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TMI Blog2018 (4) TMI 1362X X X X Extracts X X X X X X X X Extracts X X X X ..... SA Tax Treaty. Ground No. 3 of the appeal of the assessee is allowed. The taxation of royalty in respect of the CDMA handsets and equipment and the addition in respect of invoicing the revenues under the BREW agreement thus stand deleted. - ITA No. 5353/Del/2012, ITA No. 1241/Del/2014, ITA No. 7064/Del/2014, ITA No. 189/Del/2016 And ITA No. 6732/Del/2015 - - - Dated:- 16-4-2018 - SHRI H.S.SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Shri Percy Pardiwala, Sr. Adv Ms. Jasmin, Adv Shri Naveen Agarwal, FCA Ms Busrath Farheen, CA For The Revenue : Shri G. K. Dhal, CIT DR ORDER PER PRASHANT MAHARISHI, A. M. 1. These are the bunch of 5 appeals out of which 4 appeals are filed by the assessee for assessment year 2009 10 to assessment year 2012 13 and one appeal filed by the Assessing Officer for Assessment Year 2012 13. As all these appeals involve common issue, we have heard them together and disposed of by this common order. We first set out the facts for AY 2009-10, then decide the issues for that year, and apply our decision for other years. ITA No 5353/ del/2012 A Y 2009-10 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome amount in rupees 1 Invoiced under BREW operator agreement with Tata Tele services Ltd ₹ 55216185/ 2 Amount received from reliance under BREW carrier operator agreement ₹ 1 263 2500/ 4. The assessee filed its return of income on 8/9/2010 declaring total income of rupees Nil. According to the assessee the above, income earned by the assessee mentioned at serial No. 1 and 2 of the above table are not taxable in India. The main reason given by the assessee is that above income based on the nature of services rendered by assessee to Tata and Reliance, the provisions of article 12 of Indo USA DTAA are section 9(1)(v)(c) are not in the nature of royalties/fees for included services. Hence, according to the assessee they are not taxable in India. 5. It is important to note the assessment history in case of this assessee to cull out the controversy involved in the present appeals. Undisputedly the assessing officer has also noted the same at page No. 3 to 5 of the assessment order as under:- 2. Assessment history of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Department s case to tax the royalty arising out of the global contract between OEMs and QUALCOMM but only so much of royalty, which pertains to sales made in India. The source of income of OEMs is sales made to parties in India based on which royalties are paid to QUALCOMM. Thus in terms of section 9(1) (vi)(c) of the Act royalties payable to QUALCOMM are deemed to accrue or arise in India. where under subparagraph (a), royalties or fees for (iv) In terms of article 12 (7) (b) of the DTAA between India and USA, the royalty arising to QUALCOMM is clearly taxable in India. The relevant article is reproduced as under:- where under subparagraph (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. (v) It is not a case, where the royalty has been paid on lump sum for the use of CDMA technology but is an ongoing payment dependent on the volume of sales. The rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the act as it is still an admitted fact that royalty arises to QUALCOMM only when the customer is identified by the OEMs. In the Indian situation since the customers (Tata and Reliance) 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. (ix) The above position is strengthened and in view of the assessee s own submission 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. (x) In view of the above discussions, royalties arising to QUALCOMM from the sale of infrastructure equipments 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. (d) For the earlier year s assessment orders, the assessee had preferred an appeal before the Ld. CIT (A). These appeals wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the income tax act and further applied tax at the rate of 15% as per article 12 of DTAA. c. On receipt of information from Tata Tele services Ltd, that it has paid a sum of ₹ 8121093810/ to various suppliers. However it was noted that ₹ 3045237894/- is not paid as they were not licensee of QUALCOMM in relation to CDMA infrastructure equipments. However with respect to the remaining sum of ₹ 5075855916/ is the royalty was considered at 5% of the above sum as per the assessment in earlier years. d. Therefore accordingly the Ld. assessing officer computed the amount paid by reliance to OEMs of QUALCOMM of ₹ 37512459/ and amount paid by Tata Tele Services Ltd to OEMs of QUALCOMM of ₹ 5075855916/ the Ld. AO assumed rate of royalty @ 5% and held that royalty is taxable in India on CDMA equipment of ₹ 255668419/ . The Ld. AO further taxed it at the rate of 15% as per the article 12 of the double taxation avoidance agreement between India and USA amounting to ₹ 38350263/ . e. The royalty from BREW operator agreement amounting to ₹ 67848685/ was also considered and 15% thereof amounting to ₹ 10177303/ was considered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coordinate bench has decided both the above issue in favour of the assessee. (Hereinafter referred to as ‗first order ) b. For assessment year 2005-06 to assessment year 2008 09 based on the additional evidences submitted by the revenue, the coordinate bench remitted the matter back to the Ld. assessing officer. (hereinafter referred to as ‗Second order ) He therefore submitted that the only difference between the above two orders of the coordinate bench on the same set of facts is that in the later decision for assessment year 2005 06 to assessment year 2008 09 the revenue filed additional evidences in the form of income tax returns of the original equipment manufacturers in India. He submitted that for these years in appeal before the coordinate