Qualcomm Incorporate vs Assistant Director Of Income Tax

Pramod Kumar, J

1 . These four appeals pertain to the same assessee, involve some common issues arising out of the same set of facts and were heard together. As a

matter of convenience, therefore, we will dispose of all these four appeals by way of this single consolidated order, though we will first take up the

assessment years 2007-08.

2 . In this appeal, Qualcomm Incorporated [hereinafter referred to as 'the assessee'] has challenged correctness of the order dated 30th September

2010 passed by the Assistant Director of Income Tax, International Tax Circle 2(1), New Delhi [hereinafter referred to as 'the Assessing Officer']

under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 [hereinafter referred to as 'the Act'] for the assessment year 2007-08.

Grievances raised by the assessee are as follows:

Each of the grounds below are independent and without prejudice to the other grounds of appeal preferred by the appellant.

On the facts and in the circumstances of the case, the Assessing Officer ('AO') in pursuance of the directions of the Dispute Resolution Penal

('DRP')-

1 . Erred in applying the provisions of section 9(1)(vi)(c) of the Income-tax Act, 1961 ('the Act') and Article 12(7) of India-US tax treaty ('tax treaty')

for taxing the royalty income of the Appellant earned from the Original Equipment Manufacturers ('OEMs') situated outside India for the patents

licensed to the OEMs for manufacture of CDMA mobile handsets outside India.

2 . Erred in applying the provisions of section 9(1)(vi)(c) of the Act and Article 12(7) of the tax treaty for taxing the royalty income of the Appellant

earned from the OEMs situated outside India for the patents licensed to the OEMs for manufacture of CDMA network equipment outside India.

Without prejudice to ground No. 2, the AO erred in computing the royalty income on network equipment on the basis of information provided by

Reliance Communications Limited.

Erred in holding that the revenues received by the Appellant under the BREW Operator Agreement and BREW Carrier Agreement is taxable as

royalty income in India under section 9(1)(vi) of the Act and Article 12 of the India-USA tax treaty. In doing so, the AO 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'.

5 . Erred in passing the order confirming taxability of the income in the hands of Appellant by totally disregarding the decisions of the Honourable

Income Tax Appellate Tribunals that are clearly applicable.

Erred in law in confirming the levy of interest under section 234B of the Act by completely disregarding the provisions of the Act and the Doctrine

of Binding Precedents.

7 . Erred in law on initiation of penalty proceedings under section 271(1)(c) of the Act.

Erred in law in confirming the levy of interest under section 234D of the Act by completely disregarding the provisions of the Act.

4 . So far as the first three grounds of appeal are concerned, which we will take together, the first issue that we need to adjudicate is whether or not,

on the facts, and in the circumstances, of this case, royalty received by the assessee from the manufacturers of the CDMA handsets and

infrastructure equipment manufactured outside India but used on the India based CDMA networks, is taxable in India.

Let us set out the facts of this case, as culled out from material on record, and the developments leading to this appeal before us. The assessee, a

company incorporated in Delaware, is engaged in the business of design, development, manufacture and marketing of digital wireless communication

products and services, based on CDMA technology, and has four principal business units. These business units are described, by the assessee, as

follows:

i. 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.

ii. QUALCOMM Technologies Licensing ('QTL') - QTL grants licenses to manufacture of wireless products for the right to use portions of

Qualcomm's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of certain

wireless products.

iii. QUALCOMM Wireless & Internet ('QWI') - QWI is comprised of:

* QUALCOMM Internet Services ('QIS') - QIS provides technology to support and accelerate the convergence of the wireless data market including

BREW, QChat and QPoint Products and services;

* QUALCOMM Government Technologies ('QGOV') - QGOV provides development, hardware and analytical expertise to United States

government agencies involving wireless communications technologies; and

* QUALCOMM Wireless Business Solutions ('QWBS') - QWBS provides satellite and terrestrial based two way data messaging, position reporting

and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies.

iv. QUALCOMM Strategies Initiatives ('QST') - QST manages the company's strategic investment activities, and make strategic investments to

promote the worldwide adoptions of CDMA based products and services.

6 . During the course of the assessment proceedings, the Assessing Officer took note of the following facts. QCT (i.e. Qualcomm CDMA

Technologies unit) develops and supplies CDMA based integrated circuits and systems software for wireless, voice and data communication,

multimedia functions and global positioning system products. QTL (i.e. Qualcomm Technologies Licensing unit) grants licence to manufacture the

wireless products, for the right to use Qualcomm's intellectual property folio, including certain patent rights essential to and useful in the manufacture

and sale of wireless products. It was also noted that as per the business model adopted by the assessee, ""licensees typically pay a non-refundable

licence fee in one or more instalments and ongoing royalties based on the sale of products incorporating or using the licensed property"". It was in this

backdrop that the assessee was, inter alia, required to show cause as to why the royalty received by the QLT, from manufacturers of OEM who were

doing business in India in the sense they were selling their products in India, should not be brought to tax in India as well. The stand taken by the

assessee against the said taxability was summed up, in the assessment order, as follows:

• Both the contracting entities are situated outside India;

• The obligations arising out of the licencing agreements are outside India;

• The OEMs using the patents is outside India;

• The OEMs usage of patent is outside India; and

• The royalty received under the licencing agreement has already suffered tax outside India.

(@ page 11 of the assessment order)

It was submitted by the assessee that QTL licences CDMA patents to OEMs outside India for manufacture of CDMA handsets, and that the

licence arrangement permits OEMs to exploit the patents in manufacture of CDMA handsets. It was then pointed out that the OEMs are required to

pay to QLT royalty ""as a percentage of the selling price of products manufactured by the OEM"" and that the royalty ""is due when the handset is

invoiced, shipped, sold, leased, or put to use - whichever is earlier"".

8 . On these factual submissions, it was contended that under section 9(1)(vii)(c) royalty could be brought to tax in India only when the royalty is

utilized ""for the purpose of business carried on in India"" or ""for the purpose of making or earning any income from any source in India"". It was

submitted that, in the light of the judicial interpretation given to the expression to 'the place where business is carried on', the business can be said to be

carried on at a place where ""the operations, from which profits arise, are carried on"". The assessee further pointed out that in the case of the OEMs,

which have been licenced by the assessee, the operations from which profits arise are carried on outside India on account of the following reasons:

• The licencing agreement between Qualcomm and the OEMs is entered outside India;

• The handsets are manufactured by the OEMs outside India; and

• The contract from sale between the OEMs and Tata Teleservices and Reliance Communications, both of which are the wireless carriers located

in India (collectively, the 'Indian carriers') are on principal to principal basis and Qualcomm is not privy to the contract of sale between the OEMs and

the Indian carriers.

The assessee further relied on the CBDT circular No. 23 : MANU/DTCR/0010/1969, issued on 23.7.1969 by the Central Board of Direct Taxes, to

contend that ""there is no business connection in India, and, consequently, there is no business in India carried on by the OEMs"". It was contended that

transactions between the OEMs and the Indian service providers were on 'principal to principal' basis, and, therefore, ""there is not even circumstantial

evidence to suggest/prove that OEMs have any 'business connection' in India, which contributes to the royalty payable by the OEMs to Qualcomm"". It

was again reiterated that ""the OEMs conduct their business outside India and the contracts/agreements for royalties are also entered outside India

and that ""the OEMs have utilized the right, property or the information (licenced from Qualcomm) for the purpose of manufacturing handsets outside

India"". It was submitted that ""the technology is used for manufacturing the handsets before they are shipped to India or elsewhere"" and, therefore, the

royalty payable by the OEM to Qualcomm arises much before the handsets reach Indian service providers. It was also pointed out that ""the licence

agreement between Qualcomm and the OEMs does not require the OEMs to enter into licensing agreement between the OEMs and the Indian carrier

for selling the products manufactured by the OEMs"". The assessee further relied upon the decision of US Court of Appeal in the case of Ingram Vs.

Bowers (1931) 47F 2d 925) wherein it was held that ""it seems that the place where work is done, and not the place where the later event fixing the

compensation occurs, is the source of income, in cases where the income is from the exercise of a profession or vocation as in this case"". The

assessee then submitted that, in any event, the royalty paid by the OEMs to the Qualcomm was not taxable under the India US Double Taxation

Avoidance Agreement ((1991) 187 ITR Statute 102), hereinafter referred to as 'Indo-US tax treaty', as well. It was pointed out that in order to fall

within the purview of Article 12(7)(a) and 12(7)(b), the following conditions should be satisfied-namely (a) that the royalties should have been paid by

a resident in India or by a non-resident who has a permanent establishment in India; and (b) that the royalties relate to the use of, or right to use, the

right or property, in India. Since, according to the assessee, neither the OEM was resident in India nor there was any evidence on record to show that

OEMs had a PE in India, the first condition was not satisfied. The assessee further submitted that, as for the satisfaction of the second condition, it

was essential that ""patent itself should be used in India"" which cannot be equated with mere purchase of a product wherein such a patent is used. It

was emphasized that Indian service providers have not independently acquired rights to exploit any patent as such. It was stated that ""although the

royalties paid by the OEMs to Qualcomm were determined (inter alia) on the 'sale proceeds' received by the OEMs from Indian carriers, they are

'separate payments'"". The assessee submitted that, as is settled rule of interpretation, ""'basis of computation' is irrelevant when determining the nature

of a receipt or an expenditure"". It was also submitted that ""infact, this is a well settled proposition not only in India but also internationally, as is evident

from the following observation by Klaus Vogel (at page 786 of his treatise 'Klaus Vogel on Double Taxation Conventions').... 'the formulae used for

determining royalty should not be relevant for the purpose of deciding where the royalty arises"". As to the taxability of royalty income from sale of

infrastructure equipment by OEMs to the Indian carriers, the submissions of the assessee were summarized as below:

• The arguments for non-taxability of royalty income from the sale of CDMA handsets by the OEM to Indian carriers would equally apply to the

royalty income from sale of infrastructural equipment by the OEMs to the Indian carriers.

• Qualcomm licences CDMA patents to OEMs outside India for use in manufacture of CDMA infrastructure equipment. The licence agreement

permits the OEMs to exploit the patents in the manufacture of CDMA infrastructure equipment.

• The OEMs are required to pay to Qualcomm royalty for exploitation of such patents. Royalties are computed as a percentage of the selling price

of certain components of the products manufactured by the OEMs. Royalty is due when the infrastructure equipment is invoiced, shipped, sold, leased

or put to use-whichever is earlier. The assessee licences CDMA patents to OEM ""to make, sell, use or otherwise dispose"" the licenced product

generally worldwide.

• The OEMs manufacture CDMA standard infrastructure equipment and the royalties are due from OEM on sale.

• The definition of a sale is ""invoiced, shipped, sold, leased or put into use"" and the sale occurs upon first such occurrence.

• The OEMs have a contractual obligation to pay royalty. The carriers have no contractual obligation to pay any royalty. If the OEM does not pay

the royalty and is in default, Qualcomm has no contractual recourse to the carrier.

• The assessee is not involved in the sale of handsets between the OEMs and the carriers and does not have any licences that are limited to sale of

infrastructural equipment to India

The assessee then relied upon the decision of a special bench of this Tribunal, in the case of Motorola Inc. Vs. DCIT (2005) 96 TTJ 1), in support

of the stand that mere sale of network equipment to the service providers in India will not result in royalties accruing or arising in India. It was

submitted that Indian carriers own CDMA infrastructure equipment, which is located in India and which operates with CDMA handsets, and it does

not create a source of infrastructure royalty income in India for Qualcomm. The assessee then used an illustration, to support his contentions, which is

reproduced below:

Further, CDMA handsets are equally interoperable with CDMA equipment located in any region of the world. A customer may purchase a handset

from an Indian carrier and use his handset on CDMA networks in the US, Japan, Europe or elsewhere. A logical extension of the contention (is) that

interoperability of the infrastructure and handsets gives rise to a source of income would mean that any patent holder for any standard on which any

equipment operator would be taxable in each country in the world every time a piece of equipment is sold.

It was in the light of the above submissions that the assessee contended that the royalty received by the assessee, in respect of sale of CDMA

infrastructure equipment by the OEMs to Indian carriers, cannot be subjected to tax in India.

