TaxTMI 
TaxTMI 
2025 (12) TMI 1279
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....ience. 2. The assessee has raised the following grounds of appeal for AY 2022-23:- "1 The Learned Assessing Officer ("Ld. AO") erred in not passing the final assessment order within the time limit prescribed under section 153 of the Act which is the outer time limit for passing the final assessment order and hence, the assessment proceedings are already time barred and liable to be quashed. 2 The Ld. AO erred in making additions to the total income of the Appellant for the subject AY in respect of royalty income received by the Appellant from the non- resident Original Equipment Manufacturers ('OEMs')/ licensees from sale of licensed products under the Patent Licensing Agreement as per provisions of section 9(l)(vi)(c) of the Income-tax Act, 1961 ('the Act') and Article 12(7) of India-US Double Taxation Avoidance Agreement ('tax treaty'). 3 The Ld. AO erred in applying the provisions of Article 12(7)(b) of India-USA tax treaty for bringing to tax, the royalty income received by the Assessee from the non-resident OEMs/ licensees without appreciating the fact that the patents are used in a contracting state outside of India. ....
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.... INR 30,28,211. 10. The Ld. AO erred in levying interest under section 234B and 234C of the Act. 11. The Ld. AO erred in law on initiation of penalty proceedings under section 270A of the Act." 3. Ground Nos. 2 to 7 raised by the assessee in the original grounds of appeal related to taxability of royalty income received by the assessee on subscriber unit from Original Equipment Manufacturers (OEMs) located outside India and royalty income on infrastructure equipment. 4. We have heard the rival submissions and perused the material available on record. The assessee is a world leader in 3G, 4G, 5G and next generation wireless technologies. Qualcomm Incorporated includes Qualcomm's licensing business, QTL and the vast majority of its patent portfolio. QTL grants licenses or otherwise provides rights to use portions of our intellectual property portfolio, which, among other rights, includes certain patent rights essential to and / or useful in the manufacture and sale of certain wireless products, including, without limitation, products implementation, CDMA 2000, WCDMA, CDMA TDD and / or LTE standards and their derivatives. The return of income for AY 2022-23....
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....rt in the case of Havells India Ltd supra had already been considered by this Tribunal in assessee's own case for AY 2000-01 to 2004-05 dated 31.01.2013 supra. The relevant observations of the Tribunal order dated 31.01.2013 are reproduced herein:- "176. Coming to the argument that the Indian telecom operators in India constitute a source for the OEMs, the Privy Council in the case of Rhodesia Metals Limited Vs. CIT (Supra) and the jurisdictional High Court in the case of CIT Vs. Havells India Limited [ITA No.55/2012, ITA 57/2012] have laid down that the source is the activity that gives raise to income. In the present case, the right property or information licensed to OEMs relates to the manufacture of the products and hence the source of royalty is the activity of manufacturing. Though cited by the Revenue, Rhodesia Metals in our view entirely supports the Appellant's case. In that case, Rhodesia Metals Ltd. carried on the business of developing mines in Southern Rhodesia and then selling rights therein. The head seat and directing power of the company was situated in England, the contracts of purchase and sale of the mining rights were entered into in England and the c....
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....count the queries send by the ld AO to OEM and the reply given by OEMs had categorically held that all these enquiries were made by GSM handsets whereas the assessee herein is in CDMA Technology. This distinct finding has been duly observed by the Tribunal in assessee's own case for AYs 2014-15 and 2015-16 dated 13.06.2023 reported in 153 taxmann.com 146 and for AYs 2009-10 to 2012-13 reported in 93 taxmann.com 80. The relevant observations made by this Tribunal vide order dated 16.04.2018 for AYs 2009-10 to 2012-13 reported in 93 taxmann.com 80 in this regard are reproduced hereunder:- "40. In the present case, the Id DR has not filed any additional evidences as filed in the second order of the ITAT for AY 2005-06 to 2008-09 about the assessment of the OEMs for the year AY 2009-10 to AY 2012-13. No other evidences or judicial precedents were also cited before us to show the taxability in the hands of OEMs in India as shown in para no 69 of the second order of ITAT. According to sub-cl. (c) of sec. 9(l)(vi) of the Act, in case of a nonresident, the burden is on the Revenue to prove that the royalty is payable in respect of any right, property or information used or service....