bench now i.e. assessment year 2009 10 to assessment year 2012 13, no such additional evidences have been filed by revenue. Therefore, the issue is squarely covered in favour of the assessee by the order of the coordinate bench for assessment year 2000-01 to assessment year 2004-05. He also extensively read both the orders of the coordinate bench to draw the distinction between both of them and submitted that in absen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings against several OEMs to tax their income are pending with various tax authorities. Therefore, it was not correct to say for the coordinate bench that OEMs are not being assessed to tax in India. The revenue also challenged that the coordinate bench in holding that no title to the goods passed in India and no further activity was done by the OEMs in India after the sale. With respect to para No. 142 of the order, revenue submitted that the installation in India is of the equipment of the CDMA technology licensed by QUALCOMM and it would be totally erroneous to split the activity of installation as being bereft of QUALCOMM s technology and the supply of equipment being with such technology. The revenue argued that the installation activities are integral to the supply and any such segregation is highly erroneous. Vide para No. 10 of the order of the coordinate bench dismissing the miscellaneous application of the revenue has held that the revenue failed to file any evidence in support of its contentions that the OEMs were brought to tax in India on the income, which is the subject matter in these appeals. On the other issues, the coordinate bench dismissed the miscellaneo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts decided by the coordinate bench in assessment year 2000-01 to 2004-2005. He therefore submitted that the issue is squarely covered in favour of the assessee as per order dated 31/01/2013 and facts stated in order dated 28/02/2015 being absent in these years is not applicable. Arguments of the Revenue 14. The Ld. departmental representative vehemently submitted that even if there are no additional evidences filed by the revenue it is an established fact that all OEMs are assessed to tax in India on their income. He referred to article 12 of the Indo US DTAA to submit that in that article the word ‗only is missing. He therefore submitted that the part of the royalty income should have the right of taxation with the source country. He therefore submitted that according to DTAA source country has also the right of taxing the royalties of some part. 15. He further referred to the para No. 137 of the order of the coordinate bench for assessment year 2000-01 to 2004-05 and submitted that in that particular case the issue was decided holding that business of OEM and profit on it is on outside India, manufacturing is also outside India, and IP rights are utilize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary global scenario, the place of business of an entity is not merely the place of manufacturing the products but even a place where the entity has a permanent establishment, where the assessee is carrying on its business inasmuch as the very definition of the permanent establishment under the basic rule of permanent establishment. He submitted that when an entity accepts the taxability by the virtue of having permanent establishment, normally it could not be said that assessee is not carrying on business in that tax jurisdiction. He therefore submitted that when the OEMs have a permanent establishment in India then they are carrying on business in India. He further referred to para No. 76 of the second order and submitted that when OEM has a permanent establishment in India it could not be open to them to say that they are not carrying on any business in India. He therefore submitted that the all OEMs are carrying on business in India and therefore the Ld. AO has correctly charged the royalty as ‗source of such income is also in India. 18. With respect to the furnishing, any additional evidence, he submitted that additional evidences are not required, as AO has already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ara No. 177 of the first order of the coordinate bench and submitted that the findings of the coordinate bench are not in accordance with the order of the Hon ble Andhra Pradesh High Court in asafudin s case (supra). 24. In the end, his main contentions were reiterated that royalty is paid by non-resident OEMs in respect of patents used for the purpose of business in India of those OEMs. He further submitted that such royalty is also paid for the business of OEMs in India whose source is Indian carriers, which is in India. He extensively relied on the second order of ITAT and submitted that issue needs to be set aside identically for determining issue and correct facts of taxation of royalty in the hands of the assessee. Rejoinder of the assessee 25. In rejoinder The Ld. authorized representative vehemently submitted that the revenue has to come out and clearly establish that royalty is chargeable to tax under section 9(1)(vi)(c) under the Indian Income Tax Act as well as under article 12(7)(b) of the Double Taxation Avoidance Agreement. He further submitted that agreements are entered into outside India, manufacturing was also outside India IP are used are also resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness in India with respect to the CDMA technology except the sale of the handsets from the other jurisdiction. 30. He further submitted that the argument of the Ld. departmental representative that additional evidences are not required is not correct. He submitted that if the revenue wants to tax the royalty in India it has to place the additional evidences as in the case of the assessee for assessment year 2007 8 and 2008 9 in the 2nd order of the tribunal. He further submitted that onus is on the revenue to prove both the limbs of section 9(1)(vi)(c) of the Act. It has to show that OEMs in India carry on business or profession and such patents are ‗used or ‗utlised in India. Revenue has also to show that source of income of OEMs is in India. Merely, sales in India does not become source in India. 