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TMI Blog2015 (3) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... lso 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 ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Per Pramod Kumar: 1. These four appeals pertain to the same assessee, involve some common issues arising out of the same set of facts and were heard together. As a matter of convenience, therefore, we will dispose of all these four appeals by way of this single consolidated order, though we will first take up the assessment years 2007-08. ITA No. 5343/Del/2010 Assessment year 2007-08 2. In this appeal, Qualcomm Incorporated [hereinafter referred to as the assessee ] has challenged correctness of the order dated 30th September 2010 passed by the Assistant Director of Income Tax, International Tax Circle 2(1), New Delhi [hereinafter referred to as 'the Assessing Officer ] under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 [hereinafter referred to as the Act ] for the assessment year 2007-08. 3. Grievances raised by the assessee are as follows: Each of the grounds below are independent and without prejudice to the other grounds of appeal preferred by the appellant. On the facts and in the circumstances of the case, the Assessing Officer ( AO ) in pursuance of the directions of the Dispute Resolution Penal ( DRP ) - 1. Erred in applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, as culled out from material on record, and the developments leading to this appeal before us. The assessee, a company incorporated in Delaware, is engaged in the business of design, development, manufacture and marketing of digital wireless communication products and services, based on CDMA technology, and has four principal business units. These business units are described, by the assessee, as follows: i. QUALCOMM CDMA Technologies ( QCT')- QCT develops and supplies CDMA based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning system products. ii. QUALCOMM Technologies Licensing ( QTL') - QTL grants licenses to manufacture of wireless products for the right to use portions of Qualcomm's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products. iii. QUALCOMM Wireless Internet ( QWI') - QWI is comprised of: * QUALCOMM Internet Services ( QIS') - QIS provides technology to support and accelerate the convergence of the wireless data market including BREW, QChat and QPoint Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licences CDMA patents to OEMs outside India for manufacture of CDMA handsets, and that the licence arrangement permits OEMs to exploit the patents in manufacture of CDMA handsets. It was then pointed out that the OEMs are required to pay to QLT royalty as a percentage of the sell ing price of products manufactured by the OEM and that the royalty is due when the handset is invoiced, shipped, sold, leased, or put to use - whichever is earlier . 8. On these factual submissions, it was contended that under section 9(1)(vii)(c) royalty could be brought to tax in India only when the royalty is utilized for the purpose of business carried on in India or for the purpose of making or earning any income from any source in India . It was submitted that, in the light of the judicial interpretation given to the expression to the place where business is carried on , the business can be said to be carried on at a place where the operations, from which profits arise, are carried on . The assessee further pointed out that in the case of th e OEMs, which have been licenced by the assessee, the operations from which profits arise are carried on outside India on account of the following r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , hereinafter referred to as Indo - US tax treaty , as well. It was pointed out that in order to fall within the purview of Article 12(7)(a) and 12(7)(b), the following conditions should be satisfied- namely (a) that the royalties should have been paid by a resident in India or by a non-resident who has a permanent establishment in India; and (b) that the royalties relate to the use of, or right to use, the right or property, in India. Since, according to the assessee, neither the OEM was resident in India nor there was any evidence on record to show that OEMs had a PE in India, the first condition was not satisfied. The assessee further submitted that, as for the satisfaction of the second condition, it was essential that patent itself should be used in India which cannot be equated with mere purchase of a product wherein such a patent is used. It was emphasized that Indian service providers have not independently acquired rights to exploit any patent as such. It was stated that although the royalties paid by the OEMs to Qualcomm were determined (inter alia) on the sale proceeds received by the OEMs from Indian carriers, they are separate payments . The assessee submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re sale of network equipment to the service providers in India will not result in royalties accruing or arising in India. It was submitted that Indian carriers own CDMA infrastructure equipment, which is located in India and which operates with CDMA handsets, and it does not create a source of infrastructure royalty income in India for Qualcomm. The assessee then used an illustration, to support his contentions, which is reproduced below: Further, CDMA handsets are equally interoperable with CDMA equipment located in any region of the world. A customer may purchase a handset from an Indian carrier and use his handset on CDMA networks in the US, Japan, Europe or elsewhere. A logical extension of the contention (is) that interoperabil ity of the infrastructure and handsets gives rise to a source of income would mean that any patent holder for any standard on which any equipment operator would be taxable in each country in the world every time a piece of equipment is sold. 11. It was in