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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 ..... 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 the provisions of section 9(1)(vi)(c) of the Income-tax Act, 1961 ('the Act') and Article 12(7) of India -US tax treaty ('tax treaty') for taxing the royalty income of the Appellant earned from the Original Equipment Manufacturers ('OEMs') situated outside India for the patents licensed to the OEMs for manufacture of CDMA mobile handsets outside India. 2. Erred in applying the provisions of section 9(1)(vi)(c) of the Act and Article 12(7) of the tax treaty for taxing the royalty income of the Appellant earned from the OEMs situated outside India for the patents licensed to the OEMs for manufacture of CDMA network equipment out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnologies 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 Products and services; * QUALCOMM Government Technologies ('QGOV') - QGOV provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies; and * QUALCOMM Wireless Business Solutions ('QWBS') - QWBS provides satellite and terrestrial based two way data messaging, position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. iv. QUALCOMM Strategies Initiatives ('QST') - QST manages the company's strategic investment activities, and make strategic investments to promote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reasons: The licencing agreement between Qualcomm and the OEMs is entered outside India; The handsets are manufactured by the OEMs outside India; and The contract from sale between the OEMs and Tata Teleservices and Reliance Communications, both of which are the wireless carriers located in India (collectively, the 'Indian carriers') are on principal to principal basis and Qualcomm is not privy to the contract of sale between the OEMs and the Indian carriers. 9. The assessee further relied on the CBDT circular no. 23, issued on 23.7.1969 by the Central Board of Direct Taxes, to contend that " there is no business connection in India, and, consequently, there is no business in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that, as is settled rule of interpretation, "'basis of computation' is irrelevant when determining the nature of a receipt or an expenditure". It was also submitted that "infact, this is a well settled proposition not only in India but also internationally, as is evident from the following observation by Klaus Vogel (at page 786 of his treatise 'Klaus Vogel on Double Taxation Conventions').... 'the formulae used for determining royalty should not be relevant for the purpose of deciding where the royalty arises". As to the taxability of royalty income from sale of infrastructure equipment by OEMs to the Indian carriers, the submissions of the assessee were summarized as below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal 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, cannot be subjected to tax in India. 12. None of these submissions, however, impressed the Assessing Officer. Relying upon the order of the learned Commissioner (Appeals), in assessee's own case for the immediately preceding years, he proceeded to hold taxability of the royalty paid by the OEMs to Qualcomm, in respect of handsets and infrastructure equipment sold to Indian carriers, by observing as follows: I have perused the submissions made by the assessee and .the order of the CIT (A) for the earlier assessment years on the same issue. In my view the assessee's contentions are not acceptable. Further, the assessments for the previous years on similar issues have been confirmed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to Qualcomm under this Agreement until such time as such Licensed Product has been (a) sold, leased, shipped or otherwise transferred to a person or entity outside of the definition of ........ Licensee...... or (b) put into use by anyone, including but limited to by .......... Licensee whichever shall first occur." It has been stated that the definition of sale could mean invoiced, shipped etc. and sale would occur upon the first such occurrence. The fact that sale means invoiced shipped etc. by itself implies that a party has been recognized to which the goods are invoiced or shipped. In this case, unless the OEM has raised a bill/ shipped the goods to a party in India i.e. Tata or other India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sold in India, requested the Assessing Officer to "adopt the information available on your records and apply the rate of royalty as determined in the assessment order for the AY 2006-07 for computing the royalty income on handsets for AY 2007-08", the Assessing Officer to estimate the royalty income, by adopting 75,00,000 handset units at average rate of US $ 50 each, @ 5%, which worked out to Rs. 81,45,00,000. As far as the quantum of royalty on infrastructure equipment sold to Indian carriers is concerned, the assessee submitted that "licensees reporting royalties on CDMA infrastructure equipment donot report sales in sufficient details to enable Qualcomm to provide amount of royalty received for sale of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igital cellular networks used by mobile phones, it is not a complete protocol 1 (Groupe Spécial 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 context, refers to "operating syst ems using CDMA technology", which are invented and produced by Qualcomm, the precise technical meaning of CDMA technology is restricted to an "access method for wireless data transmission system". It is very important to bear in mind this distinction between colloquial use of the expression 'CDMA technology' and its technical meaning. 