TMI Blog2013 (2) TMI 219X X X X Extracts X X X X X X X X Extracts X X X X ..... s pertaining to CDMA technology and that the Appellant earns royalty from such patents and that CDMA mobile services/technology has been launched and used in India. This information and material, in our considered opinion is sufficient, prima facie, to come to a conclusion that the Appellant has earned certain income in India. The information by way of press releases, newspaper articles etc. could lead any reasonable person to believe at that the Appellant who owns several patents pertaining to CDMA technology would have income, as such, technology is used in India. In our opinion the AO had an honest belief, and has come to a conclusion, as a rational man would, based on the material that income chargeable to tax has escaped assessment. The satisfaction in question is that of the AO at that point of time. It cannot be said that the AO had no cause or justification to suppose that income has escaped assessment. The phrase 'reason to believe' cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. Whether the material would conclusively prove the escapement of income is not the concern at this stage. Thus find no force in the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty from OEMs on these products There was no finding that the OEMs had carried on business in India or a part of the sale consideration was attributable to any sale or licensing of software carried out in India. When OEM's itself were not brought to tax, to hold that the appellant was taxable was not correct. The provision of Section 9(1)(vi)(c) covers cases where the right, property or information has been used by the non-resident payer (OEM) itself and is so used in business carried on by OEM's in India & a case where the right, property or information has not been used by the non-resident payer (the appellant) itself in the business carried on by it, but the right, property and information had been dealt with in a such manner as would result in earning or making income from a source in India. In the present case, the OEMs had not carried on business in India. The OEMs couldn't be said to have used the appellant's patents for the purpose of business in India. The source of income is the activity that gives rise to the income. In the present case, the right, property or information licensed to OEMs related to the manufacture of the products and, hence, the source was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61 ('the Act'). Since the issues in all these appeals have arisen from common facts and circumstances, the appeals were heard together and are being disposed of by this consolidated order for the sake of convenience. 2. The Appellant has raised various common grounds. The grounds of appeals are many and pertain to different limbs and contentions in support of Five main issues that require our adjudication. These issues that arise in the present appeals are summarized as under: (a) Whether on the facts and circumstances of the case, the ld. CIT(A) was justified in upholding the validity of reassessment proceedings initiated under S. 148/147 of the Act; (b) Whether on the facts and circumstances of the case, the CIT(A) was justified in exercising jurisdiction under section 251 of the Act to enhance the income of the Appellant in respect of royalty income earned by the Appellant from the OEMs on network equipment; and (c) Whether on the facts and circumstances of the case, the CIT(A) was justified in upholding the taxability of royalty income earned by Qualcomm Incorporated, from the Original Equipment Manufacturers ('OEMs') of CDMA mobile handsets and network equipment, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the right to use technology; (h) the deployment of CDMA network and use of handsets by the Indian Carriers in India gives the Indian Carriers a license to receive the services from the Appellant; (i) the Appellant has licensed software to the OEMs for manufacture of handsets; (j) the OEMs acquire a license in the software from the Appellant that enable the base station to communicate with the handsets; (k) the Appellant may have received royalty from Indian Carriers or from others providing the infrastructure and embedded technology to Indian Carriers; (l) the Appellant receives royalty with respect to the CDMA network being installed in India; (m) the right to use the patented technology is given in India. 4. The brief facts of the case as brought by the AO in his assessment order for the A.Y.2000-2001 dt. 31-12-2007 and the CIT (A) in his order dt. 29.06.2007 is extracted below:- "Qualcomm Incorporated ('Qualcomm' or 'the Appellant') is a publicly traded company on the NASDAQ under the symbol: QCOM . Qualcomm was incorporated under the General Corporation Law of the State of Delaware in the United states of America on August 15, 1991. Qualcomm enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to provide R D services to Qualcomm Global Trading Inc. ('QGT') its indirect parent. The Appellant has developed key patents to Code Division Multiple Access (CDMA), a method for transmitting simultaneous signals over a shared spectrum, most commonly applied to digital wireless technology. The Appellant has also granted a nonexclusive and nontransferable worldwide license of its patents developed on CDMA technology (the Patented Technology') to unrelated wireless Original Equipment Manufacturers ('the OEMs') to make (and have made), import, use and sell CDMA handsets and wireless equipment (the 'Products') in consideration for a royalty. The Appellant's business model in relation to grant of license of its patents is as under:- (a) The Appellant licenses its Patents to OEMs who are situated outside India are not residents of India; (b) The OEMs use the patents to manufacture the Products outside of India; (c) The OEMs sold the Products to wireless carriers worldwide; (d) Royalty is payable by the OEMs to the Appellant for use of patented technology in the manufacture of products and is determined with reference to the net selling price of the product sold to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcuits and Systems software for wireless voice and data communication, multi-media functions and global positioning system(GPS), products and (b) Qualcomm technology licensing ('QTL') which grants licenses to manufacturer of wireless products for the right to use portions of Qualcomm's intellectual property portfolios which include certain patent rights essential to/or useful in the manufacture and sale of certain wireless products. 7. On facts the Appellant submitted to the revenue authorities that, (a) Qualcomm did not license CDMA technology to any network equipment manufactures in India during the subject assessment years. (b) Qualcomm does not have any role in determining the cost of handsets purchased by Reliance, etc from third parties (i.e. OEMs). (c) royalty is payable by the OEM`s for the use of patents for manufacturing CDMA handsets/equipments and the royalties is quantified and becomes payable on sale. It was clarified that royalty does not accrue on sale of handsets but only on manufacture of handsets/equipments. (d) It was contended that the patented technology as licensed to the OEM`s is for "use in manufacturing" CDMA standard network equipment and CD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded 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." With reference to the above article the assessee has submitted that "the technology is used for manufacturing the network equipment/hand sets (i.e. products) before they are shift to India or elsewhere. Under the license agreement entered into with OEMs the obligation to pay royalties to Qualcomm arises before the products reach Indian carriers. The license agreement between Qualcomm and OEMs does not require the OEMs to enter into a licensing agreement between the OEMs and carriers for selling the products manufactured by the OEMs. Further more, since the royalty is paid by OEMs for manufacturing the equipment/hand sets which is done outside India the 'use' is outside India." The assessee's submission regarding the point at which royalty becomes payable based on the contract between the OEMs and Qualcomm cannot be relied upon since the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) u/s 250 of the Act read with Rule 46A of the Income Tax rules 1962. The additional evidence consisted of redacted copies of 16 global licensing agreements between the Appellant and OEM's situated outside India. At para 7.1 pg.16 of the CIT(A)'s order it is stated as follows:- "7.1. It was submitted by the appellant that the licensing agreements contained certain commercially sensitive information and the same was redacted from the agreements to protect the competitiveness of the appellant/OEM business. The redactions were duly supported by the key to redactions and were notarized by a Notary Public - California, San Diego County and also by an affidavit by the Vice President of Tax and Trade of the Appellant that was enclosed with each of the 16 agreements submitted by the appellant. The affidavit reiterates the appellant's position on the redactions that it was essential to protect the commercially sensitive information which could inhibit the appellant's or the OEMs ability to compete effectively. The appellant has also affirmed that no information having an effect on the principle of taxability of the appellant in India has been redacted." The CIT(A) admitted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be observed that the software license to the Korean entity is for manufacture the handset which been made compatible with the software provided to Indian Telecom operators for their network. If the handsets are not made compatible with the Indian network, these shall not be usable in India. It can also be seen that these handsets are sold by the Indian Telecom operator as they have in built compatibility with their network." He issued a show cause notice proposing enhancement of the assessment to bring to tax the royalty income received by the Appellant from licensing of CDMA patents to manufacture network equipment. For various reasons given in his order, the First Appellate Authority concluded that the royalty in question falls within the key provisions of S. 9(1)(vi)(c) of the Act and is also covered under Article 12 (7)(b) of the DTAA. Aggrieved by the order of the First Appellate Authority, the Appellant is in appeal in before us. 13. Shri Soli Dastur, Ld. Sr. Counsel along with Shri Nishant Thakkar appeared for the Appellant. Shri G.C. Srivastava, Special Counsel along with Ms. Preethi Bharadwaj appeared on behalf of the Revenue. 14. Assesses submissions on reopeni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and submitted that the reasons are identical for AY 2000-2001 to 2004-05. He summarized the reasons recorded by the AO for AY 2004-05 (pages 1 to 6 of the Appellant's paper book) as under:- "i. Press release dt. March 23, 1999 issued by appellant in the USA shows that appellant has several patents registered in its favour. These patents are then used to earn royalties worldwide including India. ii. Newspaper article dt. June 28,2006 shows that appellant has research centres located in India. These locations constitute business connection as well as permanent establishment of appellant in India. iii. Newspaper article dt. June 15, 2006 and July 29, 2006 shows that appellant negotiates with the customers of CDMA technologies like Reliance and TATA the price of royalties to be embedded in the cost of the cell phone. This shows that the royalty payments are for handsets operational in India and the royalty is only routed through the manufacturers. iv. Appellant is earning fees from Included Services (FIS) from Reliance Communications Infrastructure Ltd. (Reliance) and Tata Tele services Ltd. (Tata)." 