the light of the above submissions that the assessee contended that the royalty received by the assessee, in respect of sale of CDMA infrastructure equipment by the OEMs to Indian carriers, canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. The relevant article is reproduced as under: - 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, the 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. This is because as per assessee's submission it is apparent that the payment of royalty is based upon the sale of the licensed products and not merely on its manufacturing. It is not a case, where the royalty has been paid lump sum for the use of CDMA technology but is an ongoing payment dependent on the volume of sales. The relevant clause of the agreement is as under: Sold , Sale , Sell means sold, leased or otherwise transferred or put into use and a sale shall be deemed to have occurred upon first 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance) are based in India, they necessarily constitute a source of income for the OEMs in India and the taxability under the deeming provisions of Section 9(1)(vi)(c) cannot be denied/ overlooked. The above position is strengthened in the view of the assessee's own submissions that the Indian Carriers may request specific features to be incorporated in the phones to be sold in India. Therefore, whether the specific features are driven by the assessee's technology or not is immaterial since the phone will then unequivocally be saleable only to India thereby bringing creating a strong Indian nexus for source based taxation. In view of the above discussions, royalties arising to Qualcomm from the sale of infrastructure equipment and handsets by the OEMs to Indian customers is taxable in India as per section 9(1) (vi) and article 12(7) (b) of the India- US tax treaty. 13. The assessee did raise the objections before the Dispute Resolution Panel but without any success. 14. The Assessing Officer, therefore, proceeded to frame the assessment order on the above lines. As the assessee, instead of parting with precise information about the quantity and price of handsets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to tax, in a complex web of interconnected and interdependent transactions, income of such a nature. 17. To adjudicate on this issue, the first factual aspect, which is the most crucial aspect to be taken note of in this adjudication process, is about the CDMA technology vis- -vis broad business model of the assessee before us , i.e. Qualcomm Inc., so far as relevant to our adjudication. On this aspect, it is useful to take note of some basic facts at the threshold itself. CDMA is an acronym for Code Division Multiple Access - an access method for fully digital wireless data transmission system. It is only an access method and, unlike its competitor GSM1, which is a standard developed to describe protocols for digital cellular networks used by mobile phones, it is not a complete protocol 1 (Groupe Sp cial Mobile, in french originally, or as Global System for Mobile communications, as it is referred to now) or platform for mobile communications. In 1995, IS-95 i.e. CDMAOne, the first operating system to use CDMA, was invented and produced by Qualcomm Inc. 18. While the expression CDMA technology, in everyday use as indeed in most of the discussions in the present conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Announcing the launch of Samsung MPower 699 in the Indian market, Jung Soo Shin, president CEO Samsung South West Asia, said that the launch marked a paradigm shift in the dynamics of the CDMA ecosystem with consumers now having the flexibility to choose an operator. Sunil Dutt, country head Samsung Telecom Division, Samsung India Electronics Ltd said that last year, Samsung took the first step towards giving consumers flexibility in CDMA by launching MPower series handsets to work with CDMA connections from operators, Reliance Mobile, Tata Indicom and Virgin Mobile. Mr Shin said that the introduction of OMH will lead to common development standards and inter-operability for all CDMA networks globally. A company release said that MPower 699 will support Tata Indicom, Reliance Mobile, MTS and Virgin Mobile services on their OMH SIM cards. It was also stated that the switch-over process to new OMH SIM cards from existing R-UIM/SIM connections was very easy and the new OMH phone also supports the existing SIM for voice and SMS as well as data services. (Emphasis by underlining supplied by us) 22. In the light of the above press report, referring to an event taking place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l phone service providers like Tata Indicom and Reliance India Mobile (i.e. using CDMA operating systems) have special codes dedicated to them and these are intended to identify the phone, the phone's owner and the service provider. To understand how the cell phone works, we need to know certain terms in cell phone parlance. System Identification Code (SID) is a unique 5- digit number that is assigned to each carrier by the licensor. Electronic Serial Number (ESN) is a unique 32-bit number programmed into the phone when it is manufactured by the instrument manufacturer. Mobile Identification Number (MIN) is a 10-digit number derived from cell phone number given to a subscriber. When the cell phone is switched on, it listens for a SID on the control channel, which is a special frequency used by the phone and base station to talk to one another about things like call set-up and channel changing. If the phone cannot find any control channels to listen to, the cell phone displays no service message as it is out of range. When cell phone receives SID, it compares it to the SID programmed into the phone and if these code numbers match, cell knows that it is communicating with its h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estigation revealed that all the handsets of