19. It is also important to bear in mind that unless a CDMA handset, whether manufactured in India or abroad, is whitelisted by a network, it cannot be used by a subscriber on that network. In other words, the use of a CDMA phone instrument, whether locked or unlocked, by a subscriber is dependent on the network's permission to do so. That means a consumer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 beyond the period covered by any of these assessment years, the illustration given by the assessee, which we have reproduced at the bottom of paragraph 10 earlier in this order, does not seem correct. If a consumer could simply chose, at his sweet will, any service providers of his choice, the invention of OMH would not have been necessary at all. 23. Let us, in this light, take a look at the following significant factual submissions made by the assessee in assessee's own case for the assessment years 200-01 to 2004-05 - reported as Qualcomm Inc Vs ADIT [(2013) 23 ITR Tribunal 239] which were accepted by a coordinate bench: iv. Customisation such as locking the handset to enable operation only with a specific operator and other operators wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 home system. 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. (Emphasis, by underlining, supplied by us) 25. It could be useful to carefully analyse the facts of Asiffudin's case (supra), in a little more detail, to understand some relevant aspects of the working of the CDMA industry as appreciated by Their Lordships. 26. It was a case in which a police complaint was lodged by Reliance Infocomm Limited alleging that "certain vested elements of the trade of mobile telephone services began to woo the subscribers of Reliance India Mobile (RIM) into various other schemes promoted by other similar service providers, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 Limited and re-programming with their network with different tariff packages. At the time of conducting raid in Secunderabad Office of TATA Indicom, the investigating officer also came across one Shaik Mustaffa who stated that he purchased handset from Reliance Infocomm network. Therefore, the investigating officer arrested Raj Naren and Shaik Mustaffa, and seized two mobile telephone handsets, one each from the possession of the two arrested persons. On examination, it was found that the handset recovered from Raj Naren is Samsung N191 cobranded with Reliance with ESN No. 3F7AB 832. The said set was migrated to TATA Indicom with No. 56376361 allotted by TATA Indicom. Its original Reliance India Mobile number was 31086523. The two accused along with mobile sets were brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A 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 their customers and so far as many as 63 customers belonging to Reliance Infocomm so far migrated to TATA Indicom by illegal means. ...... 20. The main allegation against the petitioners is that the MIN of Reliance phone is irreversibly integrated with ESN and the petitioners hacked ESN so as to wean away RIM customers to TATA Indicom service. The question is whether the manipulation of this electronic 32-bit number (ESN) programmed into Samsung N191 and LG-2030 cell phone instrument exclusively franchised to second respondent amounts to altering source code used by these computer handsets i.e., cell phone instruments. In the background facts, a question would also arise whether such alteration amounts to hacking with computer system? If the query answered in the affirmative, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his, "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 the purpose of Section 65 of I.-T. Act. Going by the definition, ESN of Samsung N191 model cell phone handset or ESN of LG-2030 model cell phone handset exclusively used by the second respondent as well as SID of second respondent come within the definition of computer source code. Every cell phone operator is required to obtain SID from the licensor i.e., Government of India. Further, ESN is a permanent part of the phone whereas MIN and SID are programmed into phone when one purchases a service plan and have the phone activity. When a customer of second respondent opts for its services, the MIN and SID are programmed into the handset. If someone manipulates and alters ESN, as per the case of second respondent, Samsung/LG handsets which are exclusively used by them become usable by other service provider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 acts specified in Clause (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme : Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental; (c) and (d) omitted. 28. Therefore, reading Section 2(o), (ffc) and Sections 13 and 14 together, it becomes clear that a computer programme is by very definition original literary work and, therefore, the law protects such copyright. Under Section 63 of the Copyright Act, any infringement of the copyright in a computer programme/source code is punishable. Therefore, prima facie, if a person alters computer programme of another person or another computer company, the same would be infringement of the copyright. (Emphas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stem, 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 demonstrate that the findings of Hon'ble Andhra Pradesh High Court were not valid in the present context, to demonstrate that the technical parameters were different in the present context or that the understanding of Their Lordships is at variance with the actual facts of the case before us. There is no material before us to come to such conclusions. 