4. Based on the reasons recorded by the AO, Mr. Dastur put forth the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant and the Chairman of Reliance was nothing but a report of a public relation exercise and cannot be a basis for arriving at a conclusion that royalty rates were directly negotiated by the Appellant with the Indian telephone providers. The meeting took place in the year 2006 has no relevance for earlier AYs. f. The inference drawn by the AO viz., that the royalty rates are being negotiated by the assessee with Telecom service providers is nothing but a surmise. Mr. Dastur vehemently contended that the proceedings under section 147 of the Act cannot be based on conjectures. In this connection, he referred to the decision of the Bombay High Court in the case of German Remedies v. DCIT (285 ITR 26) and the decision of the Gujarat High Court in the case of A. Raman Co v. ITO which was latter affirmed by the Apex Court in 67 ITR 11 where in the High Courts have held that reopening of the assessment based on suspicion, presumption, conjectures and surmises is not permissible in law. g. That the Appellant has not earned any fee from included services from any persons in India during the AY 2000-01, 2001-02 and AY 2004-05. Thus, the reason is factually incorrect. Furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004 had escaped assessment. The reasons must relate to the year for which the notice was issued. Reliance was placed on the decision of the Calcutta High Court in the case of Grindlays Bank Ltd. v. ITO (116 ITR 710), the decision of the Jurisdictional High Court in the case of CIT v. Mesco Laboratories Ltd. (288 ITR 219) and the decision of the Apex court in the case of ITO v. Lakhmani Mewal Das (103 ITR 437). l. That if there are multiple reasons, some relevant and other irrelevant or incorrect thus reopening must be quashed since it is unclear as to which reason the officer relied upon. Reliance was placed on the decision of the Gujarat High Court in the case of Sagar Enterprises v. ACIT (257 ITR 335). In the facts of Appellant's case, four reasons were recorded by the AO, of the four reasons, two reasons are undisputedly incorrect or wrong. Thus it was argued that the reopening must be quashed since it is unclear as to which reasons the AO relied upon. m. In the reasons recorded for reopening, jurisdiction to reopen was assumed on the footing that the Appellant has a permanent establishment/business connection in India. However the assessment, was concluded by taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Del). It was further submitted that the revenue's appeal against the above decision has been dismissed by the Jurisdictional high court r. That the sanction accorded by the Addl.DIT is mechanical and without application of mind and hence the reassessment is bad in law. The reasons recorded suppress a material fact that the newspaper articles relied upon the by the AO to assume jurisdiction to issue notice under S.148 for the A.Y. 2000-01 were published in the year 2006. In view of this suppression, the Addl.DIT could not have applied her mind to whether reasons recorded have a live link with the year sought to reopened, viz A.Y. 2000-01 and A.Y. 2001-02. In absence of application of mind to the aforementioned fact, the sanction ought to be regarded as mechanical and invalid in the eyes of law. That the sanction accorded by the Addl. DIT is mechanical, is further evident from the fact that the AO had forwarded the sheet recording reasons along with the following text just below the reasons recorded: "on the reasons recorded by the AO , I am satisfied that it is a fit case for issuance of notice under section 148. The issuance of notice is approved. The AO shall ensure that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a thing to be considered at this stage. It is sufficient if prima facie some material on the basis of which the department could reopen the case. In support of his contention, he relied on the decisions of the Hon'ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (291 ITR 500) where in it was held that the word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Raymond Woolen Mills (236 ITR 034) and on the decision of the Delhi High Court in the case of Bawa Abhay Singh v. DCIT (253 ITR 83). The Appellate authorities can look as to whether the assumption of jurisdiction is arbitrary or malafide or whether the satisfaction recorded is such that lacks application of mind. On these broad propositions, Mr. Srivastava f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the veracity of which is not in dispute, the AO concluded that the Appellant company is earning royalties in respect of handsets operational in India and further that the price of royalty component for the use of CDMA technology is directly negotiated and licensed by the Appellant and the Indian Telecom operators in India. The AO held that the royalties to the Appellant not only arise in India but are also paid by the Indian concern indirectly. The above information was adequate to come to the belief that there was a prima facie case for the chargeability of royalty income under Section 9(1)(vi)(c) of the Act and such conclusion by the AO cannot be said to be irrational or perverse. d. Even if on merits at some stage, if it is found that S. 9(1)(vi)(c)of the Act is not applicable, then also, it would not lead to an inference that the belief formed by the Assessing Officer was not based on proper material or was as such could not be drawn by a rational person. e. The Appellant had entered into a technical service agreement with Reliance and during the course of arguments, the Ld. Sr. Counsel conceded that income chargeable by way of fee for included services was disclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Srivastava had furnished the following documents in support of their contentions that the sanctioning authority Ms. Sumedha Verma Ojha, the Addl.DIT was authorized to sanction under S.151 (2) of the Act: i. Notification dt.14.09.2001 defining the territorial jurisdiction of the Directors and Commissioner of Income tax; ii. Order No 37 of 2003 dt. 26.03.2003 showing that Ms. Sumedha Verma Ojha was promoted on and from the date of the order to the grade of JCIT/Jt.DIT; and iii. Notification dt.11.101.2007 defining the territorial jurisdiction of the Additional directors/Joint Directors of Income tax. m. it is submitted that S.117 gives power to the Central Government to appoint such persons as it thinks fit to be Income tax authorities which are enumerated in S.116 of the Act and that Clause (cc) thereof puts Additional Commissioners and Additional Directors in the same Clause. A notification is placed before the Tribunal authorizing the Jt. Directors to perform the functions of a Jt. Commissioner. Thus it is submitted that when an Additional Director issues sanction under Section 151 he/she is performing the function of a Jt. Commissioner irrespective of the nomencl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f these agreements are limited to demonstrate the business models. The Ld. Sr. Counsel for the Appellant Mr Dastur strongly objected to the admission of additional evidence on various grounds. He submitted that these agreements are not the basis for making the assessment and that they have no relevance to the case. However, later when the bench wanted to adjudicate this issue separately, before proceeding with the merits of the case, the Ld. Sr. Counsel agreed for the admission of these two documents for enabling expeditious disposal of the appeal, with a caveat that reliance should not be placed on these evidences, when there is no relevance to the case on hand and agreements in question, as these agreements have been entered into in financial years relevant to AY 2008-09 and AY 2007-08 and as these are not connected in any manner to the issue on hand. In view of the rival submissions, we admit these additional evidences though the case of the A.O. or the C.I.T(A) are not based on these documents and it is well settled that the revenue cannot plead an entirely new case before the tribunal . Submissions of the Assessee on Merits: 18. On merits Mr. Dastur, the Ld. Sr. Counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements are not India's specific and the OEMs manufactured the hand sets and equipments using the patents of Qualcomm and could sell the product anywhere in the world and it is not specific to an Indian Carrier. He emphasized that technology for manufacturing products is different from product which is manufactured from the use of the technology. On the meaning of 'making or earning any income from any source in India' he submitted that ultimate use of a product manufactured by the OEMs using the patents licensed by Qualcomm, in India, cannot be said to be a source in India. Giving example he submitted that source is an overall activity carried out and a part of an activity cannot constitute a source. Giving an example he submitted that if a retailer sells 100 pens to 100 different persons, each person to whom a pen is sold is not a source. He referred to the 16 agreements entered into by the Appellant with the manufacturers of hand sets and submitted that as redacted copies were filed by the assessee, originals are now furnished for verification and that an Affidavit was filed in support of the statement that no material omissions relatable to taxability of royalty were mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the proposition that, if the property in the goods passes abroad, no part of the sale proceeds can be taxed in India. He submitted that the source of the OEMs, is sale and it would be a contradiction to say that the OEMs such as LG etc. have no source of income in India and to hold otherwise in the case of Qualcomm. 