12 . None of these submissions, however, impressed the Assessing Officer. Relying upon the order of the learned Commissioner (Appeals), in

assessee's own case for the immediately preceding years, he proceeded to hold taxability of the royalty paid by the OEMs to Qualcomm, in respect of

handsets and infrastructure equipment sold to Indian carriers, by observing as follows:

I have perused the submissions made by the assessee and the order of the CIT(A) for the earlier assessment years on the same issue. In my view the

assessee's contentions are not acceptable. Further, the assessments for the previous years on similar issues have been confirmed by the CIT(A). I

therefore, do not find any merit in the assessee's contentions for reasons discussed below;

Under the provisions of section 9(1)(vi)(c) of the income-tax Act income by way of royalty payable by a person who is a non resident will be taxable

in India if, 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.

Section 9(1)(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. Therefore, this arguments of the assessee is frivolous and without any basis.

In this case, we are concerned only with the royalty paid by the EMs 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 GEM'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. The relevant article is

reproduced as under:-

Where under sub-paragraph (a), royalties or fees for included services do not arise in one of the contracting states, and the royalties relate to the use

of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the contracting states, the royalties

or fees for included services shall be deemed to arise in that contracting state.

This is because as per assessee's submission it is apparent that the payment of royalty is based upon the sale of the licensed products and not merely

on (Page 6 of 48) www.manupatra.com Sushant Kumar barick its manufacturing. 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:

Sold"", ""Sale"", ""Sell"" means sold, leased or otherwise transferred or put into use and a sale shall be deemed to have occurred upon first shipment,

invoicing or putting into use, which ever shall first occur. Notwithstanding the forgoing, a Licensed Product shall not be deemed to have been sold by

.......... Licensee ... ... ... for purposes of paying royalties to Qualcomm under this Agreement until such time as such Licensed Product has been (a)

sold, leased, shipped or otherwise transferred to a person or entity outside of the definition of ........ Licensee ...... or (b) put into use by anyone,

including but limited to by .......... Licensee whichever shall first occur.

It has been stated that the definition of sale could mean invoiced, shipped etc. and sale would occur upon the first such occurrence. The fact that sale

means invoiced shipped etc. by itself implies that a party has been recognized to which the goods are invoiced or shipped. In this case, unless the

OEM has raised a bill/shipped the goods to a party in India i.e. Tata or other Indian carriers no royalty would be payable to Qualcomm. The

assessee's submission that the royalty received by Qualcomm is independent of whether the network equipment/handsets are sold into India is

therefore, incorrect and royalty clearly arises at the time of goods are sold to a particular customer, in this case customers in India. The method of

computation cannot be a basis for levy of royalty is not correct. The method of computation has been laid down separately as per the definition of ""net

selling price"" and the clause on ""Royalties"". The point at which royalties accrue or become payable is clearly when the product is sold or put to use

whichever is first. Accordingly, the arguments of the assessee are not tenable and royalty clearly arises at the time the handsets are sold to a

particular customer, in this case customers in India.

Lastly it may be said that the royalty for the use of CDMA technology is arising in India because the subscriber unit (handsets) and the infrastructure

equipment in which the CDMA technology is embedded are utilized in India. The handsets by themselves will be of no use unless the network service

provider also installs the infrastructure equipment.

Regarding the contentions raised by the assessee on factual inaccuracies contained in the CIT(A)'s order, I have gone through the submissions and

am of the view 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.

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.

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.

13 . The assessee did raise the objections before the Dispute Resolution Panel but without any success.

The Assessing Officer, therefore, proceeded to frame the assessment order on the above lines. As the assessee, instead of parting with precise

information about the quantity and price of handsets sold in India, requested the Assessing Officer to ""adopt the information available on your records

and apply the rate of royalty as determined in the assessment order for the A.Y. 2006-07 for computing the royalty income on handsets for A.Y.

2007-08"", the Assessing Officer to estimate the royalty income, by adopting 75,00,000 handset units at average rate of US $ 50 each, @ 5%, which

worked out to Rs. 81,45,00,000. As far as the quantum of royalty on infrastructure equipment sold to Indian carriers is concerned, the assessee

submitted that ""licensees reporting royalties on CDMA infrastructure equipment do not report sales in sufficient details to enable Qualcomm to provide

amount of royalty received for sale of CDMA infrastructure equipment by the OEMs to Indian carriers"". When Assessing Officer collected the

information on infrastructure equipment purchase by one of the carriers, i.e. Reliance Communications Ltd., which showed that such equipment worth

Rs. 426,13,40,907 were purchased by this carrier, the assessee submitted that ""the information provided by the Reliance is not sufficient to make a

determination of what products purchased by them from OEMs were manufactured using assessee's patents"". The Assessing Officer proceeded to

assume that entire amount billed by the OEMs of the assessee as relatable to royalty income to the assessee, and computed 5% royalty thereon which

worked out to Rs. 21,30,67,045. The assessee is aggrieved by the additions so made by the Assessing Officer and is in appeal before us.

15 . 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.

16 . The legal question that really requires to be adjudicated is that when a non-resident earns royalty income from licensing manufacture of a product

which is used by subscribers to Indian mobile service operators, in the circumstances set out in preceding sentences, earnings from such a royalty

income are hit by the deeming fiction of 'income deemed to accrue or arise in India' under section 9(1)(vi) of the Indian Income Tax Act, 1961. On a

conceptual note, this question examines the contours of source rule in international taxation, but, on a more practical note, the answer to this question

lies in the fact whether the provisions of the Income Tax Act, 1961, can be invoked to bring to tax, in a complex web of interconnected and

interdependent transactions, income of such a nature.

17 . To adjudicate on this issue, the first factual aspect, which is the most crucial aspect to be taken note of in this adjudication process, is about the

CDMA technology vis-Ã -vis broad business model of the assessee before us, i.e. Qualcomm Inc., so far as relevant to our adjudication. On this

aspect, it is useful to take note of some basic facts at the threshold itself. CDMA is an acronym for 'Code Division Multiple Access' - an access

method for fully digital wireless data transmission system. It is only an access method and, unlike its competitor GSM1, which is a standard developed

to describe protocols for digital cellular networks used by mobile phones, it is not a complete protocol or platform for mobile communications. In 1995,

IS-95 i.e. CDMA One, the first operating system to use CDMA, was invented and produced by Qualcomm Inc.

While the expression CDMA technology, in everyday use as indeed in most of the discussions in the present context, refers to ""operating systems

using CDMA technology"", which are invented and produced by Qualcomm, the precise technical meaning of CDMA technology is restricted to an

access method for wireless data transmission system"". It is very important to bear in mind this distinction between colloquial use of the expression

'CDMA technology' and its technical meaning.

1 9 . It is also important to bear in mind that unless a CDMA handset, whether manufactured in India or abroad, is whitelisted by a network, it cannot

be used by a subscriber on that network. In other words, the use of a CDMA phone instrument, whether locked or unlocked, by a subscriber is

dependent on the network's permission to do so. That means a consumer can only use or switch phones with his carrier's permission, and a carrier

doesn't have to accept any particular phone onto its network. It could, but typically, many carriers choose not to. Of course, in the case of an

instrument which is locked for use on a service provider, no further whitelisting is usually needed inasmuch as practically the locking process itself

takes care of the whitelisting as well.

That's quite unlike a GSM handset, in the sense that subscriber identity in the GSM is based on the information embedded in the SIM2 card, and

any GSM handset, unless it is locked to some other specific service provider's network, can be used to access the service provider. A GSM handset is

not required to be whitelisted by the service provider, and any unlocked GSM set can be used to access the service provider.

It was this limitation of the CDMA handsets which was one of the factors which restricts growth of market for CDMA technology and lead to a

significant change in technology in introducing open market handset (OMH). Reporting the launch of this open market handset or OMHG, The Hindu

newspaper stated as follows:

http://www.thehindu.com/sci-tech/technology/gadgets/samsung-launches-open-market-cdma-handset/article10841.ece

SAMSUNG LAUNCHES OPEN MARKET CDMA HANDSET

Kolkata 28th August 2009

Samsung on Friday launched the country's first open market handset (OMH) phone Mpower 699 in co-operation with Qualcomm at an

event in Kolkata.

The OMH technology gives mobile customers the flexibility to buy a CDMA handset and SIM cards from various CDMA operators of

their choice.

Announcing the launch of Samsung MPower 699 in the Indian market, Jung Soo Shin, president & CEO Samsung South West Asia,

said that the launch marked a paradigm shift in the dynamics of the CDMA ecosystem with consumers now having the flexibility to

choose an operator.

Sunil Dutt, country head Samsung Telecom Division, Samsung India Electronics Ltd. said that last year, Samsung took the first step

towards giving consumers flexibility in CDMA by launching MPower series handsets to work with CDMA connections from operators,

Reliance Mobile, Tata Indicom and Virgin Mobile.

Mr. Shin said that the introduction of OMH will lead to common development standards and inter-operability for all CDMA networks

globally.

A company release said that MPower 699 will support Tata Indicom, Reliance Mobile, MTS and Virgin Mobile services on their OMH

SIM cards. It was also stated that the switch-over process to new OMH SIM cards from existing R-UIM/SIM connections was very

easy and the new OMH phone also supports the existing SIM for voice and SMS as well as data services.

(Emphasis by underlining supplied by us)

In the light of the above press report, referring to an event taking place beyond the period covered by any of these assessment years, the

illustration given by the assessee, which we have reproduced at the bottom of paragraph 10 earlier in this order, does not seem correct. If a consumer

could simply chose, at his sweet will, any service providers of his choice, the invention of OMH would not have been necessary at all.

Let us, in this light, take a look at the following significant factual submissions made by the assessee in assessee's own case for the assessment

years 2000-01 to 2004-05 - reported as Qualcomm Inc Vs. ADIT (2013) 23 ITR Tribunal 239) which were accepted by a coordinate bench:

iv. Customisation such as locking the handset to enable operation only with a specific operator and other operators with whom reciprocal or other

arrangements are available, inclusion of Hindi or other regional languages, calculator, music, ring tones, browsers and numerous other features are no

way connected with patents of Qualcomm in these 16 agreements which are for manufacture of CDMA handsets and equipment. In fact in each

hand set a number of patented technologies other than patents with respect to CDMA connectivity are also used. Hence the argument that

patents relating to CDMA technology are customer specific, service provider specific or country specific is factually incorrect. There is

no customization of hand set qua the CDMA connectivity.

v. Coming to the argument that hand set 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 AP High court in the case of Asifuddin and others (Supra). Hence it cannot be concluded that CDMA technology was service

provider specific.

(Emphasis by underlining supplied by us)

Hon'ble Andhra Pradesh High Court's judgment in the case of Asifuddin & Others Vs. State of Andhra Pradesh ((2005) Criminal Law Journal

4314 AP) throws some light on the working of CDMA handsets. This decision, inter alia, observes as follows:

All cell phone service providers like Tata Indicom and Reliance India Mobile (i.e. using CDMA operating systems) have special codes

dedicated to them and these are intended to identify the phone, the phone's owner and the service provider. To understand how the

cell phone works, we need to know certain terms in cell phone parlance. System Identification Code (SID) is a unique 5-digit number

that is assigned to each carrier by the licensor. Electronic Serial Number (ESN) is a unique 32-bit number programmed into the phone

when it is manufactured by the instrument manufacturer. Mobile Identification Number (MIN) is a 10-digit number derived from cell

phone number given to a subscriber. When the cell phone is switched on, it listens for a SID on the control channel, which is a special

frequency used by the phone and base station to talk to one another about things like call set-up and channel changing. If the phone

cannot find any control channels to listen to, the cell phone displays ""no service"" message as it is out of range. When cell phone

receives SID, it compares it to the SID programmed into the phone and if these code numbers match, cell knows that it is

communicating with its home system. Along with the SID, the phone also transmits registration request and MTSO which keeps track

of the phone's location in a database, knows which cell phone you are using and gives a ring.

(Emphasis, by underlining, supplied by us)

It could be useful to carefully analyse the facts of Asiffudin's case (supra), in a little more detail, to understand some relevant aspects of the

working of the CDMA industry as appreciated by Their Lordships.

