standards body. LICENSEE shall, at QUALCOMM's reasonable written request, permit QUALCOMM or entities designated by QUALCOMM and accepted by LICENSEE, which acceptance shall not be unreasonably withheld or delayed, to perform tests of LICENSEE'S Subscriber Units and Infrastructure Equipment to ensure compliance and conformity with the CAI. If such tests indicate maternal noncompliance or nonconformity therewith, such tests shall be at LICENSEE cost and LICENSEE shall reimburse QUALCOMM for any such reasonable tests performed by QUALCOMM at QUALCOMM's Costs plus a twenty percent (20%) foe of the Costs. Nonconforming Subscriber Units ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thod for generating signal waveforms in a CDMA cellular telephone system U.S. Patent No. 5103459 Issued: April 7, 1992 Title: High dynamic range closed loop AGC circut U.S. Patent No. 5107225 Issued: April 21,1992 Title: Diversity Receiver in a CDMA cellular telephone system U.S. Patent No. 5109390 Issued: April 28,1992 Exhibit Don Page QC000568- Certificate Contract between Qualcomm Incorporated and LICENSEE for the License of Certain Technology for the Manufacturing and Sale of Certain CDMA Subscriber Units on Page No QC000572 to QC000628 Dual-Mode Subscriber Station (DMSS) Software: The DMSS Software controls the operation of QUALCOMM's Subscriber Unit Reference board incorporating QUALCOMM'S MSM CDMA ASIC. It is written in C and runs under the REX operating system on the ARM microprocessor that is contained in QUALCOMM's MSM CDMA ASIC. Specific release of DMSS Software to be selected by Licensee. Para-11.4 Analysis of the above Extracts I. Qualcomm holds 'patents"- which is defined in the Definitions Appendix on page QC000408 to mean every patent issued in any country of the world. Such patents are technically and commerc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es from the, agreements under consideration regarding the taxability of income,' source of income as well as correct XI. quantification of the income (Licensee and/or its affiliate may be Indian entity; the "Affected Country" as appearing in certain places may be India) Para-11.5 From the above analysis it is clear that receipts of the assessee under this revenue stream is income arising out of licensing of various Patents and IPRs belonging to Qualcomm and is received from various OEMs. This clearly falls under the definition of Royalty under Explanation 2 to section 9(i)(vi) of Income Tax Act 1961 as well as under Article 12 of India - USA DTAA. The assessee also recognizes this receipts in its books of accounts as Royalty income only. Thus, there remains no dispute on the characterization of income under this revenue stream. It is undisputed as Royalty both under the Income Tax Act 1961 and under India - USA DTAA. What remains to be examined is as to whether this royalty income falls in any of the sub clauses of section 9(i)(vi) which are reproduced as under:- "(vi) by way of royalty payable by- a) the Government; or b) a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(vi0(c) of the Act are payment based taxations. The language employed in section 9(l)(vi) is used for the purpose of in contra distinction to "utilized in the business" as appearing in section 9(l)(vii)(c). The property maybe used anywhere i.e. in or outside India, but the use should be for the purpose of business or profession carried on in India and for the purpose of earning income from a source in India. The situs of the use of the property is not material what is material is the purpose of the use of the property, whether it is for business carried on in India or for a source in India. Para-11.10 For applying these tests on the facts of the instant case the foremost requirement is the names and residential status of the OEMs who have Patent licensing agreements with the assessee. Section 9(1) (vi) (c) - Payment from one NR to another NR In respect of any right, property or information used For the purpose of business or profession carried on by the latter in India Or For earning any income from any source in India The import of the above is that the/payer-AIR must have a business or any source of Income in India. Para-11.11....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Act. The use of technology by QCOM in India or use of technology by OEMs in various other jurisdictions has no relevance or consequence for the purpose of applicability of section 9(l)(4(c) of the Act. g. That when handsets and equipments are manufactured for use of a specified service provider, then the OEMs have used the technology for the purpose of carrying on business in India. h. The license for use of technology embedded in a hand set/equipment is also granted to specific operators in India under the agreement and hence it is used by the OEMs for manufacturing India specific supplies. i. On the Assessee's argument that sale to different jurisdictions cannot be considered as a source i.e. each party to whom a product is sold by the manufacturer cannot be regarded as a source, it was submitted that this is of no consequence for the reason that products manufactured by the OEMs are not standard products which are sold anywhere and everywhere. Besides, one may have different source of income lying in different jurisdictions if the supplies differ in technical specifications, customization and are location specific. j. Regarding the taxabil....
