2013 (2) TMI 219 - AT - Income Tax

Royalty income earned from the OEMs on network equipment - Whether CIT(A) was justified in upholding the taxability of royalty income earned by Qualcomm Incorporated, from the Original Equipment Manufacturers ( OEMs ) of CDMA mobile handsets and network equipment, who are located outside India, under S. 9(1)(vi) (c) - Article 12(7)(b) of the India USA DTAA - levy of interest under section 234A & B - Held that - Qualcomm Incorporated the appellant were a company incorporated in the USA engaged in development and licensing of CDMA technology granted license to use and sell CDMA technology to the unrelated Original Equipment Manufacturers ( the OEMs ), who were non-resident and were located outside India, in consideration for royalty. The licenses granted by the appellant to the OEMs were used for manufacturing of handsets and network equipments, which, in turn were sold to various parties located outside India and in India. Reopening of assessment - Held that - A perusal of the reasons and the material demonstrate that the Appellant is the owner of patents pertaining to CDMA technology and that the Appellant earns royalty from such patents and that CDMA mobile services/technology has been launched and used in India. This information and material, in our considered opinion is sufficient, prima facie, to come to a conclusion that the Appellant has earned certain income in India. The information by way of press releases, newspaper articles etc. could lead any reasonable person to believe at that the Appellant who owns several patents pertaining to CDMA technology would have income, as such, technology is used in India. In our opinion the AO had an honest belief, and has come to a conclusion, as a rational man would, based on the material that income chargeable to tax has escaped assessment. The satisfaction in question is that of the AO at that point of time. It cannot be said that the AO had no cause or justification to suppose that income has escaped assessment. The phrase reason to believe cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. Whether the material would conclusively prove the escapement of income is not the concern at this stage. Thus find no force in the contention of the appellant that the reasons recorded are not clear or irrelevant and therefore we are unable to quash the reopening of the assessments on this score - against assessee. Enhancement of income by the C.I.T(A) - Held that - As decided in Jute Corporation 1990 (9) TMI 6 - SUPREME COURT & CIT v. Kanpur Syndicate 1964 (4) TMI 18 - SUPREME COURT the power of the Appellate Assistant Commissioner is coterminous with that of the Income-tax Officer. The first appellate authority can do what the AO can do and also direct him to do what he has failed to do. In the present case, the fact that the Appellant also earns royalty income from network equipment was before the AO. This fact was also discussed by the AO in her assessment order. The AO enquired into the matter by issuing a questionnaire, calling upon the Appellant to give reply/information with respect to the royalty income from network equipment. Thereafter, the AO concluded the assessment by taxing only the royalty income from handsets. A reading of the assessment order clearly brings out the fact that this source was always part of the assessment proceedings. However while quantifying the royalty income, the AO did not bring the royalty income arising from network equipment to tax. Hence the same would not constitute a new source of income and therefore the income can be enhanced by the CIT(A) u/s.251 of the Act. CIT(A) has rightly exercised his jurisdiction under section 251 to enhance income of the Appellant - against assessee. The license to manufacture products by using the patented intellectual property of the appellant had not been used in India as the products were manufactured outside India and when such products were sold to parties in India it couldn t be said that OEMs had done business in India. Sale in India without any operations being carried out in India would amount to business with India and not business in India. The patents of the appellant were used for manufacture of handsets and infrastructure equipments which were sold worldwide. No patents of the appellant had been used for customization of handsets. Technology for manufacturing products was different from products which were manufactured from the use of technology for which the appellant had patents. The role of appellant ended when it licensed its CDMA technology for manufacturing handsets and when it collected royalty from OEMs on these products There was no finding that the OEMs had carried on business in India or a part of the sale consideration was attributable to any sale or licensing of software carried out in India. When OEM s itself were not brought to tax, to hold that the appellant was taxable was not correct. The provision of Section 9(1)(vi)(c) covers cases where the right, property or information has been used by the non-resident payer (OEM) itself and is so used in business carried on by OEM s in India & a case where the right, property or information has not been used by the non-resident payer (the appellant) itself in the business carried on by it, but the right, property and information had been dealt with in a such manner as would result in earning or making income from a source in India. In the present case, the OEMs had not carried on business in India. The OEMs couldn t be said to have used the appellant s patents for the purpose of business in India. The source of income is the activity that gives rise to the income. In the present case, the right, property or information licensed to OEMs related to the manufacture of the products and, hence, the source was the activity of manufacturing. The source of royalty was the place where patent was exploited, viz, where the manufacturing activity took place, which was outside India. Hence, the Indian parties would not constitute source of income for the OEMs. In view of the specific clauses in the agreement between OEM s and Indian parties, it is clear that the software didn t have an independent use and is a integral part of the hardware without which the hardware cannot function. The software supplied was a copyrighted article and not a copyright right. The software was only used with the hardware and was not independent of the equipment or the chipset. Since no separate consideration was paid by Indian parties for licensing of the software and the consideration was paid only for the equipment which had numerous patented technologies, the sale could not be divided or broken down into different components.Thus, the royalty earned by the appellant couldn t be brought to tax in India under Section 9 - in favour of the assessee. As the royalty in question cannot be brought to tax under the Income Tax Act, 1961, need not go into the question of applicability under DTAA between India and USA as it would be an academic exercise. Regarding levy of interest under S. 234A as decided in the case of CIT v. Anjum Ghaswala (2001 (10) TMI 4 - SUPREME COURT) held that the levy of interest under S. 234A to be mandatory in nature - against assessee. Interest under S.234B will not be levied as decided in the case DIT v. Jacabs Civil Incorporated and Mitsubishi Corpn. And Ors (2010 (8) TMI 37 - DELHI HIGH COURT) is in favour of the assessee