26 . It was a case in which a police complaint was lodged by Reliance Infocomm Limited alleging that ""certain vested elements of the trade of mobile

telephone services began to woo the subscribers of Reliance India Mobile (RIM) into various other schemes promoted by other similar service

providers, which would have the impact on the image as well as the revenues of the second respondent"". RIL, under Dhirubhai Ambani Pioneer Offer,

had launched CDMA telephone services named as 'Reliance India Mobile', under which the subscriber gets a digital handset worth Rs. 10,500 as well

as service bundle for three years with an initial payment of Rs. 3,350 and monthly outflow of Rs. 600. The subscriber also gets one year warranty and

insurance for three years. The handset given to the subscriber was a third generation digital handset with a host of features which are of first of its

kind coupled with attractive tariff options. According to the complainant, this offer was so attractive that it affected business of the other CDMA

operator, namely Tata Teleservices, so much so that Tata Teleservices, in connivance with some individuals, started wooing away the RIL customers

by allowing them to use these handsets, on payments on some nominal amounts, on their network, and, for that purpose, hacking into the RIL handsets

and reprogramming them. As to what happened after the receipt of this police complaint, Hon'ble High Court has summed up the same as follows:

After receiving above written complaint lodged by the second respondent through its Head of Sales and Marketing Wing, the senior

executive officer of Criminal Investigation Department, on instructions of the Additional Director General of Police, CID, registered

crime No. 20 of 2003 under various provisions of IPC, IT Act and Copyright Act as mentioned hereinabove and took up investigation.

The crime was registered on 31-5-2003. Investigation revealed that all the handsets of Reliance India Mobile are being migrated to

TATA Indicom network at the behest of TATA Indicom staff members and that same is illegal as there is an agreement between the

manufacturers of the Reliance handsets and Reliance India Mobile Limited. In view of the statements given by the witnesses, the

investigating officer came to a conclusion that prima facie case is made out against the staff members of TATA Indicom and directed

two inspectors to conduct raids at the Head Office of TATA Indicom situated in Khan Lathif Khan Estate, Hyderabad. This was

ordered in view of specific information received about tampering of Reliance handsets by the staff members of TATA Indicom. Further

on specific information about similar such practices going on at TATA Indicom centre opposite to Harihara Kala Bhavan,

Secunderabad, the investigating officer along with two other inspectors and panch witnesses proceeded to LM counter at the above

place when one Raj Naren, Officer of TATA Indicom revealed that the General Manager (Marketing), Madhavan and Anil Ambati,

Manager (Marketing) of TATA Indicom are accepting the handsets belonging to Reliance Infocomm Limited and re-programming with

their network with different tariff packages. At the time of conducting raid in Secunderabad Office of TATA Indicom, the investigating

officer also came across one Shaik Mustaffa who stated that he purchased handset from Reliance Infocomm network. Therefore, the

investigating officer arrested Raj Naren and Shaik Mustaffa, and seized two mobile telephone handsets, one each from the possession

of the two arrested persons. On examination, it was found that the handset recovered from Raj Naren is Samsung N191 co-branded

with Reliance with ESN No. 3F7AB 832. The said set was migrated to TATA Indicom with No. 56376361 allotted by TATA Indicom.

Its original Reliance India Mobile number was 31086523. The two accused along with mobile sets were brought to the office of C.I.D.,

and kept under surveillance of C.I.D., staff. The team of inspectors sent to the Office of TATA Indicom at Khan Lathif Khan Estate

also arrested Syed Asifuddin, Patlay Navin Kumar and Khaja/Gareed Nawaj (petitioners in Criminal Petition No. 2601 of 2003) and

Manoj (petitioner No. 2 in Criminal Petition No. 2602 of 2003). Two Samsung N191 co-branded with Reliance re-programmed handsets

with distinct ESN and serial numbers were also seized along with 63 application forms of persons who migrated from Reliance India

Limited to TATA Indicom along with the affidavits. After getting the details of the search team, the investigating officer filed remand

report before the Court of IX Metropolitan Magistrate, Hyderabad on 3-6-2003. In the remand report, it is further stated as under:

The investigation made so far revealed that the Reliance Infocomm is offering under Dhirubhai Ambani Pioneer Scheme a third

generation digital handset costing about Rs. 10,500/- for a mere payment of Rs. 3,350/- with a condition to sail with their network for a

period of 3 years with option to exit either by surrendering the handset or paying the cost of the handset to the company. Investigation

also reveals that there is an agreement existing between the Samsung manufacturers and LG manufacturers With Reliance Infocomm

regarding their exclusive models Samsung N191 and LG-2030. These model handsets are to be exclusively used by Reliance India

Mobile Limited only. In contravention to the above contract the TATA Indicom staff members who are figured as an accused are

tampering with preprogrammed CDM-A digital, handsets belonging to Reliance Infocomm and activating with their network with all

dubious means which is an offence under Section 65, I.T. Act. Secondly, the customer is not barred from exiting from the Reliance

network as such and to quit from that network he has to fulfill the obligations laid down in the terms and conditions of the Reliance

company. Till the lock in period of 3 years is over, the handset supplied to the customer by Reliance Infocomm is a joint property of

the company and any kind of transaction on the part of the subscriber without fulfilling the obligations laid down in the terms and

conditions is clear case of Breach of Trust since the customer has not settled the accounts with the company. Further as the

competition between the CDMA service providers blown out of proportions, the TATA Indicom has hatched a conspiracy to hijack the

customers of Reliance Infocomm by all fraudulent means and as a part of their Infocomm by all fraudulent means and as a part of their

conspiracy trying to woo the customers of Reliance Infocomm with different tariff packages and trying to trap gullible customers and

succeeded in their attempt to attract their customers and so far as many as 63 customers belonging to Reliance Infocomm so far

migrated to TATA Indicom by illegal means.

......

20 . The main allegation against the petitioners is that the MIN of Reliance phone is irreversibly integrated with ESN and the

petitioners hacked ESN so as to wean away RIM customers to TATA Indicom service. The question is whether the manipulation of

this electronic 32-bit number (ESN) programmed into Samsung N191 and LG-2030 cell phone instrument exclusively franchised to

second respondent amounts to altering source code used by these computer handsets i.e., cell phone instruments. In the background

facts, a question would also arise whether such alteration amounts to hacking with computer system? If the query answered in the

affirmative, it is always open to the police to alter the F.I.R., or it is always open to the criminal Court to frame a charge specifically

with regard to hacking with computer system, which is an offence under Section 66 of the IT Act. At this stage, we may read Sections

65 and 66 of the IT Act.

Tampering with computer source documents:- Whoever knowingly or intentionally conceals, destroys or alters or intentionally or

knowingly causes another to conceal, destroy, or alter any computer source code used for a computer, computer programme, computer

system or computer network, when the computer source code is required to be kept or maintained by law for the time being in force,

shall be punishable with imprisonment up to three years, or with fine which may extend up to two lakh rupees, or with both.

Explanation.- For the purposes of this, ""computer source code"" means the listing of programmes, computer commands, design and

layout and programme analysis of computer resource in any form.

Hacking with Computer System:- (1) Whoever with the intent to cause or knowing that he is likely to cause wrongful loss or

damage to the public or any person destroys or deletes or alters any information residing in a computer resource or diminishes its

value or utility or affects it injuriously by any means, commits hacking.

(2) Whoever commits hacking shall be punished with imprisonment up to three years, or with fine which may extend up to two lakh

rupees, or with both.

The offence of tampering with computer source documents under Section 65 of the IT Act is made out when a person,

(i) intentionally conceals, destroys or alters a computer source code used for a computer, computer programme, computer system or

computer network;

(ii) intentionally or knowingly causes another to conceal, destroy or alter any computer source code used for a computer, computer

programme, computer system or computer network; and

(iii) (a) However, the offence is made out only when computer source code is required to be kept or

(b) when computer source code is maintained by law for the time being in force.

The punishment prescribed by law for the above offence is imprisonment up to three years or a fine of Rs. 2,00,000/- or both.

What is a computer source code is also defined in the Explanation to Section 65 of IT Act, which reads as under:

Explanation: For the purposes of this, ""computer source code"" means the listing of programmes, computer commands, design and

layout and programme analysis of computer resource in any form.

By the very definition of 'computer source code,' (a) list of programmes; (b) computer commands; (c) design and layout and (d)

programme analysis of computer resource in any form, is a 'computer source code' for the purpose of Section 65 of I.T. Act. Going by

the definition, ESN of Samsung N191 model cell phone handset or ESN of LG-2030 model cell phone handset exclusively used by the

second respondent as well as SID of second respondent come within the definition of computer source code. Every cell phone operator

is required to obtain SID from the licensor i.e., Government of India. Further, ESN is a permanent part of the phone whereas MIN and

SID are programmed into phone when one purchases a service plan and have the phone activity. When a customer of second

respondent opts for its services, the MIN and SID are programmed into the handset. If someone manipulates and alters ESN, as per

the case of second respondent, Samsung/LG handsets which are exclusively used by them become usable by other service providers

like TATA Indicom. Therefore, prima facie, when the ESN is altered, the offence under Section 65 of I.T. Act is attracted because

every service provider like second respondent has to maintain its own SID code and also gives a customer specific number to each

instrument used to avail the services provided. The submission that as there is no law which requires a computer source code to be

maintained, an offence cannot be made out, is devoid of any merit. The disjunctive word ""or"" is used by the Legislature between the

phrases ""when the computer source code is required to be kept"" and the other phrase ""maintained by law for the time being in force

and, therefore, both the situations are different. This Court, however, hastens to add that whether a cell phone operator is maintaining

computer source code, is a matter of evidence. So far as this question is concerned, going by the allegations in the complaint, it

becomes clear that the second respondent is in fact maintaining the computer source code. If there is allegation against any person

including the petitioners, certainly an offence under Section 65 of I.T. Act is made out. Therefore, the crime registered against the

petitioners cannot be quashed with regard to Section 65 of the I.T. Act.

That takes me to the allegation that the petitioners violated Section 63 of Copyright Act, 1957. So as to keep pace with the

advancement in science and technology especially in the field of communication and data processing, Parliament has amended

Copyright Act, 1957 in 1995 bringing within its fold computer programme also as literary work to be protected by Copyright Act.

Section 2(ffb), (fie) and 2(o) of Copyright Act read as under.

2(ffb) ""computer"" includes any electronic or similar device having information processing capabilities;

2(ffc) ""computer programme"" means a set of instructions expressed in words, codes, schemes or in any other form, including a

machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result;

2(o) ""literary work"" includes computer programmes, tables and compilations including computer databases;

Section 14 defines the copyright as exclusive right subject to provisions of the Copyright Act, to do or authorise the doing of any of

the Acts enumerated in respect of the work or substantial part thereof. Section 14(b) of the Copyright Act reads as under:

Meaning of copyright.- For the purposes of this Act, ""copyright"" means the exclusive right subject to the provisions of this Act, to

do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely:-

(a) omitted.

(b) in the case of a computer programme,-

(i) to do any of the acts specified in Clause (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any

copy of the computer programme:

Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the

essential object of the rental;

(c) and (d) omitted.

Therefore, reading Section 2(o), (ffc) and Sections 13 and 14 together, it becomes clear that a computer programme is by very

definition original literary work and, therefore, the law protects such copyright. Under Section 63 of the Copyright Act, any

infringement of the copyright in a computer programme/source code is punishable. Therefore, prima facie, if a person alters computer

programme of another person or another computer company, the same would be infringement of the copyright.

(Emphasis by underlining supplied by us)

27 . Clearly, therefore, not only some CDMA handsets supplied by the OEM to the Indian service providers were programmed to be service provider

specific and even altering with such programming was prima facie a cognizable offence, but the use of any CDMA handset, until the advent of OMH-

which happened much after the end of the relevant financial period, was entirely dependent on the permission of the service providers to do so.

In the extracts that we have reproduced at the end of paragraph 20 earlier in this order, all CDMA handsets, at that point of time, ""had special

codes dedicated to them and these are intended to identify the phone, the phone's owner and the service provider"". The SID (i.e. System Identification

Code), as noted by Their Lordships, is a unique 5-digit number that is assigned to each service provider and the ESN (Electronic Serial Number) is a

unique 32-bit number programmed into the phone when it is manufactured by the instrument manufacturer, and it is on the basis of the ESN that the

handset is recognized. When the CDMA phone is switched on, it listens for a SID on the control channel and when phone cannot find any control

channels to listen to, the cell phone displays ""no service"" message as it is out of range. ""When cell phone receives SID"", as noted by Their Lordships,

it compares it to the SID programmed into the phone and if these code numbers match, cell knows that it is communicating with its home system"".

In other words, as appreciated by Their Lordships, when SID programmed into the handset does not match with SID of a service provider, the

handset cannot work. Their Lordships further noted that, ""Along with the SID, the phone also transmits registration request and MTSO which keeps

track of the phone's location in a database, knows which cell phone you are using and gives a ring"".