31. He further referred to para No. 142 (C) of the 1st order wherein the argument of the revenue that the patented technologies used by the OEMs to manufacture India specific products and that the handsets are customized and programmed to include to a specific operator and coordinate bench has held that the ‗patents in question on which royalties s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low the first order of the coordinate bench holding that such income of the appellant is not royalty under section 9(1)(vi)(c) of the Act and hence are not taxable in India. He further stated that once the income is not chargeable to tax in India according to the provisions of the Indian Income Tax Act 1961 there is no reason to look into the provisions of the Double Taxation Avoidance Agreement. Reasons and Decisions 34. We have carefully considered the rival contentions and perused the orders of the lower authorities. Appellant engages in the design, development, manufacture, marketing and licensing of digital wireless telecommunication products and services based on Code Division Multiple Access [CDMA] technology. The four principal business units of Qualcomm are as follows : (i) Qualcomm CDMA Technologies CQCT)-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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... among other purchasers, to Tata Teleservices and Reliance Communications, both of whom are wireless carriers located in India. The Indian wireless carriers purchased the products manufactured by the OEMs outside India from the OEMs. The Indian Carriers, in turn, sold the products to end users in India. Customers of the Indian Carriers in India use the products. 36. In the present case , the issue before us is whether the royalty income earned by the assessee from use of patents by the CDMA Mobile Handset manufacturers based outside India is taxable as Royalty as per provision of section 9 (1) (vi) (c) and art. 12(7)(b) of the DTAA between India and the Unites States. 37. These issues have been decided in the assessee s own case by two different orders of ITAT as under :- i. IT APPEAL NOS. 3696 TO 3700 (DELHI) OF 2009 [ASSESSMENT YEARS 2000-01 TO 2004-05] dated JANUARY 31, 2013 where in for all those years it was held that income earned by the assessee from OEMs is not chargeable to tax in India u/s 9 (1) (vi)(c) of the Act as Royalty income. ii. IT Appeal Nos. 3701 3702 (Delhi) of 2009, 5343 (Delhi) of 2010 and 4608 (Delhi) of 2011 [ASSESSMENT YEARS 2005-06 TO 2008-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lished that the these OEMs were taxable in India in respect of their business income relating to the sale of the CDMAs and unless that fact is conclusively established, it cannot at all be suggested that the assessee was carrying on any business in India. 71. We find that there is major change in the facts of the case before the coordinate bench vis- -vis the facts of the case as before us. While there was nothing to suggest that the OEMs were subjected to tax in India in respect of their business income, and this was, as we have noted from the extracts reproduced earlier in this order, one of the factors leading to the conclusion that the OEMs were not carrying on any business, right now we have reasonable evidences to suggest the OEMs in question, who have made payments of the impugned royalty, were carrying on business in India leading to their taxability in India. b. With respect to the existence of PE of OEMs in India it is held that M whether the royalties paid were used for the purposes of the business which was carried on in India. c. For the reason that the earlier decision of coordinate bench examined the ‗patent technology onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the OEMS for the year AY 2009-10 to AY 2012-13. No other evidences or judicial precedents were also cited before us to show the taxability in the hands of OEMS in India as shown in para no 69 of the second order of ITAT. According to sub-cl. (c) of sec. 9(l)(vi) of the Act, in case of a nonresident, the burden is on the Revenue to prove that the royalty is payable in respect of any right, property or information used or services utilized for the purpose of a business or profession carried on by such person in India or for the purpose of making or earning any income from any source in India. In absence of any such evidences filed by the revenue, we are not in a position to hold that OEMS were carrying on any business in India. Even for some of the years it was shown that the OEMS were carrying on business in India but not with respect to CDMA Patent Technology, those were all the evidence showing the business of OEMS for GSM technology. We also do not agree with the contention of the ld DR that additional evidences are not required for those years. Therefore, in the present case, we do not have any evidence to suggest that OEMS in question, who have made payments of Royalty, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a person who is a resident except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or a person who is a non-resident where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. 128. Sec. 9(l)(vi)(c) is a deeming provision and has to be construed strictly. A plain reading of this section shows that any income by way of royalty is taxable in India, if such royalty is payable by a non-resident in respect of any right, property or information used or services utilized : for the purposes of business, or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India. 