23. On the evidences relied by the Revenue Mr Dastur arguments on each of these documents are as follows: A. Memorandum of understanding between Qualcomm and Reliance Communications Private Limited dated 26.03.2001. Without prejudice to his contention that these documents have no relevance, the Ld. Sr. Counsel submitted that this document was relied by the Revenue to contend that Qualcomm is actively interested in the utilization of the CDMA technology in India. However, he argued that the Memorandum in no way demonstrates that the OEMs carry on business in India or that they have a source of income in India, much less that the patents to manufacture the products licensed by Qualcomm have been used by the OEMs in a business carried on by them in India or for the purposes of making or earning any income from any source in India and hence is irrelevant for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. D. Subscriber unit license agreement between Qualcomm and Asia Telco (OEM) dated 18.04.2008. Mr. Dastur submitted that the above agreement was filed by the Appellant during the course of the assessment proceedings for the AY 2009-10. This agreement was relied by the Ld. Special Counsel to demonstrate that the agreement between Qualcomm and OEM are India specific since Qualcomm charges a different amount of fixed royalty with respect to sales made to Indian customers. However, Mr. Dastur submitted that the agreement has no relevance to the years under consideration. Further no adverse inference had been drawn either by AO or by the DRP with regard to this agreement even in the year to which it relates. Therefore the agreement cannot be relied upon. Further it was submitted that the 16 license agreements which are relevant for the years under appeal have been filed before the CIT (A) and none of the 16 agreements have any royalty date different for India, as compared to the rest of the World. The grant under this agreement insofar as manufacture of handsets or network equipment, are concerned it is non exclusive, transferable and worldwide. This is identical with the 16 lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting a license thereof or user thereof by the OEM does not arise. Apart therefrom, there is no consideration for carrying out installation activities under the contract referred to by the Revenue, and since the installations are incidental to the sale, no attribution can be made in view of the decision of the Andhra Pradesh High Court in the case of CIT v. Hindustan Shipyard Ltd. (109 ITR 158), which has been concurred with by the jurisdictional High Court in the case of DIT v. Ericisson A.B., [246 CTR 422 @ paragraph 48, page 20 (Del HC)]. On the contention that the sale concludes in India, Mr. Dastur argued that the Revenue has once again relied on the agreement between the OEM (i.e. Motorola) and Tata dated 8.12.2007 to say that since the OEM is to bear the cost of packing/loading/unloading, transportation, carriage, freight, unloading charges, insurance and any other cost or any nature at any time prior to delivery, therefore the sale concludes in India. Placing reliance on the Supreme Court decision on Ishikawajima Harima Heavy Industries Ltd v. DIT [288 ITR 408 @ paragraph 73 (SC)] and in the case of DIT v. Ericisson A.B.,[246 CTR 422 @ paragraph 37, (Del HC)] it was subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are licensed is an integral part of the hardware and hence cannot be treated independent/separately from the hardware. Therefore, it must be regarded as sale in composite manner as sale of goods. It was also submitted that the OEM receives no separate consideration for the licensing of the software which establishes that the software is meant only to be used with the hardware and not independently. For this preposition, reliance was placed on the decision of the Delhi High Court in the case DIT v. Ericsson A.B.,[246 CTR 422 at paragraph 56, 57 and 60 (Del HC). F. Equipment purchase agreement between Tata Teleservices Limited and ZTE Corporation ('ZTE' or the 'OEM') dated 19.02.2007. 24. It was submitted that no separate arguments were advanced by the Revenue Counsel and the import of this agreement was same that of Motorola. He placed reliance on the arguments made in the context of Motorola (SUPRA). 25. The Ld. Special Counsel for the Revenue Mr. G.C Srivastava on the other hand opposed to the contentions of Mr. Dastur and submitted that the chargeability of royalty income in the hands of the Appellant in India, has to be examined with reference to the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not off shell products or standard product which can be sold to anyone in any location and that the sale by OEMs is India's specific. c. The entire supply of handsets/equipments by the OEMs is India Specific. This is evident from the stipulations in the agreements that OEMs will manufacture the handsets/equipments as per the design made by the OEMs and approved by a particular operator, at the technical standards and specifications and for an agreed price. d. That hand sets are manufactured with codes which are programmed to be specific to network provider. These codes are not of the kind which can be put to the handsets after these are received in India. 30. Reliance was placed in the case of Syed Asifuddin and another (AP) 200 L CRILJ 4314 for the proposition that handsets provided by LG and Samsung to Reliance prior to 2005 was specifically designed and programmed for Reliance. Further, it was submitted that the following findings of the fact by the High Court leave no room for any doubt in this regard. i. Handsets are proprietary to Reliance; ii. there is an agreement between Reliance and manufacturer of hand sets' iii. the hand sets are to be exclusively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b. The contract has to be read as a whole to ascertain the intention of the parties. In the Motorola agreement, Clause 14.1 provides that the title and the risk shall pass upon delivery in accordance with the CIP Incoterms 2000 port of shipment. The word delivery has been defined on page 44 of the agreement to mean "physical delivery by the supplier of the equipment ordered by TTSL on CIP terms at airports/seaports mutually designated by the parties". CIP has been defined on the page 43 of the agreement to mean "cost, insurance paid to airport/seaport in India" as defined in Incoterms 2000. c. The definition of these terms clearly indicates that the entire risk is borne by the supplier and carriage and insurance charges paid till their delivery at airport/seaport in India. The repeated reference by the Appellant to Incoterms 2000 does not alter the situation because the expression by its very definition in the agreement means the obligation to bear the carriage and insurance charges upto airport/seaport in India. It would be illogical to read that the parties particularly Tata in India, can agree to the delivery at any airport/seaport outside India. This becomes further eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isional acceptance. One cannot pick up one part of supply obligation and contend that the title has passed with the discharge of that obligation. g. The definition of "delivery" on page 5 of the agreement stipulates "physical delivery by the supplier of the equipment ordered by TTSL on DDU terms at the site". DDU is defined on the same page to mean "site or sites in India" as defined in Incoterms 2000. The clause goes on further to state that it means the supplier fulfils his obligation "when goods had been made available at the named sites in the country of importation." The word "site" has been defined on page 9 of the agreement to mean "the land, building and/or any other places where the equipment is to be delivered. Carrying out of the deliveries as directed by TTSL in writing". It is obvious that the reference is to the "sites" in India and delivery obligation is on the supplier for delivering the goods to a site in India. It is needless to repeat that Incoterms 2000 only refer to the terms of the agreement generally acceptable between the contracting parties with regard to obligation to bear the cost of transportation, insurance till the point of delivery. Thus, if the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(vi)(c) of the Act stands satisfied. On the issue whether OEMs have source of income in India, Mr. Srivastava submitted that:- a. The agreement between the OEMs and the Indian operators demonstrate in no uncertain terms that what is sold by them is the hardware and the not the software embedded therein. b. OEMs are not only supplying the equipments but they are licensing the software, the ownership of which is not transferred to the operators in India. The software is licensed for the use of the operators. Thus, the intellectual property for which the payment is made by OEMs to Qualcomm is licensed for use in India which yields income and becomes a source of income for the OEMs. c. The two agreements which Indian operators entered with Motorola and ZTE make a categorical difference between the sale of the equipment and licensing of the software embedded in the firmware. The Indian operator has also agreed to purchase the equipment and license to use the software separately (Clause 2.1 of Motorola agreement). Clause 2.2 of the agreement with ZTE also clearly states that the supplier has agreed to "sell and license" and the Indian operators have agreed to purchase th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to be embedded in the handsets/equipments. h. If this basic proposition is under dispute and suggestion is made that software licensed by OEMs is not the property of Qualcomm then, the matter needs a more critical examination by someone who understands CDMA technology with all its technicalities. Reliance was placed on the decision of the Hon'ble Supreme Court in the case C.I.T., Delhi v. M/S. Bharti Cellular Ltd (330 ITR 239 (SC). He urged that if the Hon'ble bench finds itself in agreement with the appellant that the license given to Indian operators is not with regard to the software of Qualcomm embedded in the handsets/equipments, then, matter may be remanded back to AO for obtaining the expert evidence to find out: i. What is the nature of technology licensed by Qualcomm to OEMs? ii. What is the nature of software licensed by OEMs to Indian operators; and iii. Whether it contains the technology made available by Qualcomm to OEMs under a license. i. In common understanding, Qualcomm has made available to OEMs its patented technology of CDMA in the form of chipsets/ASIC. OEMs have incorporated these chipsets/ASIC in the handsets/equipments manufactured by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in the case of Ericsson, the issues under consideration were : (i) Whether Foreign Company has any business connection in India or-not? (ii) Whether Foreign Company has PE in India or not? (iii) Whether the income from the supply contract can be treated as 'royalty' under section 9(1)(vi)? In this case it was held that the Foreign co. has no business connection in India and it was also held that if the assessee did not have any business connection in India, it is not necessary to go into the issue whether the assesse had any Permanent Establishment in India or not during the relevant period. However, in the present case, we are not into determination of taxability of "OEMs" but the taxability of "Qualcomm Incorporated" which is to determined having regard to section 9(1)(vi)(c). It has nothing to do with the taxability of "OEMs". The provisions of section 9(1)(i) on which the decision was rendered by the High Court is totally out of context in the present case. Further, if a non resident (OEM) is paying royalty to another non resident (Qualcomm) in respect of any right, property or information used or services utilized for the purpose of a business carried on by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India then why then have limb i.? That Limb i. must necessarily mean something more than merely covering cases where royalty is paid for use if right property or business carried on in India, or else limb i. will be rendered otiose. It was submitted 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 OEM's 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, for e.g. the non-resident payer does not use the right property or information but sub-licenses the right property or information to a person in India for use in India by such person and earns royalty therefrom. b. The distinction between limb i. and limb ii., as contented by the Revenue, is that limb i. covers royalty earned from use of the right or property in business in India and limb ii. covers royalty earned from use of the right or property other