It would, therefore, appear to us that, in the understanding of Hon'ble AP High Court, the CDMA handsets were service provider specific.

3 1 . Once a higher tier of the judiciary, i.e. Hon'ble Andhra Pradesh High Court, expresses the views so set out above-particularly to the effect that

the CDMA handsets, by the virtue of SID control mechanism inbuilt therein-as at the relevant point of time, were service provider specific, it cannot

ordinarily be open to a lower tier of the judicial system, i.e. this Tribunal, to conclude that the CDMA handsets supplied by the OEMs, at the relevant

point of time and before the advent of OMH, could not have been service provider specific and all these handsets could be used on networks of any of

the service provider at the sweet will of the end user. There has to be some material before us to demonstrate that the findings of Hon'ble Andhra

Pradesh High Court were not valid in the present context, to demonstrate that the technical parameters were different in the present context or that

the understanding of Their Lordships is at variance with the actual facts of the case before us. There is no material before us to come to such

conclusions.

In any case, as a corollary to the working of handsets as explained above as well, unless ESN of a CDMA handset was registered with a service

provider as belonging to a particular subscriber, and approved by the service provider as such, such a CDMA handset could not have been used by

any subscriber.

33 . Whether a CDMA handset, at that point of time, could be used on any CDMA network, in the unfettered discretion of the subscriber, or not, is a

purely factual matter. Even as learned 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 to the same conclusion. In view of the discussions above-particularly the

observations made by Hon'ble AP High Court in Asifuddin's case (supra), we have our reservations on the contentions of the assessee, even though

these contentions have, in some other assessment years, have met approval of the coordinate bench. However, aware of our limitation on the face of

a categorical finding by a coordinate bench of equal strength, we are not deviating, nor can we deviate, from that stand either. Yet, given the reasons

set out earlier and in the light of observations made by Hon'ble AP High Court, we are of the considered view that this aspect of the matter needs to

be examined in detail. Our respect for the coordinate bench is one thing and our decision to take necessary precautions is quite another. As is a

proverbial saying in Arabic, even those who trust in Allah, tie their camel to the tent, and as Oliver Cromwell once said 'Trust in God, but keep your

powder dry'. All these statements basically highlight the basic fact that while faith is very important in any system, even such a faith has to be

sustained on the basis of actions and that the facts should be verified. Judicial system cannot be an exception to this universal rule particularly when,

unlike a binding judicial precedent from Hon'ble Courts above, a coordinate bench decision has only a persuasive value which cannot, and should not,

take away our right, as indeed the corresponding duty, to ascertain the true facts in a comprehensive manner at this final fact finding forum.

34 . All these aspects, as are the subject matter of these varying perceptions, are purely factual, but highly technical, aspects and we must have the

benefit of unbiased opinion of technical experts, much more than smooth generalizations from the legal luminaries, to come to a definite conclusion.

There cannot be a room for tentative conclusion, based on hypothetical presumptions, on a fundamental aspect which has been so strenuously argued

by the parties and which goes to the root of the matter.

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.

Undoubtedly, the CDMA handsets being Indian carrier specific cannot be an excuse enough for taxability of profits on manufacturing of these

handsets. The profits so earned by the OEM has to be essentially taxed in the tax jurisdiction where the manufacturing activity is carried. However,

we are not really concerned with the taxability of those profits either.

3 7 . As one of the fundamental issues requiring our adjudication in this case is whether or not the OEMs were carrying out business in India, and as it

is one of the contentions of the revenue authorities before us that the OEMS were carrying on business in India through their permanent

establishments (PEs) which are de facto projections of the OEMs in India, the CDMA handsets being service provider specific assumes significance.

When the product in India specific and the business of the OEM, producing that product, is carried on through its PE in India, the natural corollary of

this position is that the OEMs can be held to be carrying on business in India, partly if not wholly. That is one aspect of the matter. The other aspect of

the matter is that taxability of royalties paid by one enterprise to the other enterprise so far as it relates to the CDMA handsets which are meant for,

and even customized for, Indian service providers, and which were sold in India with the help of engaging Indian service providers on a commercial

and somewhat continuous basis. As a matter of fact the issue before us could possibly be viewed as even more specific in the sense that it is also not

a question before us whether royalties for use of patents in the manufacturing process be taxed in India, even as this aspect of the matter has been

hammered again and again by the assessee, and it has been extensively discussed in the order passed by the coordinate bench as well.

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.

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.

The actual controversy, therefore, is with respect to the royalties for use of the handsets rather than for the manufacturing of the handsets. This

aspect becomes all the more glaring as we see that the royalties is not with respect to the handset units manufactured by the assessee but with

respect to the handset units actually sold by the assessee.

4 1 . The question that really arises therefore is whether the royalty paid by the assessee with respect to commercial use of the handsets which are

sold by the assessee will be taxable in the tax jurisdiction in which the handsets are manufactured, i.e. the situs of manufacture of handsets, or in the

tax jurisdiction where the handsets are used, i.e. the situs of use of handsets.

As we will see as we go along, the taxation of royalties for use of a technology, on the first principles, is the situs where the technology is used.

Accordingly, when the royalty is for use of a technology in manufacturing, it is to be taxed at the situs of manufacturing the product, and, when the

royalty is for use of technology in functioning of the product so manufactured, it is to be taxed at the situs of use.

While we examine taxability of the royalty in respect of the CDMA handsets which were meant for and customized for Indian service providers,

and used in India, it will be useful to begin by taking a look at the conceptual framework for taxation of royalties and the legal provisions in respect of

the same.

In 'Tax Law Design and Drafting', originally published by International Monetary Fund [ISBN 90-411-9784-2], Richard J. Vann, in his paper

'International Aspects of Income Tax' and at page 740 in volume II of this book, has made following interesting observations:

Royalties do not have a detailed source rule in the OECD Model, given that taxation is exclusively reserved for the residence country, but almost half

of the OECD countries and the UN Model do not follow this pattern. Rather, they replicate interest source rule for royalties, that is, residence of the

payer with the permanent establishment qualification. The United States has a sourcing rule of where the property is used [USA IRC 861(a)(4)] and

can usually have this accepted in its treaties, but less powerful countries may find it difficult to go their own way. Certainly, domestic law should

contain a clear rule for sourcing royalties, as they are one of the most important forms of income internationally - especially so in a world that is

coming to be dominated by trade in technological innovation and services rather than goods.

Section 861(a)(4) of US Internal Revenue Code (a) Gross income from sources within United State provides that, amongst other things, ""royalties

from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using

in the United States patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property"" shall

be treated as income from sources within the United States.

We have referred to this provision to demonstrate that the taxability of royalty, in connection with the products used in a tax jurisdiction, in the

jurisdiction of usage of product is not alien to the tax policy and tax laws. Not only that such a source taxation is in accordance with what the first

principles of tax policy making, as evident from the extracts from International Monetary Fund's publication reproduced in the preceding paragraph,

such an approach is also an unambiguous prescription of the US Internal Revenue Code.

In view of the above discussions, source taxation of royalties, in the jurisdiction in which the related intellectual property, including, inter alia, by

way of patents and copyrights etc, is used, is quite in consonance with the sound principles of taxation and acceptable global norms. The residence tax

jurisdiction of this very assessee has consistently, and rather aggressively, followed this norm.

We now move on to the fundamental question, which is the core issues requiring our adjudication in this case, and that question is whether the

provisions of the Indian Income Tax Act, 1961, enable source taxation of royalties in India when the products, in respect of which the royalty is paid,

are used in India.

Section 9 of the Income Tax Act, 1961, which is an unambiguous extension of source rule, deals with the 'incomes which are deemed to accrue or

arise in India'. Clearly, therefore, an income, in order to be taxed in India under section 9, need not accrue or arise in India.

Let us take a pause here. While on this aspect, i.e. the deeming fiction of income accruing or arising in India, it will be useful to take a note that

Prof Michael Lang, a well known contemporary commentator on international taxation and renowned international tax academician, has made

following interesting observations, in the context of s. 9 in his book 'Introduction to the Law of Double Taxation Conventions' (an IBFD Publication by

Linde, Austria; ISBN 978-90-8722-082-2):

In international law practice, there are no significant limits on the tax sovereignty of States. In designing the domestic personal tax law, the national

legislator can even tax situations when, for example, only a ""genuine link"" exists. It is only when neither the person nor the transaction has any

connection with the taxing State that tax cannot be levied.

Coming back to Section 9, by the virtue of an amendment vide Finance Act, 1976, a new sub clause was added to Section 9(1)(vii) which provided

that the income deemed to accrue or arise in India will, inter alia, include ""a person who is a non-resident, where the royalty is payable in respect of

any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India, or for the

purposes of making or earning any income from any source in India"". Explaining the import of this amendment, CBDT circular No. 202 dated 5th July

1976 stated as follows:

15.3 Under the new provisions, royalty income of the following types will be deemed accrue or arise in India;

(a) royalty payable by the Central Government or any State Government;

(b) royalty payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India or

to any other source of his income outside India; and

( c ) royalty payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other

source of his income in India.

(Emphasis by underlining supplied by us to highlight the relevant portion)

Post 1976 amendment thus, the scope of deeming fiction under section 9 extended to royalties not only paid by an Indian resident, unless such a

payment extended to a business carried out or to any source outside India, but also to royalties paid by the non-residents as long as it was relatable to

a business carried on in India or to any source in India. The clear emphasis on taxation on the basis of usage in business rather than on the basis of

residence of the payer, so far as taxation of royalties is concerned, was thus clearly discernible from the post amendment legal position in Section 9(1)

(vi).

As we look at this foundational aspect of the taxation of royalties, it will also be useful to take a careful look at the definition of royalties, under the

Income Tax Act, which is reproduced below:

Explanation 2: For the purposes of this clause, ""royalty"" means consideration (including any lump sum consideration but excluding any consideration

which would be the income of the recipient chargeable under the head ""Capital gains"") for--

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or

trade-mark or similar property;

(ii) the imparting of any information concerning the working of or the use of, a patent, invention, model, design, secret formula or process or trademark

or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade-mark or similar property;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;

(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or

video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale,

distribution or exhibition of cinematographic films; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).

So far as taxation of royalties in connection with patents is concerned, it has two aspects- (a) first, taxation of consideration for transfer of all or

any rights (including the granting of a licence) in respect of a patent; and (b) second, taxation of consideration for the imparting of any information

concerning the working of or the use of, a patent. The taxation of royalty in respect of patents, in simpler words, could thus be broken down in the

following segments:

i. taxation of consideration for rights, wholly or in part, in respect of transfer of any right in a patent;

ii. taxation of consideration for a licence, which by implication includes a sub licence as well, in respect of a patent;

iii. taxation of consideration for imparting of any information concerning the working of a patent; and

iv. taxation of consideration for imparting of any information concerning the use of a patent.

The event triggering taxation in connection with the patents is thus (i) granting of a right, licence or sub licence in a patent, or (ii) sharing of

information concerning use or working of a patent.

A plain look at the definition of royalty, in conjunction with Section 9(1)(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 trade-mark 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.

It is important to bear in mind the fact that taxation of royalties is not a taxation of business profits of any entity, but, quite contrary thereto, it is

taxation of the consideration of a patent or know how etc. which belongs to the person who owns the patents. It is thus taxation of income of the

person owning the patents and it is taxation in the jurisdiction of end use of patents. The emphasis is on the situs of use of the patent rather than situs

of the entity making payment for the royalty. A fortiori, if the use of patent is used in the manufacturing process, for example, the taxation should be in

the tax jurisdiction in which manufacturing activity is carried on rather in the tax jurisdiction in which ultimate consumer of product is located.

However, if the patent is used by the end consumer and the manufacturer of a product is only a conduit for collection of such a consideration for use

by the end consumer, the taxation would be warranted in the end use jurisdiction.

It is in this light of the scheme of taxation of royalties, as implicit in the definition of royalties and as provided in Section 9(1)(vi)(c), that we have to

examine the contextual connotation of payment of royalties for any right, property or information used or service utilised use ""for the purposes of

business or profession carried on"" by a non-resident in India and ""for the purposes of making or earning any income from any source"" by a nonresident

in India.

