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2015 (3) TMI 364 - AT - Income TaxRoyalty received - whether amount from the manufacturers of the CDMA handsets and infrastructure equipment manufactured outside India but used on the India based CDMA networks is taxable in India? - Held that - There cannot be any adjudication on the basis of a press report, nor does this report, in any way, demonstrate that in the case of this assessee also the royalty was for use of patents or patented products, and not for use of patents in the manufacturing process. However, what this development does show that the payment of royalty on the basis of use of patented product in a jurisdiction is one of the, even if not universally applicable, criterion. The claim of the revenue, to the effect the payment was for use of intellectual properties embedded in the handsets even though the royalty is collected from the OEM, cannot thus be simply brushed aside as beyond the realm of possibilities. Since the AO had brought the impugned royalties to tax under the first limb of Section 9(1)(vii)(c), there was no occasion to hold that the income in question could also be brought to tax under second limb of Section 9(1)(vii)(c) but that does not denude this Tribunal of the powers, as also corresponding duty, to examine that aspect of the matter or have that aspect of the matter is examined. We may also add that no doubt the application of second limb of Section 9(1)(vii)(c) was not examined in sufficient detail by the Assessing Officer but then as long as the subject matter of assessment remains the same as was dealt with by the Assessing Officer, the Tribunal is duty bound to deal with all the related legal aspects of the matter. It is in this light that it is necessary to examine whether the use of patents, for which the impugned payments have been made by the OEMs to the assessee, was in manufacturing process of the handsets or in the use of the patented technology embedded in the CDMA handsets. However, as this aspect of the matter, no matter how fundamental it is, is a highly technical aspect which may also need benefit of expert advice, we deem it fit and proper to remit it to the file of the Assessing Officer for recording necessary factual findings after obtaining technical reports on the same, collecting such details, as may be necessary, and after giving due opportunity of hearing to the assessee and confronting the assessee with all such material as he may use against the assessee, by way of a speaking order. - Decided in favour of assesse for statistical purposes. Revenues received under the BREW Operator Agreement and BREW Carrier Agreement - whether is taxable as royalty income in India under section 9(1)(vi) of the Act and Article 12 of the India -USA tax treaty? - sale of Copyrighted Article v/s Copyright - Held that - 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. Right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would not amount to copyright work under section 14(1) of the Copyright Act and the payment made for the 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. 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. Learned Departmental Representative, even as he vehemently relied upon and supported the stand of the authorities below, could not point out any distinguishing feature in this case. - Decided in favour of assessee.
Issues Involved:
1. Taxability of royalty income under section 9(1)(vi)(c) of the Income Tax Act, 1961, and Article 12(7) of the India-US tax treaty. 2. Computation of royalty income based on information provided by Reliance Communications Limited. 3. Taxability of revenues under the BREW Operator Agreement and BREW Carrier Agreement. 4. Levy of interest under section 234B and 234D of the Income Tax Act. 5. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. Detailed Analysis: 1. Taxability of Royalty Income: The primary issue was whether royalty received by the assessee from OEMs for CDMA handsets and infrastructure equipment manufactured outside India but used in India is taxable in India. The assessee argued that the licensing agreements and obligations were outside India, and the royalties had already been taxed outside India. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) held that the royalties are taxable in India under section 9(1)(vi)(c) of the Income Tax Act and Article 12(7) of the India-US tax treaty. The Tribunal remitted the matter back to the AO for further examination, emphasizing the need for expert technical opinion to determine whether the royalties were for the manufacturing process or the use of the patented technology in India. 2. Computation of Royalty Income: The AO estimated royalty income based on the sale of 75,00,000 handset units at an average rate of US $50 each, applying a 5% royalty rate, resulting in Rs. 81,45,00,000. For infrastructure equipment, the AO used information from Reliance Communications Ltd., assuming the entire amount billed by OEMs as relatable to royalty income, and computed 5% royalty on Rs. 426,13,40,907, resulting in Rs. 21,30,67,045. The Tribunal remitted the matter to the AO for fresh examination, directing the AO to obtain precise information about the quantity and price of handsets sold in India. 3. Taxability of Revenues under BREW Agreements: The AO held that revenues received under the BREW Operator Agreement and BREW Carrier Agreement were taxable as royalty income in India. The assessee contended that the provision of BREW software resulted in the sale of a 'Copyrighted Article' and not the licensing of a 'Copyright'. The Tribunal, following the Delhi High Court's judgment in DIT Vs Infrasoft Limited, held that the payment was for a copyrighted article and not for the copyright itself, and thus, not taxable as royalty. The Tribunal directed the AO to delete the addition of Rs. 2,52,70,569. 4. Levy of Interest under Sections 234B and 234D: The assessee contested the levy of interest under sections 234B and 234D. The Tribunal did not provide a separate analysis on these issues, implying that the outcome would depend on the final determination of the primary issues. 5. Initiation of Penalty Proceedings under Section 271(1)(c): The initiation of penalty proceedings under section 271(1)(c) was contested by the assessee. The Tribunal did not provide a separate analysis on this issue, implying that the outcome would depend on the final determination of the primary issues. Conclusion: The Tribunal remitted the matter to the AO for further examination on the taxability of royalty income, emphasizing the need for expert technical opinion. The Tribunal upheld the assessee's contention regarding the BREW agreements, directing the AO to delete the addition. The issues related to the levy of interest and initiation of penalty proceedings were not separately analyzed, implying that their resolution would depend on the final determination of the primary issues.
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