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TMI Blog2023 (6) TMI 966X X X X Extracts X X X X X X X X Extracts X X X X ..... l discuss the facts as involved in ITA No. 7894/Del/2017 for the assessment year 2014-15. 3. Briefly, the facts are, the assessee is a non-resident corporate entity incorporated in United States of America (USA) and tax resident of USA. As stated by the Assessing Officer, the assessee is a world leader in 3G/4G and next generation wireless technologies. The assessee holds a number of patents in the field of manufacture of subscriber units and network equipments capable of operating on Code Division Multiple Access (CDMA) technology. Basically, the assessee earns revenue from two divisions operated by it, viz., Qualcomm CDMA Technology (QCT) division, which develops and supplies CDMA based integrated circuits and systems software for wireless voice and data communication, multimedia functions and global positioning system products and Qualcomm Technologies Licensing (QTL) division, which grants license to manufactures of wireless products for the right to use qualcomm's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products. In the assessment year under dispute, the assessee earned th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of no use unless the network service provider installs the infrastructure equipment. Further, he observed that in assessment years 2005-06 to 2008-09, the royalty paid by the OEMs to assessee was determined as royalty income at the hands of the assessee accruing and arising in India. The Assessing Officer observed, while deciding assessee's appeals on the issue, the Tribunal had restored the matter back to the Assessing Officer for reexamination after obtaining opinion of technical experts. He observed, in pursuance to the directions of the Tribunal, the Assessing Officer has obtained opinion of the technical experts, wherein, the technical experts have observed that OEMs are utilizing the CDMA technology by acquiring the chip set from the assessee and incorporating them in handsets manufactured by them. They further observed that technology is being used in India by the service providers for the benefit of the Indian customers. Thus, based on the assessment order passed for the assessment year 2012-13, the Tribunal's order for assessment years 2005-06 to 2008-09 and the opinion of the technical experts, the Assessing Officer ultimately concluded that the OEMs have PE in India an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, the activity relating to accrual of royalty on the manufacture of subscriber units or network equipment, happens outside India. He submitted, royalty is payable by the OEMs to the assessee irrespective of whether OEMs receive the sale consideration. He submitted, royalty is payable to assessee even in cases where OEMs use the manufactured subscriber units and network equipments for their own use. Thus, the receipt of royalty by the assessee is independent of the recovery of sale proceeds by OEMs. He submitted, pay ability of royalty based on sale price is merely a measure of royalty and nothing more. 6. He submitted, the patents held by the assessee in the field of manufacture of subscriber units and network equipments are generic in nature, in the sense that, the subscriber units and network equipments can be used anywhere in the world and are not India-specific. He submitted, even the license agreement entered with foreign OEMs are not geography specific and foreign OEMs could sell the products anywhere in the world. Further, he submitted, the functionalities such as locking of the phone to a particular network service provider or incorporating local languages or rington ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opped and the subscriber units available were open market handsets, which are not locked to any specific service provider. He submitted, the Assessing Officer has plainly placed reliance on the opinion of the technical experts without realising that the expert opinion was for the period 2010-11, after which open market handsets were launched in India discarding the old system of locking of subscriber units to any network carrier. Thus, he submitted, the report of the technical experts is of no consequence in so far as the present assessment years are concerned. 9. Without prejudice, he submitted, the technical opinions nowhere suggests that the locking of the subscriber units to the carrier has any connection with the patents of the assessee. Therefore, he submitted, the entire technical opinion analyses the technology that goes into manufacture of a chipset. He submitted, the chipsets are manufactured by the assessee and sold by OEMs. No license to manufacture chipsets is granted to any of the foreign OEMs, which are the subject matter of assessment. He submitted, the income from sale of chipset is part of a separate division, viz., QCT division, hence, not the subject matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e services should be utilized in India. He submitted, in assessee's case, the patents were utilized in the manufacturing activities undertaken outside India by the OEMs and no evidence has been brought on record by the Revenue to prove otherwise. Thus, he submitted, since the issue is squarely covered by the decisions of the Tribunal in assessee's own cases, the additions should be deleted. 10. Learned Departmental Representative, in addition to the submissions made at the time of hearing, has furnished a written submission, which reads as under : "4. REVENUE SUBMISSION 4.1 It could be seen that the assessee mostly reiterated before the Hon'ble Bench the arguments as taken before AO/DRP, and also largely relied on the ruling of the Coordinate Bench for AY 2004-05 etc . However, based on the arguments of the Revenue in the same case during the course of hearing for I.T.A. Nos.: 3701 and 3702/Del/2009, 5343/Del/2010 and 4608/Del/ll Assessment years: 2005-06, 2006-07, 2007-08 and 2008-09 dated 20.02.2015 , a number of observations have been made by the Hon'ble Bench , highlighting the additional factual matrix which was not considered in the earlier ruling by the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Observations of Hon'ble ITAT on Chargeabilitv of Use of patents as Royalty : Para-38. As the coordinate bench has very rightly held, and we are in full and considered agreement with the coordinate bench on that issue, as long as patents are used in the manufacturing process which has taken place outside India, such a royalty cannot have tax implications in India. Para-39. However, that is not the point here. As a careful analysis of facts before us would show, the subject matter of dispute, in our humble understanding, is the taxation of royalty in respect of use of patents in handsets which have been sold in India. It appears that the royalty which has been paid by the OEM of CDMA handsets is not only royalty for patents used in the manufacturing process, even if any, but predominantly, even if not wholly, for the use of the handsets so manufactured. That aspect of the matter is even more glaring when we realize that the royalty is charged on each handset sold or used and not each handset manufactured. We will, however, come to that aspect of the matter in detail a little later. Para-40. The actual controversy, therefore, is with respect to the royalties for use of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsumer and the manufacturer of a product is only a conduit for collection of such a consideration for use by the end consumer, the taxation would be warranted in the end use jurisdiction. Para-58. It is in this light of the scheme of taxation of royalties as provided in Section 9(l)(vi)(c ), that we have to examine the contextual connotation of payment of royalties for any right, property or information used or service utilized use 'for the purpose of business or profession carried on' by a non-resident in India and 'for the purposes of making or earning any income from any source" by a non-resident in India. Para-71. We find that there is major change in the facts of the case before the coordinate bench vis-a-vis the facts of the case as before us. While there was nothing to suggest that the OEMs were subjected to tax in India in respect of their business income, and this was, as we have noted from the extracts reproduced earlier in this order, one of the factors leading to the conclusion that the OEMs were not carrying on any business, right now we have reasonable evidences to suggest the OEMs in question, who have made payments of the impugned royalty, were ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of royalty paid