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....eliance Retail Limited 25,65,02,548 6 Vivo Mobile India Private Limited 5,28,78,58,032 7 Bharat FIH Private (Formerly known as Rising Stars Mobile India Pvt Limited) 33,51,209 Total 22,54,98,14,260 5. The assessee was also in receipt of further receipts which were not offered to tax as tabulated under:- S.No. Nature of Receipt Payer Details Amount(INR) Taxability as per assessee 1 Exempt Income from licensing of Patents Innominds Software Pvt Ltd 46,296 As per the provisions of any payment made by a resident, for royalty in respect of any right, property or information used, o.rservices utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside india would not betaxabie in India. 2 Royalty income Non-resident OEMs, who have reported their sales from India (no details given by the assessee) 80,06,96,914 As these Non-resident OEMs have no manufacturing in India Total 80,07,43,210 6. In response to the queries raised by the learned ....
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....,96,914/- to be brought to tax at the rate of 10% as per section 115A of the Act . The Learned AO also observed that the same would also be taxable at the rate of 10% in terms of India USA Tax Treaty. 9. The Learned DRP by placing reliance on its findings recorded in assessee's own case for the Assessment Years 2014-15 and 2015-16 and facts being identical in this year, repeated the same directions that were given in Assessment Year 2014-15 by rejecting the contentions of the assessee. Pursuant to the directions of the Learned DRP, the final assessment order stood passed in the hands of the assessee company determining total income at Rs 2335,05,11,174/- to be taxable at the rate of 10% plus surcharge and cess in terms of India USA Tax Treaty. Aggrieved, the assessee is in appeal before us. 10. We find that the Learned DRP had relied on the findings recorded in Assessment Year 2014-15 in assessee's own case. This Tribunal in Assessment Years 2014-15 and 2015-16 in ITA Nos. 7894/Del/2017 and 7559/Del/2018 respectively dated 13-6-2023 reported in 153 taxmann.com 146 (Del Trib) had decided the very same issue in favour of the assessee by holding that the royalty inco....
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....sed in the assessment year 2012-13 and the report of the technical experts relating to the assessment year 2004-05 to 2008-09. 13. It is relevant to observe, identical issue of taxability of royalty income received from OEMs located outside India came up for consideration before the Tribunal in assessee's own case for the assessment years 2000-01 to 2004-05. While deciding the issue, the Tribunal held that royalty received from OEMs located outside India is not taxable in India. However, when identical nature of addition again came up for consideration before the Tribunal in assessee's own case for assessment years 2005-06 to 2008-09, the Revenue filed certain additional evidences before the Tribunal to demonstrate that certain OEMs have PEs in India and are being assessed to tax in India. Based on the additional evidences filed by the Revenue, the Tribunal restored the issue of taxability of royalty income to the Assessing Officer for re- examination after obtaining report of the technical experts. 14. On carefully going through the two orders of the Tribunal in assessee's own cases, one for assessment years 2000-01 to 2004-05 and second one for the a....
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....erefore 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 'royalty' income earned by Qualcomm from OEMs is taxable under sec. 9(1)(vi)(c) of the IT Act 1961 : The issue in question is whether the said "royalty" is taxable under sec. 9(1)(vi)(c) of the Act. For ready reference sec. 9(l)(vi) of the Act is extracted below. "(vi) income by way of royalty payable by-- The Government; or a person who is a resident except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or a person who is a non-resident where the royalty is payable in respect of any right, property or information used or services uti....