Reliance India Mobile are being migrated to TATA Indicom network at the behest of TATA Indicom staff members and that same is illegal as there is an agreement between the manufacturers of the Reliance handsets and Reliance India Mobile Limited. In view of the statements given by the witnesses, the investigating officer came to a conclusion that prima facie case is made out against the staff members of TATA Indicom and directed two inspectors to conduct raids at the Head Office of TATA Indicom situated in Khan Lathif Khan Estate, Hyderabad. This was ordered in view of specific information received about tampering of Reliance handsets by the staff members of TATA Indicom. Further on specific information about similar such practices going on at TATA Indicom centre opposite to Harihara Kala Bhavan, Secunderabad, the investigating officer along with two other inspectors and panch witnesses proceeded to LM counter at the above place when one Raj Naren, Officer of TATA Indicom revealed that the General Manager (Marketing), Madhavan and Anil Ambati, Manager (Marketing) of TATA Indicom are accepting the handsets belonging to Reliance Infocomm Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reprogrammed CDM-A digital, handsets belonging to Reliance Infocomm and activating with their network with all dubious means which is an offence under Section 65, I.T. Act. Secondly, the customer is not barred from exiting from the Reliance network as such and to quit from that network he has to fulfil the obligations laid down in the terms and conditions of the Reliance company. Till the lock in period of 3 years is over, the handset supplied to the customer by Reliance Infocomm is a joint property of the company and any kind of transaction on the part of the subscriber without fulfilling the obligations laid down in the terms and conditions is clear case of Breach of Trust since the customer has not settled the accounts with the company. Further as the competition between the CDMA service providers blown out of proportions, the TATA Indicom has hatched a conspiracy to hijack the customers of Reliance Infocomm by all fraudulent means and as a part of their Infocomm by all fraudulent means and as a part of their conspiracy trying to woo the customers of Reliance Infocomm with different tariff packages and trying to trap gullible customers and succeeded in their attempt to attract t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) intentionally conceals, destroys or alters a computer source code used for a computer, computer programme, computer system or computer network; (ii) intentionally or knowingly causes another to conceal, destroy or alter any computer source code used for a computer, computer programme, computer system or computer network; and (iii) (a) However, the offence is made out only when computer source code is required to be kept or (b) when computer source code is maintained by law for the time being in force. 22. The punishment prescribed by law for the above offence is imprisonment up to three years or a fine of ₹ 2,00,000/- or both. 23. What is a computer source code is also defined in the Explanation to Section 65 of IT Act, which reads as under : Explanation: For the purposes of this, computer source code means the listing of programmes, computer commands, design and layout and programme analysis of computer resource in any form. 24. By the very definition of 'computer source code,' a) list of programmes; b) computer commands; (c) design and layout and d) programme analysis of computer resource in any form, is a 'computer source code' for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amme also as literary work to be protected by Copyright Act. 26. Section 2(ffb), (fie) and 2(o) of Copy-right Act read as under. 2(ffb) computer includes any electronic or similar device having information processing capabilities; 2(ffc) computer programme means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result; 2(o) literary work includes computer programmes, tables and compilations including computer databases; 27. Section 14 defines the copyright as exclusive right subject to provisions of the Copyright Act, to do or authorise the doing of any of the Acts enumerated in respect of the work or substantial part thereof. Section 14(b) of the Copyright Act reads as under : 14. Meaning of copyright.- For the purposes of this Act, copyright means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely :- (a) omitted. (b) in the case of a computer programme,- (i) to do any of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ps, when SID programmed into the handset does not match with SID of a service provider, the handset cannot work. Their Lordships further noted that, Along with the SID, the phone also transmits registration request and MTSO which keeps track of the phone's location in a database, knows which cell phone you are using and gives a ring . 30. It would, therefore, appear to us that, in the understanding of Hon ble AP High Court, the CDMA handsets were service provider specific. 31. Once a higher tier of the judiciary, i.e. Hon ble Andhra Pradesh High Court, expresses the views so set out above- particularly to the effect that the CDMA handsets, by the virtue of SID control mechanism inbuilt therein- as at the relevant point of time, were service provider specific , it cannot ordinarily be open to a lower tier of the judicial system, i.e. this Tribunal, to conclude that the CDMA handsets supplied by the OEMs, at the relevant point of time and before the advent of OMH, could not have been service provider specific and all these handsets could be used on networks of any of the service provider at the sweet will of the end user. There has to be some material before us to demonstr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsuasive value which cannot, 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. 