2023 (6) TMI 966 - AT - Income Tax

Income deemed to accrue or arise in India - Taxability of royalty income received by the assessee on subscribers units from original equipment manufacturers (OEMs) located outside India and royalty income on infrastructure equipments - As per AO since the subscriber units(handsets/equipments) containing CDMA technology/patent is 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. - assessee is a non-resident corporate entity incorporated in USA HELD THAT - Considering the submission of 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 AO 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 2018 (4) TMI 1362 - ITAT DELHI 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. Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of royalty income from OEMs outside India.
2. Relevance of technical expert reports.
3. Applicability of previous Tribunal decisions.
4. Interpretation of Section 9(1)(vi)(c) of the Income Tax Act.
5. Application of Article 12 of the India-USA DTAA.

Summary:

1. Taxability of Royalty Income from OEMs Outside India:
The primary issue in both appeals was whether the royalty income received by the assessee from OEMs located outside India is taxable in India. The assessee argued that since the OEMs are non-residents and the royalty income is for patents used outside India, it should not be taxable in India. The Assessing Officer, however, contended that the royalty income is taxable under Section 9(1)(vi)(c) of the Income Tax Act as the subscriber units (handsets/equipments) containing CDMA technology are ultimately used in India by subscribers.

2. Relevance of Technical Expert Reports:
The Assessing Officer relied on a technical expert report obtained for the assessment years 2004-05 to 2008-09 to support the taxability of royalty income in India. However, the Tribunal noted that the technical report pertained to a period when the locking of CDMA subscriber units to make them India-specific was still in practice. This practice was discontinued in the assessment year 2010-11, making the technical report irrelevant for the impugned assessment years.

3. Applicability of Previous Tribunal Decisions:
The Tribunal referred to its earlier decisions in the assessee's own case for the assessment years 2000-01 to 2004-05 and 2005-06 to 2008-09, where it was held that the royalty income from OEMs outside India is not taxable in India. The Tribunal observed that the facts and issues in the impugned assessment years were similar to those in the earlier years and thus, the royalty income should not be taxable in India.

4. Interpretation of Section 9(1)(vi)(c) of the Income Tax Act:
The Tribunal emphasized that for the royalty income to be taxable under Section 9(1)(vi)(c) of the Act, the Revenue must prove that the OEMs have used the assessee's patents for the purpose of carrying on business in India or for earning income from a source in India. The Tribunal found that the Assessing Officer failed to provide any evidence that the OEMs carried on business in India or used the patents for earning income from a source in India.

5. Application of Article 12 of the India-USA DTAA:
The Tribunal also considered the provisions of Article 12 of the India-USA DTAA and concluded that the royalty income does not relate to the use of, or the right to use, any right or property in India. Therefore, the royalty income should not be deemed to arise in India under the DTAA.

Conclusion:
The Tribunal directed the Assessing Officer to delete the addition of royalty income for the assessment years 2014-15 and 2015-16, as the royalty income from OEMs located outside India is not taxable in India under Section 9(1)(vi)(c) of the Income Tax Act and Article 12 of the India-USA DTAA. The appeals were allowed, and the stay applications were dismissed as infructuous.