X X X X Extracts X X X X
X X X X Extracts X X X X
....during the A.Y. 201011, which were also followed while completing the assessment for the AY 201112 too. All the following OEMs listed below have paid Royalty to the assessee and a portion of that pertains to the sale of handsets/equipments in India. Most of the above foreign companies (OEM's) are same with the list of companies from whom India specific Royalties are received by the assessee for the current relevant period too. During the course of assessment the AR also submitted some of the copies of agreements (although redacted versions) of all companies who are paying Royalty to Qualcomm for sale of equipments/handsets in India (other than those companies which are already on record, which were submitted by the assessee before the CIT(A) and also produced before the ITAT). However, during the course of assessment the AR confirmed that these agreements are in operation during the subject A. Y. AR also submitted the details of these OEMs from which it is seen that all the OEMs are Non-residents although some of them are having their Indian subsidiaries registered and doing the business in India. The relevant extracts of those letters sent to the various AOs in during the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... respect of the sale of mobile Yes, Ericsson AB has a PE in India in respect of the sale of equipments in the form of 2. Whether the Ericsson AB is manufacturing mobile handsets/equipments in India. Ericsson AB is not manufacturing equipments in India. However, EIL manufactures equipments in India. 3. How the sale of mobile handsets/equipments in effected in India whether through PE or subsidiary or direct Ericsson AB sells the equipments to EIL and to the Indian Cellular operators directly also. 4. Whether the co. has a business connection in India & in what form. Yes the co. has a business connection in India and a PE in India in the, form of Ericsson., India Ltd. The sale of equipments is attributable to PE directly. 5. Please also provide the last assessment order of the Ericsson AB assessed in your charge. Copy of the Ericsson AB assessment order for the A. Y. 08-09 is attached herewith a The reply of AddL. DIT Range 3 International Taxation, New Delhi is reproduced as under In this regard, on the basis of records available, this is to submit that Huawei Technology Company Ltd. manufactures and supplies GSM equipments. Further, as d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ution lnc. Assessed in your charge. Copy of the Motorola Solution Inc. assessment order for the A.Y. 08-09 is attached herewith q. The reply of DDIT Circle 2(2) International Taxation New Delhi is reproduced as under In this regard, on the basis of records available, this is to submit that, Samsung Electronics Ltd. manufactures and supplies GSM equipments. Further, as desired, kindly find the information as under S. No. Query Reply 1. Whether the, Samsung Electronics Ltd. has a PE in India in respect of the sale of mobile handsets/equipments Yes, Samsung Electronics Ltd., has a PE in India in respect of the sale of.... 2. Whether the Samsung Electronics Ltd. is manufacturing mobile handsets/equipments in India. Samsung Electronics Ltd. is not Manufacturing 3. Now the sale of mobile handsets/equipments in effected in India- whether through PE or subsidiary or direct. Samsung Electronics Ltd. sells the equipments to Samsung Electronics India Pvt. Ltd. through which 4. Whether the co. has a business connection in India & in what form. Yes, the co. has a business connection in India and a PE in India in the form ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat form. Yes, the co. has a connection in India and a PE in India in the form of Indian Subsidiaries t. In this regard, on the basis of records available, this is to submit that, Nokia Siemens Networks OY. manufactures and supplies GSM equipment S. No. Query Reply 1. Whether the, Nokia Siemens Networks Oy. has a PE in India in respect of the sale of mobile handsets/equipments Yes, Nokia Siemens Networks Oy.., has a PE in India in respect of the sale of equipments in the form of Nokia Siemens Networks India pvt. 2. Whether the Nokia Siemens Networks Oy. is manufacturing mobile handsets/equipments in India. Nokia Siemens Networks Oy.is not manufacturing equipments in India. 3. Now the sale of mobile handsets/ equipments in effected in India - whether through PE or subsidiary Nokia Siemens Networks sells the equipments to Nokia Siemens Networks India pvt. ltd. and through 4. Whether the co. has a business connection in India & in what form. Yes, the Co. has a business connection in India and a PE in India, in the form of Indian Subsidiary The facts narrated above makes it clear that the OEMs manufactured the equipments after....