Summary

Issues Involved:

1. Validity of reassessment proceedings under Sections 148/147 of the Income Tax Act.
2. Jurisdiction of CIT(A) under Section 251 to enhance the income in respect of royalty income from OEMs on network equipment.
3. Taxability of royalty income from OEMs located outside India under Section 9(1)(vi)(c) of the Income Tax Act.
4. Taxability of royalty income under Article 12(7)(b) of the India-USA DTAA.
5. Levy of interest under Sections 234A and 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings:

The Appellant argued that the reassessment proceedings were based on conjectures and surmises, relying on newspaper articles and press releases, which do not constitute valid evidence. The Tribunal held that newspaper articles can constitute information/material for forming a belief that income has escaped assessment. The Tribunal cited the Supreme Court's decision in Raymond Woollen Mills Ltd. v. ITO, emphasizing that the sufficiency of the material is not to be considered at the stage of reopening. The Tribunal found that the AO had a bona fide belief based on relevant material that income had escaped assessment and upheld the reopening of assessments for all the assessment years under appeal.

2. Jurisdiction of CIT(A) to Enhance Income:

The Tribunal held that the CIT(A) has the power to enhance the assessment under Section 251 of the Act. The enhancement of income from network equipment was considered to emanate from the same source as the royalty income from handsets. The Tribunal rejected the argument that the enhancement constituted a new source of income, citing the Supreme Court's decisions in Jute Corporation and Kanpur Syndicate, which held that the appellate authority's power is coterminous with that of the AO.

3. Taxability of Royalty Income under Section 9(1)(vi)(c) of the Income Tax Act:

The Tribunal analyzed the agreements between Qualcomm and the OEMs and found that the OEMs manufactured products outside India and sold them worldwide, including to Indian telecom operators. The Tribunal held that the OEMs did not carry on business in India and did not use Qualcomm's patents for the purpose of carrying on business in India. The Tribunal also rejected the argument that the Indian telecom operators constituted a source of income for the OEMs in India. The Tribunal concluded that the royalty income could not be taxed under Section 9(1)(vi)(c) of the Act.

4. Taxability of Royalty Income under Article 12(7)(b) of the India-USA DTAA:

The Tribunal did not address this issue in detail, as it had already held that the royalty income could not be taxed under the Income Tax Act. The Tribunal noted that addressing the DTAA issue would be an academic exercise.

5. Levy of Interest under Sections 234A and 234B of the Income Tax Act:

The Tribunal upheld the levy of interest under Section 234A, citing the Supreme Court's decision in CIT v. Anjum Ghaswala, which held that the levy of interest is mandatory. However, the Tribunal held that the Appellant was not liable to pay interest under Section 234B, following the Delhi High Court's decision in DIT v. Jacabs Civil Incorporated and Mitsubishi Corpn. and Ors, which held that when the payer fails to deduct tax at source, no interest could be imposed on the assessee under Section 234B.

Conclusion:

The Tribunal upheld the reopening of assessments and the enhancement of income by the CIT(A). It held that the royalty income from OEMs could not be taxed under Section 9(1)(vi)(c) of the Income Tax Act and did not address the DTAA issue. The Tribunal upheld the levy of interest under Section 234A but held that the Appellant was not liable to pay interest under Section 234B. The appeals were allowed in part.