129. When an assessee claims that it is covered by exceptions to cl. (b) to sub-cl. (vi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i.e. patents) for the purpose of carrying on business in India or for the purpose of making or earning income from a source in India. 134. The learned AO as well as the learned CIT(A) have based there findings only on the 16 licensing agreements between OEMs and the assessee. The learned special counsel. Mr. G.C. Srivastava for the first time before this Tribunal filed the following agreements as additional evidence to substantiate the case of Revenue to tax the royalty income earned by Qualcomm under sec. 9(1)(vi)(c) of the Act: Equipment purchase agreement between the Tata Tele Services and Motorola Inc. dt. 8th Dec., 2007; Equipment purchase agreement between the Tata Tele Services and ZTE Corporation dt. 19th Feb., 2007. 135. We agree with Mr. Dastur, that cognizance cannot be taken of these agreements as they relate to the financial year 2006-07 relevant to asst. yr. 2007-08 and asst. yr. 2007-08 have no relevance to the case on hand. The learned special counsel sought to make out a new case with the aid of these additional agreements. 136. Nevertheless we consider Mr. G.C. Srivastava's submission that these agreements of Tata Tele Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licensee a personal, non-transferable, worldwide and nonexclusive license under Qualcomm's Intellectual property solely for wireless applications to (a) make (and have made), import, use and sell, lease or otherwise dispose of subscriber units, and (b) to make (and have made) components (provided such components have been exclusively designed by licensee and which design is owned and used exclusively by licensee) and import, use and sell, lease and otherwise dispose of components but only if such components are included as part of and within subscriber units sold by licensee or as replacement parts for subscriber units previously sold by licensee. No other, further or different license is hereby granted or implied. Qualcomm's Intellectual property (page No. 236 of the paper book) 'Qualcomm's Intellectual Property' means Qualcomm's Technically Necessary IPR and Qualcomm's Included Commercially Necessary IPR and company 3 patents; provided that, notwithstanding the foregoing, the term 'Qualcomm's Intellectual Property' shall not include any intellectual property, including but not limited to patents, owned by Snap Track. Inc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se dispose of components but only if such components are included as part of and sold within licensee infrastructure equipment or as replacement parts for infrastructure equipment previously sold by licensee. No other, further or different license is hereby granted or Implied. Notwithstanding the foregoing, licensee, may exercise its 'have made' rights above with respect to components not designed by or for licensee (according to specifications provided by licensee) only to the extent that the third party benefiting from such 'have made' rights does not assert, through itself or its affiliated entities patent infringement litigation against Qualcomm or licensee and Qualcomm agrees that it will not charge royalties to any third party with restrict to the sale by such third party of components to licensee to the extent that such third party is making such sale under licensee 'have made' rights and is not using or otherwise infringing upon any of Qualcomm's patents not the subject of such 'have made' rights.' Qualcomm's applicable subscriber patents (page No. 275) : 'Qualcomm's applicable subscriber patents' means Qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dio-telephone system for wireless applications, including but not limited to BTSs, BSCs and system switches (and equipment and software for corporation therein), but the term does not include, by way of example and not by way of limitation, components, subscriber units, radiomodules or any other subscriber equipment. 2. Agreement between Tata Teleservices Ltd. and ZTE Corporation for supply of CDMA equipment (reference-agreement 2 filed by the Revenue as additional evidence) Extract of relevant clauses from the agreement on transfer of title and risk of the equipment Clause 14.1 - Title and risk of loss (page No. 33) : 'Without prejudice to TTSL's right to reject as set forth in art. 6.4 of this agreement, the title of all equipment sold hereunder shall pass from the supplier to TTSL in high seas before arrival In India and the risk of loss to the hardware portion of all equipment shall pass from supplier to TTSL upon provisional acceptance.' 3. Agreement between Tata Teleservices Ltd. and Motorola Inc. for supply of equipment (agreement 1 filed by the Revenue) Extract of relevant clauses from the agreement in relation to transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the OEMs to manufacture India specific supplies. Hence there is a certain degree of use of the property for the purpose of carrying on business in India; Placing reliance on the decision of the Hon'ble Andhra Pradesh High Court in the case of Syed Asifuddm (supra), he submitted that the handsets are specifically designed and programmed for Reliance. Relying on various clauses in the equipment purchase agreement entered by Tata with ZTE and Motorola, he contended that despite the declaration in cl. 14.1 to the agreements, the agreement has to be read as a whole to ascertain the intent of the parties. He submitted that if the agreement is read as a whole, the intent of the parties is amply clear that the title of the equipment passes in India at the site where the deliveries are made or in a worst scenario at the airport/seaports in India. 