than from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes anywhere in the world where CDMA is operated on 800 MHz. In fact there are 60 other countries in the world where CDMA technology works on 800MHz frequency band. In support of his contention, he had submitted the list of countries where CDMA technology operates at 800 MHz. Further he also submitted that the locking of handsets to a particular network operator is a requirement of the network operator and does not affect the ability of the handset to operate on any CDMA telecom network, which is evident from the fact that once the network lock is broken the handset can operate on any network. Network locks are requested by network operators since the handsets sold by them to the eventual subscribers at concessional rates in order to keep the subscribers with them for an extended period. That a locked handset is capable of working anywhere in the world is also clear from the fact that all telecom operators permit international roaming. Though handsets that may have been purchased under certain terms are locked with a particular network service provider, the handset is capable of working in any country of the world with which that particular network service provider has the commer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f his argument, Mr. Dastur relied on the decision of the Delhi High Court in the case of Ericsson AB and explained that on identical facts, the Hon'ble Delhi High Court held that acceptance test is not a material event for passing of the title and risk in the equipment supplied. g. He referred to the relevant provisions of the Sale of Goods Act 1930 and submitted that the intention of the parties should govern as to when the title and the risk passed in goods. The time and the place when the title and the risk in goods pass can be inferred from the terms of the contract, conduct of the parties and surrounding circumstances as per section 19 (2) of the sale of goods Act. However, in the present case, there was no necessity for such an inference as the agreement itself was very specific as to when the title and the risk where to pass. h. In the context of Motorola agreement, he drew the attention of this Bench to relevant definitions from CIP Incoterms 2000 to show that as per the CIP Incoterms 2000 the delivery from the seller (ie Motorola) to the buyer (i.e. Tata) concludes at the port of shipment upon delivery to the carrier not to the buyer. Accordingly, he submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... devoid of any merits. k. On the contentions of the Department that the OEMs have a source in India since the OEM has licensed software to Indian carriers, he submitted as under: i. Neither of the agreements entered into by Tata are relevant to decide the issue with respect to the year under consideration. It would be far-fetched to presume that Reliance (who was the only Indian company engaged in providing CDMA mobile services in India in the years under consideration) had entered into agreements with OEMs containing similar clauses and then proceed to decide the taxability in the hands of Qualcomm on the basis of such conjectures and surmises. ii. OEMs receive no income from such licensing hence to refer to this act of licensing to say that OEMs have a source of income in India is a contradiction in terms. In any event sale of the products coupled with the software will not result in any amount from such sale becoming taxable in India as held by the jurisdictional High Court in the case of Ericsson at paragraph 61, page 24. iii. Software is sold along with the chipsets, which is a part of the QCT Division of the Appellant's business. Income from the QCT business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sold to the OEM. The developing of software and the selling of chipsets is a part of a separate business carried on by Qualcomm known as the QCT Division. That this is in fact the position that has been recognized by the AO in page 1, last paragraph of page 2 and first paragraph of page 5 of the assessment order passed for the years under appeal. As submitted earlier, the income earned by Qualcomm from its QCT division is not the subject matter of assessment and what has been brought to tax and is the subject matter of dispute, is only the royalty earned from the licensing of patents to the OEMs. Hence to ask for a remand under the guise of determining whether there is any software involved in the operation of CDMA network is only with the view to enable the revenue to reinvent its case against the Appellant, which is not permissible. vii. The request for remand must be considered bearing in mind that more than 12 years have lapsed from the end of the first financial year under consideration. It must further be borne in mind that even after filing additional evidence/documents mentioned above by the Revenue, no reliance has been placed and no adverse inference has been drawn b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalties may also be taxed in the source state in which they arise according to the Laws of that state. Further, Para 7(b) of the Article provides that where royalties do not arise in one of the contracting states in terms of Para 7(a) and the royalties relate to the use or the right to use the right or property in one of the contracting states, the royalties shall be deemed to arise in that contracting state. On analysis, he submitted that the following conditions need to be fulfilled for the applicability of Article 12 (7) (b) : - Royalty do not arise in the contracting state in terms of sub para (a) of 7 - Royalty relates to the use of the right to use the property in the contracting state. 37. He also referred to para 2 of Article 3 of DTAA and submitted that any term not defined in the DTAA shall have the meaning which it has under the laws of the contracting state. The treaty does not define the meaning of the expression 'use' or 'right to use'. It also does not define "computer software" or "copy right". Hence, in terms of Article 3(2), the meanings of these terms will have to be derived as per domestic law. 38. He also submitted that in the facts of the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as placed on the technical service agreement between Qualcomm and Reliance and it was submitted that the agreement was intended to promote CDMA technology in India and that the network planning is done by Qualcomm and training was also given by Qualcomm to various persons in India for the use of technology. Qualcomm assists in network deployment and conducted acceptance test and also supervised site preparations. Clause 9.1 states that in case of large CDMA network, one of the daunting task is to integrate the system to network effectively and efficiently and that Qualcomm has also undertaken the primary responsibility in Clause 14 for the project implementation. Clause 13 states that Qualcomm has developed this technology and assumes an important role for implementing this technology for Reliance. 41. He further submitted that CDMA technology is not about handsets or equipments. It is a wholesome technology which works on certain defined scientific principles. Qualcomm may have entered into only service agreement with Reliance and may have accepted a business model of charging royalty from the OEMs through the sale of handsets and equipments in India or elsewhere but the fact re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amendment contained in Explanation 4 introduced by the Finance Act of 2012 and submitted that the same would also apply in the context of treaty for the reason that the source state has the right of taxation under para 2 of Article 12 "according to the laws of that state". Neither the definition of the royalty contained in Para 3 of Article 12 nor the language employed in Para 7(b) place any bar on the application of Explanation 4 introduced in the domestic law. This is so for the reason that the definition of the royalty as contained in Para 3 is similar to the definition of royalty contained in the domestic law. The treaty has not defined the expression "use" to give any restrictive meaning to the term. If domestic laws provide that "use or the right to use" is irrespective of the medium through which such right is transferred, there is nothing in the treaty law to suggest that use or right of use as used in Article 12 would not have the same meaning. 47. The argument that the agreement with Reliance was reached by LG in 1993 when India was not on the horizon is of little relevance for the reason that for the application of DTAA, one is not concerned with the arrangement/agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue since, the right or property "used in India" by Reliance is the "CDMA technology", the royalty earned by the Appellant albeit from third parties is taxable in India under Article 12(7)(b). Revenue argues that the CDMA technology cannot be broken up into handsets and network equipment, it must be looked at on a wholesome basis; and when so looked at it becomes clear that but for the use of the CDMA technology in India, Qualcomm would not have earned the royalty. He submitted that the above contention is incorrect for the following reasons: a. At the outset, Qualcomm is not the exclusive owner of CDMA technology. Qualcomm merely holds a large number of patents in the field of CDMA technology. This is evident from the following facts: i. Qualcomm itself obtains licenses from certain 3rd parties (referred to as Company 1 and Company 2) as it is evident from the license agreements (page 247 and page 292 of Appellant's paper book). ii. Chipsets which go into the products can be purchased from Qualcomm or from third parties such as Via Telecom Nokia, STMicro, TI, DSPC, and EoNex, this is evident from the agreement itself which specifically deals with handsets manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfined to India or (b) India should be one of the countries where the right or property must be specified as being. Neither of the aforementioned conditions are satisfied in the facts of the case at hand and hence the royalty cannot be regarded to have deemed to arise in India. 51. In the context of the DTAA , Mr. Srivastava has argued that just as use of a software product in India amounts to a use of the copyright therein, the use of the patented products sold by the OEMs to the Indian carriers amounts to a use of the patents in India. In support thereof reliance was placed on the decisions of the Authority for the Advance Ruling in the case of Millennium IT Software Ltd., In Re (338 ITR 391 and Citrix Systems Asia Pacific Pty. Ltd., In Re (343 ITR 1) as also the decision of the Karnataka High Court in the case of CIT (Intl Tax) v. Samsung Electronics Co. Ltd (245 CTR 481). Reliance was also placed on the retrospective insertion of Explanation 4 and it was submitted that that the decision of the Delhi High Court in the case of Ericsson insofar as it held that there is a difference between use of a copyright and a copyrighted article is no longer good law. 52. Insofar as the 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lcomm is providing technology and earning royalty (albeit from third party); royalty is not on account of sale but its income from deployment of technology by looking at it on a wholesome basis; hence it is absurd to suggest that income from such deployment is not a source in India. 