Learned counsel suggests that this area is no longer res integra. He invites our attention to a decision of a coordinate bench of this Tribunal in the

case of Metro & Metro Vs. Additional CIT ((2014) 147 ITD 207), which, speaking through one of us, holds as follows:

This exception thus has two distinct segments-first, in respect of services utilized in a business or profession carried on by Indian resident outside

India, and - second, in respect of services utilized in respect of earning any income from a source outside India. No doubt whether an India based

business is one hundred percent export oriented unit or not, it is still a business carried on in India, and it cannot, therefore, be covered by the first limb

of exception envisaged in Section 9(1)(vii)(b). Even if entire products are sold outside India, the fact of such export sales by itself does not make

business having been carried outside India. What matters really, in this perspective, is whether or not business is carried on in India or not, and once it

is an undisputed position that business is set up and carried on India, irrespective of where the end consumers are, the business is carried on outside

India. However, the scope of second limb of this exception is rather narrow. As against use of expression 'profession or business carried on ......

outside India', this exception refers to use of service in 'making or earning any income from any source outside India'. In order to be covered by this

exception, what is material is that, irrespective of where the business is situated, the services need to be used for earning or making income from any

source outside India. A business outside India and a source outside India are used together in contrast, and can be viewed as reflecting relatively

active and passive activities. For example, if technical service is used in a business activity outside India, it could be covered by the first category,

while technical service used in an asset which gave on lease could be in the second category. The question, however, is whether the customers being

outside India could be viewed as source of income. In our considered view, the source of income, whether customers are inside India or outside India,

continues to be business in India. A customer is an important part of the business but no matter how important a segment of business is, such a part of

the business cannot be the business itself. The assessee has all along claimed that the leather testing services were required under instructions from

importers and so as to enable its products to enter the German markets. All it indicates is that the services were required because of the foreign

importers, but, as the mandate of the law, is that aspect itself is not decisive and sufficient for the purpose of exclusion from the scope of Section 9(1)

(vii). The services should be for the purpose of earning an income from a source outside India. A customer is not the source of income, he is an

important part of the business, which, in turn, is the source of income.

It is, however, necessary to appreciate the context in which these observations were made. That was a case in which a German entity was paid

testing fees for certain leather products manufactured by an Indian exporter. The case of the assessee was that the fees so paid, which was covered

by the definition of fees for technical services under section 9(1)(vii), was not taxable in India as it was covered by the exclusion clause set out therein

which provided that ""utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income

from any source outside India"" shall not be deemed to accrue or arise in India. In nutshell, contention of the assessee was that his entire income is

from source outside India inasmuch as the assessee was a one hundred percent exporter. It was a very simplistic situation involving sale of goods and

there was nothing on the record to even suggest that it involved any use of patents in the products or the complex transnational business models, as is

the situation before us. It is only elementary that the words used in a judgment, even of Hon'ble Supreme Court, cannot be used as standalone

exposition of law on a question which did not even come up for consideration before the judicial forum. In this context, it will be useful to refer to the

following observations made by Hon'ble Supreme Court in the case of CIT Vs. Sun Engineering Works Pvt. Ltd. (1992) 198 ITR 297):

... ... ... ... It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the

question under consideration and treat it to be the complete ""law"" declared by this Court. The judgment must be read as a whole and the observations

from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the

questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true

principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions

under consideration by this Court, to support their reasoning. In Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India (1971) 3 SCR 9 : AIR

1971 SC 530, this Court cautioned:

It is not proper to regard a word, clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full

exposition of the law on a question when the question did not even fall to be answered in that judgment.

When such are the views of the Hon'ble Supreme Court about the observations made in judgments rendered by Hon'ble Supreme Court itself, it

does not appeal to logic that the views expressed by a coordinate bench, in an entirely unrelated context, can be treated as exposition of law on a

subject, and in a context, which was not before the coordinate bench.

It is also important to bear in mind the fundamental legal position that in the course of judicial functioning and interpretation, the 'context', in which

an expression is to be judicially analysed or interpreted, is of the utmost importance. Even when an expression is statutorily defined, as is

unambiguously obvious from the opening words of Section 2 of the Income Tax Act, 1961, these statutory definitions hold good only ""unless the

context otherwise requires"". The importance of context in which an expression is placed is, therefore, of the paramount importance. The context in

which the expression 'business carried outside India' was interpreted in the said decision was that only factor, based on which the business was

claimed to have been carried outside India, was that the customers of the assessee were outside India and it was nobody's case that the assessee had

any other business involvement outside India. In sharp contrast with that situation, here is case in which the royalty in question, and not fees for

technical services as was the position in Metro & Metro (supra), was for use of patents in the end products in India. The assessee thus does not

derive any advantage from his support on this judicial precedent.

63 . As for the connotations of the expressions employed in the first limb of the section 9(1)(vii)(c), i.e. ""for the purposes of business or profession

carried on"" by a non-resident in India, in the present context, and to deal with the question whether the activities of the assessee are covered by the

same, we may refer to a diagram, with the help of which the assessee has explained his business model, as follows:

As this diagram highlights, the patents are licenced by the assessee to the OEM and the OEM carries out manufacturing activity of the CDMA

handsets is carried out outside India. Explaining this transaction structure in step wise, the assessee has further submitted before us as follows:

• Qualcomm owns essential patents pertaining to CDMA technology.

• Qualcomm's division QTL grants a personal, non transferable worldwide and non exclusive patent license to Original Equipment Manufacturers

('OEMs') (like Alcatel Lucent, ZTE Corporation, LGE etc) to manufacture and sell CDMA products.

• OEMs create the design, decide the features of the product and manufacture

the product outside India.

• OEMs manufacture CDMA products and sell them to worldwide telecom operators including India.

However, what this diagram does not enlighten us about is whether the business of the assessee was carried out entirely outside India. No doubt,

manufacturing is an important part of business but the business per se is little more than manufacturing. To give an example, in a situation, in which the

core manufacturing activity, with respect to a product, is carried out in China but the sales and manufacturing activity in respect of the same product is

carried out is another jurisdiction or other jurisdictions, it cannot be said that the business is not carried by the assessee in that another or those other

jurisdictions. Of course, when it comes to taxation of profits from manufacturing activities, such profits can only be taxed in China in this example, but

that is not the issue before us. We are not concerned about taxation of any business profits. We are not even concerned about taxation of royalties

used in the manufacturing process which is carried out, as in this example in China, in another jurisdiction. We are only concerned about the taxability

of royalties to the extent such royalties are used in ""a business or profession carried on by him (i.e. a non-resident) in India"". Therefore, in our

considered view, even when an income is partly carried out in India but the royalties are payable in respect of such part of the business as is carried

on in India, it would be taxable in India.

We may also mention that during the course of the proceedings before us, learned Departmental Representative has filed two volumes of

documents, containing agreements between the assessee and the OEMs, the OEMs and the Indian service providers, and the incentive agreements, to

throw light on the business of the assessee. These documents were filed before us as additional evidences, and the assessee has also moved a petition

dated 25th June 2014 seeking admission of these additional evidences. Having heard the rival contentions on this prayer of the assessee, we consider it

appropriate to admit these additional evidences as these documents, in our considered view, help us appreciate the nature of business carried on by the

assessee and the business model adopted by the assessee, which is very important in determining whether or not the assessee could be said to be

carrying on business in India.

One of the important factors, which will have bearing on the determination of the question as to whether or not the OEMs carried on business in

India, is whether the CDMA handsets made by the OEMs were India specific and whether the assessee, as a part of his business, was carrying on

any operations in India. When an OEM is making an India specific product and when that assessee is carrying out a part of his business activities in

India, it cannot be said that the assessee is not carrying on business, even if not manufacturing, in India. In such a situation, the assessee may not be

wholly carrying out his business in India but carrying on business wholly in India or exclusively in India is not even a sine qua non for attracting

taxability under section 9(1)(vii)(c). On the aspect of the matter as to whether these products were India specific, as we have stated earlier in the

order, the matter stands restored to the file of the Assessing Officer for fresh examination. As to the aspect, whether the assessee was carrying on

any business operations in India, there is a categorical finding by the coordinate bench that the assessee was not carrying on any business in India and

was, accordingly, not subjected to tax in India. As a matter of fact, at one place, the coordinate bench has categorically observed as follows:

It is not the case of the revenue that the OEM's 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 OEM's 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 OEM's itself are not brought to tax, to hold that Qualcomm

is taxable in not correct. This is not a case of the OEM's being not taxed due to a lapse of the officer concerned or being let off by the revenue by

mistake or oversight. It is not brought to our notice that the OEM's have been brought to tax in any of the subsequent years.

6 8 . In the course of proceedings before us, however, learned Departmental Representative has filed a list of the OEMs who are assessed to tax in

India and also the details about the Assessing Officer having jurisdiction to assess their income in India. This list, which is set out at page 530 of the

paper book volume II of additional evidences, is as follows:

Ericsson AB

Huawei Technology Co. Ltd.

ZTE Corporation, China

Samsung Electronics Ltd.

Nokia Corporation

Nokia Siemens Networks OY

Sony Ericsson Mobile Communication

Motorola Solutions Inc.

6 9 . Learned Departmental Representative has also filed a copy of the assessment order for the assessment year 2005-06, in the case of Huawei

Technologies Co. Ltd., which indicates that not only that they had a presence in India, the said entity was making sales, through its PE in India, to

different customers based in India. Our attention is also invited to several decisions of the coordinate benches of this Tribunal wherein the taxability in

the hands of these OEMs has been upheld in India.

7 0 . When the assessee was confronted with these documents, learned counsel's defence was two fold. His first point was that non taxability of the

OEMs in India was not the only reason as to why the coordinate bench came to the conclusion that the royalty income in question is not taxable in

India. His second point, which was without prejudice to the first line of defence, was that it is not established that the these OEMs were taxable in

India in respect of their business income relating to the sale of the CDMAs and unless that fact is conclusively established, it cannot at all be

suggested that the assessee was carrying on any business in India.

We find that there is major change in the facts of the case before the coordinate bench vis-Ã -vis the facts of the case as before us. While there

was nothing to suggest that the OEMs were subjected to tax in India in respect of their business income, and this was, as we have noted from the

extracts reproduced earlier in this order, one of the factors leading to the conclusion that the OEMs were not carrying on any business, right now we

have reasonable evidences to suggest the OEMs in question, who have made payments of the impugned royalty, were carrying on business in India

leading to their taxability in India.

It is also important to bear in mind that in the contemporary global scenario, the place of business of an entity is not merely the place of

manufacturing the products. In our considered view, even a place where the entity has a permanent establishment is also a place where the assessee

is carrying on its business inasmuch as the very definition of the permanent 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.

Hon'ble Andhra Pradesh High Court, in the landmark judgment in the case of CIT Vs. Visakhapatnam Port Trust (MANU/AP/0033/1983 : (1983)

144 ITR 146), had observed as follows:

In view of the standard O.E.C.D. Models which are being used in various countries, a new area of genuine ""international tax law"" is

now in the process of developing. Any person interpreting a tax treaty must now consider decisions and rulings world wide relating to

similar treaties (British Tax Review, 1978 p.394). The maintenance of uniformity in the interpretation of a rule after its international

adaptation is just as important as the initial removal of divergencies (per Scott L.J., in Eurymedon Corstar vs. Eurymedon (1938) 1 All

ER 122 (CA). Therefore, the judgments rendered by Courts in other countries or rulings given by other tax authorities would be

relevant.

The Supreme Court of Belgium (judgment of the Supreme Court of Belgium on French-Belgium Treaty) has held that a Belgian

subsidiary of a French parent-company was not the parent's ""permanent establishment"", notwithstanding the very tight control

exercised by the parent-company over the sales-territory and product lines allocated to the subsidiaries notwithstanding the

considerable amount of management and financial reporting which was required of the subsidiary. This decision of the Belgium

Supreme Court, if regarded as persuasive in other countries, is of immense relief to multinational corporations (MNC) which often do

lay down strict guidelines for the operations of their subsidiaries [vide Michael Edwardes-Ker's Book, The International Tax Treaty

Service published by In-Depth Publishing Ltd., 1978 Dublin (13)].

The Swiss Bundesgericht (judgment of the Swiss Bundesgericht dt. 17th Sept., 1977 on Swiss-Spanish Treaty) had to interpret the

Swiss-Spain Treaty and decide whether the ""representative-office"" of a Spanish bank constituted a ""permanent establishment"" in

Switzerland. The Bundesgericht, whilst it cited the commentary of the 1963 O.E.C.D. Model, held that it was not such a ""permanent

establishment"" of the Spanish bank in Switzerland (British Tax Review, 1978 p.394).