32. In any case, as a corollary to the working of handsets as explained above as well, unless ESN of a CDMA handset was registered with a service provider as belonging to a particular subscriber, and approved by the service provider as such, such a CDMA handset could not have been used by any subscriber. 33. Whether a CDMA handset, at that point of time, could be used on any CDMA network, in the unfettered discretion of the subscriber, or not, is a purely factual matter. Even as learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 assessee, on this purely factual but highly technical aspect, can be accepted. 36. Undoubtedly, the CDMA handsets being Indian carrier specific cannot be an excuse enough for taxability of profits on manufacturing of these handsets. The profits so earned by the OEM has to be essentially taxed in the tax jurisdiction where the manufacturing activity is carried. However, we are not really concerned with the taxability of those profits either. 37. As one of the fundamental issues requiring our adjudication in this case is whether or not the OEMs were carrying out business in India, and as it is one of the contentions of the revenue authorities before us that the OEMS were carrying on business in India through their permanent establishments (PEs) which are de facto projections of the OEMs in India, the CDMA handsets being service provider specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 in the tax jurisdiction where the handsets are used, i.e. the situs of use of handsets. 42. As we will see as we go along, the taxation of royalties for use of a technology, on the first principles, is the situs where the technology is used. Accordingly, when the royalty is for use of a technology in manufacturing, it is to be taxed at the situs of manufacturing the product, and, when the royalty is for use of technology in functioning of the product so manufactu red, it is to be taxed at the situs of use. 43. While we examine taxability of the royalty in respect of the CDMA handsets which were meant for and customized for Indian service providers, and used in India, it will be useful to begin by taking a look at the conceptual framework for taxation of royalties and the legal provisions in respect of the same. 44. In 'Tax Law Design and Drafting' , o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Income Tax Act, 1961, enable source taxation of royalties in India when the products, in respect of which the royalty is paid, are used in India. 49. Section 9 of the Income Tax Act, 1961, which is an unambiguous extension of source rule, deals with the 'incomes which are deemed to accrue or arise in India'. Clearly, therefore, an income, in order to be taxed in India under section 9, need not accrue or arise in India. 50. Let us take a pause here. While on this aspect, i.e. the deeming fiction of income accruing or arising in India, it will be useful to take a note that Prof Michael Lang, a well known contemporary commentator on international taxation and renowned international tax academician, has made following interesting observations, in the context of s. 9 in his book 'Introduction to the Law of Double Taxation Conventions' (an IBFD Publication by Linde, Austria; I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade-mark or similar property; (ii) the imparting of any information concerning the working of or the use of, a patent, invention, model, design, secret formula or process or trademark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade-mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axation 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 tax jurisdiction in which manufacturing activity is carried on rather in the tax jurisdiction in which ultimate consumer of product i s located. However, if the patent is used by the end consumer and the manufacturer of a product is only a conduit for collection of such a consideration for use by the end consumer, the taxation would be warranted in the end use jurisdiction. 58. It is in this light of the scheme of taxation of royalties, as implicit in the definition of royalties and as provided in Section 9(1)(vi)(c), that we have to examine the contextual connotation of payment of royalties for any right, property or information used or service utilised use "for the purposes of business or profession carried on" by a non- resident in India and "for the purposes of making or earning any income from any source" by a nonresident in India. 59. Learned counsel suggests that this area is no longer res integra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 itself is not decisive and sufficient for the purpose of exclusion from the scope of Section 9(1)(vii). The services should be for the purpose of earning an income from a source outside India. A customer is not the source of income, he is an important part of the business, which, in turn, is the source of income. 60. It is, however, necessary to appreciate the context in which these observations were made. That was a case in which a German entity was paid testing fees for certain leather products manufactured by an Indian exporter. The case of the assessee was that the fees so paid, which was covered by the definition of fees for technical services under section 9(1)(vii), was not taxable in India as it was covered by the exclusion clause set out therein which provided that "utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 importance. Even when an expression is statutorily defined, a s is unambiguously obvious from the opening words of Section 2 of the Income Tax Act, 1961, these statutory definitions hold good only "unless the context otherwise requires". The importance of context in which an expression is placed is, therefore, of the paramount importance. The context in which the expression 'business carried outside India' was interpreted in the said decision was that only factor, based on which the business was claimed to have been carried outside India, was that the customers of the assessee were outside India and it was nobody's case that the assessee had any other business involvement outside India. In sharp contrast with that situation, here is case in which the royalty in question, and not fees for technical services as was the position in Metro & Metro (supra), was for use of patents in the end products in India. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 India, it would be taxable in India. 66. We may also mention that during the course of the proceedings before us, learned Departmental Representative has filed two volumes of documents, containing agreements between the assessee and the OEMs, the OEMs and the Indian service providers, and the incentive agreements, to throw light on the business of the assessee. These documents were filed before us as additional evidences, and the assessee has also moved a petition dated 25th June 2014 seeking admission of these additional evidences. Having heard the rival contentions on this prayer of the assessee, we consider it appropriate to admit these additional evidences as these documents, in our considered view, help us appreciate the nature of business carried on by the assessee and the business model adopted by the assessee, which is very important in determining whether or not the assessee could be said to be carrying on bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dditional 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 Solutions Inc 69. Learned Departmental Representative has also filed a copy of the assessment order for the assessment year 2005-06, in the case of Huawei Technologies Co. Ltd, which indicates that not only that they had a presence in India, the said entity was making sales, through its PE in India, to different customers based in India. Our attention is also invited to several decisions of the coordinate benches of this Tribunal wherein the taxability in the hands of these OEMs has been upheld in India. 70. When the assessee was confronted with these documents, learned counsel's defence was two fold. His first point was that non taxability of the OEMs in India was not the only reason as to why the coordinate bench came to the conclusion that the royalty income in question is not t axable in India. His second point, which was without prejudice to the first line of defence, was that it is not established that the these OEMs were taxable in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-company over the sales-territory and product lines allocated to the subsidiaries notwithstanding the considerable amount of management and financial reporting which was required of the subsidiary. This decision of the Belgium Supreme Court, if regarded as persuasive in other countries, is of immense relief to multinational corporations (MNC) which often do lay down strict guidelines for the operations of their subsidiaries [vide Michael Edwardes- Ker's Book, The International Tax Treaty Service published by In-Depth Publishing Ltd., 1978 Dublin (13)]. 38. The Swiss Bundesgericht (judgment of the Swiss Bundesgericht dt. 17th Sept., 1977 on Swiss-Spanish Treaty) had to interpret the Swiss-Spain Treaty and decide whether the "representative-office" of a Spanish bank constituted a "permanent establishment" in Switzerland. The Bundesgericht, whilst it cited the commentary of the 1963 O.E.C.D. Model, held that it was not such a "permanent esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il, 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 the matter also, the matter deserves to be remitted to the file of the Assessing Officer. 76. As we part with this issue, we may mention that the coordinate bench in assessee's own case had observed as follows: "A sale to India without any operations being carried out in India would amount to business with India and not business in India. For the business to be carried out in India there should be some activity carried out in India. Thus the argument that if manufacturing is done in one jurisdiction and sales in the other jurisdiction, then there is business in another jurisdiction is devoid of merit". We are in complete agreement with the views so expressed by the coordinate bench. However, that was a case in which not only that there was no material to suggest that any activity is carried out in India, there was no evidence of taxability of income of those OEMs in India. In the present case, however, primary evidence about the taxability of these OEMs in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by the coordinate bench in the case of Metro & Metro (supra), the royalty is a consideration for use of an intangible asset and is covered by the second limb of exception clause set out in Section 9(1)(vi)(b). While dealing with this aspect, the coordinate decision, relied upon by the learned counsel, itself states, at the cost of repetition, as follows: .........However, the scope of second limb of this exception is rather narrow. As against use of expression 'profession or business carried on .......outside India', this exception refers to use of service in 'making or earning any income from any source outside India'. In order to be covered by this exception, what is material is that, irrespective of where the 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hts, 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 documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements; (h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights; (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; 82. It is thus clear that in order to attract taxability under second limb of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Explanation