56. On the above contention of the Revenue, he submitted that the argument of the Revenue is devoid of any merit. At the outset the issue at hand is whether under the deeming fiction of S. 9(1)(vi)(c) of the Act, the income earned by the non-resident OEMs as a result of use of is taxable in India. The involvement of Qualcomm in India to assist Reliance on aspects of effectively running a CDMA network in India has been remunerated and taxed in India. Neither has it been alleged nor can it be stated that any portion of royalty is relatable to such activity (particularly since the agreements with OEMs have been entered into much before CDMA telephony was used in India). 57. Secondly, the decision in the case of DIT v. Ericsson A.B., (246 CTR 422), where Ericsson AB and its group companies, an OEM, had entered into an agreement to setup and install a GSM system and in addition Ericsson AB had agreed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecent amendments cannot be read into the Treaty. Questions No 1 and 2 were accordingly decided in favour of the assessee. The Hon'ble High Court proceeded to discuss Questions No. 3 and 5 on Page 29 (Para 25). After reproducing extracts from their earlier judgment in the case of Ericsson, the Hon'ble Court observed that Software had no independent existence leading to the finding that the payment cannot be regarded as "royalty". 62. On the other hand, Grounds of Appeal raised by the appellant before the Hon'ble Tribunal do not dispute the nature and character of payment but the dispute raised is only with regard to situs of income or situs of accrual of such income. (Ground No.1, 2, 3, 4, and 5). 63. The issues before the Hon'ble Bench are entirely different. While in Nokia or Ericsson, the nature of income being Royalty was in dispute, here there is no dispute that the income is by way of royalty. In Nokia (or Ericsson), taxability of OEMs in India was under dispute but in the case of the Appellant, the taxability of licensors of OEMs is in dispute. The scope of Sub. Section 9(1)(i) and 9(1)(vi) are entirely different. 64. Hence a decision which is wholly out of context and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that they all are patented products or processes. Hence, it is highly illogical for the appellant to rely on cases pertaining to software and draw distinction between Copyright and Copyrighted article when, according to their assertion, their case is in the realm of patents which is an altogether genre of intellectual property. Had it been the case of the use of patent, the Hon'ble High Court of Delhi could not have reached the same conclusion as it did in the case of a Nokia. 70. Coming to ground nos.5 and 6 on the issue of enhancement, the Ld. Sr. Council submitted that the AO assessed the royalty income only in respect of handsets. However, the CIT (A) invoked his powers of enhancement under the Act and brought to tax a new source of income namely the royalty earned from OEMs on network equipments. Referring to the order of CIT (A), he referred to the wordings "might have been licenses" "would have been received". He argued that the CIT (A) can enhance the assessment only in respect of "source" which has been considered and taxed by the AO. When nothing is assessed by the AO on equipments, enhancing assessment based on agreements for purchase of equipment, tantamoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smissed the Department's special leave petition against the judgement dated June 22, 2009 of the Bombay High Court in ITA No 890 of 2009, whereby the High Court following the decision in the case of DIT (Intl.Tax) v. NGC Network Asia LLC (313 ITR 187) held that when a duty was cast on the payer to deduct the tax at source, on the failure of the payer to do so, no interest could be imposed upon the assessee under S.234 B. 75. On additional grounds, he submitted that ground no.2 to 4 and 5 to be treated as not pressed and ground no 1 and 3 which are on the issue of reopening have already been argued. Findings: 76. We have heard rival contentions at length. Both parties have filed detailed submissions and other material. We have perused all the papers on record and the orders of the authorities below. The case laws cited are also considered. 77. On a careful consideration of the facts and circumstances of this case, the arguments and the material placed on record, we hold as follows. Reopening of assessments: 78. We first take up the issue of reopening. Admission of the additional grounds of appeal on reopening of assessment The five additional grounds raised by the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. Explanation 2.-For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :- (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; (c) where an assessment has been made, but- (i) income chargeable to tax has been under-assessed ; or (ii) such income has been assessed at too low a rate ; or (iii) such income has been made the subject of excessive relief under this Act ; or (iv) excessive loss or depreciation allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and allowing 19 additional claims. The patent, which was issued in April 1992, had been the subject of two requests for reexamination filed by anonymous requestors in 1996 and 1997. The requests for reexamination alleged that prior publications not originally considered by the Patent Office rendered the patent invalid. In total, more than 80 additional references were submitted to the Patent Office during the reexamination proceedings by the requestors and Qualcomm. The Patent Office, after carefully reviewing all the additional prior art, concluded that the patent was valid and that Qualcomm was also entitled to 19 new claims. The 459 Patent, entitled "System and Method for Generating Signal Waveforms in a CDMA Cellular Telephone System," describes inventions for generating the basic CDMA waveforms used in CDMA wireless systems such as IS-95 and others. The same basic waveforms are also utilized in CDMA systems proposed for third-generation standards. The inventions of the 459 Patent enable multiple callers in a CDMA wireless telecommunications network to efficiently use the same frequency band without mutual interference, allowing for greater system capacity and better link ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following news clippings:- New Delhi, June 28 Qualcomm Inc has told the Union Communications and IT Minister, Mr Dayanidhi Maran, that the company would enable setting up of Code Division Multiple Access (CDMA) handset manufacturing unit in the country. The company also said that it was working towards enabling cheaper CDMA handsets apart from leveraging its research and development centres in India for Qualcomm's global requirement by Increasing the headcount. After a closed-door meeting with Mr. Maran, Qualcomm's Chief Executive Officer, Dr Paul Jacobs, said, "We had a discussion on manufacturing. I cannot disclose details, as we now have to go back to do a lot of work before that happens. We are actually going to get more manufacturers to the market." Dr Jacobs said that Qualcomm would come in with design, the latest chipset, and hardware with engineering resources to enable local manufacturing. While the company does not manufacture handsets directly, It gives licenses to companies such as LG and Samsung to produce CDMA handsets, During the meeting, Mr Maran is understood to have told Qualcomm to remove all bottlenecks hindering the growth of CDMA services in the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expected to meet the Communication and IT Minister, Mr. Dayanidhi Maran, and CDMA operators as well. The move comes after India's largest CDMA payer Reliance Communication announced its plans to roll out GSM based cellular services in the country. The agency responsible for Qualcomm India's press relations said that Qualcomm Inc had not made any announcement in this regard yet. Mr. Kanwalinder Singh, president Qualcomm India, could not be contacted as he is away at the company's global headquarters in San Diego. However, industry sources said Mr. Jacob's visit has been scheduled for next week. (Source: Hindu Business Line) Reliance had earlier requested Qualcomm to bring down its royalty from the current levels of 7 per cent, as it was adding to the cost of services. Sources pointed out that in China, Qualcomm was charging a royalty of only 2 per cent. Mr. Maran is also understood to have observed recently that CDMA operators were at a disadvantage due to their royalty obligations, which made it difficult to bring down the prices of handsets. Qualcomm stand : However, Qualcomm has maintained that the royalty was being charged from Hand set manufacturers and not toe operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove, it is seen that the assessee company is Earning royalties in respect of handsets operational in India. These handsets. Though are got manufactured by the Indian Telecom Operators from LG, samsung etc. but the price of the royalty component for use of CDMA technology are directly negotiated and finalized by the assessee and the Indian Telecom Operators in India. Only the payments of royalties are routed through the manufacturer on the basis of price rate agreed between the assessee and the Indian telephone operators. Therefore, it can safely be held that the royalties to the assessee not only arise in India but also paid by Indian concerns indirectly." 84. On perusal of the reasons, the material available with the Assessing Officer at the time of recording the reasons is as follows:- i. Press release dt. 23rd March 1999 issued by the Appellant in USA, which states that the Appellant got several patents pertaining to CDMA technology. ii. Newspaper article dt. 28th June, 2006 stating that the Appellant has research and development centre located in India. iii. Newspaper article dt. 15th June, 2006 and 29th July, 2006 showing that the Chief Executive Officer of Qual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. P. Ltd. [1996] 217 ITR 597 (SC) ; Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC). The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied : firstly the Assessing Officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xus between the material and the belief of escapement of income. It also cannot be said that the material in possession of the AO does not enable him to draw an inference that income has escaped assessment. There is a rational connection, direct nexus and live link between the material and the belief. The reason is based on material which prima facie showed that income has escaped assessment. At that stage, the final outcome of the proceeding is not relevant and the fact of escapement of income need not be established. Whether the materials would conclusively prove the escapement is not the concern at that stage. 89. It is well settled that the Court cannot examine the sufficiency of the reason to believe. Factually it cannot be said that the material in question is vague, indefinite, distant, remote or farfetched as claimed by the Ld Sr. Council. It also cannot be said that the assumption of jurisdiction is arbitrary or malafide nor can it be said that there is non-application of mind. The material definitely indicates that the assessee has a role and was involved in promoting and launching of CDMA Technology in India. Where such involvement ultimately results in the assessee be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the reasons the assessee can always state his objections. Hence we do not agree with this argument. 