QUALCOMM INCORPORATED, USA V. DCIT, CIRCLE- 3(1)(1), INTL. TAXATION, NEW DELHI

ITA 7894/DEL/2017

AI Insights

The case involves Qualcomm Incorporated, a non-resident company, challenging the taxability of royalty income received from Original Equipment Manufacturers (OEMs) on subscriber units and infrastructure equipment. The Income Tax Department had taxed these royalties, asserting that the income accrued in India as the technology was used in the country. Qualcomm argued that the royalties were not taxable in India as the OEMs were not using the patents for any business in India, and the income did not arise from a source in India. The Tribunal examined the agreements between Qualcomm and the OEMs, the nature of the technology used, and the specific provisions of the Income Tax Act and the DTAA.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 116258 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 26-10-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 28-12-2017
• Other Referred Cases: Qualcomm Incorporated vs. DCIT, Ericsson A.B. vs. DCIT, Nokia Networks vs. DCIT
• Laws Referred To: Income-tax Act, 1961, India-USA Double Taxation Avoidance Agreement (DTAA)
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Residential status; Double taxation relief; Deemed to accrue or arise in india; Additional evidence; Permanent establishment; Fair market value; Reason to believe
• Section: 143(3); 5(2); 264; 192; 43; 48; 9(1); 9(1); 9(1); 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’, NEW DLEHI BEFORE SHRI G.S. PANNU, PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA Nos. 7894/Del/2017 & 7559/Del/2018 And SA Nos. 309 & 304/Del/2020 Assessment Years: 2014-15 & 2015-16 Qualcomm Incorporated USA, SRBC & Associates LLP, Oval Offisce, 18, Ilabs Centre, Hitech City, Madhapur, Hyderabad. PAN: AAACQ1484H Versus DCIT, Circle 3(1)(1), New Delhi (Appellant) (Respondent) Assessee by : Sh. Percy J. Pardiwala, Sr. Counsel, Sh. Nishant Thakkar, Advocate & Ms. Jasmin Amalsadwala, Advocate Revenue by : Sh. Gangadhar Panda, CIT(DR) Sh. Sanjay Kumar, Sr. DR Date of hearing : 24.03.2023 Date of pronouncement : 13.06.2023 ORDER PER SAKTIJIT DEY, J.M.: Captioned appeals have been filed by the assessee challenging the final assessment orders passed u/s. 143(3) read with section 144C(13) of the Income-tax Act, 1961 pertaining to assessment years 2014-15 ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 2 and 2015-16, in pursuance to the directions of learned Dispute Resolution Penalty (DRP). 2. The common issue arising in both the appeals relates to taxability of royalty income received by the assessee on subscribers units from original equipment manufacturers (OEMs) located outside India and royalty income on infrastructure equipments. Since the facts involved in both the appeals are common, for the sake of brevity, we will discuss the facts as involved in ITA No. 7894/Del/2017 for the assessment year 2014-15. 3. Briefly, the facts are, the assessee is a non-resident corporate entity incorporated in United States of America (USA) and tax resident of USA. As stated by the Assessing Officer, the assessee is a world leader in 3G/4G and next generation wireless technologies. The assessee holds a number of patents in the field of manufacture of subscriber units and network equipments capable of operating on Code Division Multiple Access (CDMA) technology. Basically, the assessee earns revenue from two divisions operated by it, viz., Qualcomm CDMA Technology (QCT) division, which develops and supplies CDMA based integrated circuits ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 3 and systems software for wireless voice and data communication, multimedia functions and global positioning system products and Qualcomm Technologies Licensing (QTL) division, which grants license to manufactures of wireless products for the right to use qualcomm’s intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products. In the assessment year under dispute, the assessee earned the following incomes : S. No. Nature of Income Amount (Rs) 1. Royalty from Datawind Innovations Pvt. Lt. (OEMs) 29,67,500/- 2. Royalty from Innominds Software Pvt. Ltd. (OEMs in India) 29,67,500/- 3. Royalty on subscriber units (paid by OEMs outside India) 435,54,84,680/- 4. Royalty on Infrastructure equipments 5,36,96,200/- Total 441,51,15,880/- 4. Royalty income aggregating to Rs.59,35,000/- received from OEMs carrying on business in India through their Permanent Establishments (PEs) were offered to tax in India. Whereas, the royalty on subscriber units from OEMs outside India and royalty on infrastructure equipments received outside India were not offered to ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 4 tax on the reasoning that no taxable event has happened in India in terms of section 9(1)(vi) of the Act as well as Article 12 of India-USA Double Taxation Avoidance Agreement (DTAA). The Assessing Officer, however, was not convinced with the submissions of the assessee. After calling upon the assessee to furnish various details relating to royalty received from OEMs and examining asessee’s submissions, the Assessing Officer was of the view that the royalty received by QTL division of the assessee from OEMs doing business in India by selling their CDMA products, such as, handsets and other equipments is taxable as royalty income under section 9(1)(vi)(c) of the Act. Though, the assessee tried to impress upon the Assessing Officer that neither of the limbs of section 9(1)(vi)(c) of the Act is applicable to the assessee, however, the Assessing Officer remained unconvinced. Even, assessee’s submission that the issue is covered by the decision of Tribunal in assessee’s own case for assessment years 2000-01 to 2004-05 was not accepted by the Assessing Officer. From the details