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at of the last year. Further, no details/deception regarding the changed/new clauses of the amended agreements vis a vis the earlier/original agreement, have been filed. Accordingly, the verifications made and information gathered by the AO for the A. Y. 2011-12 & 2010-11, are relied upon for the current assessment proceedings also. Para-11.12. Whether OEMs have source of income in India a. The agreement between the OEMs and the Indian operators demonstrate in no uncertain terms that what is sold by them is the hardware and the not the software embedded therein. b. OEMs are not only supplying the equipment but they are licensing the software, the ownership of which is not transferred to the operators in India. The software is licensed for the use of the operators. Thus, the intellectual property for which the payment is made by OEMs to Qualcomm is licensed for Use in India which yields income and becomes a source of income for the OEMs. c The two agreements which Indian operators entered with Motorola and ZTE make a categorical difference between the sale of the equipment and licensing of the software embedded in the firmware. The Indian operator....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dded in the hardware under a license from OEMs. h. There is no dispute on the fact that the patent portfolio of Qualcomm is licensed to the OEMs. This patent portfolio mainly consists of the essential patents required to manufacture any handset/equipment, which will be compatible in CDMA network environment. Qualcomm owns all essential patents for CDMA . It is not clear so far from the facts gathered as to where these patents are used. They are definitely used by the OEMs in their business in India at the point of manufacturing of handsets/equipment. The CDMA equipment is installed in India. The CDMA handsets are sold in India. Both are separate hardware items in which essential CDMA patents owned by Qualcomm are used. Both need to communicate to each other for making the CDMA system functional. This communication is not possible without the use of some appropriate technology. Without this technology the CDMA system cannot function or rather it cannot achieve the purpose for which it is meant. Whatever be the name of this technology, it has to be patented and should form part of the essential patents required for making the CDMA system functional. Undoubtedly, such technol....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... l. The source of income in terms of monies received is in the form of the Indian carriers. Such source, in terms of spring or fount from which a clearly defined channel of income flows- or activity giving rise to income, can also be traced to India in form of supply of equipments having CDMA technology to the Indian carriers. The activity includes the whole gamut of operations starting from manufacturing and ending in the installation/commissioning/sale of the CDMA equipment. Therefore there exists sufficient nexus between the activities of the OEMs and the Indian Territory so as to qualify the definition of source of Income. Para-11.13. whether the title passes in India or outside India a. Section 19(1) of the Sale of Goods Act provides in a contract for the sale of goods, the property is transferred to a buyer at such time as the parties to the contract intend it to be transferred. However section 19(2) of the Act provides that for the purpose of ascertaining the intention of the parties, regard shall be had to; i. the terms of the contract; ii. the conduct of the parties; and iii. the circumstances of the case b. The co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the risk and title would go together. In the present case, the terms of the agreement read as whole and the conduct of the parties go to indicate that the terms indicated in clause 14.1 do not demonstrate the true intent of the parties. The fourth preamble to the agreement on page 2 of the agreement provides that buyer has asked the supplier to supply/deliver the "equipment in full and guaranteed working condition to the full satisfaction of TTSL". This condition of the supply cannot be met if the goods are delivered on High seas. The "full satisfaction" can be reached only in India after the provisional acceptance. Clause 2.8 of the agreement on page 3 defines the scope of the supplies and includes various task including, network planning and RF optimization. The provisional acceptance is referred to in clause 4.1 of page 16 to define the supplier's obligation and clause goes on to provide that the supplier shall manufacture, supply, deliver, all the equipment "to achieve provisional acceptance and final acceptance of the equipment in accordance with schedule A". This clause further indicates that supplies and delivery of equipments is subject to achieving provisional acceptan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed the deliverable state only when their compatibility with existing network is established through the provisional or final testing. The supplier has definite obligation to achieve this milestone and unless this is done the property cannot pass. Unlike other kinds of overseas supplies where the supplier has no other obligation beyond the point of shipment, in the present case, the obligation of the supplier extends to the geographical limits of India where he has to put the supply into a deliverable state. In CDMA technology, handsets and equipment are integral part of the wholesome technology and these cannot be viewed independently. i. In view of the above, there is no room for any doubt that the title to the goods has passed in India despite the declaration in clause 14.1 to the contrary. In this scenario, it is not open to argue that OEMs do not carry out business in India. If one leg of the business operations is in India and other is in Korea, it cannot be said that OEMS carry business only in Korea