34. All these aspects, as are the subject matter of these varying perceptions, are purely factual, but highly technical, aspects and we must have the benefit of unbiased opinion of technical experts, much more than smooth generalizations from the legal luminaries, to come to a definite conclusion. There cannot be a room for tentative conclusion, based on hypothetical presumptions, on a fundamental aspect which has been so strenuously argued by the parties and which goes to the root of the matter. 35. In view of all these factors, as also bearing in mind entirety of the case, we deem fit and proper to remit the matter to the file of the Assessing Officer for recording categorical findings in this regard by obtaining expert technical opinion, by recording witnesses, if necessary, of experts and after confronting the assessee with whatever material he brings on record in this respect. It is only after such an exercise has been carried out that a call can be taken on whether the stand of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect 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 i f 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 manufactured. We will, however, come to that aspect of the matter in detail a little later. 40. The actual controversy, therefore, is with respect to the royalties for use of the handsets rather than for the manufacturing of the handsets . This aspect becomes all the more glaring as we see that the roya lties is not with respect to the handset units manufactured by the assessee but with respect to the handset units actually sold by the assessee. 41. The question that really arises therefore is whether the royalty paid by the assessee with respect to commercial use of the handsets which are sold by the assessee will be taxable in the tax jurisdiction in which the handsets are manufactured, i.e. the situs of manufacture of handsets, or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be treated as income from sources within the United States. 46. We have referred to this provision to demonstrate that the taxability of royalty, in connection with the products used in a tax jurisdiction, in the jurisdiction of usage of product is not alien to the tax policy and tax laws. Not only that such a source taxation is in accordance with what the first principles of tax policy making, as evident from the extracts from International Monetary Fund s publication reproduced in the preceding paragraph, such an approach is also an unambiguous prescription of the US Internal Revenue Code . 47. In view of the above discussions, source taxation of royalties, in the jurisdiction in which the related intellectual property, including, inter alia, by way of patents and copyrights etc, is used, is quite in consonance with the sound principles of taxation and acceptable global norms. The residence tax jurisdiction of this very assessee has consistently, and rather aggressively, followed this norm. 48. We now move on to the fundamental question, which is the core issues requiring our adjudication in this case, and that question is whether the provisions of the Indian Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India or to any other source of his income in India (Emphasis by underlining supplied by us to highlight the relevant portion) 52. Post 1976 amendment thus, the scope of deeming fiction under section 9 extended to royalties not only paid by an Indian resident, unless such a payment extended to a business carried out or to any source outside India, but also to royalties paid by the non-residents as long as it was relatable to a business carried on in India or to any source in India. The clear emphasis on taxation on the basis of usage in business rather than on the basis of residence of the payer, so far as taxation of royalties is concerned, was thus clearly discernible from the post amendment legal position in Section 9 (1)(vi). 53. As we look at this foundational aspect of the taxation of royalties, it will also be useful to take a careful look at the definition of royalties , under the Income Tax Act, which is reproduced below: Explanation 2: For the purposes of this clause, royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for- (i) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the definition of royalty, in conjunction with Section 9(1)(vi)(c), makes it clear that the taxation of royalties is in the source jurisdiction in which related business is being carried on by a person, rather than the jurisdiction in which he is tax resident, and it extends to, inter alia, the use of any patent, invention, model , design, secret formula or process or trade-mark or similar property . Where does an assessee use a patent in business is, therefore, the decisive factor in determining taxability of royalties, rather than where is the assessee located. 57. It is important to bear in mind the fact that taxation of royalties is not a taxation of business profits of any entity, but, quite contrary thereto, it is taxation of the considerat ion of a patent or knowhow etc. which belongs to the person who owns the patents. It is thus taxation of income of the person owning the patents and it is taxation in the jurisdiction of end use of patents. The emphasis is on the situs of use of the patent rather than situs of the entity making payment for the royalty. A fortiorari, if the use of patent is used in the manufacturing process, for example, the taxation should be in the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business is situated, the services need to be used for earning or making income from any source outside India. A business outside India and a source outside India are used together in contrast, and can be viewed as reflecting relatively active and passive activities. For example, if technical service is used in a business activity outside India, it could be covered by the first category, while technical service used in an asset which gave on lease could