TMI Blog2023 (6) TMI 966X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that driven by the assessment order passed for the assessment year 2012-13, the AO has concluded that the royalty income received from OEMs located outside India is taxable in India. Pertinently, while deciding the appeals for the assessment years 2009-10 to 2012-13 [ 2018 (4) TMI 1362 - ITAT DELHI] the Tribunal, having taken note of the relevant facts and earlier decisions on the issue, has held that the royalty income received from OEMs located outside India is not taxable in India. Decided in favour of assessee. - ITA Nos. 7894/Del/2017 & 7559/Del/2018 And SA Nos. 309 & 304/Del/2020 - - - Dated:- 13-6-2023 - SHRI G.S. PANNU, PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER For the Assessee : Sh. Percy J. Pardiwala, Sr. Counsel, Sh. Nishant Thakkar, Advocate Ms. Jasmin Amalsadwala, Advocate For the Revenue : Sh. Gangadhar Panda, CIT (DR) Sh. Sanjay Kumar, Sr. DR ORDER PER SAKTIJIT DEY, J.M.: Captioned appeals have been filed by the assessee challenging the final assessment orders passed u/s. 143(3) read with section 144C(13) of the Income-tax Act, 1961 pertaining to assessment years 2014-15 and 2015-16, in pursuance to the directions of learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) were offered to tax in India. Whereas, the royalty on subscriber units from OEMs outside India and royalty on infrastructure equipments received outside India were not offered to tax on the reasoning that no taxable event has happened in India in terms of section 9(1)(vi) of the Act as well as Article 12 of India-USA Double Taxation Avoidance Agreement (DTAA). The Assessing Officer, however, was not convinced with the submissions of the assessee. After calling upon the assessee to furnish various details relating to royalty received from OEMs and examining assessee s submissions, the Assessing Officer was of the view that the royalty received by QTL division of the assessee from OEMs doing business in India by selling their CDMA products, such as, handsets and other equipments is taxable as royalty income under section 9(1)(vi)(c) of the Act. Though, the assessee tried to impress upon the Assessing Officer that neither of the limbs of section 9(1)(vi)(c) of the Act is applicable to the assessee, however, the Assessing Officer remained unconvinced. Even, assessee s submission that the issue is covered by the decision of Tribunal in assessee s own case for assessment years 2000-01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the same is used by the enduser and in the instant case the end-user is in India. Hence, the technology is used in India and the royalty paid by the OEMs to the assessee, which was 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 paid by OEMs to the assessee is taxable as royalty income both under section 9(1)(vi)(c) of the Act as well as Article 12(7) of India-USA DTAA. Accordingly, he brought the amount to tax. Though, against the draft assessment order the assessee raised objections before learned DRP, however, the decision of the Assessing Officer was upheld. 5. Before us, learned counsel appearing for the assessee submitted that the assessee itself is not the owner of CDMA Technology, which was developed by a collaborative group known as 3rd Generation Partnership Project 2 (3GPP-2). He submitted, the assessee merely holds a large number of patents pertaining to CDMA technology. He submitted, the wireless telecom service providers in India are not under any contractual obligation to obtain approval of the assessee to use the CDMA products. However, if a manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer has not brought any fact or material on record to prove that the OEMs have utilized the patents of the assessee in India to bring to tax the royalty income. 7. He submitted, in assessment year 2000-01 to 2004-05, the Tribunal held that the foreign OEMs do not carry on any manufacturing activity in India and therefore, the royalty paid by the foreign OEMs cannot be taxable under the first limb of section 9(1)(vi)(c) of the Act. He submitted, even in its decision for the assessment year 2005-06 to 2008-09, the Tribunal has concluded that as long as patents are used in the manufacturing process which has taken place outside India, such royalty cannot be taxed in India. He submitted, while deciding the issue in assessment years 2009-10 to 2012-13, the Tribunal has observed that where no evidence was brought on record by the Assessing Officer to establish that the OEMs are carrying on business in India, in which patents of assessee were used, such income cannot be taxed in India. He submitted, in the impugned assessment years, the Assessing Officer has not brought any evidence on record to prove that the OEMs carry on business in India, in which, patents of the assessee are used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted, the license agreement, under which royalty is paid by the foreign OEMs to the assessee is for the manufacture of those very items, i.e., subscriber units. Further referring to Assessing Officer s observation that royalty income accrues in India, he submitted, the assessee does not earn any royalty from the end user. End-user is purchaser of a product manufactured by OEMs using the patents of assessee, for the use of which the OEMs pay royalty to the assessee. Therefore, the end-user has no role to play or has no privity of contract with the assessee. Neither the assessee can call upon the end user to pay any royalty nor is the end user uses the subscriber unit