and not in India. j. It is evident that the OEMs have used the property for the purpose of carrying out business in India and the first limb of 9(l)(vi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... deployment including Radio network optimization 3. Setting up and running a specific team In R&D Organization exclusively for TTSL for CDMA Equipment research and evaluation in order to improve services; 4. Ensuring that the Equipment supplied/ to be supplied will support prepaid and postpaid convergence feat res: 16 ether with other network elements required in TSNL network e.g. HLR&IN and up gradation thereon from time to time during the Term of this Agreement; N. It is necessary to decide whether property in goods has been transferred to buyer to determine rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in goods passes, risk also passes. The clause 14.1 of agreement says Extract from Contract Without prejudice to TTSILs right to reject as set forth in article 6.4 of this agreement the title of all equipment sold hereunder shall pass from TTSIL in high seas before arrival in India and the risk of loss to the hardware portion of all equipment shall pass from supplier to TTS1 upon provisional acceptance. m. It is seen that title of all Equipment sold was to p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is deemed to have accrued or arose in India and therefore taxable in India Para-12. UNDER THE INDIA- USA DTAA Article 12 of the India-US DTAA defines royalty as follows- 3. The term 'royalties" as used in this article means: payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or. scientific experience, including gains derived from the alienation of any such right or properly which are contingent on the productivity, use, or disposition thereof; and Para-12.1. Applicability of Article 12(7) (b) - Indo- US DTAA The definitions of term "royalty" as appearing in Explanation 2 to section 9(1)(4 and paragraph 3 of Article 12 of lndo-US DTAA are identical. The relevant article 12 (7)(b) is reproduced as under.:- "Where under sub-paragraph (a), royalties or fees for included serv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he technology developed by QUALCOMM which is also required for their installation and commissioning. Therefore OEMs use of QUALCOMM technology extends very much into the territory of India where these equipments are installed. [Please refer to the relevant clauses in the Agreement between equipment OEMs and Qualcomm wherein Qualcomm is required to render requisite technical support to OEMs as and when required.] Para-12.6 The Indian carriers also use the design and technology owned and developed by Qualcomm for their network operations in India. This is done by way of procurement of various components of CDMA Architecture and installing those equipment and then running and maintaining them. Here, Qualcomm's involvement does not stop with granting license for its technology to OEMs. Qualcomm goes a step further and provides a gamut of technical assistance to the India carriers in their business of setting up and operating the CDMA based wireless communication business. This is evident from the Technical services Agreement between Indian carders and Qualcomm and also the MOU furnished in the paper book. Para-12.7 The use of licensed material is further ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompanies, private fleets, construction equipment fleets and other enterprise companies. (d) Qualcomm Strategic Initiatives (QSI) - QSI manages the Company's strategic investment activities, and makes strategic investments to promote the worldwide adoptions of CDMA-based products and services. Para-12.10. Perusal of earlier year assessment orders would show that the AO observed that two important streams of the assessee's income are 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 licenses to manufacture of wireless products for the right to use Qualcomm's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products. AO sought to tax revenues of these units and quantified it in form of income from CDMA handsets and CDMA infrastructure equipments. Attention is invited to the profile of QCT which develops and supplies CDMA-based ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rst shipment, invoicing or putting into use, which ever shall first occur. Notwithstanding the forgoing, a Licensed Product shall not be deemed to have been sold by Licensee For purposes of paying royalties to Qualcomm under this Agreement until such time as such Licensed Product 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." 5. It has been stated that the definition of sale could mean invoiced, shipped etc_ and sale would occur upon the first such occurrence. The fact that sale means invoiced shipped etc. by itself implies that a party has been recognized to which the goods are invoiced or shipped. In this case, unless the OEM has raised a bill/shipped 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 custom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccrue or arise in India. Consequently, it is not under dispute that the Article 12(7)(a) of the India-USA tax treaty is irrelevant for the purposes the present assessment. Article 12(7)(b) of the treaty provides as follows: "Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, MO: right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State." Qualcomm wishes to submit that for the royalty to relate to the use of or right to use the right or property in India, the agreement between Qualcomm and the OEM should: a) Be confined to India or (b) India should be one of the countries where the right or property must be specified as being used. In Qualcomm's case, neither of the aforementioned conditions is satisfied. Hence, the royalty cannot be regarded to have deemed to arise in India. In light of this, it is submitted that Article 12(7) does not apply in Qual....