be in the second category. The question, however, is whether the customers being outside India could be viewed as source of income. In our considered view, the source of income, whether customers are inside India or outside India, continues to be business in India. A customer is an important part of the business but no matter how important a segment of business is, such a part of the business cannot be the business itself. The assessee has all along claimed that the leather testing services were required under instructions from importers and so as to enable its products to enter the German markets. All it indicates is that the services were required because of the foreign importers, but, as the mandate of the law, is that aspect it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciple laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning. In Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India (1971) 3 SCR 9 : AIR 1971 SC 530, this Court cautioned : It is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment. 61. When such are the views of the Hon ble Supreme Court about the observations made in judgments rendered by Hon ble Supreme Court itself, it does not appeal to logic that the views expressed by a coordinate bench, in an entirely unrelated context, can be treated as exposition of law on a subject, and in a context, which was not before the coordinate bench. 62. It is also important to bear in mind the fundamental legal position that in the course of judicial functioning and interpretation, the context , in which an expression is to be judicially analysed or interpreted, is of the utmost importan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business but the business per se is little more than manufacturing. To give an example, in a situation, in which the core manufacturing activity, with respect to a product, is carried out in China but the sales and manufacturing activity in respect of the same product is carried out is another jurisdiction or other jurisdictions, it cannot be said that the business is not carried by the assessee in that another or those other jurisdictions. Of course, when it comes to taxation of profits from manufacturing activities, such profits can only be taxed in China in this example, but that is not the issue before us. We are not concerned about taxation of any business profits. We are not even concerned about taxation of royalties used in the manufacturing process which is carried out, as in this example in China, in another jurisdiction. We are only concerned about the taxability of royalties to the extent such royalties are used in a business or profession carried on by him (i.e. a non-resident) in India . Therefore, in our considered view, even when an income is partly carried out in India but the royalties are payable in respect of such part of the business as is carried on in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me from licensing of software in these products which is assessable to tax. There is no finding that the OEM s have carried on business in India much less that a part of the sale consideration is attributable to any sale or licensing of software carried out in India. When OEM s itself are not brought to tax, to hold that Qualcomm is taxable in not correct. This is not a case of the OEM s 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 OEM s have been brought to tax in any of the subsequent years. 68. In the course of proceedings before us, however, learned Departmental Representative has filed a list of the OEMs who are assessed to tax in India and also the details about the Assessing Officer having jurisdiction to assess their income in India. This list, which is set out at page 530 of the paper book volume II of additional evidences, is as follows: 1. Ericsson AB 2. Huawei Technology Co. Ltd. 3. ZTE Corporation, China 4. Samsung Electronics Ltd 5. Nokia Corporation 6. Nokia Siemens Networks OY 7. Sony Ericsson Mobile Communication 8. Motorola Soluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said that the assessee is not carrying out business in that tax jurisdiction. 73. Hon ble Andhra Pradesh High Court, in the landmark judgment in the case of CIT Vs Visakhapatnam Port Trust [(1983) 144 ITR 146], had observed as follows: 36. In view of the standard O.E.C.D. Models which are being used in various countries, a new area of genuine international tax law is now in the process of developing. Any person interpreting a tax treaty must now consider decisions and rulings world wide relating to similar treaties (British Tax Review, 1978 p.394). The maintenance of uniformity in the interpretation of a rule after its international adaptation is just as important as the initial removal of divergencies (per Scott L.J., in Eurymedon Corstar vs. Eurymedon (1938) 1 All ER 122 (CA). Therefore, the judgments rendered by Courts in other countries or rulings given by other tax authorities would be relevant. 37. The Supreme Court of Belgium (judgment of the Supreme Court of Belgium on French-Belgium Treaty) has held that a Belgian subsidiary of a French parent-company was not the parent's permanent establishment , notwithstanding the very tight control exercised by the parent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country. (Emphasis, by underlining, supplied by us) 74. Clearly, therefore, even existence of a PE amounts to virtual projection of a business in the tax jurisdiction in which the PE is situated. When a business entity has a virtual projection in another tax jurisdiction, it would, in our humble understanding, essentially imply that such an entity is carrying on business in the jurisdiction in which such a PE is situated. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fundamental aspect of the OEMs carrying on business in India, we see no need to address ourselves to other issues raised by the learned counsel. All those issues on the scope of the first limb of Section 9 (1)(vi)(c) will be rendered infructuous in case we come to the conclusion that the assessee was, by the virtue of having a PE, carrying on business in India. 