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.... 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 the patented IPs to the Indian telecom operators for commercially exploiting the CDMA technology in India. In our view neither the AO nor the CIT(A) have demonstrated, that for the years under appeal, the OEMs have used Qualcomm's right/information/property (i.e. patents) for the purpose of carrying on business in India or for the purpose of making or earning income from a source in India. 134. The learned AO as well as the learned CIT(A) have based there findings only on the 16 licensing agreements between OEMs and the assessee. The learned special counsel. Mr. G.C. Srivastava for the first time before this Tribunal filed the following agreements as additional evidence to substantiate the case of Revenue to....
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.... 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. Clause 5.1 Grant of License "Subject to the terms and conditions of this agreement, including but not limited to timely payment of the royalties set forth herein, Qualcomm hereby grants to licensee a personal, non- transferable, worldwide and non- exclusive license under Qualcomm's Intellectual property solely for wireless applications to (a) make (and have made), import, use and sell, lease or otherwise dispose of subscriber units, and (b) to make (and have made) components (provided such components have been exclusively designed by licensee and which design is owned and used exclusively by licensee) and impo....
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....;s applicable subscriber patents to (a) make (and have made), import, use, sell, offer to sell, lease or, otherwise dispose of subscriber units and radiomodules and (b) to make (and have made) components and import, use, sell, offer to sell, lease and otherwise dispose of components but only if such components are included as part of and sold within licensee subscriber units or .licensee radiomodules or as replacement parts for subscriber units or radiomodules previously sold by licensee and (2) under Qualcomm's applicable infrastructure patents to (a) make (and have made), import, use sell, offer to sell, lease or otherwise dispose of infrastructure equipment and (b) to make (and have made) components and import, use, sell, offer to sell, lease and otherwise dispose of components but only if such components are included as part of and sold within licensee infrastructure equipment or as replacement parts for infrastructure equipment previously sold by licensee. No other, further or different license is hereby granted or Implied. Notwithstanding the foregoing, licensee, may exercise its 'have made' rights above with respect to components not designed by....
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....pplicable infrastructure patents (page No. 275) : 'Qualcomm's applicable infrastructure-patents' means (i) every patent issued or to be issued to Qualcomm in any country of the world which claims priority from a patent application filed anywhere in the world on or prior to the effective date and (ii) every patent issued or to be issued to Qualcomm in any country of the world which (a) claims priority from a patent application filed anywhere in the world during the life of the applicable CDMA wireless standard and (b) are technically necessary to use, make and/or sell Infrastructure Equipment compliant with such standard. Infrastructure equipment (page No. 272) : 'Infrastructure equipment' means network equipment for use as a part of any land mobile radio-telephone system for wireless applications, including but not limited to BTSs, BSCs and system switches (and equipment and software for corporation therein), but the term does not include, by way of example and not by way of limitation, components, subscriber units, radiomodules or any other subscriber equipment. 2. Agreement between Tata Teleservices Ltd. and ZTE Corporation ....
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....he 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 can be sold to anyone in any location. The technology is used by the OEMs to manufacture India specific supplies. Hence there is a certain degree of use of the property for the purpose of carrying on business in India; Placing reliance on the decision of the Hon'ble Andhra Pradesh High Court in the case of Syed Asifuddm (supra), he submitted that the handsets are specifically designed and programmed for Reliance. Relying on various clau....
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....s 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 to CDMA connectivity, is a universal technology and is not customer specific. Customisation such as locking the handset to enable operation only with a specific operator and other operators with whom reciprocal or other arrangements are available, inclusion of Hindi or other regional languages, calculator, music, ring tones, browsers and numerous other features are no way connected .wi....
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....umber 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 Qualcomm has patents. The role of Qualcomm ends when it licensed its patents on IPRs pertaining to CDMA products for manufacture and when it collects royalty from OEMs on these products, when they are shipped out of the country of manufacture. There is no activity for Qualcomm after this sale and shipment under these 16 agreements. For the OEMs it is a sale of a product wh....