by the OEM to Qualcomm in respect of CDMA handsets sold in India. Whether this income is taxable under first limb of Section 9(l)(vi)(c) or in second limb of Section 9(l)(vi)(c), in our humble understanding, does not make much of a material difference so far as scope of proceedings before us is concerned. As the Assessing Officer held that the said royalty income was taxable under the first limb, he may not have seen any need to examine the application of the second limb of the same clause- though ideally he should have examined that aspect of the matter as well, but then, even if we are to hold that the said income is not taxable in the first limb, it would indeed be appropriate for us to examine remaining limbs of the same legal provision. In support of this proposition, we may refer to the following observations made by a Special Bench of this Tribunal in the case of Tata Communications Limited Vs JCIT [ (2009) 121 ITD 384]: (iv) Observations of Hon'ble ITAT Chargeabilitv to tax of Royalty Payment under DTAA: Para- 97. As evident from a plain reading of Article 13(7)(b), in a situation in which the income of royalty does not arise under Article 13(7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, after giving assessee a reasonable opportunity of hearing and after confronting the assessee with all the material that the revenue authorities may gather in support of their claim, at the assessment stage. On this aspect of the matter also, the matter deserves to be remitted to the file of the Assessing Officer. Directions in Para-76- As we part with this issue, we may mention that the coordinate bench in assessee's own case had observed as follows: "A sale to India without any operations being carried out in India would amount to business with India and not business in India. For the business to be carried out in India there should be some activity carried out in India. Thus the argument that if manufacturing is done in one jurisdiction and sales in the other jurisdiction, then there is business in another jurisdiction is devoid of merit". We are in complete agreement with the views so expressed by the coordinate bench. However, that was a case in which not only that there was no material to suggest that any activity is carried out in India, there was no evidence of taxability of income of those OEMs in India. In the present case, however, primary evidence about the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to use, the right or property, ..............in one of the Contracting States", the taxability of royalty in the source jurisdiction, i.e. the jurisdiction in which the property is ordinarily used, may arise. However, the taxability under this clause will essentially depend on whether the property, including intellectual property such as patent, design or model etc, for the use of which the royalty arises is actually in respect of the use in handsets and equipment or in respect of use in the manufacturing process. As we have already remitted the matter in respect of factual findings on this aspect we see no need to deal with this aspect of the matter any further at this stage. Directions in Para-98- It is in this backdrop that we decline to deal with, at this stage and in the light of the limited facts on record, the taxability of impugned royalties in terms of the provisions of the Indo US tax treaty as well. Directions in Para- 99- For the reasons set out above, we are of the considered view that further examination about certain basic facts of the case is required, and a categorical finding about those factual aspects, which have been elaborated upon earlier in these di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whole-some technology and whether it can be broken down into the handsets and equipments. (f) Whether it can be said that Qualcomm had no role to play in the transfer of technology to India." Para 7.2 (Pg 31) Keeping in view of the Technical opinion and facts of the case for A.Y 2005-06 to 2008-09, the Royalty received by assessee from OEM's was treated as taxable as provisions of Section 9(l)(vi)(c) of the IT Act as well as Article 12(7) (b) of DTAA between India and USA. 4.4.2 (Ref. Assessment order Pas 43 to 951 Para-9 ............. In case of Huawei Technology Company Ltd China, Hon'ble ITAT in it's order dated 21.03.2014 in ITA No. 5253 to 5256/Del/2011 for A.Y 200506 to 2008-09 has categorically confirmed the existence of PE in India. In para 8 of the order, the Tribunal has explained that the Assessing Officer has categorically established the PE of the assessee on the basis of documents collected and statement of personnel's recorded during the survey conducted u/s 133A. In para No. 9 it has been mentioned that the assessee has filed objections before DRP on the issue of establishing the PE in India and Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermine the taxability of assessee's receipts under this revenue stream first thing which is required to be examined is the nature of receipts. The assessee enters into various types of agreements with the OEMs which enables the OEMs to use the Qualcomm's worldwide patents and I PR portfolio for the purposes of their business of manufacturing and selling various types of CDMA equipments, handsets and other smart phones based on Qualcomm's technology. The assessee has never submitted these agreements during assessment proceedings. However redacted versions of some of these agreements were submitted during appellate proceedings. Relevant portions of some of these agreements are reproduced hereunder:- DS-CDMA Technology Agreement QC000414 "Affiliate" means as to a party any present or future subsidiary of the party: For purposes of this definition, the term "subsidiary" of an entity means a corporation or other legal entity (i) the majority of whose shares or other securities entitled to vote for election of directors (or other managing authority) is now or hereafter owned or controlled by such entity either directly or indirectly or (ii) which does not have outsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Product itself (as sold or leased), or (vi) a method or process involving the use of a Licensed Product to manufacture (including associated testing) any other product. Notwithstanding anything to contrary contained above, (1) to the extent that Corporation's Patents are incorporated in the transceiver, Licensee may not have made any transceiver (in which Corporation's Patents are incorporated) unless (i) such transceiver is of Licensee design and specification (which design and specification is engineered by or on behalf of Licensee or (ii) Licensee has such transceiver made by a manufacturer licensed under the DSCDMA TA and (2) to the extent that Licensee Patents are incorporated in the transceiver, Corporation may not have made any transceiver (in which Licensee Patents are incorporated) unless (i) such transceiver is of Corporation's design and specification (which design and specification is engineered by or on behalf of Corporation) or (ii) Corporation has such transceiver made by a manufacturer licensed under the DS-CDMA TA. Notwithstanding anything to contrary contained above, (1) Corporation may have made staple articles of commerce (including but not limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orth in this Agreement; and Definition of CDMA Enabling Infrastructure Equipment on Page No'QC000500 CDMA Enabling Infrastructure Equipment" shall mean the (i) CDMA selector associated with the vocoder bank (or other special implementation, including a switch implementation, of hard or soft handoff) which incorporates all or any part of QUALCOMM Intellectual Property, (ii) the CDMA controller, whether or not such CDMA controller is separate from or incorporated as part of the main Base Station controller, (Hi) distributed': antenna, meaning a multi-node antenna system and related circuitry (excluding the fair value of the antenna element) that is designed to make use of delays in CDMA signal transmission and/or reception so that the rake receiver functionality can be utilized and (iv) SBS, meaning the selector Bank Subsystem that includes (a) selectors that support soft and/or hard handoff (b) the vocoder; (c) data services based on any QUALCOMM Intellectual Property, (d) fax services based on any QUALCOMM Intellectual Property and/or (e) other service options based on any QUALCOMM Intellectual Property. If so handoff is implemented as a pad of the switch function, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PR" means the following intellectual property of QUALCOMM: QUALCOMM's (and its Affiliate's) patents and patent applications (including divisions, reissues, renewals, continuations