93. The second contention of the Appellant is that the proceedings under Section 147 of the Income Tax Act, 1961 cannot be based on mere conjectures and surmises. Reliance was placed in the case of German Remedies (supra); A Raman Co. (supra); Lakhmani Mewaldas (supra). While there is no dispute with regard to the legal proposition laid out in the judgments relied by the Appellant, we have to examine whether the AO acted upon conjectures or surmises and whether the reasons recorded by him are only pretence. These are questions of fact, which we would be once again specifically dealing hereinafter. 94. In the case of Sarthak Securities P. Ltd. (supra) the Hon'ble Delhi High Court found that the reasons recorded were contrary to the law laid down by the Hon'ble Apex Court in the case of Lovely Exports P. Ltd. (216 CTR (SC) 195) while quashing the notice issued under Section 148 of the Income Tax Act, 1961. No such situation prevails in this case. 95. The Appellant contended that there is no nexus between the material available before the AO and the belief formed by him. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has escaped assessment during the years prior to such publication when the CDMA mobile services were available in India. The notice under Section 148 was issued on 29.3.2007 and information on all the impugned AYs were available as on that date of recording the reasons. 98. The AO reopened assessments from the Assessment Year 2000-01 to 2006-07 in respect of income earned for the period from 1.4.99 to 31.3.2006 and the income that was sought to be taxed in these reopened assessments was the income accruing to the appellant from the patents registered in its favour in respect of CDMA technology. The nature of income sought to be taxed was royalties and fees for 'included services'. 99. The AO based on the material formed a prima facie belief that the Appellant is earning royalty income or fees from 'included services' which is taxable in India under S.9 of the Act as well as the DTAA. To put it the other way, there is no prohibition under the Act in taxing these incomes in India. Whether on consideration of all the facts and the provisions of law, it can be concluded that these incomes can be brought to tax in India, is altogether the different question and the AO cannot be comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held as under: "From the facts that have come on record, protective assessment for asst. yr. 1992-93 was carried in appeal by the assessee and on the assessee succeeding before the CIT(A), the Revenue has filed second appeal before the Tribunal which is stated to be pending. It is pertinent to note that the first appellate authority decided the appeal for asst. yr. 1992-93 on 26th Jan., 1996 (sic) and the reasons have been recorded thereafter on 18th Aug., 1997. Therefore, taking into consideration the totality of the circumstances and the facts which have come on record, it is apparent that the respondent himself is not sure as to the year of taxability and whether the said item requires to be taxed in. asst. yr. 1991-92 or asst. yr. 1992-93. In such a situation, it is not possible to agree with the stand of the Revenue that any income could be stated to have escaped the assessment for asst. yr. 1991-92 as a consequence of any failure or omission on the part of the assessee. The petition is therefore allowed. The impugned notice dt. 3rd Oct., 1997 (Annexure R) is quashed and set aside. Rule is made absolute with no order as to costs." 104. We find that the facts in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer was of the opinion that the Central as well as the State Sales Tax and other income in the net profit would not qualify for deduction under section 80HHC of the Act. It may be that he referred to the decisions of the Apex Court in the case of Sterling Foods Ltd., however, mere wrong reference to a judgment would not invalidate the ground if otherwise was valid in law. Equally, in the third ground, the Assessing Officer noted that the assessee had debited warranty expenses of Rs. 1,43,48,347/- to the P L Account, out of which an amount of Rs. 1,05,48,633/- was incurred during the financial year under consideration. He was, therefore, of the opinion that remaining amount of Rs. 37,99,714/- is not allowable expenditure. We are of the opinion that such reason also would permit the Assessing Officer to reopen the assessment. The Assessing Officer has found that a claim not arising during the year under consideration was made. He desires to disallow such a claim. It cannot be stated that the ground was not germane. The counsel for the petitioner, however, vehemently contended that the petitioner's claim in this respect has been accepted by this Court. He drew our atten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to restrict the assessment or reassessment proceedings only to the issues in respect of which reasons were recorded for reopening the assessment. The corrective exercise embarked upon by "Parliament in the form of Expln. 3 consequently provides that the AO may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice under Section 148(2). The decisions of the Kerala High Court in Travancore Cements Ltd. [2008] 305 ITR 170 and of the Punjab and Haryana High Court in Vipan Khanna [2002] 255 ITR 220 would, therefore, no longer hold the field. However, in so far as the second line of authority is concerned, which is reflected in the judgement of the Rajasthan High Court in Shri Ram Singh [2008] 306 ITR 343, Explanation 3 as inserted by Parliament would not take away the basis of that decision. The view which was taken by the Rajasthan High Court was also taken in another judgement of the Punjab and Haryana High Court in CIT v. Atlas Cycle Industries [1989] 180 ITR 319. The decision in Atlas Cycle Industries [1989] 180 ITR 319 held that the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. In this case reopening was made for making the addition towards club fees, gifts and presents and in the final assessment the AO reworked deduction under Section 80HHC and 80 I only. In our opinion both these cases are not applicable to the case on hand. As already stated the assessment was reopened to assess the royalty income accruing to assessee in India, in respect of patents relating to CDMA technology. The income assessed in the reassessment proceedings was also the same. Thus we reject the contentions of the Ld. Counsel for the Appellant. 109. The Ld. Counsel for the Appellant contended that the first CDMA mobile services were launched by Reliance Infocomm on 15.1.2003 and therefore for the Assessment Year 2000-2001 and 2001-02 the notice issued under Section 148 is invalid. As already stated, the income sought to be taxed by the AO is the income of the Appellant from the patents with regard to CDMA technology owned by it. From the press release dt. 23rd March, 1999, the AO got information that the Appellant has several patents registered in its favour with regard to CDMA technology. On the foundation of this and on the basis of series of developments the information wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sanction ought to have been given only by the JCIT as mandated by the provisions of S.151 of the Act. Since the notice was issued without sanction of the appropriate authority, the Ld. Sr. Counsel argued that the same is liable to be quashed as void ab initio. Reliance was placed in the case of ITO v. Mrs. Navin Khanna. In the case of Mrs. Navin Khanna approval was given by higher authority i.e. the CIT, whereas, the JCIT was the designated authority. The case on hand Ms. Sumedha Verma Ojha gave sanction for issue of notice under Section 148. She was authorized to exercise the power of an Addl. CIT. Under Section 2(28 C) of the Income Tax Act, 1961 a JCIT means a Jt. Commissioner or an Additional Commissioner of Income Tax. Thus the sanction in this case is by an appropriate authority. One cannot go by the nomenclature or rank of the Officer but what has to be seen is whether the Officer is having current jurisdiction conferred by the Board. 112. We draw strength from the decision of the Hon'ble Gauhati High Court in the case of CIT v. Narendra Narayan Panicker 320 ITR, 436 (Gau) where it has been held as follows:- "The CIT is an authority who is entrusted with the duty and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that income has escaped assessment. He further specifically mentioned therein that reassessment proceedings were initiated to conduct further investigation. On these facts, it was held that the authorized Officer could not have given sanction for issue of notice under Section 148 on the basis of such incomplete and insufficient reasons. 115. In the case of the Central India Electric Supply Company Ltd. v. ITO, 333 ITR 237 (supra) the facts as noticed by the Hon'ble High Court was as under:- "The assessee company was engaged in the generation and supply of electricity from its units at Bilaspur and Katni. These units were acquired by the Government of Madhya Pradesh in the year 1964 when the appellant's license expired and not renewed. The compensation for compulsory acquisition of both units was fixed at Rs. 5,85,000/- and paid to the assessee in the year 1964 itself. The assessee filed its return on October 7, 1965, claiming a loss of Rs. 50,572/- and thereafter revised return on December 16, 1867 declaring a loss of Rs.1,07,183 on account of retrenchment. The assessment was completed at the behest of the assessee at a total loss of Rs. 56,611/- on January 13, 1969, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at page 693) and in CIT v. Kanpur Syndicate (53 ITR 225 at page 229) held that the power of the Appellate Assistant Commissioner is coterminous with that of the Income-tax Officer. The first appellate authority can do what the AO can do and also direct him to do what he has failed to do. 120. In the case on hand, the enhancement is emanating from the same source that is royalty income from licensing of CDMA patents for manufacture of CDMA products. Hence, in our view handsets and equipments cannot be treated as two different sources of income. 121. The Hon'ble Delhi High Court in the case of Gurinder Mohan Singh Nindrajog v. CIT (348 ITR 0170) after considering the judgements of the Hon'ble Supreme Court in CIT v. Shapoorji Pallonji Mistry, CIT v. Rai Bahadur Hardutroy Mohilal Chamaria, CIT v. Nirbheram Daluram [224 (Supra) and the full bench decision of the Delhi High Court in the case CIT v. Sardari lal Co (251 ITR 864 (FB)), CIT v. Union Tyres (Supra) held as under: "22. We do not agree with this submission. Obviously, when this matter/item is considered but addition on that account is not made in the assessment order, it would clearly follow that the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... network equipment was before the AO. This fact was also discussed by the AO in her assessment order. The AO enquired into the matter by issuing a questionnaire, calling upon the Appellant to give reply/information with respect to the royalty income from network equipment. Thereafter, the AO concluded the assessment by taxing only the royalty income from handsets. 