Similarly, the U.S. Revenue Ruling (No. 72-1-418 on U.S.-German Treaty) has decided while dealing with the U.S. German Tax

Treaty that a German bank's representative office in U.S. did not constitute a ""permanent establishment"" of the German bank in the

U.S. (British Tax Review, 1978 p. 394).

A ""permanent establishment"" connotes a projection of the foreign enterprise itself into the territory of the taxing State in a substantial

and enduring form: (vide F.E. Koch's Book on the Double Taxation Conventions published by Stevens & Sons, London, 1947, Vol. I,

at p. 51, quoting Mitchell B. Caroll before the sub-committee of the Committee of the U.S. Senate Foreign Relations). It is common

practice for an enterprise which carries on trade or business in one country to expand its operations, without incorporation or further

incorporation into another country, for it then has a branch there, or a permanent establishment which can be regarded as having

sufficient presence in that country to make them taxable there in the same manner as the residents of that country. (Harvey Mc.

Gregor, Old Exemptions-New Credits. The Rights of Permanent Establishment under the Double Taxation Agreements between U.K.

and U.S.A.-1 (British Tax Review, 1977, Pt. 6, P.327).

In our opinion, the words ""permanent establishment"" postulate the existence of a substantial element of an enduring or permanent

nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of

such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country.

(Emphasis, by underlining, supplied by us)

74 . Clearly, therefore, even existence of a PE amounts to virtual projection of a business in the tax jurisdiction in which the PE is situated. When a

business entity has a virtual projection in another tax jurisdiction, it would, in our humble understanding, essentially imply that such an entity is carrying

on business in the jurisdiction in which such a PE is situated.

7 5 . However, in all fairness, as the issue regarding existence of the permanent establishments, in India, of the OEMs has been taken up for the first

time before us, this aspect of the matter needs to be examined in detail, after giving assessee a reasonable opportunity of hearing and after confronting

the assessee with all the material that the revenue authorities may gather in support of their claim, at the assessment stage. On this aspect of the

matter also, the matter deserves to be remitted to the file of the Assessing Officer.

76 . As we part with this issue, we may mention that the coordinate bench in assessee's own case had observed as follows: ""A sale to India without

any operations being carried out in India would amount to business with India and not business in India. For the business to be carried out in India

there should be some activity carried out in India. Thus the argument that if manufacturing is done in one jurisdiction and sales in the other jurisdiction,

then there is business in another jurisdiction is devoid of merit"". We are in complete agreement with the views so expressed by the coordinate bench.

However, that was a case in which not only that there was no material to suggest that any activity is carried out in India, there was no evidence of

taxability of income of those OEMs in India. In the present case, however, primary evidence about the taxability of these OEMs in India is now placed

on record. We have also noted that it is a case in which even such basic information as the price and number of CDMA handsets sold by these OEMs

in India, in respect of which the assessee had received the royalty, was not furnished by the assessee and the assessee had, instead of parting with

precise information about the quantity and price of handsets sold in India, requested the Assessing Officer to ""adopt the information available on your

records and apply the rate of royalty as determined in the assessment order for the A.Y. 2006-07 for computing the royalty income on handsets for

A.Y. 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.

7 7 . As we are remanding the matter back to the Assessing Officer for fresh examination on this fundamental aspect of the OEMs carrying on

business in India, we see no need to address ourselves to other issues raised by the learned counsel. All those issues on the scope of the first limb of

Section 9(1)(vi)(c) will be rendered infructuous in case we come to the conclusion that the assessee was, by the virtue of having a PE, carrying on

business in India.

Let us now move on to the second limb of Section 9(1)(vii)(c), which provides that the income deemed to accrue or arise in India will include

income payable by way of royalty payable by a person who is a nonresident, where the royalty is payable in respect of ... ... .... for the purposes of

making or earning any income from any source in India

As we deal with legal provision, it is important to bear in mind the fact that unlike in the case of fees for technical services, which is an active

work, the royalty is paid for use of a patent which does not require much of an active association by the person receiving royalty. While fees for

technical services is a consideration for the work done, royalty is a consideration for use of an asset-tangible or intangible. Viewed thus, even going by

the interpretation given by the coordinate bench in the case of Metro & Metro (supra), the royalty is a consideration for use of an intangible asset and

is covered by the second limb of exception clause set out in Section 9(1)(vi)(b). While dealing with this aspect, the coordinate decision, relied upon by

the learned counsel, itself states, at the cost of repetition, as follows:

... ... ... However, the scope of second limb of this exception is rather narrow. As against use of expression 'profession or business

carried on ... .... outside India', this exception refers to use of service in 'making or earning any income from any source outside India'.

In order to be covered by this exception, what is material is that, irrespective of where the business is situated, the services need to

be used for earning or making income from any source outside India. A business outside India and a source outside India are used

together in contrast, and can be viewed as reflecting relatively active and passive activities. For example, if technical service is used in

a business activity outside India, it could be covered by the first category, while technical service used in an asset which gave on lease

could be in the second category.

(Emphasis, by underlining supplied by us)

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(1)

(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.

The expression 'for the purpose of making or earning any income from any source in India' not only involves active earnings such as a business in

India but also a passive earning by exploiting an asset in India. To this extent, learned counsel does not dispute the legal position and he repeatedly

points out to the example of ""an asset given on lease"" generating passive income. It is, however, important to bear in mind the fact that an asset or a

property, so exploited to make or earn an income in India, need not only be a physical or tangible asset or property. There is no reason to exclude

exploitation of an intangible assets or intangible property from such a usage of asset leading to taxation in the source country. While on this aspect of

the matter, it is useful to appreciate the scope of 'intangible property', as is explained in Explanation (ii) to Section 92B of the Act:

For the removal of doubts, it is hereby clarified that

(i) ... ... ...

(ii) the expression ""intangible property"" shall include--

(a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos;

(b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical

know-how;

(c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings;

(d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit

masks and masters;

(e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints,

proprietary documentation;

(f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders;

(g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements;

(h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts;

(i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights;

(j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill,

general business going concern value;

(k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data;

It is thus clear that in order to attract taxability under second limb of section 9(1) (vi) the asset or property, exploitation of which leads to 'making

or earning of any income from any source in India', is not only a physical asset or software but also an intangible asset such as ""technology related

intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how"".

We may also mention that, on this aspect of the matter, the coordinate bench, in assessee's own case for some earlier assessment years, has

decided the issue in favour of the assessee, by observing as follows:

Now we come to the second limb of the issue that is, whether the OEMs have used Qualcomm's patents for the purpose of

making or earning income from a source in India. The Revenue once again heavily relied on the CDMA equipment purchase

agreement between Tata and ZTE and Tata and Motorola to demonstrate that OEMs have used the Qualcomm's patents for the

purpose of making or earning income from a source in India. On the basis of the equipment purchase agreement of 2007, it was

submitted that the two agreements between Indian operators and OEMs make a distinction between sale of equipment and licensing of

software embedded in the firm ware. 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.

Reliance was placed on Clause 19.5 of the agreement with ZTE dt. 19th December, 2007, wherein it is recorded that all licensed

material are the property of the supplier or its suppliers. Hence it is argued that the supplier of OEMs is Qualcomm which supplied the

intellectual property to be used under license for manufacturing of handsets/equipment. It was further submitted that the agreement

between Qualcomm and the OEMs, which was the basis for the AO to assess the income, states in the Preamble that OEMs desired to

obtain licenses of Qualcomm's intellectual property to manufacture and sell subscriber units.

Reliance was placed on the definition of the term 'chip sets' in the agreement, as well as other definitions such as ""CDMA, ASIC

and it was argued that OEMs have given license to use chip sets/ASICs purchased from Qualcomm in manufacturing the

handsets/equipment. It was argued that CDMA technology belonging to Qualcomm is embedded in chip sets which are used by the

OEMs and licensed to Indian customers for further used by them. He further submitted that, if this basic proposition is under dispute,

relying on the decision of the Hon'ble Supreme Court he submitted that the matter needs a more critical examination by someone who

understands CDMA technology.

Clause 5.1 of the license agreement is relied upon and it is pointed out that Qualcomm has granted worldwide licenses under

Qualcomm's Intellectual Property to make, import, use, sell or lease or otherwise dispose of subscriber units and to make components

and use and sell such components and hence it is only software that was licensed by Qualcomm to OEMs. It was further contended that

intellectual property cannot be anything other than chip sets or some other software going to be embedded in the handsets/equipment.

Reliance was also placed on Finance Act, 2012 wherein Explanation IV to S. 9(1)((vi) has been inserted. It was submitted that the

argument that OEM sell copyrighted article or thing and the argument and that they do not give any right in the copyright, is of no

consequence post this amendment as the transfer of any rights in an intellectual property includes transfer of any right to use of a

computer software irrespective of the medium through which it is transferred.

In a nutshell the submissions of the Revenue are that Qualcomm has made available to the OEMs its patented intellectual

property relating to CDMA technology in the form of chip sets/ASIC and that OEMs have inserted these chip sets into the

handsets/network equipment manufactured by them and that these in turn have been licensed to Indian operators for which OEMs

have received a consideration and hence they have a source of income in India.

These arguments of the Revenue are in our view not acceptable for the following reasons:

a. The AO assessed the royalty arising from licensing of CDMA patents by Qualcomm to OEMs. The royalty which is brought to tax by

the AO does not refer to any software being provided. It is not demonstrated by the Revenue that the software is provided as part of

the licensing of Qualcomm patents.

b. 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 OEM's.

c. 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 from 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.

The revenue for the first time before the Tribunal argued that chip sets are purchased by OEMs from Qualcomm and these chip

sets which has embedded software and helps in function of the hardware. This is not the basis on which either the AO or the CIT(A)

proceeded to tax in this case.

It is not necessary for the OEMs to purchase chip sets from Qualcomm only. The OEMs can also purchase the chip sets from a

third party other than Qualcomm. In fact, the AO in his assessment order had specifically held that the income of QCT division from

the sale of chip sets is not assessable and that the assessment is confined to the income received by QTL division i.e. the business

segment of Qualcomm which is involved in licensing of the patents to manufacture the products. We emphasise that what is brought to

tax is the royalty earned from the licensing of patents and not royalty earned on software embedded in the chip sets.

(Emphasis, by underlining, supplied by us)

As evident from the above extracts, while this coordinate bench noted that the case of the revenue is that ""Qualcomm has made available to the

OEMs its patented intellectual property relating to CDMA technology in the form of chip sets/ASIC and that OEMs have inserted these chip sets into

the handsets/network equipment manufactured by them and that these in turn have been licensed to Indian operators for which OEMs have received

a consideration and hence they have a source of income in India"", the coordinate bench dealt only with the question of taxability of software

embedded in the chip set. In paragraph 163 of the coordinate bench's decision, which has been reproduced above, the coordinate bench has dealt with

only software as an intellectual property.

8 5 . The connotations of the expression ""intellectual property"", in our humble understanding, cover much more ground that ""software"" simplicitor and

essentially include use of any patent or patented technology which is embedded in a CDMA handset.

8 6 . Software is an intellectual property, but that cannot be the only intellectual property embedded in a CDMA handset. The patented CDMA

handset technology is clearly one such intellectual property. Let us not lose sight of the fact that technology for mobile communication ""operating

systems using CDMA technology"" were invented by Qualcomm and Qualcomm owns vital patents in respect of the same. A clear corollary of

Qualcomm holding such patents is that unless Qualcomm is paid royalty for such patents, which are utilized in the CDMA handsets, as also in the

operating systems used by the service provider, and are owned by Qualcomm, these handsets and operating systems cannot be used. The royalty is

thus for use of such patented technology while the point of its collection, as a measure of convenience and in consonance with the industry practice, is

from manufacturer when the patented product is put into use by sale. While this argument of the revenue on the consideration for use of ""intellectual

property"" was duly recorded, there is no finding in respect of the same inasmuch as there is no finding to the effect whether or not there was any use

of any patented technology in the CDMA handset in respect of which the OEMs have paid royalty to the Qualcomm.