under the permission or license of the assessee. As regard the basis for payment of royalty, ld. Counsel submitted, the mechanism of computing royalty on sale of subscriber units in India is just a measure, hence, cannot be considered for determining the source of income. As regards reliance placed by the Assessing Officer on the decision of Hon ble Supreme Court in the case of GVK Industries (54 taxmann.com 347), ld. Counsel submitted, the said decision is of no relevance as the Hon ble Supreme Court was concerned wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble ITAT in the aforesaid decision examined the facts of the case at length, and analysed the contentions of the parties and made various observations. Such observations of the Hon'ble Bench are divided into 4 categories namely (i) Observation relating to the additional facts which were not before the Hon'ble Bench, (ii) Chargeability of Royalty on Use of patents (iii) Applicability of provision of the Act to the transaction (iv) taxability of the transaction under the DTAA. Some of the relevant observations of the Hon'ble Bench on these issues are extracted below: (i) Observations of Hon'ble ITAT on Factual Matrix : Para-30. It would, therefore, appear to us that, in the understanding of Hon'ble AP High Court, the CDMA handsets were service provider specific. Para-33. Whether a CDMA handset, at that point of time, could be used on any CDMA network, in the unfettered discretion of the subscriber, or not, is a purely factual matter. Even as learned counsel for the assessee has relied upon the stand taken by the coordinate bench, which was given on the facts before the coordinate bench, we are unable to find any material to come t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the tax jurisdiction in which the handsets are manufactured, i.e. the situs of manufacture of handsets, or in the tax jurisdiction where the handsets are used, i.e. the situs of use of handsets. Para-55. The event triggering taxation in connection with the patents is thus (i) Granting of a right, license or sub license in a patent, or (ii) sharing of information concerning use or working of a patent. (iii) Observations of Hon'ble ITAT Applicability of Provisions of Domestic Act to the Royalty Payment : Para-56. A plain look at the definition of royalty, in conjunction with Section 9(l)(vi)(c), makes it clear that the taxation of royalties is in the source jurisdiction in which related business is being carried on by a person, rather than the jurisdiction in which he is tax resident, and it extends to, inter alia, the use of any patent, invention, model, design, secret formula or process or trademark or similar property . Where does an assessee use a patent in business is, therefore, the decisive factor in determining taxability of royalties, rather than where is the assessee located. Para-57. It is important to bear in mind the fact that taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt establishment, under the basic PE rule, is a fixed place of business through which the business of enterprise is wholly or partly carried on . When an entity accepts the taxability by the virtue of having a PE, normally it cannot be said that the assessee is not carrying out business in that tax jurisdiction. Para-80. In view of the above discussions, even going by the coordinate bench decision in the case of Metro Metro (supra), the royalty paid by the OEMs to the assessee, if it is held to be in respect of use of patents in CDMA handsets sold in India, will be taxable under second limb of Section 9(l)(vi)(c) but then we have to examine whether or not, as a matter of fact, the royalty paid by the OEMs to the Qualcomm, i.e. the assessee, was for use in the manufacturing process or for use of patents in the CDMA handsets by the end consumer. We will deal with this issue a little later. Para -87. The question whether or not the payment of royalty was for intellectual property by way of patented technology, other than software, in the CDMA handsets sold in India was thus, perhaps inadvertently, left intact. Learned counsel's defense on that legal issue primarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 4.3 Directions of remand to the AO by the Hon ble Bench in the order dated 20.02.2015 and the findings of the Assessing Officer thereon in the Impugned Assessment Order: Directions in Para-35 - In view of all these factors, as also bearing in mind entirety of the case, we deem fit and proper to remit the matter to the file of the Assessing Officer for recording categorical findings in this regard by obtaining expert technical opinion, by recording witnesses, if necessary, of experts and after confronting the assessee with whatever material he brings on record in this respect. It is only after such an exercise has been carried out that a call can be taken on whether the stand of the assessee, on this purely factual but highly technical aspect, can be accepted. Directions in Para- 71 - We find that there is major change in the facts of the case before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of handsets sold in India, requested the Assessing Officer to adopt the information available on your records and apply the rate of royalty as determined in the assessment order for the AY 2006-07 for computing the royalty income on handsets for AY 2007- 08 . The assessee has been behaving in a somewhat evasive manner all along. In these circumstances, in our considered view, the ends of justice require that this matter is restored to the file of the Assessing Officer for ascertaining