78. Let us now move on to the second limb of Section 9(1)(vii)(c), which provides that the income deemed to accrue or arise in India will include income payable by way of royalty payable by a person who is a nonresident, where the royalty is payable in respect of ..for the purposes of making or earning any income from any source in India 79. As we deal with legal provision, i t is important to bear in mind the fact that unlike in the case of fees for technical services, which is an active work, the royalty is paid for use of a patent which does not require much of an active association by the person receiving royalty. While fees for technical services is a consideration for the work done, royalty is a conside ration for use of an asset- tangible or intangible. Viewed thus, even going by the interpretation given b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. There is no reason to exclude exploitation of an intangible assets or intangible property from such a usage of asset leading to taxation in the source country. While on this aspect of the matter, it is useful to appreciate the scope of intangible property , as is explained in E xplanation (ii) to Section 92 B of the Act: For the removal of doubts, it is hereby clarified that (i) (ii) the expression intangible property shall include- (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitute a source of income for the OEMs in India. 162. Reliance was placed on Clause 19.5 of the agreement with ZTE dt. 19th December, 2007, wherein it is recorded that all licensed material are the property of the supplier or 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 argued that CDMA technology belonging to Qualcomm is embedded in chip sets which are used by the OEMs and licensed to Indian customers for further used by them. He further submitted that , if this basic proposition is under dispute, relying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 chip sets are purchased by OEMs from Qualcomm and these chip sets which has embedded software and helps in function of the hardware. 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 chip sets from Qualcomm only. The OEMs can also purchase the chip sets 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 chip sets is not assessable and that the assessment is confined to the income received by QTL division i.e. the business segment of Qualcomm which is involved in licensing of the patents to manufacture the products. We emphasise that what is brought to tax is the royalty earned from the licensing of patents and not royalty earned on software embedded in the chip sets. (Emphasis, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual property by way of patented technology, other than software, in the CDMA handsets sold in India was thus, perhaps inadvertently, left intact. 88. Learned counsel s defence on that legal issue primarily consists of the findings of the coordinate bench and on the example given by another coordinate bench, in the case of Metro Metro (supra), by way of lease of an asset and the contention that the scope of the that expression must remain confined to the lease of an asset, as also the contention that we cannot enlarge the scope of controversy before us. We have noted this defence but then it is only fundamental that examples are only illustrative and not exhaustive whereas the very sentence relied upon by him starts with the words for example . We are unable to see how such an example could fetter the application to other situations not envisaged by the coordinat e bench. In any case, as we have seen in the earlier discussions even income generated by use of an intangible asset, including patented knowhow, is covered by the scope of expression the royalty is payable in respect of ..for the purposes of making or earning any income from any source in India . 89. While on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course after three years of negotiations failed to yield a license agreement on standard-essential patents, or patents on technologies that are standards for certain equipment such as mobile phones. Ericsson had alleged that India's largest domestic handset maker has refused to enter into a licensing agreement covering its patented innovations across several wireless technology standards such as GSM, EDGE and third generation (3G). This is the first high-profile case in an intensifying mesh of litigation in the technology space around essential patents. Subsequently, Ericsson also entered into litigation with other handset makers including Intex and Gionee over the same issue. Despite exiting the handset space, Ericsson continues to be among the biggest patent holders in the mobile industry along with Nokia, Qualcomm and Samsung. This is big step forward in protecting intellectual property rights in India. By fixing interim rates, India has recognised standard essential patents said Prathiba Singh, senior advocate, who is representing Ericsson in this case. Ericsson has argued that it has similar payment arrangements with many handset makers globally and to support the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pay interim royalty, pending the final decision, on the imported consignment of the patented products. The plea of the defendants that they are not required to pay any royalty on mere import of products has not been accepted. Hon ble Delhi High Court has gone by the premise that the royalty is paid on use of the patented products. Ericson has patented various products which are made outside Indian but are only used in India. 91. Learned counsel for the assessee, on the other hand, submitted that neither the full text of this decision is available nor there is anything to demonstrate that Hon ble Delhi High Court was dealing with a materially similar situation. It is also submitted that a press report cannot be legally sustainable basis of any adjudication by a judicial forum. 