and continuations-in-part), copyrights, other intellectual property rights, trade secrets, know-how and technical information, including but not limited to that intellectual properly that is incorporated into the CAI, which QUALCOMM (or its Affiliates) has acquired and is in possession of as of the Effective Date, which QUALCOMM (or its Affiliates) has the right to license to LICENSEE in accordance with this Agreement and which are technically necessary IPR developed or acquired during the Improvement Period; but the term QUALCOMM's Technically Necessary IPR does not include and trade name trademark, service mark or similar symbols, abbreviations contractions or simulations identifying QUALCOMM (except as set forth in Section 9). On Page No QC000505 "Subscriber Unit License" means a complete CDMA and/or Dual Mode CDMA telephone, including but not limited to mobile, transportable and portable telephones, which incorporates all or any part of QUALCOMM Intellectual Property and can be used, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustry Association (TIA) and other international standard bodies. Components means application specific integrated circuits (ASICs), electronic devices, integrated circuits, including firmware thereon, and/or families of devices intended for use in Subscriber Units and/or Infrastructure Equipment for Wireless Applications. Cordless Base Station means a residential device that provides wireless receive and/or transmit functionality to and/or from Subscriber Units, which incorporates all or any part of Qualcomm Intellectual Property, and which is connected to a public or private switched telecommunications network. Dual Mode CDMA means, as applied to Subscriber Units, having a capability to operate with CDMA technology and existing analog FM cellular technology for such backward compatibility with currently existing cellular infrastructure and terminal as may be required by the marketplace. On Page No QC000540- "QUALCOMM Intellectual Property" means both QUALCOMM'S Technically Necessary IPR and QUALCOMM'S Commercially Necessary IPR. "QUALCOMM Commercially Necessary IPR" means the following intellectual property of QUALCOMM: Qualcomm's (and its Affiliate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Base Station License. Subject to the terms and conditions of this Agreement, including but not limited to timely payment of the license fees and royalties set forth herein, QUALCOMM, on behalf of itself and its Affiliates, hereby grants to LICENSEE a personal, no transferable, worldwide and nonexclusive license (without the right to sublicense, except to Affiliates of LICENSEE as permitted in Section 5.3) to use QUALCOMM's Intellectual Property solely for Wireless Applications to (a) make (and have made) Components that have been exclusively designed by LICENSEE (which design is owned exclusively by LICENSEE) and use, sell lease or otherwise dispose of Components, provided, however that if such Components incorporate any of QUALCOMM's CDMA Intellectual Property (e.g., CDMA AS/Cs, vocoder DSP, vocoder ASIC, etc.) then such Components may only be used, sold, leased or otherwise disposed by LICENSEE if they are Included and used, sold, leased or otherwise disposed of by LICENSEE as part of and within complete Subscriber Units and/or Cordless Base Stations Sold by LICENSEE(or as replacement pads for Subscriber Units previously sold by LICENSEE). No other, further or different l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bly withheld or delayed, to perform tests of LICENSEE'S Subscriber Units and Infrastructure Equipment to ensure compliance and conformity with the CAI. If such tests indicate maternal noncompliance or nonconformity therewith, such tests shall be at LICENSEE cost and LICENSEE shall reimburse QUALCOMM for any such reasonable tests performed by QUALCOMM at QUALCOMM's Costs plus a twenty percent (20%) foe of the Costs. Nonconforming Subscriber Units and Infrastructure Equipment, if any, shall not be sold or marketing by LICENSEE until the non-conformity is corrected. Exhibit B on Page QC000566 License Agreement Documents Exhibit A Title D Base Station ASIC Questions and Answers Baseband Analog ASIC Questions and Answers CDMA Base Station ASIC User Manual, January 1993 CDMA Baseband Analog ASIC Data Sheet, December 1992 CDMA Baseboard System Document, Ver. 1.1. 03/10/92 CDMA Cell Processing, 09/09/92 CDMA Capacity 2.0 Test Report CDMA Cell Partition Trade-Offs, Ver. 1.2, 08/24/90 CDMA Data Analysis Tool Analysis Guide CDMA Data Analysis Tool User's Guide CDMA Digital Cellular D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S Software to be selected by Licensee. Para-11.4 Analysis of the above Extracts I. Qualcomm holds 'patents"- which is defined in the Definitions Appendix on page QC000408 to mean every patent issued in any country of the world. Such patents are technically and commercially necessary for implementation of DS-CDMA in FNE, Components and Subscriber Units or which/s technically or commercially necessary for implementation of existing analog FM cellular technology in Dual Mode subscriber Units. II. The components have been defined on Page QC000411 to mean ASICs, electronic devices, integrated circuits, including firmware thereon, and/or families of devices incorporating DS- CDMA technology and intended for use in FNE (including Channel Units and DS-CDMA Enabling Infrastructure Equipment) and SUBSCRIBER UNITS, but the term does not mean any Channel Unit, FNE or SUBSCRIBER UNIT III. DS-CDMA has been defined to mean Direct Sequence Code Division Multiple Access technology. IV. The above extracts show that Qualcomm is in possession of certain patents which are technically and commercially necessary for use in Cellular Applications (defined on oaae QC000410). The licensee is g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether this royalty income falls in any of the sub clauses of section 9(i)(vi) which are reproduced as under:- "(vi) by way of royalty payable by- a) the Government; or b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Para-11.6. First condition to be examined to decide whether the royalty income received by the assessee accrues or arises in India is to see who is the payer of royalty. In the case of receipts arising out of Patent licensing agreements which are entered between the assessee and the OEMs. Assessee has not submitted the list of OEMs with whom it has agreements. Assuming that most of the OEMs with whom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e import of the above is that the/payer-AIR must have a business or any source of Income in India. Para-11.11. Whether OEMs carrying on business in India. a. Business as defined in section 2(13) of the Act, is admittedly an expression of wide import. The business is not only manufacturing or trading but encompasses many other activities which together constitute a business. Example of MNCs was cited to prove the point that different activity of a composite business are carried out in different locations e.g. manufacturing in one jurisdiction and sales in another jurisdiction and that it cannot be said that business is done in one of the jurisdictions only. b. That handsets or equipments although manufactured outside India are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cific. j. Regarding the taxability of royalty income under the Act, the assessee has submitted that the OEMs do not have a source of income in India. The assessee has also referred to the ITAT's consolidated order in assesses own case where in the ITAT for the AY 2000-01 to AY 2004-05 in ITA Nos. 3696, 3697, 3698, 3699 and 3700/Del/2009 has held that the royalty income received by Qualcomm from the OEMs on manufacture of handsets and infrastructure equipment is not liable to tax in India under section 9(l)(vi)( c) of the Act. Further, Para 135 of the order the ITAT held that to tax the royalty income earned by Qualcomm, the Revenue must show that the OEMs have used Qualcomm's patents for a business carried on in India or for making or earning income from a source in India, which leads to the taxability of the OEMs. Therefore, the taxability of Qualcomm directly depends on the OEMs taxability in India': Accordingly, the ITAT has held that for the AY 2000-01 to AY 2004-05 the Revenue has failed to discharge this burden and hence the royalty income earned by Qualcomm cannot be brought to tax under section 9(l)(vi)(c) of the Act. k. However, this office is in possessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AOs in during the assessment proceeding for A.Y. 2010- 11, are as under :- Seeking information regarding assessment proceeding in the case of M/s Qualcomm Incorporated, FY 2009-10- Regarding- Please refer to the subject mentioned above. In continuation to this office letter No. F.No. Addl. DIT/Range-2/lntl. Tax./2012-13 dated 10.12.2012 on the subject mention above your requested to provide the following information On the basis of assessment completed in past years in the case of Huawei Technology Company Ltd. 1. Whether the OEM has a PE in India in respect of the sale of mobile handsets / equipments. 