correctness of foundational facts furnished by the assessee to the effect that the OEMs were not carrying on any business in India, which, prima facie, seems to be highly doubtful even if not conclusively incorrect. When an OEM has a PE in India, it could not be open to him to say that he was not carrying on any business in India. Of course, this is still to be examined whether the royalties paid were used for the purposes of the business which was carried on in India. Directions in Para-95- It is in this light that it is necessary to examine whether the use of patents, for which the impugned payments have been made by the OEMs to the assessee, was in manufacturing process of the handsets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings in Assessment Order for AY 2014-15 on above observations of Hon'ble ITAT 4.4.1 (Ref, refer Pas 21 to 31 for Technical Expert's Report. Para 7) Para-7 The Revenue has sought the technical opinion of Mr. Mr. Ambrish Aggarwal (ITS) (Graduated in Engineering from IIT Roorkee), Gl General Manager, Department of Telecom, Government of India and Mr. V. Mitra (ITS), Engineering Post Graduate from IIT Roorkee, Ex Deputy Director General, Telecom Commission, Government of India, for their technical opinion on the use of CDMA Technology. The enquiries have been conducted from the Telecom Department which reveal that these two Ex-officers of the Telecom Department are an authority on the subject and have co-authored book namely Mobile Communication and Wireless LAN (GSM, GPRS, EGDE, CDMA, 30 Communication, UMTS, CDMA 2000 lx EV DO, Wireless LAN WiMax . These facts give a strong reason to believe that these officers will be in a position to impart a technically sound and objective opinion In the matter to fulfill the judicious requirement of the directions of the Hon'ble ITAT. In this regard, they both were supplied with the copies of agreements between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned DRP in this regard. Accordingly, ground no. 5 6 of the assessee's appeal are rejected. From the above, it is clear that Hon'ble ITAT has confirmed that M/s Huawei Technology Company Ltd China and ZTE have PE in India. In cases of all other OEMs, the PE has been established by the AO. In those cases either the issue of PE is pending before the Appellate authorities or has been decided in favour of department. From the above, it is clear that the OEMs of the assessee have PE in India and the intellectual property is being used through the PEs to earn the Revenue from India. In view of above, the objections of the assessee do not have any merit to be considered, hence, are rejected. Further it not a case of taxability of OEMs. The issue is related to that the OEMs were carried out their business activities in India through its PE. Para- 11. TAXABILITY OF ROYALTY ARISING FROM LICENSING OF CDMA TECHNOLOGY TO OEM (ORIGINAL EQUIPMENT MANUFACTURERS) FOR CDMA INFRASTRUCTURE EQUIPMENT AND HANDSETS. Para-11.1 Two important streams of the assessee's income are from Qualcomm CDMA Technologies (QCT) which develops and supplies CDMA- based integrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) the selling price which a seller would realize from an unaffiliated buyer in an arm's length sale of an identical product in the same quantity and at the same time and place as such sale, or (ii) the selling price actually obtained for such product in the form in which it is Sold, whether or not assembled (and without excluding there from any components or subassemblies thereof which are included in the selling price). In determining selling price, the following shall be excluded: (a), (b) costs, (c) costs of and (d) import, export, excise, sales and value added taxes custom duties; Patent License agreement from Internal Page No QC 000398 to QC 000411 Clause 1.01 on PC0003981 - Grant (b) The CORPORATION grants to Licensee under CORPORATION'S PATENTS worldwide, nonexclusive, personal, and non-transferable licenses for Components, FNE and Subscriber Units for use only in CELLULAR APPLICATIONS. 1.03-Scope The licenses granted herein are licenses to (i) make, have made, use, lease, sell and (in accordance with Section 5.01) import LICENSED PRODUCT (ii) make, have made, use and import machines, tools, materials and other instrumentaliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticles of commerce (including but not limited to handset, cables and standard analog ASICs, etc) and Licensee may have made parts of the transceiver which are of Licensee own design and specification (which design and specification is engineered by or on behalf of Licensee). Subscriber Unit License Agreement on Internal Page No QC 000453 to QC000496 Para 2 on QC000489 WHEREAS, QUALCOMM and Licensee have entered into that certain Subscriber Unit License Agreement (the SULA) and the Software Agreement (the SA), each effective date (the SULA and the SA are collectively hereinafter referred to as the CDMA Agreements), pursuant to which QUALCOMM granted Licensee a right to sub-license QUALCOMM's Intellectual Property (as defined in the SULA) to the Sub licensees to provide such Sub licensees a right to manufacture and sell Subscriber Units (as defined in the SULA); List of Licensed Patents for Subscriber Units in Exhibit D on Internal Page No QC000491 to QC000494. Exhibit F on Internal Page No QC000496, showing Certificate as to how the Royalty income is computed. Infrastructure and Subscriber Unit License and Technical Assistance Agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... handoff implementation if