furnished by the assessee, the Assessing Officer noticed that 49 OEMs have reported sales to India during the year under consideration. Referring to the past assessment history of the assessee, the Assessing Officer observed that ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 5 in assessment year 2012-13, the Assessing Officer had examined the issue in detail and held that the royalty from use of CDMA technology in the products sold in India arise in India because the subscriber units (mobile handsets) and the infrastructure equipment, in which CDMA technology is embedded, are utilized in India. He observed that handsets or equipments by themselves will be of no use unless the network service provider installs the infrastructure equipment. Further, he observed that in assessment years 2005-06 to 2008-09, the royalty paid by the OEMs to assessee was determined as royalty income at the hands of the assessee accruing and arising in India. The Assessing Officer observed, while deciding assessee’s appeals on the issue, the Tribunal had restored the matter back to the Assessing Officer for re- examination after obtaining opinion of technical experts. He observed, in pursuance to the directions of the Tribunal, the Assessing Officer has obtained opinion of the technical experts, wherein, the technical experts have observed that OEMs are utilizing the CDMA technology by acquiring the chip set from the assessee and incorporating them in handsets manufactured by them. They further observed that technology is being used in India by the service providers for the benefit of the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 6 Indian customers. Thus, based on the assessment order passed for the assessment year 2012-13, the Tribunal’s order for assessment years 2005-06 to 2008-09 and the opinion of the technical experts, the Assessing Officer ultimately concluded that the OEMs have PE in India and the intellectual property is being used through PEs to earn revenue from India. He held that the intellectual property of the assessee, i.e., assembly, module, modem card including CDMA modem etc. is not manufactured by OEMs but it is manufactured by the assessee with its patent technology. He observed, the said intellectual property is provided to OEMs to incorporate or to embed in the equipments such as modem etc. manufactured by OEMs. He observed, though, the patent technology is not used by the OEMs, but the same is used by the end- user and in the instant case the end-user is in India. Hence, the technology is used in India and the royalty paid by the OEMs to the assessee, which was calculated on the number and sale consideration of subscribers units, i.e., modem etc. and equipments in India, is sourced from India. Therefore, the royalty paid by OEMs to the assessee is taxable as royalty income both under section 9(1)(vi)(c) of the Act as well as Article 12(7) of India-USA DTAA. Accordingly, he brought the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 7 amount to tax. Though, against the draft assessment order the assessee raised objections before learned DRP, however, the decision of the Assessing Officer was upheld. 5. Before us, learned counsel appearing for the assessee submitted that the assessee itself is not the owner of CDMA Technology, which was developed by a collaborative group known as 3 rd Generation Partnership Project 2 (3GPP-2). He submitted, the assessee merely holds a large number of patents pertaining to CDMA technology. He submitted, the wireless telecom service providers in India are not under any contractual obligation to obtain approval of the assessee to use the CDMA products. However, if a manufacturer wishes to manufacture subscriber units or network equipments adopting the technology patented by the assessee, it is required to obtain a license from the assessee. He submitted, the end-customer, such as, the network carriers or individuals using the subscriber units do not deal with the assessee. He submitted, as per agreement between the assessee and OEMs, the OEMs make lump sum payment at the time of entering into the patent license agreement followed by a running payment computed on the basis of selling price of such subscriber units or network equipments. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 8 He submitted, except in the case of OEMs who carry on business in India through PE, in respect of OEMs located outside India, the activity relating to accrual of royalty on the manufacture of subscriber units or network equipment, happens outside India. He submitted, royalty is payable by the OEMs to the assessee irrespective of whether OEMs receive the sale consideration. He submitted, royalty is payable to assessee even in cases where OEMs use the manufactured subscriber units and network equipments for their own use. Thus, the receipt of royalty by the assessee is independent of the recovery of sale proceeds by OEMs. He submitted, payability of royalty based on sale price is merely a measure of royalty and nothing more. 6. He submitted, the patents held by the assessee in the field of manufacture of subscriber units and network equipments are generic in nature, in the sense that, the subscriber units and network equipments can be used anywhere in the world and are not India-specific. He submitted, even the license agreement entered with foreign OEMs are not geography specific and foreign OEMs could sell the products anywhere in the world. Further, he submitted, the functionalities such as locking of the phone to a particular network service provider or ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 9 incorporating local languages or ringtones etc. have no connection with the patents of the assessee and no portion of the royalty is attributable to such functionalities. He submitted, the burden lies on the Revenue to prove that the OEMs have utilized the patents licensed by the assessee in India so as to bring to tax the royalty income. He submitted, this ratio has been laid down by the Tribunal in assessee’s own case for the assessment years 2000-01 to 2004-05 as well as in assessment years 2009-10 to 2012-13. He submitted, the Assessing Officer has not brought any fact or material on record to prove that the OEMs have utilized the patents of the assessee in India to bring to tax the royalty income. 