142. We are unable to agree with the contention of the learned special counsel for the following reasons : Accepting such a proposition would lead to a situation where every purchase and sale of goods made by any party in India ) with any party in other countries would be considered as if those parties are doing bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... universal technology and is not customer specific. Customisation such as locking the handset to enable operation only with a specific operator and other operators with whom reciprocal or other arrangements are available, inclusion of Hindi or other regional languages, calculator, music, ring tones, browsers and numerous other features are no way connected .with patents of Qualcomm in these 16 agreements which are for manufacture of CDMA handsets and equipments. In fact in each handset a number of patented technologies other than patents with respect to CDMA connectivity are also used. Hence the argument that patents relating to CDMA, technology are customer specific, service provider specific or country specific is factually incorrect. There is no customization of handset qua the CDMA connectivity. Coming to the argument that handsets are programmed to a particular network service provider and hence it is India specific is not tenable. As rightly pointed out by Mr. Dastur locking of a handset to network is a requirement of the network service provider depending upon its business plans and exigencies and does not affect the ability of the handset to operate on any CDMA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tents. The role of Qualcomm ends when it licensed its patents on IPRs pertaining to CDMA products for manufacture and when it collects royalty from OEMs on these products, when they arc shipped out of the country of manufacture. There is no activity for Qualcomm after this sale and shipment under these 16 agreements. For the OEMs it is a sale of a product which is the end of the activity. The revenues are generated on sale only. There are no revenues either to the OEMs or to Qualcomm after the sale of the products. The sale is of a chattel as a chattel. The product is a combination of hardware, integrated circuits, designs multiple application software, CDMA components, chipsets with embedded software etc. The Revenue attempt to break down the sale into various components is not supported by the terms of the agreements and the facts of this case. It cannot be said that every item other than software was sold and that software which is embedded has been separately licensed. It is not the case of the Revenue that the OEMs have income in India from these sales or that they have income from licensing of software in these products which is assessable to tax. There is no finding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the decision of the Hon'ble Delhi High Court in the case of Ericssion A.B (supra). Ericssion and Nokia's was the case of the OEMs who are into supply of GSM equipment to Indian telecom operators for use in fixed/mobile GSM telecommunication. The equipment was manufactured and supplied from overseas; installation was carried out by their respective affiliates in India. Along with hardware, perpetual license was granted by all the three companies for use of software. Software was inseparable and integral part of hardware, without which hardware could not function. Significant restrictions were placed on the Indian telecom operators on use of software (the Indian telecom operators could not onward sell the software independently without sale of the hardware, etc.). There were distinct agreements with an overall agreement for supply and installation of GSM systems, though split into separate agreements, one for supply and the other for installation which was left to the subsidiaries. The facts of this case are similar to the facts of the case of Ericsson A.B. (supra). The Hon'ble Delhi High Court held as under : Para 41. We find that the terms of contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... took place ? On a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India'. 149. We would discuss the propositions laid down in this case in greater detail later in this order. 150. Coming to cl. 14.1 of the agreement between Tata and Motorola it reads as under : Clause 14.1- Title and risk of loss (page No. 14) : Without prejudice to TTSL's right to reject as set forth in art. 6.4 of this agreement, the title and the risk of loss to the hardware portion of all equipment sold hereunder shall pass from supplier to TTSL upon delivery in accordance with CIP Incoterms 2000 port of shipment. Delivery (page No. 44) is defined to mean delivery or delivered or deliveries shall mean the physical delivery by the supplier, of the equipment ordered by TTSL on CIP terms (as defined above), at airports/seaports mutually designated by the parties. CIP (page No. 43) : CIP means cost, insurance paid to airport/seaport in India as defined in Incoterms 2000. It means that supplier shall pay and bear the cost of packing/loading/unloadin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgument that the contract has to be read as whole to ascertain the intention of the parties as to when the title and the risk passed in goods is devoid of merit in the present case as the agreement itself is very specific as to when the title and the risk were to pass. 153A As already stated under identical facts in the case of Ericsson A.B (supra) the Delhi Special Bench in Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Del.)(SB) held that the title of the GSM equipment passed outside India. The order of the Delhi Special Bench decision in the case of Ericsson (supra) was latter affirmed by the Delhi High Court in Ericsson A.B. (supra). Regarding the applicability of Ericsson and Nokia ruling, we are unable to appreciate the argument that the propositions in these judgments would not be applicable to the facts of the present easel To tax the royalty income earned by Qualcomm, the Revenue must show that the OEMs have used Qualcomm patents for a business carried on in India or for making or earning income from a source in India, which leads to the taxability of the OEMs. Therefore, the taxability of Qualcomm-directly depends on the OEMs taxability in India. 