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....'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 decision of the Hon'ble Delhi High Court in the case of Ericssion A.B (supra). Ericssion and Nokia's was the case of the OEMs who are into supply of GSM equipment to Indian telecom operators for use in fixed/mobile GSM telecommunication. The equipment was manufactured and supplied from overseas; installation was carried out by their respectiv....
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....ibed as the date of the bills of lading. The payment was also to be made outside India. The agreement further makes it clear that the insurance risk during the course of the journey was that of the assessee and it paid for the same; even the freight charges from the European port to the place of destination were paid by the assessee. Thus, judged from any angle, the sale of machinery, which are 'goods' within the meaning of the Sale of Goods Act, was completely outside India. A mere provision in the agreement that the assessee is entitled to satisfy itself about the quality and standard of the machinery in India cannot, in the circumstances of this case, detract from the fundamental position that the sale took place outside India. In such a situation, one has to apply the test of predominance and decide where the sale took place ? On a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India'." 149. We would discuss the propositions laid down in this case in greaterdetail later in this order. 150. Coming to cl. 14.1 of the agreement between Tata and Motorola itreads as under : C....
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....nt 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 in goods is devoid of merit in the present case as the agreement itself is very specific as to when the title and the risk were to pass. 153A As already stated under identical facts in the case of Ericsson A.B (supra) the Delhi Special Bench in Motorola In....
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....T 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 Court in the case of Tata Consultancy Services v. State of A.P. [2004] 192 CTR (SC) 257 making a distinction between assignment of "copyright right" and sale of "copyrighted product" could not be di....
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....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 into contracts with cellular operators in India for setting up of GSM system in India, the hardware and software for which were supplied ....
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....les 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 (ii) covers a case where the right prope....
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....te, 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. 166.....
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....royalty earned on software embedded 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, decom....
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....be bifurcated or broken-down into different components. 175. Under the 16 licensed agreements between Qualcomm and the OEM which is the basis for the AO as well as the CIT(A) to raise a demand, what is licensed is the right to manufacture "subscriber units". Under these agreements subscriber unit is defined as "complete CDMA telephone of which 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 an....
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....we observe that the Revenue in its effort to support the order of the AO as well as the CIT(A) brought in agreements entered into by Tata in later years i.e. in the 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 thwartGerman wire interference. CDMA history can be directly....
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....ea) TTC- Telecommunications Technology Committee (Japan) These SDOs are known as the project's organizational partners. 3GPP2 requires that a participating individual member company be affiliated with at least one of the organizational partners. In addition, the project has welcomed market representation partners (MRPs) who offer market advice to 3GPP2 and bring a consensus view of market requirements (e.g.. services, features and functionality) falling within the 3GPP2 scope. They are : The CDMA Development Group (CDG) IPv6 Forum and Femto Forum The work of producing 3GPP2's specifications resides in the project's four technical specification groups (TSGs) comprised of representatives from the project's individual member companies. The TSGs are : TSG-A (Access network interfaces)TSG-C (Cdma2000ilil) TSG-S (Services and systems aspects)TSG-X (Core networks) Each TSG meets, on average, ten times a year to produce technical specifications and reports. Since 3GPP2 has no legal status, ownership and copyright of these output documents is shared between the organizational partners. The documents cover all areas of the project's charter, inc....
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....mbedded software when operated may in a way result in use of licensed software or IPRs in India. The use of such equipment cannot result in a source of income for the as it 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 patentslicensed 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. [Asthe 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. Accordin....
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....re as per the terms of the BOA as reproduced above, the assessee has given TATA Teleservices the license to reproduce and install the copyrighted software. The license fee for the right to reproduce and use the BREW Software 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 towardsroyalty 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, where....
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.... and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation 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. ....
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....ll or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty. 88. The license granted 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 transf....
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....lowed to exploit the computer software commercially, they have acquired under licence agreement, only the copy righted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to whom the Assessee company has sold/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 toany 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 Infra....
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....e grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. 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. 98. 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 a....