implemented as part of the switch function (the parties recognize and agree that the contribution of the soft handoff function to the switch would be percentage of the overall value of the switching equipment performing the soft handoff function), and (ii) the CDMA controller, and if such CDMA controller is incorporated as part of the main Base Station controller (the parties recognize and agree that the contribution of the CDMA controller if it is part of the main Base Station controller would be a percentage of the overall value of the main Base Station controller not to exceed percent and not be less than percent. The Base station controller shall not include the GPS clock, MUX, any piece of equipment providing switching functions and any piece of equipment whose prime function is to provide operational alarm and maintenance functions. On Page No QC000504 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's) patent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its obligations to deliver documentation to LICENSEE, QUALCOMM shall promptly deliver to LICENSEE after the Effective Date the documentation (and shall also promptly deliver to LICENSEE any updates to such documentation available during the Improvement Period) specified in Exhibit A attached hereto. Infrastructure and Subscriber Unit License and Technical Assistance Agreement on page No QCD00535 to QC000566 Recitals on Page no QC000535 WHEREAS, QUALCOMM has developed certain proprietary Code Division Multiple Access (CDMA) technology which may be useful in providing greater capacity and improved quality and reliability compared to other cellular telephone technologies; WHEREAS, LICENSEE has been selected by Agency Country to obtain a license from QUALCOMM to make and sell Subscriber Units and Infrastructure Equipment; WHEREAS LICENSEE desired to obtain from QUALCOMM a license to use QUALCOMM's Intellectual Property (as defined below) and technical assistance necessary for the manufacture and sell Subscriber Units and Infrastructure Equipment (as defined below) and QUALCOMM desires to provide LICENSEE with such license and technical assistance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty rights, trade secrets, knowhow and technical information which QUALCOMM (or its Affiliates) has acquired or developed and is in possession of as of the Effective Date, which QUALCOMM (or its Affiliate) has the right to license to LICENSEE in accordance with this Agreement and which are commercially necessary to use, make and/or sell Subscriber Units, Cordless Base Stations, Channel Units and/or CDMA Enabling Infrastructure Equipment, and any Improvements to any of such Commercially Necessary IPR developed or acquired during the Improvement Period; but the term QUALCOMM's Commercially necessary IPR does not include any trade name, trademark, service mark or similar symbols, abbreviations, contractions or simulations identifying QUALCOMM (except as set forth in Section 9). QUALCOMM's Technology Necessary IPR 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, knowhow and technical information, including but not limited to that intellectual pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut not limited to timely payment by LICENSEE of Up-Front License Fee and royalties, QUALCOMM, on behalf of itself and its Affiliates, hereby grants to LICENSEE a personal, non transferable, worldwide and nonexclusive license (without the right of sublicense, except to Affiliates of LICENSEE as permitted in Section 5.3) to use QUALCOMM's Intellectual Property solely for Wireless Application to (a) make (and have made and use, sell, lease or otherwise dispose of Infrastructure Equipment and (b) to make (and have made)Components that have been exclusively designed by LICENSEE (which design is owned exclusive 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/C's vocoder DSP vocoder ASIC, etc.) then such Components may only be used , sold leassed or otherwise disposed by LICENSEE as part of and within complete Channel Units sold by LICENSSEE (or as replacements parts for Channel Units previously sold by LICNSEE). No other or different Lincese is hereby granted or implied. Clause 10 on Page QC000553 on Quality Control General Qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade-Offs, Ver. 1.2, 08/24/90 CDMA Data Analysis Tool Analysis Guide CDMA Data Analysis Tool User's Guide CDMA Digital Cellular DM Mobile Station HLD, Executive Overview, Ver. 1.1, 07/02/92 CDMA Digital Cellular Technology Forum February 1993 CDMA Digital Cellular Technology Forum January 1992 CMDA Dual-Mode Mobile Cellular Telephone Operating Instructions CMDA Dual-Mode Mobile Terminal High Level Overview, VI.1 CDMA Mobile Station Modem ASIC Specification Sheet, August CDMA Network Engineering Handbook CDMA Portable Block Diagram and Architecture CDMA System Manual CDMA Training Documents Forward Channel Performance at Low Vehicle Speeds Memo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lular 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 granted various rights as mentioned in the Scope of the Agreement- to manufacture and sell the Licensed Products. V. Licensed Products are various products which are defined in the Definition Column of various agreements- some of which have been extracted above. Many of products which are licensed by Qualcomm are Patented Products VI. The Royalty arises, mainly, from Patents and not from Copyrights-referred to as Licensed Produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 the assessee has Patent licensing agreements are nonresidents