154. Ericsson wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract, it did not have any independent existence, so as to justify the inference that there has been supply of software. The decision of the Hon'ble Supreme Court in the case of Tata Consultancy Services v. State of A.P. [2004] 192 CTR (SC) 257 making a distinction between assignment of copyright right and sale of copyrighted product could not be disregarded. Computer programmes are goods and merely because the software was unloaded from dumb CD from the computer, usable only when it is activated, it does not cease to be goods. The payment to the assessee cannot be split up as between supply and royalty/technical fees. There is no assignment of any copyright in the facts of the case, in the sense contemplated under sec. 14 of the Copyrights Act, 1957 as a consequence of either the overall agreement or the supply contract. The difference between acquisition of a copyright right and a copyrighted product was pointed out. 155. In the case of Nokia Networks (supra) the relevant facts are: The assessee, a company incorporated under the laws of Finland, was a leading manufacturer of advanced telecommunicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, supply agreement and installation agreement, are to be taken to form an integrated business arrangement between the parties which was governed by the overall agreement proceeded on the basis that the assessee had entered into contracts with cellular operators in India for setting up of GSM system in India, the hardware and software for which were supplied by the assessee, and the installation thereof was also overseen by the assessee. who was to ensure that it was carried out to the satisfaction of Indian buyers in accordance with the terms of the contract. This was also considered by the Court and it was held that the taxable event took place outside India with the passing of the property from seller to buyer. The decision might have been different if the buyer had the right to reject the equipment on failure of acceptance test. The overall agreement does not result in the income accruing in India. The execution of the overall agreement is prompted by pure commercial considerations. Board Instruction No. 1829, dt. 29th Jan., 1989 must continue to govern the assessment for the relevant years, despite withdrawal of this Instruction by CBDT by virtue of Circula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second limb of argument, we agree with the argument of Mr. Dastur that : Limb (i) covers cases where the right property or information has been used by the non-resident payer (OEM) itself and is so used in a business carried on by OEMs in India. Limb (ii) covers a case where the right property or information has not been used by the non-resident payer (OEM) itself in the business carried on by it, but the right property or information has been dealt with in such a manner as would result in earning or making income from a source in India. Any other interpretation to our mind would not be harmonious, as it would make limb (i) otiose. 161. Now we come to the second limb of the issue that is, whether the OEMs have used Qualcomm's patents for the purpose of making or earning income from a source in India. The Revenue once again heavily relied on the CDMA equipment purchase agreement between Tata and ZTE and Tata and Motorola to demonstrate that OEMs have used the Qualcomm's patents for the purpose of making or earning income from a source in India On the basis of the equipment purchase agreement of 2007, it was submitted that the two agreements between India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the argument that they do not give any right in the copyright, is of no consequence post this amendment as the transfer of any rights in an intellectual property includes transfer of any right to use of a computer software irrespective of the medium through which it is transferred. 166. In a nutshell the submissions of the Revenue are 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. 167. (These arguments of the Revenue are in our view not acceptable for the following reasons : i. The AO assessed the royalty arising from licensing of CDMA patents by Qualcomm to OEMs. The royalty which is brought to tax by the AO does not refer to any software being provided. It is not demonstrated by the Revenue that the software is provided as part of the licensing of Qualcomm patents. ii. The software embedded in the hardware sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons (listed below) on Tata for use of the licensed material i. The object code version of the software and related documentation could only be used along with the equipment; ii. Tata has no right to sell or sub-license the licensed materials or modify, decompile or disassemble the software furnished as object code to generate the corresponding source code (part of firmware ) embedded in the equipment; iii. Tata shall hold the licensed materials in confidence and shall not, without Motorola and ZTE's consent, disclose, provide or otherwise make available, in whole or in part, any licensed material to anyone, except to its employees having a need-toknow. Tata shall not copy software' embodied in the firmware. iv. Tata is obligated to return all copies of the licensed materials to Motorola and ZTE when the licensed materials are no longer needed by Tata or if Tata's license in respect thereof is cancelled or terminated by the supplier. v. Further, equipment has been defined under the agreement to mean and include certain CDMA equipment, including but not limited to the hardware, the software, the firmware, the licensed material, and parts ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of