123. The AO while taxing the royalty income earned by the Appellant under the provisions of the Act held as under: "In this case, we are concerned only with the royalty payable by the OEMs to Qualcomm based on the network equipment/handsets sold by them to parties in India. It is not our case to tax the royalty arising out of the global contract between OEMs and Qualcomm but only so much of the royalty which pertains to sales made in India. The source of income of the OEMs is sales made to parties in India based on which royalties are paid to Qualcomm. Thus in terms of S.9(1)(vi)(c ) of the Income Tax Act, 1961 royalties payable to Qualcomm are deemed to accrue and arise in India." 124. A reading of the assessment order clearly brings out the fact that this source was always part of the assessment proceedings .Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty 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 (a) for the purposes of business, or Profession carried on by such person outside India or (b) 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 clause (b) to sub clause (vi) to S.9(1), the burden lies on the tax payer to prove that it falls within those exemption provisions. In comparison, when it is claimed by revenue that the income falls under Clause (c) to Sub Clause (vi) of S.9(1) the burden is on the Revenue to prove the same. 130. Thus to tax the royalty income earned by Qualcomm from OEM's located outside India, under the deeming provision of S. 9(1)(vi) (c) of the Act, the burden is on the Revenue to prove that the OEMs carry on business in India and that they have used Qualcomm's patents for the purposes of, such business in India; or that they have used Qualcomm's patents for the purpose of, making or earning income from a source in India. Thus we agree with the arguments of the Ld. Counsel for the Appellant that the burden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant to AY 2007-08 and AY 2007-08 and have no relevance to the case on hand. The ld Spl council sought to make out a new case with the aid of these additional agreements. 136. Nevertheless we consider Mr. G.C. Srivastava submission that these agreements of Tata Tele Services can be relied upon for the limited purpose of understanding the business model of the OEMs in relation to sale of CDMA products to India. The plea that similar agreements would have been entered into by the India Telecom operators with the OEMs for purchase of network equipment, cannot be accepted as it would be a conjecture and surmise. 137. The AO as well as the CIT(A)'s order are based on 16 license agreements entered into by Qualcomm with OEMs. Redacted copies of the license agreement were filed before us. The Appellant during the course of the hearing filed an affidavit disclosing the names of the OEMs along with the dates of execution of the license agreements. Admittedly these agreements were entered into on 13th August, 1993 and certain other dates. Majority of the agreements were executed prior to year 2000 i.e. before CDMA services were launched in India. We are basically concerned with these ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Intellectual Property" shall not include any intellectual property, including but not limited to patents, owned by SnapTrack,Inc. Subscriber Unit (Page no 238 of the paperbook): "Subscriber Unit" means a Complete CDMA Telephone, a Cordless Base Station and/or a CDMA Subscriber Knockdown Kit and "Subscriber Units" means a complete CDMA Telephones, a Cordless Base Stations and CDMA Subscriber Knockdown Kits. Components (Page no 233 of the paper book): "Components" means application specific integrated circuits ("ASIC's"), electronic devices, integrated circuits, including firmware thereon and accompanying software, and/or families of devices for use in wireless subscriber equipment. CDMA ASIC (Page no 231): "CDMA ASIC" means QUALCOMM's mobile station modem (MSM) CDMA application specific integrated circuit, and any revision, generation, modifications or integration to or of the MSM, purchased by LICENSEE from QUALCOMM. (ii) Subscriber Unit and Infrastructure Equipment License Agreement between QUALCOMM and Licensee (i.e. OEM).[ [Agreement reference - Page no 264 to Page no 316 of the Appellant's paper book] Extract of relevant clauses from the Agreement in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 4.4.6, either QUALCOMM's Later Patents or QUALCOMM's Other Patents, as the case may be. Subscriber Unit (Page no 278): "Subscriber Unit" means a complete CDMA and/or Multi-Mode CDMA user terminal, including but not limited to mobile, transportable, and portable telephones, which can be used, without any additional equipment or components being attached thereto, to transmit and/or receive transmissions for Wireless Applications. Radiomodule (Page no 277): "Radiomodule" means an electronics subassembly for Wireless Applications which (i) includes, at a minimum, a printed circuit board, multiple individually packaged integrated circuits mounted on the printed circuit board, a CDMA Component, and any embedded software, and (ii) provides RF/analog and digital and baseband processing necessary to implement the functions of a CDMA Subscriber Unit such as to initiate and/or receive Wireless telecommunications transmissions; provided that a Radiomodule shall not be capable of initiating and/or receiving Wireless telecommunication transmissions without being incorporated into or attached to the product of which it is intended to be a subassembly. Components (Page no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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." 139. Based on the above, we now proceed to answer the first question as to whether the OEMs have carried on the business in India and that they have used the Appellant's patents for the purpose of carrying on such business in India. 140. What is licensed in these 16 agreements is the use of 'intellectual property" owned and patented by QUALCOMM for the purpose of manufacture of subscriber units and infrastructure equipment. These agreements were entered much before CDMA technology was introduced in India. A perusal of these agreements does not demonstrate that these are India specific. In fact they are not specific to any particular country. The OEM's manufactured products outside India and sold them to not only service providers in India but also to number of others in other countries. The license to manufacture products by using the patented Intellectual Property of the assessee has not been used in India as the products are manufactured outside India and when such products are sold to parties in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. 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. Further on the facts of the case, for the reasons given later in this order, even the sale cannot be said to have been done in India. b. The contention of the Revenue that OEMs (i.e Motorola and ZTE) carries out installation work for Tata and hence there is some business activity being carried by the OEM in India is factually incorrect and contrary to the clauses in the equipment purchase agreement which clearly states that installation of the equipment is carried out by a third party appointed by the purchaser (ie Tata) in consultation with the Supplier. Even presuming for a moment that the installation of the equipment is done by the OEMs in India, the Revenue has failed to demonstrate/prove that the patents licensed by Qualcomm are used by Motorola/ZTE for carrying out such installation activities in India. c. The next contention of the Revenue that the patented technology is used by the OEMs to manufacture India specific products and that the handsets are customized and programmed to include a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be concluded that CDMA technology was service provider specific. Network locks are requested by network service providers to keep the subscribers with them for an extended period. There is no dispute that the locked handset is capable of working anywhere in the world. This is evident from the scheme on international roaming using CDMA handsets downloaded from the website of Reliance Communications. Further there is also no dispute that all telecom operators permit international roaming. Though handsets that may have been purchased under certain terms are locked with a particular network service provider, the handset is capable of working in any country of the world with which that particular network service provider has commercial understanding. This clearly demonstrates that the CDMA connectivity of the phone is in no manner connected with the locking of the phone with a network service provider. Hence, in our view the decision of the A.P High court in the case Syed Asiffudin and others (Supra) is not relevant . 144. Even otherwise, we are unable to understand as to how sale of India specific handsets can be a basis of coming to the conclusion that the OEMs are carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not correct. This is not a case of the OEM's being not taxed due to a lapse of the officer concerned or being let off by the revenue by mistake or oversight. It is not brought to our notice that the OEM's have been brought to tax in any of the subsequent years. Thus the argument that two wrongs do not make a right does not apply to the situation on hand. 145. Regarding passing of the title in the equipment, there is no evidence with the revenue, for any of the assessment years before us that the title passed in India and that certain further activity was done by the OEM's in India after the sale. As already stated the burden is on revenue to prove that business is carried on in India by the OEM's. Arguments have been made without the support of any document or evidence pertaining to these years. The revenue contended that the title in the goods passes to Tata at the port of destination i.e. India based on agreements of 2007. Though these documents have no relevance for the years under consideration, on a perusal of these 2007 agreements we find that there is no clause in both the agreements to support the contentions of the Revenue that the title in the goods passes at the "port ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y consequence would be that the cellular operator would be entitled to call upon the assessee to cure the defect by repairing or replacing the defective part. If there was delay caused due to the acceptance test not being complied with, art. 19 of the supply contract provided for damages. Thus, the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test was not determinative of this factor. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. In Skoda Export (supra), the Andhra Pradesh High Court dealt with this issue in the following manner "We may also mention that learned standing counsel for the Department challenged the finding of the Tribunal that the sale of machinery was completed outside India. According to him, the sale was completed only in India, in as much as the assessee was entitled to and satisfy itself about the quality and standard of the machinery supplied. We do not see any substance in this contention. The various clauses in the agreement referred to above make it clear that the sale of machinery was F.O.B., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 does not alter the situation because the expression by its very definition in the agreement means obligation to bear carriage and insurance charges up to airports/seaports in India. 