or Foreign Companies the payers of royalty to the assessee are Non residents and therefore in the instant case applicability of section 9(i)(vi)(c) is required to be examined, Para-11.7 Next, it is required to be seen as whether the non resident payer is carrying on any business or profession? If yes, where such business or professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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. e. Reliance was placed in the case of Syed Asifuddin and another (AP) 200 L CR1LJ 4314 for the proposition that handsets provided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 700/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 possession of information, that the OEMs have presence in India, through a permanent, establishment in India and accordingly OEMs have a source in India. Further, as already mentioned earlier, there lies some factual in accuracy in considering the issues by Hon'ble ITAT in the aforesaid order which has been duly corrected by Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 AO 1 Ericson A.B Dy. Director of Income-Tax, Circle 1(2), International Taxation, New Delhi. 2 Huawei Technology Company Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Please also provide the last assessment order of the Ericsson AB assessed in your charge. Copy of the Ericsson AB assessment order for the A. Y. 08-09 is attached herewith a The reply of AddL. DIT Range 3 International Taxation, New Delhi is reproduced as under In this regard, on the basis of records available, this is to submit that Huawei Technology Company Ltd. manufactures and supplies GSM equipments. Further, as desired, kindly find the information as under:- S. Query Reply 1 Whether the Huawei Technology Company 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 mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 is attached herewith q. The reply of DDIT Circle 2(2) International Taxation New Delhi is reproduced as under In this regard, on the basis of records available, this is to submit that, Samsung Electronics Ltd. manufactures and supplies GSM equipments. Further, as desired, kindly find the information as under S. No. Query Reply 1. Whether the, Samsung Electronics Ltd. has a PE in India in respect of the sale of mobile handsets/equipments Yes, Samsung Electronics Ltd., has a PE in India in respect of the sale of . 2. Whether the Samsung Electronics Ltd. is manufacturing mobile handsets/equipments in India. Samsung Electronics Ltd. is not Manufacturing 3. Now the sale of mobile handsets/equipments in effected in India- whether through PE or subsidiary or direct. Samsung Electronics Ltd. sells the equipments to Samsung Electronics India Pvt. Ltd. through which 4. Whether the co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a PE in India in respect of the sale of mobile handsets/equipments Yes, Nokia Corporation has a PE in India in respect of the sale of equipments in the form of Nokia India Pvt.Ltd. 2 Whether the Nokia Corporation. is manufacturing mobile handsets/equipments in India. Nokia India Pvt. 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. Nokia Corporationsells the ipments to PE through which they are sold to the end user. 4 Whether the co. has a business connection in India in what form. Yes, the co. has a connection in India and a PE in India in the form of Indian Subsidiaries t. In this regard, on the basis of records available, this is to submit that, Nokia Siemens Networks OY. manufactures and supplies GSM equipment S. No. Query Reply 1. Whether the, Nok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 connected to these PEs in India. Suppliers like Alcatel, ZTE, Huawei, Nokia, Samsung etc are assessed to tax in Delhi Charge and their cases are also well documented. Without prejudice to this, it must be emphasized that it is not the taxability of OEMs that is our concern at this point. The Act, in Section 9(l)(4(c) envisages that the NR payer of royalty must have some business c/source of income in India. As to the taxability of those OEMs in India, here, DTAAs of respective OEMs will come into play and that requires the business connection to cross a threshold (inform of PE) so as to become taxable. The assessee has only filed the copy of some amended agreements, which are also redacted and excluding some basic related information. During this current scrutiny proceedings, the AR has also stated that the basic and modus operandi of the transaction of the assessee with the OEM's, remained same as that of the last year. Further, no details/deception regarding the changed/new clauses of the amended agreements vis a vis th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 components and use and sell such components. This clause does not make any reference to what kind of intellectual property is being licensed. OEMs do riot need any license to manufacture handsets/equipment unless there is an intellectual property belonging to Qualcomm, which is going to be used by OEMs. These intellectual properties have to be used for making the chipsets going to be embedded in the handsets/equipment. g. 