7. He submitted, in assessment year 2000-01 to 2004-05, the Tribunal held that the foreign OEMs do not carry on any manufacturing activity in India and therefore, the royalty paid by the foreign OEMs cannot be taxable under the first limb of section 9(1)(vi)(c) of the Act. He submitted, even in its decision for the assessment year 2005-06 to 2008-09, the Tribunal has concluded that as long as patents are used in the manufacturing process which has taken place outside India, such royalty cannot be taxed in India. He submitted, while deciding the issue ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 10 in assessment years 2009-10 to 2012-13, the Tribunal has observed that where no evidence was brought on record by the Assessing Officer to establish that the OEMs are carrying on business in India, in which patents of assessee were used, such income cannot be taxed in India. He submitted, in the impugned assessment years, the Assessing Officer has not brought any evidence on record to prove that the OEMs carry on business in India, in which, patents of the assessee are used. He submitted, the conclusion drawn by the Assessing Officer that the OEMs carry on business in India is based on the responses received from the Assessing Officers of some of the OEMs during the assessment proceedings of assessment year 2010-11 and not of the impugned assessment years. 8. He submitted, while putting much emphasis on the Tribunal’s orders for the assessment years 2005-06 to 2008-09, restoring the issue to the Assessing Officer, the Assessing Officer has failed to notice that the Tribunal while directing for obtaining technical opinion, has recorded that the enquiry is relevant only for the assessment year 2010- 11 since, thereafter the locking of subscriber units stopped and the subscriber units available were open market handsets, which are not ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 11 locked to any specific service provider. He submitted, the Assessing Officer has plainly placed reliance on the opinion of the technical experts without realising that the expert opinion was for the period 2010-11, after which open market handsets were launched in India discarding the old system of locking of subscriber units to any network carrier. Thus, he submitted, the report of the technical experts is of no consequence in so far as the present assessment years are concerned. 9. Without prejudice, he submitted, the technical opinions nowhere suggests that the locking of the subscriber units to the carrier has any connection with the patents of the assessee. Therefore, he submitted, the entire technical opinion analyses the technology that goes into manufacture of a chipset. He submitted, the chipsets are manufactured by the assessee and sold by OEMs. No license to manufacture chipsets is granted to any of the foreign OEMs, which are the subject matter of assessment. He submitted, the income from sale of chipset is part of a separate division, viz., QCT division, hence, not the subject matter of assessment, as the subject matter of assessment is royalty income earned by the assessee from licensing of patents to manufacturers of subscriber units and network equipments, which is in the QTL division. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 12 Further, he submitted, there are many factual inaccuracies in the observations of the Assessing Officer, as he has observed that assembly, module, modem including the CDMA modem etc. is not manufactured by the OEMs but it is manufactured by the assessee with its patent technology. Whereas, he submitted, the license agreement, under which royalty is paid by the foreign OEMs to the assessee is for the manufacture of those very items, i.e., subscriber units. Further referring to Assessing Officer’s observation that royalty income accrues in India, he submitted, the assessee does not earn any royalty from the end user. End-user is purchaser of a product manufactured by OEMs using the patents of assessee, for the use of which the OEMs pay royalty to the assessee. Therefore, the end-user has no role to play or has no privity of contract with the assessee. Neither the assessee can call upon the end user to pay any royalty nor is the end user uses the subscriber unit under the permission or license of the assessee. As regard the basis for payment of royalty, ld. Counsel submitted, the mechanism of computing royalty on sale of subscriber units in India is just a measure, hence, cannot be considered for determining the source of income. As regards reliance placed by the Assessing Officer on the decision of Hon’ble ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 13 Supreme Court in the case of GVK Industries (54 taxmann.com 347), ld. Counsel submitted, the said decision is of no relevance as the Hon’ble Supreme Court was concerned with the interpretation of section 9(1)(vii)(b) and not section 9(1)(vi)(c) of the Act. Further, he submitted, in that case, the burden was on GVK Industries to establish that it has used the service of foreign merchant banker for a business outside and therefore was covered by the exclusion contained in section 9(1)(vii)(b) of the Act. Whereas, he submitted, in case of the assessee, the burden to show that royalty income was for the use of patents by the foreign OEMs in a business carried on by them in India, is on the Revenue, which the Revenue failed to discharge. Further, he submitted, in case of GVK Industries, Hon’ble Supreme Court has held that for the fees to be taxable in India, the services should be utilized in India. He submitted, in assessee’s case, the patents were utilized in the manufacturing activities undertaken outside India by the OEMs and no evidence has been brought on record by the Revenue to prove otherwise. Thus, he submitted, since the issue is squarely covered by the decisions of the Tribunal in assessee’s own cases, the additions should be deleted. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 14 10. Learned Departmental Representative, in addition to the submissions made at the time of hearing, has furnished a written submission, which reads as under : “4.REVENUE SUBMISSION 4.1 It could be seen that the assessee mostly reiterated before the Hon'ble Bench the arguments as taken before AO/DRP, and also largely relied on the ruling of the Coordinate Bench for AY 2004-05 etc . However, based on the arguments of the Revenue in the same case during the course of hearing for I.T.A. Nos.: 3701 and 3702/Del/2009, 5343/Del/2010 and 4608/Del/ll Assessment years: 2005-06, 2006-07, 2007-08 and 2008-09 dated 20.02.2015 , a number of observations have been made by the Hon'ble Bench , highlighting the additional factual matrix which was not considered in the earlier ruling by the Hon'ble coordinate Bench , before remitting the matter back to AO to first put on record the complete factual matrix of transactions in India , including technical inputs to be obtained from telecom specialists, and then to examine the transactions for taxability under IT Act and Indo-US DTAA. 4.2. Observations made by Hon'ble ITAT in the decision dated 20.02.2015 on taxability of royalty received by assessee hold a strong bearing in deciding the present appeal. It is submitted that the Hon'ble ITAT in the aforesaid decision examined the facts of the case at length, and analysed the contentions of the parties and made various observations. Such observations of the Hon'ble Bench are divided into 4 categories namely (i) Observation relating to the additional facts which were not before the Hon'ble Bench, (ii) Chargeability of Royalty on Use of patents (iii) Applicability of provision of the Act to the transaction (iv) taxability of the transaction under the DTAA. Some of the relevant observations of the Hon'ble Bench on these issues are extracted below: (i) Observations of Hon'ble ITAT on Factual Matrix : Para-30. It would, therefore, appear to us that, in the understanding of Hon'ble AP High Court, the CDMA handsets were service provider specific. Para-33. Whether a CDMA handset, at that point of time, could be used on any CDMA network, in the unfettered discretion of the subscriber, or not, is a purely factual matter. Even as learned counsel for the assessee has relied upon the stand taken by the coordinate bench, which was given on the facts before the coordinate bench, we are unable to find any material to come 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. ........... Judicial system cannot be an exception to this universal rule particularly ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 15 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. (ii) Observations of Hon'ble ITAT on Chargeabilitv of Use of patents as Royalty : Para-38. As the coordinate bench has very rightly held, and we are in full and considered agreement with the coordinate bench on that issue, as long as patents are used in the manufacturing process which has taken place outside India, such a royalty cannot have tax implications in India. Para-39. However, that is not the point here. As a careful analysis of facts before us would show, the subject matter of dispute, in our humble understanding, is the taxation of royalty in respect of use of patents in handsets which have been sold in India. It appears that the royalty which has been paid by the OEM of CDMA handsets is not only royalty for patents used in the manufacturing process, even if any, but predominantly, even if not wholly, for the use of the handsets so manufactured. That aspect of the matter is even more glaring when we realize that the royalty is charged on each handset sold or used and not each handset manufactured. We will, however, come to that aspect of the matter in detail a little later. Para-40.The actual controversy, therefore, is with respect to the royalties for use of 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. Para-41. Thequestion 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 thetax jurisdiction in which the handsets are manufactured, i.e. the situs of manufacture of handsets, or in the tax jurisdiction where the handsets are used, i.e. the situs of use of handsets. Para-55. The event triggering taxation in connection with the patents is thus (i) Granting of a right, license or sub license in a patent, or (ii) sharing of information concerning use or working of a patent. (iii) Observations of Hon'ble ITAT Applicability of Provisions of Domestic Act to the Royalty Payment : Para-56. A plain look at the definition of royalty, in conjunction with Section 9(l)(vi)(c), makes it clear that the taxation of royalties is in the source jurisdiction in which related business is being carried on by a person, rather than the jurisdiction in which he is tax resident, and it extends to, inter alia, "the use of any patent, invention, model, design, secret formula or process or trade- ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 16 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. Para-57. It is important to bear in mind the fact thattaxation 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 knowhow 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 fortiorari, 