2. Whether the OEM's are manufacturing mobile handsets/equipment in India. 3. How the sale of mobile handsets/equipments in effected in India-whether through PE or subsidiary or direct. 4. Whether the co. has a business connection in India & in what form. 5. Please also provide the last assessment order of the OEM assessed in your charge. The information is being solicited and required to be furnished urgently as the case is getting time barred on 31.03.2013. m. The list of OEMs, the AOs of whom were sent these letters are as under:- s. No OEM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany Ltd. has a PE in India in respect of the sale of mobile handsets/equipments Yes, Huawei Technology Company Ltd. has a PE in India in respect of the sale of equipments in the form of Huawei India (Indian) 2 Whether the Huawei Technology Company Ltd. is manufacturing mobile handsets/equipments in India. Huawei Technology Company Ltd. is not manufacturing equipments in India. 3 How the sale of mobile handsets in effected in India whether through PE or direct. Huawei Technology Company Ltd. sells the equipments to EIL and to the Indian Cellular operators directly also. The sale of equipments is attributable to PE directly. 4 Whether the co. has a business connection in India & in what form. Yes, the co. has a business connection in India and a PE in India in the form of Indian Subsidiary. 5 Please also provide the last assessment order of the Huawei Technology Company Ltd. assessed in your charge. Copy of the Huawei Technology Company Ltd. assessment order for the A. Y. 08-09 is attached herewith p. The reply of DDIT Circle 3(2) International Taxation New Delhi is reproduced as under- in this regard, on the basis of records available, this is to submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Communication manufactures and supplies GSM equipments. Further, as desired, kindly find the information as under S. No. Query Reply 1. Whether the, Sony Ericsson Mobile Communication has a PE in India in respect of the sale of mobile handsets/equipments Yes, Sony Ericsson Mobile Communication, has a PE in India in respect of the sale of equipments in the form of Sony Ericsson Mobile Communication 2. Whether the Sony Ericsson mobile communication. is manufacturing mobile handsets/equipments in India. Sony Ericsson Ltd. is not Manufacturing equipments in India. 3. How the sale of mobile handsets/equipments in effected in India-whether through PE or subsidiary or direct. Sony Ericsson Mobile Communication sells the ipments to PE through which 4. Whether the co. has a business connection in India & in what form. the co. has a business S. Please also provide the last assessment order of the Sony Ericsson Mobile Communication assessed in your Copy of the Sony Ericsson Mobile Communication assessment order for the A.Y. 08-09 is attached herewith The erstwhile AO of the assessee that time, happened to be also the Assessing officer of Nokia Corporati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. From the replies received from various AOs, it is amply clear that all the OEMs have a strong business connection and also the PE in India. The sale of handsets and equipments in which Qualcomm's patented technology is used is directly attributable to the PE of these OEMs in India. It may also be pertinent to mention here that in the Patent licensing agreements all the AEs of the OEMs are treated as a single entity and any sale between them is not considered for computation of Royalty. It is only when the handset/equipment is sold to an end user or a third party reseller, a mutually agreed proportion is computed as Royalty and become payable to Qualcomm. The business of these OEMs consists of manufacturing and selling of the handsets/ equipments . Only manufacturing of handsets/equipments can never be called as business, That can at best be one of the activities of the business of OEMs. As per the Act the technology to which the Patents relate should be used in the 'business' of OEM carried on in India. It is a matter of record as narrated in the replies of the AOs of OEMs that they are carrying on business in India through PE and the business revenues are connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se for the software. Both OEMs and Indian operators treat the software embedded in the handset/equipment as distinct from hardware. d. Clause 19.5 (page 43) of ZTE agreement further records that all licensed material are the property of "the supplier or its suppliers". The supplier of OEMs is Qualcomm which has supplied the intellectual property to be used under a license for manufacturing of handsets/equipment. e. The agreement between Qualcomm and OEM states in the preamble itself that OEM desires to obtain a license of Qualcomm's chipsets and other definition of "CDMA ASIC" appearing on page 231 clearly shows that OEMs have been given license to use chipset/ASIC purchased from Qualcomm in manufacturing equipment/handsets. The CDMA technology belonging to Qualcomm is embedded in chipsets which are used by OEMs and licensed to Indian customers for further use by them. There is absolutely no material to, suggest that Qualcomm has not licensed its technology to OEMs. f. Clause 5.1 states that Qualcomm has guaranteed worldwide licenses under Qualcomm intellectual property to make, import, use, sell, or lease or otherwise dispose of subscriber units and (b) to make compon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to Qualcomm is also getting used in India. In view of this discussion, it is clear that, the Qualcomm's Patents are used for the business in India. i. The Finance Act of 2012 has introduced explanation 4 to section 9(l)(vi) to clarity for removal of doubts that transfer of any right in an intellectual property includes transfer of any right for use of a computer software irrespective of the medium through which such right is transferred. The amendment comes into operation with retrospective effect from 1.6.1976. In view of this clarificatory amendment it is immaterial that the properties or rights are embedded in handsets/equipment. The entire argument to the effect that OEMs sell copyrighted article and do not give any right in the copyright is of no consequence post this amendment. j. Qualcomm is in not giving license to OEMs for manufacturing some engineering or mechanical products. Qualcomm is having its patents for wireless technology, which has to have software and computer programs to transmit or receive data/signals and provide connectivity and make the network functional. This activity is possible only through the use of software, which are in other words only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts/ 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 Incoterms2000. c The definition of these terms clearly indicates that the entire risk is borne by the supplier and carnage and insurance charges paid till their delivery at airport/ seaport in India. The repeated reference by the Assessee 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 evident from the definition of "Site" on page 47 of the agreement which reads to mean "the land building and/or any other place where the equipment is to be delivered". It is obvious that the reference to the "sites" is to the place where the network is to be installed and commissioned. d. Clause 4.15 of the agreement further provides that the supplier shall ensure that the equipment is "as per agreed scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 Incotenns 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 agreement is viewed as a whole, it demonstrates that the supplier has the obligation to deliver the goods at the relevant sites in India and the declaration in clause 14.1 that the title passes in High seas does not reflect the actual mode and delivery of the supply nor the true intent of the parties. Section 19(2) of Sales of Goods Act provides for the factors to determine the intent of the parties and if despite the declaratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fications. Such specifications are met once the installment is done on Site in India. (Ref is invited to definition of site in the contract). The risk of loss does not pass to TTSL unless Provisional Acceptance is given by TTSL. Such PAT is also done in India on Site. The installation is done by an entity recommended and approved by the OEM thereby indicating that installation is done by the OEM. Ref is invited to the Sale of Goods Act, section 19(2) and Section 20- 24. Section 21: Specific goods to be out into a deliverable state.- Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof. K. Further regarding Acceptance of goods by buyer - Contract of Sale is completed not by mere delivery of goods but by acceptance of goods by buyer. 'Acceptance' does not mean mere receipt of goods. It means checking the goods to ascertain whether they are as per contract. - Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. This clearly shows that operational utilization and full and guaranteed working condition in accordance with technical specifications are the requirements for the contracted goods to be put into a deliverable state and the property does not pass until such thing is done i.e. working condition as per technical specifications and the buyer has notice thereof though the provisional acceptance test. Note that final Acceptance tests which are conducted after one year of the successful completion of the probation period of one year in service post the event of achieving provisional acceptance (pg. 5 of 65) thus conforming to the guaranteed working condition part of the contract. o. A reading of the aforesaid sections of the Sale of Goods Act will show that where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof. p. In view of the discussion above, the OEMs (the payers of royalty) are found to have used the property for carrying on business in India and also for earning income from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent assessee are for the use of or the right to use copyright, patent, invention or process in India and consequently liable to tax in India u/s 9(l)(w) of income tax Act, 1961. Para-12.3 The patented technology is being utilized by the OEMs for their business of telecom network equipments in India- thus royalty is accruing/arising in India. As Per Explanation inserted by the Finance Act, 2010 w.e.f. 1.4.1976 the income by way of royalty of a non-resident shall be deemed to accrue or arise in India under clause (vi) irrespective of the fact whether the non-resident has a residence or a place of business or business connection in India. Para-12.4 The assessee's argument that the technology license is used by OEMs outside India and what Indian Carriers are using is only copyrighted items is misplaced. There is no such thing as copyrighted article either in DTAA or any domestic legislation in India. Further, if any term is not defined in DTAA, then domestic legislation must be referred to. Indian Income tax Act has done away with the distinction between copyright and copyrighted article vide Explanation 5 to the Section 9. Para-12.5. OEMs use the technology and design dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logy and not any software to the OEMs for use. Further, it tries to argue that the software licensing has not been sought to be taxed by Indian Revenue Authorities. Its software business is distinct and what has been sought to be taxed by Revenue Authorities is royalty accruing from patent division. With respect to the revenue's argument w.r.t EULA clause, the assessee appears to be silent. Para-12.9 Here it may be mentioned that the four principal business units of Qualcomm are as follows: Qualcomm CDMA Technologies ('QCT) - QCT develops and supplies CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning system products. Qualcomm Technologies Licensing ('QTL') - QTL grants licenses to manufacturers of wireless products for the right to use portions of Qualcomm's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and safe of certain wireless products. Qualcomm Wireless & Internet ('QWI') - QWI is comprised of: Qualcomm Internet Services ('QIS) - QIS provides technology to support and accelerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information used or services utilized for the purposes of a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source in India. 2. Section 9(l)(vi) of the I. T. Act is a deeming provision seeking to tax royalty payable by one non resident to another non resident in relation to income earned from a source in India. Under the provisions of section 9(1) (vi) (c) of the I.T. Act, it is not mandatory to bring the payer to tax before initiating the proceedings against the person receiving royalty income. 3. In this case, we are concerned Dilly with the royalty paid by the OEMs to Qualcomm based on network equipment/ handsets sold by them to parties in India. It is not the Department's case to tax the royalty arising out of the global contract between OEM's and Qualcomm but only so much of royalty which pertains to sales made in India. The source of income of OEM's is sales made to parties in India based on which royalties are paid to Qualcomm. Thus in terms of section 9(1) (vi) (c) of the I.T. Act royalties payable to Qualcomm are deemed to accrue or arise in India. In terms of Article 12(7) (b) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entions raised by the assessee on factual inaccuracies contained in the CIT (A)'s order, it was observed that the same does not alter the position of taxability of the royalty income in India under the provisions of Section 9(1) (vi) (c) of the Act as it is still an admitted fact that royalty arises to Qualcomm only when the customer is identified by the OEMs. In the Indian situation since the customers (Tata and Reliance) are based in India, they necessarily constitute a source of income for the OEMs in India and the taxability under the deeming provisions of Section 9(1) (vi) (c) cannot be denied/ overlooked. 7. The above position is strengthened in the view of the assessee's own submissions that the Indian Carriers may request specific features to be incorporated in the phones to be sold in India. Therefore, whether the specific features are driven by the assessee's technology or not is immaterial since the phone will then unequivocally be saleable only to India thereby bringing creating a strong Indian nexus for source based taxation. 8. In view of the above discussions, royalties arising to Qualcomm from the sale of infrastructure equipment and handsets by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tally inapplicable to the facts of the present case . That 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(l)(vi)? Para-13.1 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 assessee 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(l)(vi)( c). It has nothing to do with the taxability of "OEMs". The provisions of section 9N(i) on which the decision was rendered by the High Court is totally out of context in the present case. Para-13.2 Further, if a non resident (OEM) is paying royalty to another non resident (Qualcomm) in respect of any right, property or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt use and hence the tran ii. Payment was not taxable under India Finland DTAA as it was for Copy righted article and not for a Copyright. iii. The definition of "royalty" under the said DTAA differs from the amended definition of Royalty under the Act. 2. In the context, Question raised before Hon'ble High Court of Delhi as responded on Page 7 of the Judgment were: Questions 1 and 2 on whether Nokia has any business connection and/or PE in India. Question no.3 on whether the amount was Taxable as royalty. 3. Hon'ble High Court observed on Page 16 (Para 9) that the liaison office cannot be regarded as PE. After, coming to this finding again in Para 22 (Page 26), the High Court discussion the amendments and observed on Page 29 that the amendments can the Treaty. Questions No 1 and 2 were accordingly decided in favour of the assessee. 4. Hon'ble High Court proceeded to discuss Questions No. 3 and 5 on page 29 (para 25). After reproducing extracts from the 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 5. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o defined to mean a combination of hardware and software. The "Equipment" is also defined to mean and include CDMA Equipment. Thus, the network operators in India are given the right to use the patented products and processes of Qualcomm through OEMs. The agreement between Qualcomm and OEM defines "CDMA ASIC" to mean Qualcomm mobile station modem and integrated circuit etc. and "chipset" is defined to means" Qualcomm's baseband analog, ASIC, AGC Tx, AGC Rx ASIC and CDMA ASIC" (all patented products or processes) 10. These facts raised an altogether different questions in this case-different from those in the cases' of Nokia or Ericsson. i. What are the patented technologies that Qualcomm has got patented which go to make CDMA technology, ii. Whether or not these patents being used in a business carried out in India, iii. Whether Indian operations have the necessary authority in law to make use of such patents. iv. Whether use of such patents would full within the meaning of the expression "Royalty" as used in the DTAA and the domestic law. 11. It is a very significant and important fact that up to the year 2004, Qualcomm had already got n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole, and not adopt a dissecting approach. The Supreme Court's judgment favors a "look at" test in which Revenue looks at the entire arrangement, holistically, and not adopt a dissecting approach. 14.3. The contentions of the assessee are not acceptable as, undoubtedly the technology is used in India and therefore the provisions of Article 12 (7) (b) are attracted. Further, the ITAT did not examine the taxability of the royalty income under Article 12 (7) (b). The Hon'ble ITAT also did not consider the fact that the OEM's were held taxable in India. Accordingly, the position adopted during the earlier years survives in the case of the assessee for taxability of the income under the provisions of the India-USA DTAA." 13. Further, during the year under consideration, the AR of the assessee has filed the copies of different agreements. As per Subscriber Unit License agreement dated 13.01.2012 between assessee and Unique Mobinet Surfers Private Limited (now known as Data wind Innovation Private Limited the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s calculated on the number and sale consideration of subscribers units i.e. modem, etc. and equipments in India is sourced from India. Therefore, the royalty on Subscriber Units i.e. module, assembly, modem card, CDMA modem, etc., earned from India and paid by OEMs to the assessee company, is accrued and arisen in India and is taxable in India. Further, the network infrastructure equipments are also used in India by way of supporting the connectivity of intellectual property of the assessee company. Therefore, the royalty on infrastructure equipments is accrued or arisen in India and is taxable in India. Para-14.1 In view of above, the royalty on Subscriber Units and Royalty on infrastructure equipments is taxed as Per of section 9(l)(vi)(c) of IT Act as well as Article 12(7) of DTAA between India and USA. " 4.5 In view of the clear finding of the AO in regard to taxability of Royalty relating to use of patent on the handsets sold by the service provider in India, the observation made by Hon'ble ITAT in respect of its ruling for AY 2005-06 to 2008-09 has been complied with. These Assessment orders for these Assessment years, however could not be adjudicated by the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax jurisdiction where the handsets are used by the customer after exclusive facilitation for its use by the Indian service providers and therefore, the royalty on Subscriber Units and Royalty on infrastructure equipments is taxed as Per of section 9(l)(vi)(c) of IT Act as well as Article 12(7) of DTAA between India and USA. " 11. We have considered rival submissions in the light of decisions relied upon and perused the materials on record. As could be seen from the facts on record, the assessee has offered the royalty income received from OEMs carrying on business in India through their PEs. Whereas, in respect of royalty received from OEMs located outside having no PE in India, the assessee has not offered royalty income to tax. It is the say of the assessee that it has granted patent license of subscriber units/equipments to OEMs, who manufacture them by incorporating/embedding the patents license given by the assessee. The manufactured handsets/equipments also incorporate/embed the chipsets sold by the QCT Division of the assessee, containing the CDMA technology. Whereas, the Assessing Officer has observed that since the subscriber units(handsets/equipments) containing CDM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two orders of the Tribunal in assessee's own cases, one for assessment years 2000-01 to 2004-05 and second one for the assessment years 2005-06 to 2008-09, it is observed, in the order passed for the assessment years 2000-01 to 2004-05, the Tribunal has categorically held that foreign OEMs, since, have not carried on any business in India, it cannot be said that such OEMs have used assessee's patents for the purpose of any business by them in India. The Tribunal has further held that by utilizing the patents of the assessee, OEMs have not earned any income from a source in India. Therefore, the royalty income cannot be taxable under the first limb of section 9(1)(vi)(c) of the Act. Even, in the second order passed for the assessment years 2004-05 to 2005-06, the Tribunal has agreed with the observations made in earlier order to the effect that as long as patents are used in the manufacturing process, which has taken place outside India, such royalty income cannot have tax implications in India. 15. As could been seen, the Assessing Officer, as discussed earlier, has laid much emphasis on the report of technical experts for the assessment year 2004-05 to 2008-09. However, the cru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India." 128. Sec. 9(l)(vi)(c) is a deeming provision and has to be construed strictly. A plain reading of this section shows that any income by way of royalty is taxable in India, if such royalty is payable by a non-resident in respect of any right, property or information used or services utilized : for the purposes of business, or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India. 129. When an assessee claims that it is covered by exceptions to cl. (b) to sub-cl. (vi) to sec. 9(1), the burden lies on the taxpayer to prove that it falls within those exemption provisions. In comparison, when it is claimed by Revenue that the income falls under cl. (c) to sub-cl. (vi) of sec. 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 sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Revenue to tax the royalty income earned by Qualcomm under sec. 9(1)(vi)(c) of the Act: Equipment purchase agreement between the Tata Tele Services and Motorola Inc. dt. 8th Dec., 2007; Equipment purchase agreement between the Tata Tele Services and ZTE Corporation dt. 19th Feb., 2007. 135. We agree with Mr. Dastur, that cognizance cannot be taken of these agreements as they relate to the financial year 2006-07 relevant to asst. yr. 2007-08 and asst. yr. 2007-08 have no relevance to the case on hand. The learned special counsel sought to make out a new case with the aid of these additional agreements. 136. Nevertheless we consider Mr. G.C. Srivastava's submission that these agreements of Tata Tele Services 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such components are included as part of and within subscriber units sold by licensee or as replacement parts for subscriber units previously sold by licensee. No other, further or different license is hereby granted or implied." Qualcomm's Intellectual property (page No. 236 of the paper book) 'Qualcomm's Intellectual Property' means Qualcomm's Technically Necessary IPR and Qualcomm's Included Commercially Necessary IPR and company 3 patents; provided that, notwithstanding the foregoing, the term 'Qualcomm's Intellectual Property' shall not include any intellectual property, including but not limited to patents, owned by Snap Track. Inc. Subscriber unit (page No. 238 of the paper book) : '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 telephone, a cordless base station 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;have made' rights does not assert, through itself or its affiliated entities patent infringement litigation against Qualcomm or licensee and Qualcomm agrees that it will not charge royalties to any third party with restrict to the sale by such third party of components to licensee to the extent that such third party is making such sale under licensee 'have made' rights and is not using or otherwise infringing upon any of Qualcomm's patents not the subject of such 'have made' rights. 'Qualcomm's applicable subscriber patents (page No. 275) : 'Qualcomm's applicable subscriber patents' means Qualcomm's early patents and only if licensee elects under sec. 