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s whether such non resident has PE in India or not and whether there is any exclusion in the respective treaty etc. Source of income is distinct from the place of accrual of Income. In the case of Ericsson, the other issue before the Hon'ble Delhi High court was whether the income from the supply contract can be treated as 'royalty' under section 9(l)(vi) read with Explanation 2 of the Act. But in the present case the nature of payment is not in dispute. The royalty is paid by a non resident to another non- resident, which would be taxable under clause (c) of section 9(0(vi) and not under clause (b) of S. 9(0(4 of the Act. Para-13.3 Further, in the case of Ericsson, the fact that the title of the goods passed outside India was not in dispute whereas in the present case it is under serious dispute. In the case of Ericsson, it was an admitted position that installation and commissioning of the equipment was done by two separate corporate entities where as in the present case it is still in dark who did the installation and commissioning of the equipment. The mere fact that the agreement does not cast obligation for installation and commissioning on the OEMs does ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rent in this case. While in Nokia or Ericsson. The nature of income being Royalty was in dispute here, there is no dispute that the income is by way of royalty. In Nokia or Ericsson taxability of OEMS in India was under dispute but in the case of assessee the taxability of licensor'sn of OEMs is in dispute. The scope of sub section 9(1)(i) and 9(1)(vii) are entirely different. Hence a decision which is wholly out of context is sought to be pressed into service. The taxability of licensor may arise even if the OEM is not found to have PE in India (and hence not taxable). The taxability under 9(1) (vi) depends,6n the 'intellectual property being used for a business be taxable in the hands of OEM due to non-existence of PE etc. 7. A look at the facts in the case of the assessee goes to indicate that Qualcomm is deriving income from license of patented technology. The use of Copyright (as in the case of Nokia/ Ericsson) not being even remotely suggested. 8. Unlike Copyright Act, the Patents Act 1970 defines not only "patent" but also "patented article" and 'patented process" to mean respectively an article or process in respect of which a patent is in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee to rely on cases pertaining to software and draw distinction between Copyright and Copyrighted article when, according to their assertion, their case is in the realm of patents which is an altogether genre of intellectual property. 13.Had it been the case of the use of patent, the Hon'ble High Court of Delhi could not have reached the same conclusion as it did in the case of Nokia (or Ericsson). Para-14.1. Reference is also invited to Nokia Special bench decision wherein inspite of title being passed outside India, PE/BC was upheld considering the activities of Indian subsidiary in Network planning Marketing and installation. In the case of OEMs and Indian carder, installation is done by OEM recommended and approved party therefore responsibility lay with OEM and network planning is also done by OEM along with a host of other activities set out in Supplier's scope. Para-14.2 In the impugned case, the question under review is whether the Non-resident payer has business /source of income in India and whether Qualcomm is earning royalty from use of technology, which is patented in its name, in India. So, we have to answer two qu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a. The agreement says that the assessee has developed certain proprietary code division technology which may be useful in providing greater capacity, higher data rates and improved quality and reliability compare to other cellular wires technologies and it manufactures and sells CDMA components and equipments. b. It explains that CDMA Access Point means a complete device which (i) incorporates all or any part of Qualcomm's Intellectual Property,(ii) connects to CDMA network infrastructure equipment over a CDMA wireless network utilizing a wireless air interface in compliance with the CAI, (Hi) does not incorporate a speaker or keypad c. It explains that CDMA means either a complete module, modem car, or other electronic assembly (a "Module") which (a) incorporates all or any part of Qualcomm's Intellectual Property, and (b) solely when embedded within, coupled with, or connected JO a 'Communications Device, is capable of being used to implement wireless communications transmissions in mince with any wireless air interface standard include/id in the definition of CAI. d. It explains that Embedded application means the use of any assembly, mod....