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/equipment manufactured by them and have in turn licensed these to Indian operators. Therefore, it is not only OEMs who are using the intellectual property of Qualcomm in manufacturing the equipment/handsets, the Indian operators are also using the technology embedded in the hardware under a license from OEMs. h. There is no dispute on the fact that the patent portfolio of Qualcomm is licensed to the O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 computer programs. Handsets are dumb equipment unless software providing connectivity to the networks embedded in if so is the case with equipment. Therefore, when OEMs license the intellectual property for a consideration (forming part of the overall consideration) to Indian operators, they definitely have a source of income in India, k. Reliance was placed on the decision of the Privy Council in the case of Rhodesia Metals Limited reported-9AR45 (Sup) where the Privy Council held the view that the source does not mean a legal concept but something which a practical man would regard as a real source of income. It is not in doubt that in commercial parlance, OEMs definitely have a source of income in India in the given facts and circumstances and all technical argument about the nature of use etc. is really of no consequence. l. The source of income in terms of monies received is in the form of the Indian carriers. Such source, in terms of spring or fount from which a clearly def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the purchase order . Clause 7.5 gives the right to buyer to change the location at which the equipment is originally required to be delivered. It further provides that the purchase order given by the buyer does always mention the location of the delivery of the equipment. e. In view of all the above referred clauses, if the agreement is read as a whole, the intent of the parties is clear that the title to the equipment passes in India at the site where the deliveries are made or in a worst scenario at the airports/seaports in India. f. In the agreement between Tata and ZTE, Clause 14.1 on page 33 it is stated that the title shall pass in high seas before arrival in India and the risk of loss shall pass upon provisional acceptance . Under normal circumstances, the risk and title would go together. In the present case, the terms of the agreement read as whole and the conduct of the parties go to indicate that the terms indicated in clause 14.1 do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 declaration to the contrary under the section 19(1), if it is found as a matter of fact that the deliveries had been made in India it would be open to Revenue to assert that title to the goods had passed in India. h. Section 21 of the Sales of Goods Act provides that where there is contract for sale of specific goods and seller is bound to do something to goods for the purpose of putting them in a deliverable state the property does not pass until such thing is done and the buyer has notice thereof In the present case, the sale is not of standard goods but of components of a wireless network. Unless the compatibility of the handsets and equipment is established with CDMA network setup in India, these supplies would be worthless. These handsets and equipment reached the deliverable state only when their compatibility with existing network is established through the provisional or final testing. The supplier has definite obligation to achieve this milesto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;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 unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract (Section 41(1)] l. Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract (Section 41(2)] M. Further Suppliers scope as per clause 2.8 includes of TTSL/ZTE contract spells out the following: Supply of Hardware/Software/Firmware for 4GVC 1. Supply of Hardware/Software/Firmware for number portability 2. Network planning and RF optimization for EV DO deployment including Radio network optimization 3. Setting up and running a specific team In R D Organization exclusively for TTSL for CDMA Equipment research and evaluation in order to improve services; 4. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 source in India. Therefore the royalty income shall be deemed to have arisen in India and would be chargeable to tax and that nothing further needs to be established for the chargeability under the domestic law. The two limbs of S.9(l)(vi) carrying on business in India and having the source of income in India are not inter dependent on each other and may operate independent of each other. q Accordingly, the above submissions of the assessee that the OEMs do not have a source of income in India deserve to be rejected and the royalty income received from the non-resident OEMs on sale of CDMA handsets and CDMA infrastructure equipment is deemed to have accrued or arose in India and therefore taxable in India Para-12. UNDER THE INDIA- USA DTAA Article 12 of the India-US DTAA defines royalty as follows- 3. The term royalties as used in this article means: pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 developed and owned by Qualcomm [pls refer the preamble of sample agreements b/w OEMs and Qualcomm] to manufacture, commission, install and sell various CDMA architectural equipments. It can be seen that other than mobile station i.e. the handset, all other network equipments enumerated in the pars above require specialized technical expertise for installation, commissioning and making them compatible with the handsets. Therefore the sale of these network equipments cannot be said to be completed unless they are properly installed and tested. All these network equipments use the technology developed by QUALCOMM which is also required for their installation and commissioning. Therefore OEMs use of QUALCOMM technology extends very much into the territory of India where these equipments are installed. [Please refer to the relevant clauses in the Agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight 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 accelerate the convergence of the wireless data market, including in it BREW, QChat and QPoint products and services; Qualcomm Government Technologies ('QGOV) QGOV provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies; and Qualcomm Wireless Business Solutions ('QWBS) QWBS provides satellite- and terrestrial-based- two, way data messaging, position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. (d) Qualcomm Strategic Initiatives (QSI) QSI manages the Company's strategic investment activities, and makes strategic investments to promote the worldwide adoptions of CDMA-based products and services. Para-12.10. Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the DTAA between India and USA, the royalty arising to Qualcomm is clearly taxable in India. 4. It is not a case, where the royalty has been paid lump sum for the use of CDMA technology but is an ongoing payment dependent on the volume of sales. The relevant clause of the agreement is as under: а. Sold , Sale , Sell means sold, leased or otherwise transferred or put into use and a sale shall be deemed to have occurred upon first shipment, invoicing or putting into use, which ever shall first occur. Notwithstanding the forgoing, a Licensed Product shall not be deemed to have been sold by Licensee For purposes of paying royalties to Qualcomm under this Agreement until such time as such Licensed Product has been (a) sold, leased, shipped or otherwise transferred to a person or e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the OEMs to Indian customers is taxable in India as per section 9(1) (vi) and article 12(7) (b) of the India- US tax treaty. Para-12.12. Regarding taxability of the royalty income under the treaty, the assessee vide submissions dated 07 March 2013 has submitted as follows: In the facts of the instant case, it is undisputed that the royalty income earned by Qualcomm from non-resident OEMs does not accrue or arise in India. Consequently, it is not under dispute that the Article 12(7)(a) of the India-USA tax treaty is irrelevant for the purposes the present assessment. Article 12(7)(b) of the treaty provides as follows: Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 information used or services utilized for the purpose of a business carried on by such non resident (OEM) in India or earning any income from any source in India would not necessarily give rise to taxable income in the hands of such non resident (OEM) since the taxability would depend upon other factors also such as whether such non resident has PE in India or not and whether there is any exclusion in the respective treaty etc. Source of income is distinct from the place of accrual of Income. In the case of Ericsson, the other issue before the Hon'ble Delhi High court was whether the income from the supply contract can be treated as 'royalty' under section 9(l)(vi) read with Explanation 2 of the Act. But in the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 other hand, on the facts of this case, there is no dispute the nature and character of payment but the dispute raised is only with regard to situs of income or situs of accrue/ of such income. 6. The issues are entire different in this case. 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 assessee the taxability of licensor sn of OEMs is in dispute. The scope of sub section 9(1)(i) and 9(1)(vii) are entirely different. Hence a decision which is wholly out of context is sought to be pressed into service. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 nearly 400 patents registered in India which figure has swelled up to roughly over 1300 patents by now. 12.lt is highly illogical for the assessee 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. 13.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 Nokia (or Ericsson). Para-14.1. Reference is also invited to Nokia Special bench decision wherein inspite of title being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 following definitions elaborate the actual business module of the assessee company a. The agreement says that the assessee has developed certain proprietary code division technology which may be useful in providing greater capacity, higher data rates and improved quality and reliability compare to other cellular wires technologies and it manufactures and sells CDMA components and equipments. b. It explains that CDMA Access Point means a complete device which (i) incorporates all or any part of Qualcomm's Intellectual Property,(ii) connects to CDMA network infrastructure equipment over a CDMA wireless network utilizing a w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ara-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'ble Bench due to allowing of the appeals on technical ground but not on merit. Thereafter the assessment orders for assessment years 2014-15 and 2015-16 dealt with in detail the compliance of the Hon'ble ITAT directions taking into a account the technical experts report, the additional facts and the applicability of both the limbs of section 9(l)(vi)(c) in regards to OEMs business in India and income on from a source located in India, and also on the issue of applicability of Article 12(7)(b) of the Indo-US DTAA. Therefore, during the course of the current hearing the revenue vehemently, argued before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CDMA technology/patent is ultimately used in India by subscribers, the royalty connected to such patent would be taxable in India as the OEMs selling the subscribers units/equipments have PEs in India. 