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 14.1 - Title and risk of loss (page No. 33) : 'Without prejudice to TTSL's right to reject as set forth in art. 6.4 of this agreement, the title of all equipment sold hereunder shall pass from the supplier to TTSL in high seas before arrival In India and the risk of loss to the hardware portion of all equipment shall pass from supplier to TTSL upon provisional acceptance.' 3. Agreement between Tata Teleservices Ltd. and Motorola Inc. for supply of equipment (agreement 1 filed by the Revenue) Extract of relevant clauses from the agreement in relation to transfer of title and risk of the equipment Clause 14.1- Title and risk of loss (page No. 14): 'Without prejudice to TTSL's right to reject as set forth in art. 6.4 of this agreement, the title and the risk of loss to the hardware portion of all Equipment sold hereunder shall pass from supplier to TTSL upon delivery in accordance with CIP Incoterms 2000 port of shipment.' 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 appellants for the purpose of carrying on such business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that if the agreement is read as a whole, the intent of the parties is amply clear that the title of the equipment passes in India at the site where the deliveries are made or in a worst scenario at the airport/seaports in India. 142. We are unable to agree with the contention of the learned special counsel for the following reasons : Accepting such a proposition would lead to a situation where every purchase and sale of goods made by any party in India with any party in other countries would be considered as if those parties are doing business in India and sale to India without any operations being carried out in India would amount to business with India and not business in India. For the business to be carried out in India there should be some activity carried out in India. Thus the argument that if manufacturing is done in one jurisdiction and sales in the other jurisdiction, then there is business in another jurisdiction is devoid of merit. 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. The contention of the Revenue that OEMs (i.e. Motorola and ZTE) carries out installation work fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r specific, service provider specific or country specific is factually incorrect. There is no customization of handset qua the CDMA connectivity. Coming to the argument that handsets are programmed to a particular network service provider and hence it is India specific is not tenable. As rightly pointed out by Mr. Dastur locking of a handset to network is a requirement of the network service provider depending upon its business plans and exigencies and does not affect the ability of the handset to operate on any CDMA telecom network, which is evident from the fact that once the network lock is broken the handset can operate on any network. This fact is also supported by the decision of the Andhra Pradesh High Court in the case of Asifuddin (supra). Hence it cannot 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hipsets with embedded software etc. The Revenue attempt to break down the sale into various components is not supported by the terms of the agreements and the facts of this case. It cannot be said that every item other than software was sold and that software which is embedded has been separately licensed. It is not the case of the Revenue that the OEMs have income in India from these sales or that they have income from licensing of software in these products which is assessable to tax. There is no finding that the OEMs have carried on business in India much less that a part of the sale consideration is attributable to any sale or licensing of software carried out in India. When OEMs itself are not brought to tax, to hold that Qualcomm is taxable is not correct. This is not a case of the OEMs 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 OEMs 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t onward sell the software independently without sale of the hardware, etc.). There were distinct agreements with an overall agreement for supply and installation of GSM systems, though split into separate agreements, one for supply and the other for installation which was left to the subsidiaries. The facts of this case are similar to the facts of the case of Ericsson A.B. (supra). The Hon'ble Delhi High Court held as under : Para 41. "We find that the terms of contract make it clear that acceptance test is not a material event for passing of the title and risk in the equipment supplied. It is because of the reason that even if such test found out that the system did not conform to the contractive parameters, as per art. 21.1 of the supply contract, the only 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to mean "delivery" or "delivered" or "deliveries" shall mean the physical delivery by the supplier, of the equipment ordered by TTSL on CIP terms (as defined above), at airports/seaports mutually designated by the parties. CIP (page No. 43) : "CIP" means "cost, insurance paid" to airport/seaport in India as defined in Incoterms 2000. It means that supplier shall pay and bear the cost of packing/loading/unloading, transportation, carriage, freight, unloading charges, insurance and any other cost of any nature at any time prior to delivery. 151. It is the submission of the Revenue that entire risk is borne by Motorola and the carriage, insurance is paid till the delivery at seaports/airports in India. Hence, the sale concludes in India. The reference by the appellant to CIP Incoterms 2000 does not alter the situation because the expression by its very definition in the agreement means obligation to bear carriage and insurance charges upto airports/seaports in India. 152. At this stage, we find it relevant to extract 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 bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the present easel To tax the royalty income earned by Qualcomm, the Revenue must show that the OEMs have used Qualcomm patents for a business carried on in India or for making or earning income from a source in India, which leads to the taxability of the OEMs. Therefore, the taxability of Qualcomm-directly depends on the OEMs taxability in India. 154. Ericsson was a company incorporated in Sweden. It was engaged in the business of supply of hardware and software. It entered into an agreement with 10 cellular operators in India for supply of telecommunication systems. These were installed and commissioned in India by two sister concerns of Ericsson, one being a branch of nonresident group company, and the other being resident company of the same group. There was an overall agreement with the operators for supply and installation 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 AO held that the assessee company had a business connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upply contract. The difference between acquisition of a "copyright right" and a "copyrighted product" was pointed out. 155. In the case of Nokia Networks (supra) the relevant facts are: The assessee, a company incorporated under the laws of Finland, was a leading manufacturer of advanced telecommunication systems and equipment (GSM equipment), which were used in fixed and mobile phone networks. During the previous years, the assessee maintained a LO and also had a subsidiary in India, known as, Nokia India (P.) Ltd. (NIPL). Its activities involved supply of hardware and software as well as installation and commissioning and also after sale services. It entered into agreements with various Indian telecom/cellular 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income accruing in India. The execution of the overall agreement is prompted by pure commercial considerations. Board Instruction No. 1829, dt. 29th Jan., 1989 must continue to govern the assessment for the relevant years, despite withdrawal of this Instruction by CBDT by virtue of Circular No. 7 of 2008 (sic-of 2009), dt. 22nd Oct.. 2009 [(2009) 226 CTR (St) 57]. The place of negotiation, the place of signing of agreement, or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances as the transaction relates to the sale of goods and the relevant factor and determinating factor would be as to where the property in the goods passes. In the instant case the property passed on the high seas. 