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. Para-58. It is in this light of the scheme of taxation of royalties as provided in Section 9(l)(vi)(c ), that we have to examine the contextual connotation of payment of royalties for any right, property or information used or service utilized use 'for the purpose of business or profession carried on' by a non-resident in India and 'for the purposes of making or earning any income from any source" by a non-resident in India. Para-71. We find that there is major change in the facts of the case before the coordinate bench vis-a-vis the facts of the case as before us. While there was nothing to suggest that the OEMs were subjected to tax in India in respect of their business income, and this was, as we have noted from the extracts reproduced earlier in this order, one of the factors leading to the conclusion that the OEMs were not carrying on any business, right now we have reasonable evidences to suggest the OEMs in question, who have made payments of the impugned royalty, were carrying on business in India leading to their taxability in India. Para-72. 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. Para-80. In view of the above discussions, even going by the coordinate bench decision in the case of Metro & Metro (supra), the royalty paid by the OEMs to the assessee, if it is held to be in respect of use of patents in CDMA handsets sold in India, will be taxable under second limb of Section 9(l)(vi)(c) but then we have to examine whether or not, as a matter of fact, the royalty paid by the OEMs to the Qualcomm, i.e. the assessee, was for use in the manufacturing process or for use of patents in the CDMA handsets by the end consumer. We will deal with this issue a little later. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 17 Para -87. The question whether or not the payment of royalty was for intellectual property by way of patented technology, other than software, in the CDMA handsets sold in India was thus, perhaps inadvertently, left intact. Learned counsel's defense on that legal issue primarily consists Para - 93. We may also add that no doubt the application of second limb of Section 9(l)(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(l)(vi)(c) or in second limb of Section 9(l)(vi)(c), in our humble understanding, does not make much of a material difference so far as scope of proceedings before us is concerned. As the Assessing Officer held that the said royalty income was taxable under the first limb, he may not have seen any need to examine the application of the second limb of the same clause- though ideally he should have examined that aspect of the matter as well, but then, even if we are to hold that the said income is not taxable in the first limb, it would indeed be appropriate for us to examine remaining limbs of the same legal provision. In support of this proposition, we may refer to the following observations made by a Special Bench of this Tribunal in the case of Tata Communications Limited Vs JCIT [ (2009) 121 ITD 384]: (iv) Observations of Hon'ble ITAT Chargeabilitv to tax of Royalty Payment under DTAA: Para- 97. As evident from a plain reading of Article 13(7)(b), in a situation in which the income of royalty does not arise under Article 13(7)(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. 4.3 Directions of remand to the AO by the Honble Bench in the order dated 20.02.2015 and the findings of the Assessing Officer thereon in the Impugned Assessment Order: Directions in Para-35- In view of all these factors, as also bearing in mind entirety of the case, we deem fit and proper to remit the matter to the file of the Assessing Officer for recording categorical findings in this regard by obtaining expert technical opinion, by recording witnesses, if necessary, of experts and after confronting the assessee with whatever material he brings on record in this respect. It is only after such an exercise has been carried out that a call can be ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 18 taken on whether the stand of the assessee, on this purely factual but highly technical aspect, can be accepted. Directions in Para- 71- We findthat there is major change in the facts of the case before the coordinate bench vis-a-vis the facts of the case as before us. While there was nothing to suggest that the OEMs were subjected to tax in India in respect of their business income, and this was, as we have noted from the extracts reproduced earlier in this order, one of the factors leading to the conclusion that the OEMs were not carrying on any business, right now we have reasonable evidences to suggest the OEMs in question, who have made payments of the impugned royalty, were carrying on business in India leading to their taxability in India. Directions in Para-75- 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. Directions in Para-76- As we part with this issue, we may mention that the coordinate bench in assessee's own case had observed as follows: "A sale to India without any operations being carried out in India would amount to business with India and not business in India. For the business to be carried out in India there should be some activity carried out in India. Thus the argument that if manufacturing is done in one jurisdiction and sales in the other jurisdiction, then there is business in another jurisdiction is devoid of merit". We are in complete agreement with the views so expressed by the coordinate bench. However, that was a case in which not only that there was no material to suggest that any activity is carried out in India, there was no evidence of taxability of income of those OEMs in India. In the present case, however, primary evidence about the 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 AY 2006-07 for computing the royalty income on handsets for AY 2007- 08". The assessee has been behaving in a somewhat evasive manner all along. In these circumstances, in our considered view, the ends of justice require that this matter is restored to the file of the Assessing Officer for ascertaining correctness of foundational facts furnished by the assessee to the effect that the OEMs were not carrying on any business in India, which, prima facie, seems to be highly doubtful even if not conclusively incorrect. When an OEM has a PE in India, it could not be open to him to say that he was not carrying on any business in India. Of course, this is still to be examined whether the royalties paid were used "for the purposes of" the business which was carried on in India. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 19 Directions in Para-95- It is in this light that it is necessary to examine whether the use of patents, for which the impugned payments have been made by the OEMs to the assessee, was in manufacturing process of the handsets 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. Directions in Para-97- As evident from a plain reading of Article 13(7)(b), in a situation in which the income of royalty does not arise under Article 13(7)(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. Directions in Para-98- It is in this backdrop that we decline to deal with, at this stage and in the light of the limited facts on record, the taxability of impugned royalties in terms of the provisions of the Indo US tax treaty as well. Directions in Para- 99- For the reasons set out above, we are of the considered view that further examination about certain basic facts of the case is required, and a categorical finding about those factual aspects, which have been elaborated upon earlier in these 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. 4.4 AO's findings in Assessment Order for AY 2014-15 on above observations of Hon'ble ITAT 4.4.1 (Ref, refer Pas 21 to 31 for Technical Expert's Report. Para 7) Para-7 The Revenue has sought the technical opinion of Mr. Mr. Ambrish Aggarwal (ITS) (Graduated in Engineering from IIT Roorkee), Gl General Manager, Department of Telecom, Government of India and Mr. V. Mitra (ITS), Engineering Post Graduate from IIT Roorkee, Ex Deputy Director General, Telecom Commission, Government of India, for their technical opinion on the use of CDMA Technology. The enquiries have been conducted from the Telecom Department which reveal that these two Ex-officers of the Telecom Department are an authority on the subject and have co-authored— book namely "Mobile Communication and Wireless LAN (GSM, GPRS, EGDE, CDMA, 30 Communication, UMTS, CDMA 2000 lx EV DO, Wireless LAN ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 20 WiMax". These facts give a strong reason to believe that these officers will be in a position to impart a technically sound and objective opinion In the matter to fulfill the judicious requirement of the directions of the Hon'ble ITAT. In this regard, they both were supplied with the copies of agreements between the assessee and OEMs, OEMS and Reliance/ Tata and technical agreement between Qualcomm and Reliance/Tata and were requested vide this office letter no. 849 dated 14.10.2016, to give their technical opinion on the following issues: “(a) What is the nature of intellectual property (CDMA) sought to be Transferred by Qualcomm to OEMs along with its technical details, (b) Whether the OEMs make any use of such technology or the OE simply incorporate the patented product in the handsets /equipments, (c) Where the technology is actually used, whether by the OEMs or by the Reliance or Tata being the end user, (d) Whether the handsets as made available by Reliance/ Tata in those years were India specific or these could be used in any other network globally. (e) Whether the CDMA Technology as developed by the Qualcomm is Whole-some technology and whether it can be broken down into the handsets and equipments. (f) Whether it can be said that Qualcomm had no role to play in the transfer of technology to India." Para 7.2 (Pg 31) Keeping in view of the Technical opinion and facts of the case for A.Y2005-06 to 2008-09, the Royalty received by assessee from OEM's was treated as taxable as provisions of Section 9(l)(vi)(c) of the IT Act as well as Article 12(7) (b) of DTAA between India and USA. 4.4.2 (Ref. Assessment order Pas 43 to 951 Para-9 ............. In case of Huawei Technology Company Ltd China, Hon'ble ITAT in it's order dated 21.03.2014 in ITA No. 5253 to 5256/Del/2011 for A.Y 200506 to 2008-09 has categorically confirmed the existence of PE in India. In para 8 of the order, the Tribunal has explained that the Assessing Officer has categorically established the PE of the assessee on the basis of documents collected and statement of personnel's recorded during the survey conducted u/s 133A. In para No. 9 it has been mentioned that the assessee has filed objections before DRP on the issue of establishing the PE in India and Hon'ble DRP has rejected the objection of the assessee and upheld the decision of the AO. In pars no. 10, the Hon'ble ITAT has given the following observation: "All these facts recorded by the Assessing Officer and upheld by the DRP have not been controverted before us. In view of the above, we do not find justification to interfere with the order of learned DRP in this regard. Accordingly, ground no. 5 & 6 of the assessee's appeal are rejected." From the above, it is clear that Hon'ble ITAT has confirmed that M/s Huawei Technology Company Ltd China and ZTE have PE in India. In cases of all other OEMs, the PE has been established by the AO. In those cases either the issue of PE is pending before the Appellate ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 21 authorities or has been decided in favour of