IV to S.9(1)((vi) has been inserted. It was submitted that the argument that OEM sell copyrighted article or thing and the argument and that they do not give any right in the copy right, is of no consequence post this amendment as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 underlining, supplied by us) 84. As evident from the above extracts, while this coordinate bench noted that the case of the revenue is that "Qualcomm has made available to the OEMs its patented intellectual property relating to CDMA technology in the form of chip sets/ASIC and that OEMs have inserted these chip sets into the handsets/network equipment manufactured by them and that these in turn have been licensed to Indian operators for which OEMs have received a consideration and hence they have a source of income in India", the coordinate bench dealt only with the question of taxability of software embedded in the chip set. In paragraph 163 of the coordinate bench's decision, which has been reproduced above, the coordinate bench has dealt with only software as an intellectual property. 85. The connotations of the expression "intellectual property", in our humble understanding, cover much more ground that "software" simplicitor and essentially include use of any patent or patented techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 this subject, it is useful to take note of a recent press report, to which our attention was invited by the learned Departmental Representative vide his note dated 21st November 2014, which is as follows: Economic Times, New Delhi ; November 20, 2014 Delhi HC Asks Micromax to Pay Royalty to Ericsson Soma Das & Anandita Singh Mankotia; New Delhi: Co told to pay royalty till the court arrives at a final order; may have to shell out Rs. 10 crore a month The Delhi High Court has asked homegrown handset maker Micromax to pay a royalty that amounts up to 1% of the selling price of its devices to Ericsson for using the Swedish equipment maker's patents on technologies that are essential to manufacture the products. The interim order holds until December 31, 2015, the deadline set by the court to conclude the trial. The Gurgaon based company may have to shell out about Rs. 10 crore every month at least till that time, said an industry executive. If the final verdict upholds the interim order, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presenting Ericsson in this case. Ericsson has argued that it has similar payment arrangements with many handset makers globally and to support the claim, it furnished at least 26 licence agreements. The court, after perusing the royalty rates contained in those agreements, arrived on this rate, which both parties agreed upon, according to the order. Micromax has also made clear that it has little operations overseas and when it plans to expand to other markets, it will negotiate royalty rates separately with Ericsson under global guidelines. Micromax seems to have agreed to this arrangement for now because it was already depositing almost double that amount in the court since last year, said a senior executive at a rival handset firm. It has also challenged the validity of many of Ericsson's patents in Indian courts, he added. Industry executives on condition of anonymity told ET that negotiations between Micromax and Ericsson got stuck mainly because the former wanted to link the payment to the value of the chipset while the latter insisted that it be a share of the hand-set value as is the case globally. A patent expert said standards patent holders such as Ericsson shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 93. 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. The proceedings before the Tribunal are not adversarial proceedings. While the subject matter of dispute before the Tribunal may not be enlarged, and, to that extent, the case of the revenue authorities cannot be improved, there is no bar on examining all the related factual and legal aspects of the subject matter of issue before the Tribunal. The subject matter of dispute before us is taxability of royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dabad Electricity Co. Ltd. (supra), their Lordships of Hon'ble Supreme Court were in seisin of a situation in which it was argued before their Lordships that "the Tribunal was not competent to go into the question whether the provisions of para 2 of Taxation Laws Order were applicable to the present case and the respondent (i.e. the Revenue) should be allowed to raise this contention for the first time before the Tribunal". In essence, therefore, one of the qualifying conditions, which was not considered by the AO or CIT(A), was disputed for the first time before the Tribunal. It was in this background, and dealing with the powers of the Tribunal under s. 33(4) of the 1922 Act, which are exactly the same as under s. 254(1) of the present IT Act, 1961, Hon'ble Supreme Court, inter alia, observed as follows : "8. .......Tribunal had jurisdiction to permit the question to be raised before it for the first time in appeal. The powers of the Tribunal, in dealing with the appeals are expressed in s. 33(4) in the widest possible manner.......... 9. The word 'thereon' in s. 33(4) of the 1922 Act, of course, restricts the jurisdiction of the Tribunal to the subject-matter of appeal. The wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o ensure that the requirements of section are fully complied with and the Tribunal cannot shun away from its duty to examine all the eligible conditions merely on the ground that some of these conditions are not specifically rejected by the authorities below. As is clearly evident from the observations made by the AO, which have been extracted hereinbefore, the claim is rejected on one ground but such a rejection cannot be construed to mean that all other conditions are taken as complied with. As far the observations made by the AOs in the course of assessments for the other assessment years, it is not open to us to deal with those assessment years at this stage. 