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. That the amendment to sec. 9 vide Finance Act, 2012 wherein Explns. IV, V and VI have been added to s. 9 seeking to clarify the scope of cl. (vi) of sub-sec. (1) of sec. 9, it was held that the amendment cannot be read into the treaty. The reasoning given in Ericsson A.B.'s case (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Tata and Motorola to demonstrate that OEMs have used the Qualcomm's patents for the purpose of making or earning income from a source in India On the basis of the equipment purchase agreement of 2007, it was submitted that the two agreements between Indian operators and OEMs make a distinction between sale of equipment and licensing of software embedded in the firmware. It was submitted that Indian operators have agreed to purchase the equipment and take licenses for the software. In addition, the Revenue has also contended that Indian operators constitute a source of income for the OEMs in India. 162. Reliance was placed on cl. 19.5 of the agreement with ZTE dt. 19th Dec. 2007, wherein it is recorded that all licensed material are the property of the supplier of 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 manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to tax by the AO does not refer to any software being provided. It is not demonstrated by the Revenue that the software is provided as part of the licensing of Qualcomm patents. ii. The software embedded in the hardware sold to Indian Carriers by the OEMs belong to the OEMs. The software may have been self- generated or procured by the OEMs. iii. None of the 16 agreements between Qualcomm and OEMs which form the basis for assessment in these cases, refer to licensing of software. Thus to argue that software is licensed by Qualcomm to OEMs and which are in turn sub-licensed to the Indian Carriers is contrary' to the facts of the case. The software which is licensed at best relates to the functionality aspect of the product and has nothing to do with the capability to provide CDMA connectivity. 168. The Revenue for the first time before the Tribunal argued that chipsets are purchased by OEMs from Qualcomm and these chipsets which have embedded software and help in function of the hardwares. 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 chipsets from Qualcomm only. The OEMs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , equipment has been defined under the agreement to mean and include certain CDMA equipment, including but not limited to the hardware, the software, the firmware, the licensed material, and parts thereof and related spares to be supplied by the supplier to Tata under the agreement. vi. Further firmware and software have, been defined in the agreements as under : "Firmware" shall mean a combination of hardware and software represented by a pattern of bits contained in such hardware. "Software" shall mean a set of man and machine readable instructions on magnetic or other appropriate media, including firmware, which is necessary for the control, operation and performance of the equipment in accordance with the requirements of the specification contained in 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 an 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 (supra), Nokia (supra) the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. Hence, we are unable to accept the contention that Indian telecom operators would constitute source of income for the OEMs. 177. Coming to the insertion of Expln. 4 to sec. 9(l)(vi) of the Act, we find that the amendment has no effect in the present case as the controversy in this case is taxability of royalty on patents relating to intellectual property for manufacture of CDMA handsets and equipment and does not relate to royalty on licensing of any computer software. The OEMs received no income from licensing in computer software. The OEMs sell handsets/equipments to the service providers, outside India and hence the OEMs have no source of income in India. 178. Thus, for all these reasons, we are of the considered opinion 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 sec. 9(1)(vi) (c) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication applications. Qualcomm was joined by US network operators Nynx and Ameritch to develop the first generation of CDMA telecommunication system. Later this team was joined by Motorola and AT&T. As a result of this it was possible to start writing of specification for CDMA in 1990. It was then a standard group was set up with the support of Cellular Telecommunications Industry Association (CTIA) and the Telecommunication Industry Association (TIA). This group then published the standard of first CDMA system in the form of IS 95 resulting in the formal publication of IS 95A in 1995 (Source: Wikepedia). The first GDMA system was launched in September, 1995 by Hutchson Telephone Co. Ltd. in Hong Kong and SA Telecommunications in Korea soon to be followed along with the networks in the USA. Later CDMA 2000 series of standards were developed. The standards for CDMA are specified by 3GPP2. (Source: http://www.radio-elecironies.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 tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phone is a device that can make and receive telephone calls over a radio link while moving around a wide geographic area. It does so by connecting to the cellular network provided by a mobile telephone operator. This would allow access to the public telephone network. In addition to voice data transmission modern mobile phones also support a wide variety of other services such as text messaging, MMS, e-mail, internet access, short range wireless communication, blue tooth, business applications, gaming and photography. Such mobile phones are also referred to as 'smart phones'. The other forms of wireless data communication technologies currently in use are WiFi, global positioning system (GPS), blue tooth, gig B. satellite television, wireless USB etc. From the above 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 TV remote or an AC remote have wireless technology and it transmits signals between two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has failed to appreciate that the provision of BREW software to Tata and Tata Teleservices (Maharashtra) Limited and Reliance Communications Infrastructure Limited results in sale of 'Copyrighted Article' and not licensing of a 'Copyright'. 103. So far as this grievance of the assessee is concerned, only a few facts are required to be taken note of. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has invoiced an amount of Rs 2,52,70.569 to Tata Teleservices Limited under BREW (Binary Runtime Environment for Wireless) agreement. It was noted that it is an application development platform, developed by Qualcomm, for mobile phones that enables users to download and run applications for playing games, sending messages and sharing photos etc. It was also noted that this platform runs between the application and wireless device's chip operating system so that programmers can develop applications for wireless device without the code for system interface or understanding operating systems. It was also noted that end users of BREW customers are the carriers who pay an enablement fees based on device sales or a revenue sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would without such licenses constitute the infringement of copyrights." Under the laws of the country, if the software owned by the assessee is used without licenses, it becomes infringement of the copyright. Therefore arguments of the assessee regarding applicability of OECD commentary fail on this count as well 104. The assessee did raise a grievance before the DRP but without any success. The assessee is not satisfied and is in appeal before us. 105. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 106. We find that the payment in question is admittedly the payment is for a software which is for a copyrighted article and not the copyright itself. There is nothing on record to suggest that the payment is for the copyright itself. In this view of the matter, the issue is clearly covered, in favour of the assessee, by Hon'ble Delhi High Court's judgment in the case of DIT v. Infrasoft Ltd. [2014] 220 Taxman 273/[2013] 39 taxmann.com 88 wherein Their Lordships have, inter alia, observed as follows: '85. The Licensing Agreement shows that the license is non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorpore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just ast he owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. 95. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof f or the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. 95. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 96. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. 97. We are not in agreement with the decision of the Andhra Pradesh High Court in the case of Samsung Electronics Co. Ltd. (supra) that right to make a copy of the software and storin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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