X X X X Extracts X X X X
X X X X Extracts X X X X
....appeals on technical ground but not on merit. Thereafter the assessment orders for assessment years 2014-15 and 2015-16 dealt with in detail the compliance of the Hon'ble ITAT directions taking into a account the technical experts report, the additional facts and the applicability of both the limbs of section 9(l)(vi)(c) in regards to OEMs business in India and income on from a source located in India, and also on the issue of applicability of Article 12(7)(b) of the Indo-US DTAA. Therefore, during the course of the current hearing the revenue vehemently, argued before the Hon'ble Bench regarding taxability of Royalty income received by the appellant towards sale of handsets in India to the Indian customer/the service providers, by relying on the aforesaid sets of facts and law. 4.6 During the course of hearing, in response to Hon'ble Bench's specific query to explain is to how the transaction leads to earning of Royalty by the applicant from a non-resident for the purpose of making or earning any income from any source in India, it is submitted that the source of income is always link to the source of payment to complete a transactions. The Hon'ble Sup....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s ultimately used in India by subscribers, the royalty connected to such patent would be taxable in India as the OEMs selling the subscribers units/equipments have PEs in India. 12. From the facts on record, it is evident that the assessee has offered the royalty income in respect of OEMs having PEs in India. In so far as the other OEMs located outside India are concerned, the Assessing Officer has not brought any material on record to demonstrate that they have PEs in India. While treating the royalty income received from foreign OEMs as taxable in India, the Assessing Officer has applied section 9(1)(vi)(c) of the Act. On a careful perusal of the impugned assessment order, it becomes very much clear that except relying upon the assessment order passed in case of the assessee for the assessment year 2012-13 and the report of technical experts obtained by the Assessing Officer while complying to the directions of the Tribunal in assessee's case for the assessment years 2004-05 to 2008-09, the Assessing Officer has done precious little himself to establish accrual of royalty income in India. In fact, the assessment order clearly reveals that his entire decision making process, wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich arises is, whether that technical report can be utilized for deciding the issue in the impugned assessment years. Considering the submission of the ld. Counsel for the assessee that locking of CDMA subscriber units to make it India-specific or network carrier-specific, was discontinued in assessment year 2010-11 and thereafter, subscriber units available were open market handsets not locked in any specific service provider, in our view, the report of the technical expert do not have any relevance in so far as the impugned assessment years are concerned. In any case of the matter, the assessment order makes it clear that driven by the assessment order passed for the assessment year 2012-13, the Assessing Officer has concluded that the royalty income received from OEMs located outside India is taxable in India. Pertinently, while deciding the appeals for the assessment years 2009-10 to 2012-13, arising out of ITA No. 5353/Del/2012 & others, in order dated 16.04.2018, the Tribunal, having taken note of the relevant facts and earlier decisions on the issue, has held that the royalty income received from OEMs located outside India is not taxable in India. For the ease of reference,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 arguments of the assessee. iv. Equipment purchase agreement between the Tata Tele Services and Motorola Inc. dt. 8th Dec, 2007; v. Equipment purchase agreement be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bscriber 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 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 license....
X X X X Extracts X X X X
X X X X Extracts X X X X
....plete 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 subassembly. Components (page No. 271): 'Components' means application specific integrated circuits (ASIC's), electronic devices, multi-chip module....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ut 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 our view 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ied 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. Though these documents 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 agre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ason 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. According to him, the sale was completed only in India, inasmuch as the assessee was entitled to and satisfy itself about the quality and standard of the machinery suppli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f 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 who, in a contract of carriage, undertakes to perform or to procure the performance, of transport, by rail, road, air, sea, inland waterway or by a combination of such ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or supply of telecommunication systems. These were installed and commissioned in India by two sister concerns of Ericsson, one being a branch of nonresident 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 goods reached the Indian shores and hence no profit could accrue to the non-resident. Sec. 19 of the Sale of the Goods Act would have application. The fact that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 and the same was taxed as royalty both under sec. 9(l)(vi) and under art. 12 of DTAA between India and Finland holding that software was not sold but lic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 the supply contract entered by the Ericsson and Nokia for supply of GSM equipment. Hence, we are of the view that the propositions lai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ensing 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 of 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 was argued that OEMs have given license to use chip sets/ASICs purchased from Qualcomm in manufacturing the handsets/equipment. It was ar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ftware may have been self- generated 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 that the income, of QCT division from the sale of chipsets is not assessable and that the assessment is confined to the income received ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es 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 software is only used with the hardware and is not independent of the equipment or the chipset. Further, no separate consideration is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 whether the royalty paid to Qualcomm by OEMs can be taxed in India under art. 12(7)(b) of the DTAA between India and USA. 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....munication 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/rf- technology design/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 2G CDMA technology. The participating associations are five officially recognized Standard Development Organizations (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 that are used by us in our daily life. A TV remote or an AC remote have wireless technology and it transmits signals between two points. Many other devices such as washing machines....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate 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 understanding operating systems. It was also noted that end users of BREW customers are the carriers who pay an enablement fees based on device sales or a revenue share for applicat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at 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 case of DIT v. Infrasoft Ltd. [2014] 220 Taxman 273/[2013] 39 taxmann.com 88 wherein Their Lordships have, inter alia, observed as follows: '85. The Licensing Agreement sho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iliated 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 such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 facility, the licensee has no right to deal with the product just ast he owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ter 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. 95. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 96. 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 material and the same does not give rise to any royalty income and would be business income. 97. We are not in agreement with the decision of the Andhra Pradesh High Court ....