17. It is also contended that the appellant cannot be worse off as a result of being in appeal but that argument proceeds on a factual misconception in as much as the assessee was never allowed the deduction, even partly, under s. 80-IA by any of the authorities below and, therefore, no disadvantage is caused to the assessee by being in appeal. So far as the issue in appeal was concerned, the position was exactly the same before and after the appeal was disposed of by the Tribunal, i.e., the assessee was disallowed deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article (other than services described in sub-paragraph (b) of this paragraph ): (i) during the first five taxable years for which this Convention has effect, (A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company; and (B) 20 per cent of the gross amount of the royalties or fees for included services in all other cases; and (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent personal services). 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business profits) or Article 15 (Independent personal services), as the case may be, shall apply. 7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Indo US tax treaty as well. 99. For the reasons set out aboe, we are of the considered view that further examination about certain basic facts of the case is required, and a categorical finding about those factual aspects, which have been elaborated upon ea rlier in these discussions, is a necessary for proper adjudication on the grievances raised by the assessee. In the absence of such findings, in our humble understanding, it is not appropriate to decide the matter one way or the other. We, therefore, remit the matter to the file of the Assessing Officer in terms of our directions set out earlier in this order. 100. Ground nos. 1 to 3 are thus allowed for statistical purposes in the terms indicated above. 101. As we part with these grounds, we may mention that our disposal of these grounds is not quite the same as was done by a coordinate bench in assessee's own case for the preceding assessment years, but then we have, in view of the facts subsequently coming to notice i.e. about taxability of the OEMs in India, and, in view of the Special Bench decision in the case of Tata Communications Ltd (supra) as also full bench decision of Hon'ble Bombay High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and wireless device's chip operating system so that programmers can develop applications for wireless device without the code for system interface or understanding operating systems. It was also noted that end users of BREW customers are the carriers who pay an enablement fees based on device sales or a revenue share for application software that are downloaded. On these facts, the Assessing Officer proceeded to bring the same to tax by observing as follows: I have perused the submissions made by the assessee. However, this hypothesis is not correct as Software is licensed and not sold. Furthermore 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early covered, in favour of the assessee, by Hon'ble Delhi High Court's judgment in the case of DIT Vs Infrasoft Limited [(2014) 264 CTR 329] wherein Their Lordships have, inter alia, observed as follows: 85. The Licensing Agreement shows that the license is non-exclusive, nontransferable and the software has to be uses in accordance with the Agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and associated support information 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all 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 us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA. 92. The licensees are not allowed 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 to any t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be business income. 98. We are not in agreement with the decision of the Andhra Pradesh High Court in the case of SAMSUNG ELECTRONICS CO. LTD (SUPRA) that 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 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. 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. 99. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consolidated order for the assessment years 2000-01 to 2006-07. 117. Vide order dated 31st January 2013, a coordinate bench of this Tribunal has already adjudicated upon this CIT(A)'s order, though only for the purposes of assessment years 2000-01 to 2004-05, so far as the addition in respect of royalty income in respect of the CDMA handsets and equipment is concerned and right now the matter is pending for adjudication before Their Lordships of Hon'ble High Court. One of the arguments raised by the learned Departmental Representative before us is that the order of the CIT(A) has, for all practical purposes, merged in the order passed by the coordinate bench, and, therefore, it is no longer open to us to adjudicate on the same. It is thus suggested that propriety requires that all the appeals, in respect of which a common order is passed, should be heard together and even the appeals, which are already disposed of, should be recalled for that purpose. On the other hand, learned counsel for the assessee has submitted that there is no merger of the CIT(A)'s order in the coordinate bench's order, and, therefore, the point being made by the learned Departmental Representative is devoi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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