12. From the facts on record, it is evident that the assessee has offered the royalty income in respect of OEMs having PEs in India. In so far as the other OEMs located outside India are concerned, the Assessing Officer has not brought any material on record to demonstrate that they have PEs in India. While treating the royalty income received from foreign OEMs as taxable in India, the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 crucial issue, which arises is, whether that technical report can be utilized for deciding the issue in the impugned assessment years. Considering the submission of the ld. Counsel for the assessee that locking of CDMA subscriber units to make it India-specific or network carrier-specific, was discontinued in assessment year 2010-11 and thereafter, subscriber units available were open market handsets not locked in any specific service provider, in our view, the report of the technical expert do not have any relevance in so far as the impugned assessment years are concerned. In any case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 9(l)(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 learned counsel for the appellant that the burden of proof when it falls within the exceptions to sec. 9(l)(vi)(b) is on the assessee and on the contrary the burden is on the Revenue when they chose to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned 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. Redacted copies of the license agreements 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 Aug., 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 agreements only. For ready reference we extract relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m'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) : 'Radiomodule' means an electronics sub-assembly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 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 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 fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 (i.e. Tata) in consultation with the supplier. Even presumin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 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 underst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Revenue, for any assessment years before us that the title passed in India and that certain further activity was done by the OEMs in India after the sale. As already stated the burden is on Revenue to prove that business is carried on in India by the OEMs. Arguments have been made without the support-of any-document or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 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 ment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 insu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, 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 connection under domestic law and that it had a PE under the DTAA 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 per cent of the billed supplies of hardwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 AO 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 ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant 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) would apply to Nokia Net Work OY. 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 sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uipment 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... censing 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 can also purchase the chipsets from a third party other than Qualcomm. In fact, the AO in his assessment order had specifically held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited 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 income from embedded software cannot be taxed in India. The software is only used with the hardware ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitute 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 Act. 179. The next issue is whether the royalty paid to Qualcomm by OEMs can be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 technology. The participating associations are five ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 points. Many other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, that would without such licenses constitute the infringement of copyrights. Under the laws of the country, if the software owned by the assessee is used without licenses, it becomes infringement of the copyright. Therefore arguments of the assessee regarding applicability of OECD commentary fail on this count as well 104. The assessee did raise a grievance before the DRP but without any success. The assessee is not satisfied and is in appeal before us. 105. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 106. We find that the payment in question is admittedly the payment is for a software which is for a copyrighted article and not the copyright itself. There is nothing on record to suggest that the payment is for the copyright itself. In this view of the matter, the issue is clearly covered, in favour of the assessee, by 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft. 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. 95. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof f or the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. 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. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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