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 defence on that legal issue primarily consists of the findings of the coordinate bench and on the example given by another

coordinate bench, in the case of Metro & Metro (supra), by way of lease of an asset and the contention that the scope of the that expression must

remain confined to the lease of an asset, as also the contention that we cannot enlarge the scope of controversy before us. We have noted this

defence but then it is only fundamental that examples are only illustrative and not exhaustive whereas the very sentence relied upon by him starts with

the words ""for example"". We are unable to see how such an example could fetter the application to other situations not envisaged by the coordinate

bench. In any case, as we have seen in the earlier discussions even income generated by use of an intangible asset, including patented know-how, is

covered by the scope of expression 'the royalty is payable in respect of ......for the purposes of making or earning any income from any source in

India'.

While on this subject, it is useful to take note of a recent press report, to which our attention was invited by the learned Departmental

Representative vide his note dated 21st November 2014, which is as follows:

Economic Times, New Delhi; November 20, 2014

Delhi HC Asks Micromax to Pay Royalty to Ericsson

Soma Das & Anandita Singh Mankotia; New Delhi:

Co told to pay royalty till the court arrives at a final order; may have to shell out Rs. 10 crore a month

The Delhi High Court has asked homegrown handset maker Micromax to pay a royalty that amounts up to 1% of the selling price of its devices to

Ericsson for using the Swedish equipment maker's patents on technologies that are essential to manufacture the products.

The interim order holds until December 31, 2015, the deadline set by the court to conclude the trial. The Gurgaon based company may have to shell

out about Rs. 10 crore every month at least till that time, said an industry executive. If the final verdict upholds the interim order, that could even dent

the low-cost business strategy of domestic handset and tablet companies by significantly undermining their cost advantage.

A senior executive at a domestic handset manufacturer told ET that in case royalty at 0.8%-1% is applied, as directed in the interim order, it would

shave up to 20% off the profit for these handsets.

Realising this problem, China instituted laws that the total payout for all such patent holders cannot exceed more than 0.017% of the adjusted sale

value of the handsets, thus allowing the Chinese handset makers to produce competitively,"" another executive said.

Micromax declined to comment, saying the matter is still before the court.

Ericsson welcomed the order.

Industry experts said the development could prove counter-effective for Prime Minister Narendra Modi's Digital India push. ""Digital India requires to

encourage the domestic industry to start manufacturing low-cost but high-feature mobile phones in India. However, some of the biggest road blocks

are the policies adopted by patent holders in arm twisting the Indian industry by demanding huge amounts of royalty based on totally discriminatory

policies,"" an executive at a handset manufacturer said, requesting anonymity.

Last year, Ericsson sued Micromax claiming about Rs. 100 crore in damages stating that it had to take legal recourse after three years of negotiations

failed to yield a license agreement on standard-essential patents, or patents on technologies that are standards for certain equipment such as mobile

phones. Ericsson had alleged that India's largest domestic handset maker has refused to enter into a licensing agreement covering its patented

innovations across several wireless technology standards such as GSM, EDGE and third generation (3G). This is the first high-profile case in an

intensifying mesh of litigation in the technology space around essential patents.

Subsequently, Ericsson also entered into litigation with other handset makers including Intex and Gionee over the same issue.

Despite exiting the handset space, Ericsson continues to be among the biggest patent holders in the mobile industry along with Nokia, Qualcomm and

Samsung. ""This is big step forward in protecting intellectual property rights in India. By fixing interim rates, India has recognised standard essential

patents"" said Prathiba Singh, senior advocate, who is representing Ericsson in this case. Ericsson has argued that it has similar payment arrangements

with many handset makers globally and to support the claim, it furnished at least 26 licence agreements. The court, after perusing the royalty rates

contained in those agreements, arrived on this rate, which both parties agreed upon, according to the order.

Micromax has also made clear that it has little operations overseas and when it plans to expand to other markets, it will negotiate royalty rates

separately with Ericsson under global guidelines.

Micromax seems to have agreed to this arrangement for now because it was already depositing almost double that amount in the court since last year,

said a senior executive at a rival handset firm. It has also challenged the validity of many of Ericsson's patents in Indian courts, he added.

Industry executives on condition of anonymity told ET that negotiations between Micromax and Ericsson got stuck mainly because the former wanted

to link the payment to the value of the chipset while the latter insisted that it be a share of the hand-set value as is the case globally.

A patent expert said standards patent holders such as Ericsson should make more disclosures about their licensing agreements as the patented

technology under consideration is a 'standard' here, which shouldn't be treated as a purely private property. ""Courts and the government must force

the standard patent holder and the standard-setting organisation to publicly disclose its licensing terms with third parties. A standard cannot be used to

hold others to gun point and extract excessive royalties,"" said Shamnad Basheer.

Essential patent wars in courtrooms worldwide are not in the technology space as tech czars Apple and Samsung, HTC and Nokia have locked horns

alleging abuse of such patents across different jurisdictions. However, there is a significant difference between the bigbang global patent wrangles and

the Ericsson-Micromax case here. While in global patent fights, both accusing and defending players are technology owners, in the Ericsson-

Micromax case, the Indian player is not an owner of technology, while the Swedish player has exited the devices market and is no longer directly

competing in the handset or tablet market with Micromax.

Learned Departmental Representative has submitted that the following points are worth consideration, in connection with the above, in regard to

the appeals before us:

• Hon'ble Delhi High Court has directed that the Indian entity to pay interim royalty, pending the final decision, on the imported consignment of the

patented products. The plea of the defendants that they are not required to pay any royalty on mere import of products has not been accepted.

• Hon'ble Delhi High Court has gone by the premise that the royalty is paid on use of the patented products. Ericson has patented various products

which are made outside Indian but are only used in India.

Learned counsel for the assessee, on the other hand, submitted that neither the full text of this decision is available nor there is anything to

demonstrate that Hon'ble Delhi High Court was dealing with a materially similar situation. It is also submitted that a press report cannot be legally

sustainable basis of any adjudication by a judicial forum.

Undoubtedly, there cannot be any adjudication on the basis of a press report, nor does this report, in any way, demonstrate that in the case of this

assessee also the royalty was for use of patents or patented products, and not for use of patents in the manufacturing process. However, what this

development does show that the payment of royalty on the basis of use of patented product in a jurisdiction is one of the, even if not universally

applicable, criterion. The claim of the revenue, to the effect the payment was for use of intellectual properties embedded in the handsets even though

the royalty is collected from the OEM, cannot thus be simply brushed aside as beyond the realm of possibilities.

We may also add that no doubt the application of second limb of Section 9(1)(vii)(c) was not examined in sufficient detail by the Assessing Officer

but then as long as the subject matter of assessment remains the same as was dealt with by the Assessing Officer, the Tribunal is duty bound to deal

with all the related legal aspects of the matter. The proceedings before the Tribunal are not adversarial proceedings. While the subject matter of

dispute before the Tribunal may not be enlarged, and, to that extent, the case of the revenue authorities cannot be improved, there is no bar on

examining all the related factual and legal aspects of the subject matter of issue before the Tribunal. The subject matter of dispute before us is

taxability of 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(1)(vi)(c) or in second limb of Section 9(1)(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):

15 . It is evident from above that AO rejected the assessee's claim on the ground that earth station by itself is not an undertaking. He did not go into

other requirements of s. 80-IA. The matter ultimately travelled to the Tribunal which was required to record a finding that all the

requirements/conditions of above provisions are satisfied to allow relief to the assessee. The issue before the Tribunal was whether the assessee was

entitled to relief under the above provision. It was bounded duty of the Tribunal to consider and decide the above issue and to examine that each of the

conditions specified by the section is satisfied. The question relating to satisfaction of the conditions could even be raised by the respondent

(Department) in appeal before the Tribunal and it was so raised. The position on this question, relating to power and jurisdiction of the Tribunal is more

than clear as per decision of Allahabad High Court in the case of Phool Chand Gajanand vs. CIT (1966) 62 ITR 232 (All) which has been applied by

Full Bench of jurisdictional High Court in the case of Ahmedabad Electricity Co. Ltd. vs. CIT (1992) 106 CTR (Bom)(FB) 78 : (1993) 199 ITR 351

(Bom)(FB). Their Lordships have discussed in detail, as to how powers of the Tribunal are to be exercised. In the case of Hukumchand Mills Ltd. vs.

CIT (1967) 63 ITR 232 (SC), which has been followed by the Hon'ble Bombay High Court's Full Bench judgment in the case of Ahmedabad

Electricity Co. Ltd. (supra), their Lordships of Hon'ble Supreme Court were in seisin of a situation in which it was argued before their Lordships that

the Tribunal was not competent to go into the question whether the provisions of para 2 of Taxation Laws Order were applicable to the present case

and the respondent (i.e. the Revenue) should be allowed to raise this contention for the first time before the Tribunal"". In essence, therefore, one of

the qualifying conditions, which was not considered by the AO or CIT(A), was disputed for the first time before the Tribunal. It was in this

background, and dealing with the powers of the Tribunal under s. 33(4) of the 1922 Act, which are exactly the same as under s. 254(1) of the present

IT Act, 1961, Hon'ble Supreme Court, inter alia, observed as follows:

.......Tribunal had jurisdiction to permit the question to be raised before it for the first time in appeal. The powers of the Tribunal, in dealing with the

appeals are expressed in s. 33(4) in the widest possible manner..........

The word 'thereon' in s. 33(4) of the 1922 Act, of course, restricts the jurisdiction of the Tribunal to the subject-matter of appeal. The words 'pass

such orders as the Tribunal think fit' include all the powers (except possibly enhancement) which are conferred on AAC under s. 31............

1 0 . In the present case, the subject-matter of appeal before the Tribunal was the question as to what should be the proper WDV of the building,

machinery, etc. of the assessee for calculating depreciation under s. 10(2)(vi) of the Act. It was certainly open to the Department, in the appeal filed

by the assessee before the Tribunal, to support the findings of the AAC with regard to WDV on any of the grounds decided against it................ We

are accordingly of the view that the

Tribunal had jurisdiction to entertain the argument of the Department in this case and direct the ITO to find out whether any depreciation was actually

allowed...................and whether such depreciation should be taken into account for computing the WDV.

The facts of the case before us are materially similar to the above case before the Hon'ble Supreme Court. In the present case also, the condition

regarding providing eligible telecommunication services was not discussed by the AO and the CIT(A) and yet this issue was taken up by the

Departmental Representative before us. The same was the situation in Hukumchand Mills's case (supra) wherein, as noted by the Hon'ble Supreme

Court in para 4 of their judgment, ""it was urged before the Tribunal by the Department that although the ITO had not considered the provisions of para

2 of s. 2 of Taxation Laws Order, the said provisions were applicable in the present case and certain amounts of depreciation, which are allowed

under the Industrial Tax Rules, which had the force of law in Indore State, were required to be deducted in arriving at WDV of the assets of the

assessee"". This plea was accepted by the Tribunal and the Hon'ble Supreme Court confirmed the action of the Tribunal in doing so. In this view of the

matter, not only that admitting the plea regarding the assessee not rendering eligible telecommunication services does not suffer from any mistake

apparent on record, but it does not suffer from any mistake at all. The stand so taken by the Tribunal is clearly in conformity with the law laid down by

the Hon'ble Supreme Court. Once the Tribunal is called upon to examine as to whether or not the assessee is entitled to a claim of deduction, there is

no escape from its duty to ensure that the requirements of section are fully complied with and the Tribunal cannot shun away from its duty to examine

all the eligible conditions merely on the ground that some of these conditions are not specifically rejected by the authorities below. As is clearly evident

from the observations made by the AO, which have been extracted hereinbefore, the claim is rejected on one ground but such a rejection cannot be

construed to mean that all other conditions are taken as complied with. As far the observations made by the AOs in the course of assessments for the

other assessment years, it is not open to us to deal with those assessment years at this stage.

It is also contended that the appellant cannot be worse off as a result of being in appeal but that argument proceeds on a factual misconception in

as much as the assessee was never allowed the deduction, even partly, under s. 80-IA by any of the authorities below and, therefore, no disadvantage

is caused to the assessee by being in appeal. So far as the issue in appeal was concerned, the position was exactly the same before and after the

appeal was disposed of by the Tribunal, i.e., the assessee was disallowed deduction under s. 80-IA.

In the light of above, assessee's contention that it was not required to satisfy the condition regarding rendering ""eligible telecommunication

services""' because no such objection was raised by the Departmental Representative, and as it was not raised by the AO in the assessment order, is

devoid of any merit. Once a legal claim was before the Tribunal, it was duty bound to consider and examine that all the conditions are satisfied before

relief is allowed. This is precisely what the Tribunal has done and assessee is not justified in contending that question of basic or cellular services could

not have been examined by the Tribunal.