manufacturing. Though cited by the Revenue, Rhodesia Metals (supra) in our view entirely supports the appellant's case. In that case Rhodesia Metals Ltd. carried on the business of developing mines in Southern Rhodesia and then selling rights therein. The head seat and directing power of the company was situated in England, the contracts of purchase and sale of the mining rights were entered into in England and the consideration for sale of the mining rights was received in England (para 2 at p. 50 of the order). Despite all this, the Privy Council upheld the contention of the company that the amount earned on sale of such mining rights was not chargeable to tax in England since the source of income was the development of the mines, which activity was carried out in Southern Rhodesia Applying this principle to the facts of the case at hands it becomes clear that the source of the royalty is the place where patent (right property or information) is exploited, viz. where the manufacturing activity takes place, which is outside India. Hence, we are unable to accept the contention that Indian telecom operators would constitute source of income for the OEMs. 177. Coming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 183. CDMA is a channel access method used by various radio communication technologies. It is a method of wireless data communication that was originally invented during World War II in England to thwart German wire interference. CDMA history can be directly linked back to the 1940s when this form of transmission was first envisaged. This technology has been used in many communication systems, including the global positioning system and in the Omni Tracs. The other form of digital technologies currently used to transmit in a wireless transmission is Frequency Division Multiple Access (FDMA) and Time Division Multiple Access (TDMA). TDMA is the primary commercial form of GSM phones (source : Wikepedia, http://www.radio-electroics.com/info/rftechnologydesign/ cdma/what-is-cdma-basics-tutorial.php) l84. Qualcomm was the first company to commercialize this technology in OmniTracs (a fleet management system). Qualcomm publicly introduced the concept that CDMA a digital communication technique method could be commercially successful in cellular wireless communication applications. Qualcomm was joined by US network operators Nynx and Ameritch to develop the first generation of CDMA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etworks) Each TSG meets, on average, ten times a year to produce technical specifications and reports. Since 3GPP2 has no legal status, ownership and copyright of these output documents is shared between the organizational partners. The documents cover all areas of the project's charter, including CDMA 2000 and its enhancements. 185. In view of the above, it would be incorrect to say that Qualcomm is the owner of CDMA technology. What Qualcomm owns are essential patents in, respect of numerous intellectual properties based on CDMA technology. This fact is evident from the clauses in the license agreements. A perusal of the license agreements shows that Qualcomm itself obtains licenses from certain third parties to use their CDMA patents, (pp. 247 and 292 of the paper book filed by the appellant). Thus the argument that CDMA is a technology owned by Qualcomm is devoid of merit. All that Qualcomm owns is essential patented intellectual properties developed under CDMA technology. To put it in simple words a mobile phone or a cellphone is a wireless data communication device which work on wireless technology, while phone is a device that can make and receive telephone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licensed to OEMS for manufacture of CDMA Network outside India we hold that same is not chargeable to tax u/s 9 (1) (vi)(c) of the ACT. [As the revenue is not chargeable to tax in India as per Income tax Act 1961 requirement of looking at the provision of article 12 (7) of Indo USA DTAA is futile. Accordingly, we allow ground No 1 and 2 of the appeal of the assessee. 46. Now we come to ground No. 3 of the appeal of the assessee with respect to revenue received by appellant under BREW operator agreement and BREW carrier agreement what is taxed as ‗Royalty income in India u/s 9(1)(vi)(c) of the Act and article 12 of the India-US Treaty. This issue has been dealt with extensively by the coordinate bench in second order for Assessment Year 2005-6 to 2008-09 dated 20th February 2015 in paragraph No. 102 to 108 as under:- 102. That takes us to ground no. 4, as raised by the assessee, against 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf agrees that payment is made for only the right to use the software and no other title or interest in the software is transferred to the payer. There is no transfer of ownership rights. Various decisions of the Supreme Courts and High Courts clarify that sales constitutes out and out transfer, whereas in license there is only right to use. Some of these decision are at 69 ITR 692 (SC), 236 ITR 314 (ASC), 811 ITR 243, 671 ITR 227. Thus this reasoning of the assessee has no legal or factual basis. In this case, the user only has a right and gets a license to use the software. Even in the OECD commentary it is mentioned that the character of payments received in transactions involving the transfer of computer software depends upon the nature of rights that the transferee acquires under the particular arrangement, regarding the use and exploitation of the program. The rights in computer programme are in the form of intellectual property. It has further 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... frasoft 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. 86. The Licensing Agreement shows that the license is nonexclusive, non- transferable 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 authorisat ion 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non -exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de-assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft. 94. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income.' 107. Learned Departmental Representative, even as he vehemently relied upon and supported the stand of the authorities below, could not point out any distinguishing feature in this case. 108. In view of the above discussions, and respectfully following the esteemed views of Hon'ble jurisdictional High Court, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned addition of ₹ 2,52,70.569. The assessee gets the relief accordingly. 47. Therefore, respectfully following the second order of the coordinate bench we hold that royalty from BREW operator agreement of ₹ 67848685/- and 15% thereof amounting to ₹ 10177303/- is not chargeable to tax in the hands of the assessee u/s 9(1)(vi) of the Act as well as Article 12 of the Indo-USA Tax Treaty. Accordingly, ground No. 3 of the appeal of the assessee is allowed. 48. Ground No 4 is regarding initiation of penalty proceedings u/s 271 (1) (c) of the act , which is premature and hence rejected. 49. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. 6. Failed to appreciate that the royalty income earned by the Appellant is for license of CDMA patents for manufacture of CDMA handsets and equipments and not for installation and commissioning of the equipment. Thus to hold that the OEMs use Appellant's technology very much in India where these equipments are installed is grossly incorrect. 7. Erred in making certain incorrect factual observations/ statements for taxing the royalty income of the Appellant earned from the OEMs situated outside under the deeming provisions of section 9(l)(vi)(c) of the Act. The incorrect factual observations / statements are brought out in the annexure enclosed to the grounds of appeals. 8. Erred in 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(l)(vi) of the Act and under Article 12 of the India-USA tax treaty. 9. Erred in levying interest under section 234B of the Act. 10. Erred in law on initiation of penalty proceedings u/s 271(1)(c) of the Act. 51. Learned parties fairly agreed that whatever is decided for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishiguishable facts on record is untenable and bad in law. 4. Erred in holding that the OEMs like Alcatel, Nokia, Huawei, ZTE, LG, Samsung etc. have obtained license from the Appellant for their own business in India and the tax the royalty income of the Appellant under the deeming provisions of section 9(l)(vi)(c) of the Act. 5. Failed to appreciate that the information/ replies received from the assessing officers of the eight OEMs ( a) clearly states that these OEMs are into manufacture and supply of GSM equipment. Hence, to hold that the sale of handsets and equipments in which Qualcomm's patented technology is used is directly attributable to the Permanent Establishments ('PE') of these OEMs is grossly incorrect. ( b) Does not establish that the OEMs have used Qualcomm's CDMA patents for the purpose of carrying on business in India or for the purpose of earning income from any source in India. 6. Failed to appreciate that the royalty income earned by the Appellant is for license of CDMA patents for manufacture of CDMA handsets and equipments and not for installation and commissioning of the equipment. Thus to hold that the OEMs u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Incometax Act, 1961 ('the Act') and Article 12(7) of India-US tax treaty ('tax treaty') for bringing to tax, the royalty income received by the Appellant from the non-resident Original Equipment Manufacturers ('OEMs') under the Subscriber Unit License Agreement with the non-resident OEMs. 2. Erred in applying the provisions of section 9(l)(vi)(c) of the Incometax Act, 1961 ('the Act') and Article 12(7) of India-US tax treaty ('tax treaty') for bringing to tax, the royalty income received by the Appellant from the non-resident Original Equipment Manufacturers ('OEMs') under the Infrastructure Equipment License Agreement with the non-resident OEMs. 3. Erred in framing the assessment order on the same set of arguments that have been considered in detail and adjudicated by the Hon'ble Tribunal in Appellant's own case for AY 2000-01 to AY 2004-05. Thus, the action of the Ld.AO in not following the order of the Hon'ble Tribunal without bringing any distishiguishable facts on record is untenable and bad in law. 4. Failed to appreciate that the information/ replies received from the assessing officers of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the observations made in the order for the said year will apply mutatis mutandis to this assessment year as well. The taxation of royalty in respect of the CDMA handsets and equipment and the addition in respect of invoicing the revenues under the BREW agreement thus stand deleted. Accordingly, Ground no 1 to 7 of the appeal of the assessee are allowed. 65. Ground No 8 is regarding initiation of penalty proceedings u/s 271 (1) (c) of the act, which is premature and hence rejected. 66. Ground no 9 of the appeal of assessee is that ld. DRP and the Ld. AO fell in error of violating the principles of natural justice by framing the assessment order without considering the Appellant's request for a detailed examination of facts/ technical aspects as directed by the Hon ble Tribunal vide its order dated February 20, 2015. We dismiss this ground of appeal for the reason that firstly the ld AR has objected to looking in to the orders of the ld AO framed in consequences of the order of the coordinate bench dated 20/2/2015 and secondly we have already deleted the addition on account of royalty. Hence, this ground of appeal is rejected. 67. In the result, the appeal for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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