152. At this stage, we find it relevant to extracts the definition of CIP from Incoterms 2000. CIP-" Carriage and Insurance Paid to " means that the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This means that the buyer bears all risks and any additional costs occurring after the goods have been so delivered. However, in CIP the seller also has to procure insurance against the buyer's risk of loss or damage to the goods during the carriage. "Carrier" means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport, by rail, road, air, sea, inland waterway or by a combination of such modes. "Delivery" -The seller must deliver the goods to the carrier contracted in accordance with the contract of carriage or, if there are subsequent carriers to the first carrier, for transport to the agreed point at the named place on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llation of GSM systems. The supply of equipment was made on continuous basis. The supply had to satisfy the acceptance test. The issue before the Court was the taxability of such supplies in respect of which title and risk in the goods passed to the customers before the goods were delivered in India. The Assessing Officer held that the assessee company had a business connection under domestic law and that it had a Permanent Establishment under the Double Taxation Avoidance Agreement between India and Sweden. Business profits were estimated. Entire consideration for supply of software was brought to tax. Income from hardware was estimated at 26% of the billed supplies of hardware. The Hon'ble High Court held that:- (a) The title in the goods passed to the buyer before the goods reached the Indian shores and hence no profit could accrue to the Non-Resident. Sec.19 of the Sale of the Goods Act would have application. (b) The fact that the contract itself is signed in India or that the freight charges are borne by the importer would make no difference to the inference as was pointed out by the Hon'ble A.P. High Court in the case of Addl. CIT v. Skoda Exports. (c) The fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar operators and entered into three contracts with them, namely, (1) overall agreement, (2) supply agreement and 3) installation agreement. The assessee supplied GSM equipment, i.e. both hardware and software manufactured in Finland to Indian telecom operators from outside India on a principal to principal basis under independent buyer/seller arrangements. Installation activities were undertaken by NIPL under its independent contracts with Indian telecom operators. The Assessing Officer held that the assessee was carrying on business in India through a PE. Both the LO and NIPL constituted a PE of the assessee in India. 70 per cent of the total equipment revenue attributed to sale of hardware. The remaining 30 per cent of the equipment revenue attributed towards supply of software and the same was taxed as royalty both under Section 9(1)(vi) and under Article 12 of DTAA between India and Finland holding that software was not sold but licensed to the Indian telecom operators. The Hon'ble High Court held as follows:- (a) if supply agreement is taken as a stand alone agreement, the property in the goods passes to the buyer outside India and hence not taxable in India. (b) S.19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on the high seas. (i) Even if it is a case of a composite contract, the supply has to be segregated from the installation and only then the question of apportionment would arise. (j) That the Amendment to S.9 vide Finance Act, 2012 wherein Explanation IV, V and VI have been added to S.9 seeking to clarify the scope of Clause (vi) of Sub-section (1) of S.9, it was held that the amendment cannot be read into the treaty. (k) The reasoning given in Ericsson AB's case would apply to Nokia Network O.Y. 156. In the facts of the present case, Motorola and ZTE are OEMs supplying CDMA equipment to the Tata an Indian telecom operator. Their business model and supply contract for CDMA equipment is similar to the supply contract entered by the Ericsson and Nokia for supply of GSM equipment. Hence, we are of the view that the propositions laid by the Hon'ble Delhi High Court with respect to taxability of GSM equipment with embedded software would be squarely applicable to taxability of OEM's supplying CDMA handsets and equipment.. 157. Applying these principles laid down in Erricson's case, to the facts of the case on hand we have to hold that the title in the goods in this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are the property of the supplier or its suppliers. Hence it is argued that the supplier of OEMs is Qualcomm which supplied the intellectual property to be used under license for manufacturing of handsets/equipment. It was further submitted that the agreement between Qualcomm and the OEMs, which was the basis for the AO to assess the income, states in the Preamble that OEMs desired to obtain licenses of Qualcomm's intellectual property to manufacture and sell subscriber units. 163. Reliance was placed on the definition of the term 'chip sets' in the agreement, as well as other definitions such as "CDMA, ASIC" and it was argued that OEMs have given license to use chip sets/ASICs purchased from Qualcomm in manufacturing the handsets/equipment. It was argued that CDMA technology belonging to Qualcomm is embedded in chip sets which are used by the OEMs and licensed to Indian customers for further used by them. He further submitted that , if this basic proposition is under dispute, relying 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the capability to provide CDMA connectivity. 168. The revenue for the first time before the Tribunal argued that chip sets are purchased by OEMs from Qualcomm and these chip sets which has embedded software and helps in function of the hardware. This is not the basis on which either the AO or the CIT (A) proceeded to tax in this case. 169. It is not necessary for the OEMs to purchase chip sets from Qualcomm only. The OEMs can also purchase the chip sets from a third party other than Qualcomm. In fact, the AO in his assessment order had specifically held that the income of QCT division from the sale of chip sets is not assessable and that the assessment is confined to the income received by QTL division i.e. the business segment of Qualcomm which is involved in licensing of the patents to manufacture the products. We emphasis 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. 170. Regarding the request made by the revenue for remand of the case for examination by a technical expert, We do not find it necessary at this stage as there is no dispute that the software is embedded in the chi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement. 173. In view of the specific clauses in the agreement, it is clear that the software does not have an independent use and is a integral part of the hardware without which the hardware cannot function. The software supplied was a copyrighted article and not a copyright right. 174. Applying the propositions laid down by the Jurisdictional High Court in the case of Ericsson/Nokia (Supra), the income from embedded software cannot be taxed in India. The software is only used with the hard ware and is not independent of the Equipment or the chipset. Further, no separate consideration is paid by Tata for licensing of the software under the Equipment purchase agreement. Consideration is paid only for the equipment which has numerous patented technologies, chip sets and software which enables the hardware to function. The sale cannot be bifurcated or broken-down into different components. 175. Under the 16 licensed agreements between Qualcomm and the OEM which is the basis for the AO as well as the CIT(A) to raise a demand, what is licensed is the right to manufacture "subscriber units". Under these agreements subscriber unit is defined as "complete CDMA telephone of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that the assessee was right in his argument that the Revenue has not proved that the OEMs have carried on the business in India and that they have used Qualcomm's patents for carrying on such business in India nor the Revenue has proved that the OEMs have used Qualcomm's patents for the purpose of making/earning income from a source in India. Thus we hold that the royalty in question cannot be brought to tax under S.9(1)(vi)(c) of the Act. 179. The next issue is Whether the royalty paid by Qualcomm to OEMs can be taxed in India under Article 12(7)(b) of the DTAA between India and USA. 180. As we have held that the royalty in question cannot be brought to tax under the Income Tax Act, 1961, we need not go into the question of applicability under DTAA between India and USA as it would be an academic exercise. 181. Before we part, we observe that the Revenue in his effort to support the order of the AO as well as the CIT(A) brought in agreements entered into by Tata in later years i.e. in the F.Y. 2006-07 and 2007-08. It further widened the grounds of assessment by bringing in not only new material but fresh submissions like licensing of software, chip sets etc. Further, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed along with the networks in the USA. Later CDMA 2000series of standards were developed. The standards for CDMA are specified by 3GPP2 .( Source: http://www.radio-electronics.com/info/rf-technology-design/cdma/what-is-cdma-basics-tutorial.php,http://webopedia.com/TERM/C/CDMA.html ) A look at Wikipedia discloses the following:- "3GPP2 is the standardization group for CDMA 2000, they set 3G standard based on earlier 2G CDMA technology. The participating associations are five officially recognized Standard Development Organizations ('SDOs'). They are: ARIB - Association of Radio Industries and Businesses (Japan) CCSA - China Communications Standards Association (China) TIA - Telecommunications Industry Association (North America) TTA - Telecommunications Technology Association (Korea) TTC - Telecommunications Technology Committee (Japan) These SDOs are known as the Project's Organizational Partners. 3GPP2 requires that a participating individual member company be affiliated with at least one of the Organizational Partners. In addition, the Project has welcomed Market Representation Partners (MRPs) who offer market advice to 3GPP2 and bring a consensus view of mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is clear that there are many digital technologies used to transmit data in wireless form. Hence the argument that CDMA is a wholesome technology and that Qualcomm is the exclusive owner of such technology cannot be accepted. 186. There are a number of simple wireless technologies that are used by us in our daily life. A T.V. remote or an A.C. remote have wireless technology and it transmits signals between two points. Many other devices such as washing machines, microwaves, cars, computers and even fixed landline telephones, fax machines etc. have chipsets with embedded software which enable the equipment to work. Technology in a sense, the patent of which is owned by someone, is being used in India. All these devices which have chipsets with some embedded software when operated may in a way result in use of licensed software or IPR's in India. The use of such equipment cannot result in a source of income for the as it is sale of a the equipment is as a "Chattel", the title of which gets transferred. The software is embedded in the chipset and the chipset is part of the equipment. Hence this argument is devoid of merit and hence cannot be accepted. 187. In the result this i ..... 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