In this view of the matter, and respectfully following the special bench decision, we hold that since the AO had brought the impugned royalties to

tax under the first limb of Section 9(1)(vii)(c), there was no occasion to hold that the income in question could also be brought to tax under second limb

of Section 9(1)(vii)(c) but that does not denude this Tribunal of the powers, as also corresponding duty, to examine that aspect of the matter or have

that aspect of the matter is examined.

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 or in the use of the patented technology embedded in the CDMA handsets. However, as this

aspect of the matter, no matter how fundamental it is, is a highly technical aspect which may also need benefit of expert advice, we deem it fit and

proper to remit it to the file of the Assessing Officer for recording necessary factual findings after obtaining technical reports on the same, collecting

such details, as may be necessary, and after giving due opportunity of hearing to the assessee and confronting the assessee with all such material as

he may use against the assessee, by way of a speaking order.

We may also refer to the relevant provisions for taxability under the Indo US tax treaty which is reproduced below for ready reference:

ARTICLE 12

Royalties and fees for included services

Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that

other State.

However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of

that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall

not exceed:

(a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article (other than services

described in sub-paragraph (b) of this paragraph):

(i) during the first five taxable years for which this Convention has effect,

(A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is

the Government of that Contracting State, a political sub-division or a public sector company; and

(B) 20 per cent of the gross amount of the royalties or fees for included services in all other cases; and

(ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and

(b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary

and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of

the royalties or fees for included services.

The term 'royalties' as used in this Article means:

(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including

cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent,

trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including

gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and

(b) payment of any kind received as consideration for the use of, or the right to use, the industrial, commercial, or scientific equipment, other than

payments derived by an enterprise described in paragraph

1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 or Article 8.

For purposes of this Article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any

technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is

received; or

(b) make available technical knowledge, experience, skill, know-how,

or processes, or consist of the development and transfer of a technical plan or technical design.

5 . Notwithstanding paragraph 4, 'fees for included services' does not include amounts paid:

(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in

paragraph 3(a);

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in international traffic;

(c) for teaching in or by educational institutions;

(d) for services for the personal use of the individual or individuals making the payment; or

(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as

defined in Article 15 (Independent personal services).

The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a

Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent

establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or

fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business profits) or

Article 15 (Independent personal services), as the case may be, shall apply.

7 . (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-

division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a

resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to

pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent

establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent

establishment or fixed base is situated.

(b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the

use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the

royalties or fees for included services shall be deemed to arise in that Contracting State.

8 . Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the

amount of the royalties or fees for included services paid exceeds the amount which would have been paid in the absence of such relationship, the

provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to

the laws of each Contracting State, due regard being had to the other provisions of the Convention.

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)(a) but ""the

royalties relate to the use of, or the right 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.

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.

9 9 . 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 discussions, is a necessary for proper adjudication on

the grievances raised by the assessee. In the absence of such findings, in our humble understanding, it is not appropriate to decide the matter one way

or the other. We, therefore, remit the matter to the file of the Assessing Officer in terms of our directions set out earlier in this order.

100 . Ground Nos. 1 to 3 are thus allowed for statistical purposes in the terms indicated above.

As we part with these grounds, we may mention that our disposal of these grounds is not quite the same as was done by a coordinate bench in

assessee's own case for the preceding assessment years, but then we have, in view of the facts subsequently coming to notice i.e. about taxability of

the OEMs in India, and, in view of the Special Bench decision in the case of Tata Communications Ltd. (supra) as also full bench decision of Hon'ble

Bombay High Court in the case of Ahmedabad Electricity Co. Ltd. vs. CIT (1993) 199 ITR 351) - which was no brought to the notice of the

coordinate bench, considered it appropriate to direct further examination of facts. It is only after the actual facts of the case are settled, in terms of

our directions above, that a decision can be taken on these grievances of the assessee. There is thus no occasion, as on now, to take a stand a

contrary to the stand taken by the coordinate bench, and, therefore, reference to Hon'ble President for constitution of larger bench would have been

premature. The question of agreeing or not agreeing with the conclusions arrived at by the coordinate bench can arise only after the factual findings,

as directed earlier in this order, are recorded, and it is only then that the bench, adjudicating on the appeal after findings of fact are recorded, will have

to take a call as to whether it is a fit case for recommending constitution of special bench or whether the coordinate bench would like to, in its

considered opinion, follow the esteemed views taken by another coordinate bench in assessee's own case for the assessment years 2000-01 to 2004-

We leave it at that.

That takes us to ground No. 4, as raised by the assessee, against holding that the revenues received by the Appellant under the BREW Operator

Agreement and BREW Carrier Agreement is taxable as royalty income in India under section 9(1)(vi) of the Act and Article 12 of the India-USA tax

treaty. The assessee contends that in doing so, the AO 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'.

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 share for application software that are downloaded. On these facts, the

Assessing Officer proceeded to bring the same to tax by observing as follows:

I have perused the submissions made by the assessee. However, this hypothesis is not correct as Software is licensed and not sold. Furthermore as

per the terms of the BOA as reproduced above, the assessee has given TATA Teleservices the license to reproduce and install the copyrighted

software. The license fee for the right to reproduce and use the BREW Software cannot be anything else but royalty. There is a distinction between

sale and license since in a sale no agreement is entered into between buyer and seller, however in case of licensing of software an agreement is

entered into between copyright holder and the user.

Grant of license is granting the user a right to use the software. The assessee's submission that in cases where rights acquired are limited and

necessary only to enable the user to operate the program and allow the user to copy the program on the user's computer hard drive, payments would

not be treated as towards royalty but as towards business income is not acceptable. The assessee itself agrees that payment is made for only the right

to use the software and no other title or interest in the software is transferred to the payer. There is no transfer of ownership rights. Various decisions

of the Supreme Courts and High Courts clarify that sales constitutes out and out transfer, whereas in license there is only right to use. Some of these

decision are at 69 ITR 692 (SC), 236 ITR 314 (ASC), 811 ITR 243, 671 ITR 227. Thus this reasoning of the assessee has no legal or factual basis. In

this case, the user only has a right and gets a license to use the software.

Even in the OECD commentary it is mentioned that the character of payments received in transactions involving the transfer of computer software

depends upon the nature of rights that the transferee acquires under the particular arrangement, regarding the use and exploitation of the program.

The rights in computer programme are in the form of intellectual property. It has further mentioned ""payments made for the acquisition of partial right

in the copyright (without the transferor fully alienating the copyrights) will represent a royalty, where the consideration is for granting of rights to use

the program in a manner, 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

The assessee did raise a grievance before the DRP but without any success. The assessee is not satisfied and is in appeal before us.

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.

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 Vs. Infrasoft Limited (2014) 264 CTR 329) wherein Their Lordships have,

inter alia, observed as follows:

The Licensing Agreement shows that the license is non-exclusive, non-transferable and the software has to be uses in accordance with the

Agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and

associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and

other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device,

which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence

Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by

any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. 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.

The Licensing Agreement shows that the license is non-exclusive, non-transferable and the software has to be uses in accordance with the

agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the software and

associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and

other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorise at ion device,

which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence

Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by

any parent, subsidiary or affiliated entity 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.

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

incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted

article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright.

Copyright or even right to use copyright is distinguishable from sale consideration paid for ""copyrighted"" article. This sale consideration is for purchase

of goods and is not royalty.

8 8 . The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are

specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival

copy is an essential step in utilizing the program. Therefore, rights in relation to theseb acts of copying, where they do no more than enable the

effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these

types of transactions would be dealt with as business income in accordance with Article 7.

There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a

copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the

copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this

angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of

the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted

product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to

any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is

contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein 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 coextensive with the owner/transferor who divests himself of the rights he possesses pro tanto.

9 0 . 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

as the owner would be in a position to do.

There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is

for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under

the DTAA.

9 2 . The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copyrighted

software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to

whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information

for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of

Infrasoft. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-

licence or transfer the copy of software to any third party without the consent of Infrasoft.

9 3 . The licensee has been prohibited from copying, de-compiling, de-assembling, or reverse engineering the software without the written consent of

Infrasoft. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the

software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software.

The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting

information and licence authorization device to Infrasoft.

9 4 . The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a

copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the

payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the

definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with

the owner and the Licensees have acquired a computer programme for being used in their 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.

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 for the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial.

96 . The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA.

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.

We are not in agreement with the decision of the Andhra Pradesh High Court in the case of SAMSUNG ELECTRONICS CO. LTD. (SUPRA)

that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to

copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute

royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was

only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was

necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision

because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss,

destruction or damage has been held by the Delhi High Court in DIT v. M/s. Nokia Networks OY (Supra) as not amounting to acquiring a copyright in

the software.

In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the

copyrighted material and does not give rise to any royalty income.

Learned Departmental Representative, even as he vehemently relied upon and supported the stand of the authorities below, could not point out

any distinguishing feature in this case.

In view of the above discussions, and respectfully following the esteemed views of Hon'ble jurisdictional High Court, we uphold the grievance of

the assessee and direct the Assessing Officer to delete the impugned addition of Rs. 2,52,70.569. The assessee gets the relief accordingly.

Ground No. 4 is thus allowed.

No other grievance was pressed before us.

In the result, the appeal for the assessment year 2007-08 is partly allowed in the terms indicated above.

I.T.A. No. 4608/Del/2011

Assessment year 2008-09

We now move to the ITA No. 4608/Del/11, i.e. assessee's appeal against the order dated 18th August 2011, in the matter of assessment under

section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 for the assessment year 2008-09.

Learned representatives fairly agree that whatever is decided for the assessment year 2007-08 will equally apply for this assessment year as well

as all the material facts and circumstances of the case, as also grievance of the assessee, are the same.

In view of the above position, and following our decision for the assessment year 2007-08, we hold that the observations made in the order for the

said year will apply mutatis mutandis to this assessment year as well. The issue regarding taxation of royalty in respect of the CDMA handsets and

equipment thus stands restored to the file of the Assessing Officer, and the addition in respect of invoicing the revenues under the BREW agreement

thus stand deleted.

In the result, the appeal for the assessment year 2008-09 is also partly allowed in the terms indicated above.

I.T.A. No. 3701 and 3702/Del/2009

Assessment year 2005-06 and 2006-07

That leaves us with the ITA Nos 3710 and 3702/Del/2009, i.e. appeals filed by the assessee for the assessment years 2005-06 and 2006-07

against the consolidated order dated 26th June 2009 passed by the CIT(A), in the matter of assessment under section 143(3) of the Income Tax Act,

1961, which was a consolidated order for the assessment years 2000-01 to 2006-07.

Vide order dated 31st January 2013, a coordinate bench of this Tribunal has already adjudicated upon this CIT(A)'s order, though only for the

purposes of assessment years 2000-01 to 2004-05, so far as the addition in respect of royalty income in respect of the CDMA handsets and equipment

is concerned and right now the matter is pending for adjudication before Their Lordships of Hon'ble High Court. One of the arguments raised by the

learned Departmental Representative before us is that the order of the CIT(A) has, for all practical purposes, merged in the order passed by the

coordinate bench, and, therefore, it is no longer open to us to adjudicate on the same. It is thus suggested that propriety requires that all the appeals, in

respect of which a common order is passed, should be heard together and even the appeals, which are already disposed of, should be recalled for that

purpose. On the other hand, learned counsel for the assessee has submitted that there is no merger of the CIT(A)'s order in the coordinate bench's

order, and, therefore, the point being made by the learned Departmental Representative is devoid of legally sustainable merits.

We are indeed unable to see any legally sustainable merits in the stand of the learned Departmental Representative. If they were really aggrieved

of the stand so taken by the coordinate bench, the right course of action for them was to raise that point before the coordinate bench, either during the

hearing itself or by way of a miscellaneous petition later, but that has not been done. In such circumstances, these appeals are to be disposed of on

merits.

119 . The issues raised in these appeals are exactly the same as raised in the assessment year which we have disposed of above by way of a detailed

order. Accordingly, the observations which we have made for the assessment year 2007-08 will also apply mutatis mutandis to these assessment

years as well, and the Assessing Officer will give effect to the same accordingly.

In the result, the appeals for the assessment years 2005-06 and 2006-07 are also partly allowed in the terms indicated above.

To sum up, all the four appeals are partly allowed in the terms indicated above. Pronounced in the open court today on 20th day of February,

2015.