92. Undoubtedly, 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 jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue before the Tribunal was whether the assessee was entitled to relief under the above provision. It was bounded duty of the Tribunal to consider and decide the above issue and to examine that each of the conditions specified by the section is satisfied. The question relating to satisfaction of the conditions could even be raised by the respondent (Department) in appeal before the Tribunal and it was so raised. The position on this question, relating to power and jurisdiction of the Tribunal is more than clear as per decision of Allahabad High Court in the case of Phool Chand Gajanand vs. CIT (1966) 62 ITR 232 (All) which has been applied by Full Bench of jurisdictional High Court in the case of Ahmedabad Electricity Co. Ltd. vs. CIT (1992) 106 CTR (Bom)(FB) 78 : (1993) 199 ITR 351 (Bom)(FB). Their Lordships have discussed in detail, as to how powers of the Tribunal are to be exercised. In the case of Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232 (SC), which has been followed by the Hon ble Bombay High Court s Full Bench judgment in the case of Ahmedabad Electricity Co. Ltd. (supra), their Lordships of Hon ble Supreme Court were in seisin of a situation in which it was argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in para 4 of their judgment, it was urged before the Tribunal by the Department that although the ITO had not considered the provisions of para 2 of s. 2 of Taxation Laws Order, the said provisions were applicable in the present case and certain amounts of depreciation, which are allowed under the Industrial Tax Rules, which had the force of law in Indore State, were required to be deducted in arriving at WDV of the assets of the assessee . This plea was accepted by the Tribunal and the Hon ble Supreme Court confirmed the action of the Tribunal in doing so. In this view of the matter, not only that admitting the plea regarding the assessee not rendering eligible telecommunication services does not suffer from any mistake apparent on record, but it does not suffer from any mistake at all. The stand so taken by the Tribunal is clearly in conformity with the law laid down by the Hon ble Supreme Court. Once the Tribunal is called upon to examine as to whether or not the assessee is entitled to a claim of deduction, there is no escape from its duty to ensure that the requirements of section are fully complied with and the Tribunal cannot shun away from its duty to exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, 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. 96. We may also refer to the relevant provisions for taxability under the Indo US tax treaty which is reproduced below for ready reference: ARTICLE 12 Royalties and fees for included services 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design. 5. Notwithstanding paragraph 4, fees for included services' does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting State, due regard being had to the other provisions of the Convention. 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. 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 provisions of the Indo US tax treaty as well. 99. For the reasons set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that the revenues received by the Appellant under the BREW Operator Agreement and BREW Carrier Agreement is taxable as royalty income in India under section 9(1)(vi) of the Act and Article 12 of the India -USA tax treaty. The assessee contends that in doing so, the AO has failed to appreciate 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 Copyri ght . 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther mentioned payments made for the acquisition of partial right in the copyright (without the transferor fully alienating the copyrights) will represent a royalty, where the consideration is for granting of rights to use the program in a manner, that 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 H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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. 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. Distinctio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions 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 coextensive 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer 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. 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned representatives fairly agree that whatever is decided for the assessment year 2007-08 will equally apply for this assessment year as well as all the material facts and circumstances of the case, as also grievance of the assessee, are the same. 114. In view of the above position, and following our decision for the assessment year 2007-08, we hold that the observations made in the order for the said year will apply mutatis mutandis to this assessment year as well. The issue regarding taxation of royalty in respect of the CDMA handsets and equipment thus stands restored to the file of the Assessing Officer, and the addition in respect of invoicing the revenues under the BREW agreement thus stand deleted. 115, In the result, the appeal for the assessment year 2008-09 is also partly allowed in the terms indicated above. ITA No. 3701 and 3702/Del/2009 Assessment year 2005-06 and 2006-07 116. That leaves us with the ITA Nos 3710 and 3702/Del/2009, i.e. appeals filed by the assessee for the assessment years 2005-06 and 2006-07 against the consolidated order dated 26th June 2009 passed by the CIT(A), in the matter of assessment under section 143(3) of the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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