department. From the above, it is clear that the OEMs of the assessee have PE in India and the intellectual property is being used through the PEs to earn the Revenue from India. In view of above, the objections of the assessee do not have any merit to be considered, hence, are rejected. Further it not a case of taxability of OEMs. The issue is related to that the OEMs were carried out their business activities in India through its PE. Para- 11. TAXABILITY OF ROYALTY ARISING FROM LICENSING OF CDMA TECHNOLOGY TO OEM (ORIGINAL EQUIPMENT MANUFACTURERS) FOR CDMA INFRASTRUCTURE EQUIPMENT AND HANDSETS. Para-11.1 Two important streams of the assessee's income are from Qualcomm CDMA Technologies (QCT) which develops and supplies CDMA- based integrated circuits and systems software for wireless voice and data communications, multimedia functions and global positioning system products and Qualcomm Technologies Licensing ('QTLj which grants licenses to manufacture of wireless products for the right to use Qualcomm's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products. For the Indian income tax assessment of the assessee we are only concerned with the revenues of QTL that to the extent they are sourced in India. Para-11.2 As per the business model adopted by the assessee "licensees typically pay a nonrefundable license fee in one or more installments and ongoing royalties based on their sales of products incorporating or using our licensed intellectual property." Para-11.3 To determine the taxability of assessee's receipts under this revenue stream first thing which is required to be examined is the nature of receipts. The assessee enters into various types of agreements with the OEMs which enables the OEMs to use the Qualcomm's worldwide patents and I PR portfolio for the purposes of their business of manufacturing and selling various types of CDMA equipments, handsets and other smart phones based on Qualcomm's technology. The assessee has never submitted these agreements during assessment proceedings. However redacted versions of some of these agreements were submitted during appellate proceedings. Relevant portions of some of these agreements are reproduced hereunder:- DS-CDMA Technology Agreement QC000414 "Affiliate" means as to a party any present or future subsidiary of the party: For purposes of this definition, the term "subsidiary" of an entity means a corporation or other legal entity (i) the majority of whose shares or other securities entitled to vote for election of directors (or other managing authority) is now or hereafter owned or controlled by such entity either directly or indirectly or (ii) which does not have outstanding shares or security but the majority of the equity interest in which is now or hereafter owned or controlled by such party either directly or indirectly, but only for so long as such ownership or control exists; ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 22 QC000418 "Net Selling Price" means, with respect to any product Sold, the greater of (i) the selling price which a seller would realize from an unaffiliated buyer in an arm's length sale of an identical product in the same quantity and at the same time and place as such sale, or (ii) the selling price actually obtained for such product in the form in which it is Sold, whether or not assembled (and without excluding there from any components or subassemblies thereof which are included in the selling price). In determining "selling price," the following shall be excluded: (a), (b) costs, (c) costs of and (d) import, export, excise, sales and value added taxes custom duties; Patent License agreement from Internal Page No QC 000398 to QC 000411 Clause 1.01 on PC0003981 - Grant (b) The CORPORATION grants to Licensee under CORPORATION'S PATENTS worldwide, nonexclusive, personal, and non-transferable licenses for Components, FNE and Subscriber Units for use only in CELLULAR APPLICATIONS. 1.03-Scope The licenses granted herein are licenses to (i) make, have made, use, lease, sell and (in accordance with Section 5.01) import LICENSED PRODUCT (ii) make, have made, use and import machines, tools, materials and other instrumentalities, insofar as such machines, tools, materials and other instrumentalities are involved in or incidental to the development, manufacture, testing or repair of LICENSED PRODUCT which are or have been made, used, leased, owned, sold or imported by the grantee of such licenses (but only to the extent necessary to develop, manufacture, test or repair LICENSED PRODUCT); (Hi) convey to any customer of the grantee, with respect to any LICENSED PRODUCT which is sold or leased by such grantee to such customer, rights to use and resell such LICENSED PRODUCT as sold or leased by such grantee (whether or not as part of a longer combination); provided, however, that no rights maybe conveyed to customers with respect to any invention which is directed to(iv) a combination of such Licensed Product (as sold or leased) with any other product, (v) a method or process which is other than the inherent use of such Licensed Product itself (as sold or leased), or (vi) a method or process involving the use of a Licensed Product to manufacture (including associated testing) any other product. Notwithstanding anything to contrary contained above, (1) to the extent that Corporation's Patents are incorporated in the transceiver, Licensee may not have made any transceiver (in which Corporation's Patents are incorporated) unless (i) such transceiver is of Licensee design and specification (which design and specification is engineered by or on behalf of Licensee or (ii) Licensee has such transceiver made by a manufacturer licensed under the DS- CDMA TA and (2) to the extent that Licensee Patents are incorporated in the transceiver, Corporation may not have made any transceiver (in which Licensee Patents are incorporated) unless (i) such transceiver is of Corporation's design and specification (which design and specification is engineered by or on behalf of Corporation) or (ii) Corporation has such transceiver made by a manufacturer licensed under the DS-CDMA TA. Notwithstanding anything to contrary contained above, (1) Corporation may have made staple articles of commerce ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 23 (including but not limited to handset, cables and standard analog ASICs, etc.) and Corporation may have made parts of the transceiver which are of Corporation's own design and specification, (which design and specification is engineered by or on behalf of Corporation) and (2) Licensee may have made staple articles of commerce (including but not limited to handset, cables and standard analog ASICs, etc) and Licensee may have made parts of the transceiver which are of Licensee own design and specification (which design and specification is engineered by or on behalf of Licensee). Subscriber Unit License Agreement on Internal Page No QC 000453 to QC000496 Para 2 on QC000489 WHEREAS, QUALCOMM and Licensee have entered into that certain Subscriber Unit License Agreement (the SULA) and the Software Agreement (the SA), each effective date (the SULA and the SA are collectively hereinafter referred to as the "CDMA Agreements), pursuant to which QUALCOMM granted Licensee a right to sub-license QUALCOMM's Intellectual Property (as defined in the SULA) to the Sub licensees to provide such Sub licensees a right to manufacture and sell Subscriber Units (as defined in the SULA); List of Licensed Patents for Subscriber Units in Exhibit D on Internal Page No QC000491 to QC000494. Exhibit F on Internal Page No QC000496, showing "Certificate" as to how the Royalty income is computed. Infrastructure and Subscriber Unit License and Technical Assistance Agreement- from Page No QC000499 to QC000532 Recitals on QC000499 Whereas, QUALCOMM has developed certain proprietary Code Division Multiple Access (CDMA) technology which may be useful in providing greater capacity and improved quality and reliability compared to other cellular telephone technologies; Whereas, Licensee has been selected by the agency of country to obtain a license from QUALCOMM to make and sell Subscriber Units and Infrastructure Equipment; WHEREAS, LICENSEE desired to obtain from QUALCOMM a license to use QUALCOMM's Intellectual Property (as defined below) and technical assistance necessary for the manufacture and sell Subscriber Units and Infrastructure Equipment (as defined below) and QUALCOMM desired to provide LICENSEE WITH SUCH license and technical assistance in exchange for the license fees, royalties and other provisions hereof, each in accordance with the terms and conditions set forth in this Agreement; and Definition of CDMA Enabling Infrastructure Equipment on Page No'QC000500 CDMA Enabling Infrastructure Equipment" shall mean the (i) CDMA selector associated with the vocoder bank (or other special implementation, including a switch implementation, of hard or ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 24 soft handoff) which incorporates all or any part of QUALCOMM Intellectual Property, (ii) the CDMA controller, whether or not such CDMA controller is separate from or incorporated as part of the main Base Station controller, (Hi) distributed': antenna, meaning a multi-node antenna system and related circuitry (excluding the fair value of the antenna element) that is designed to make use of delays in CDMA signal transmission and/or reception so that the rake receiver functionality can be utilized and (iv) SBS, meaning the selector Bank Subsystem that includes (a) selectors that support soft and/or hard handoff (b) the vocoder; (c) data services based on any QUALCOMM Intellectual Property, (d) fax services based on any QUALCOMM Intellectual Property and/or (e) other service options based on any QUALCOMM Intellectual Property. If so handoff is implemented as a pad of the switch function, the royalty payable to QUALCOMM with respect to the soft handoff implementation will be based upon the fair market value of the soft handoff function, the parties agree to negotiate in good faith to determine the fair market value of (i the soft handoff implementation if implemented as part of the switch function (the parties recognize and agree that the contribution of the soft handoff function to the switch would be percentage of the overall value of the switching equipment performing the soft handoff function), and (ii) the CDMA controller, and if such CDMA controller is incorporated as part of the main Base Station controller (the parties recognize and agree that the contribution of the CDMA controller if it is part of the main Base Station controller would be a percentage of the overall value of the main Base Station controller not to exceed percent and not be less than percent. The Base station controller shall not include the GPS clock, MUX, any piece of equipment providing switching functions and any piece of equipment whose prime function is to provide operational alarm and maintenance functions. On Page No QC000504 "QUALCOMM Intellectual Property" means both QUALCOMM'S Technically Necessary IPR and QUALCOMM'S Commercially Necessary IPR. "QUALCOMM Commercially Necessary IPR" means the following intellectual property of QUALCOMM: Qualcomm's (and its Affiliate's) patents and patent applications (including divisions, reissues, renewals, continuations and continuations-in-part), copyrights, other intellectual property rights, trade secrets, know-how and technical information which QUALCOMM (or its Affiliates) has acquired or developed and is in possession of as of the Effective Date, which QUALCOMM (or its Affiliate) has the right to license to LICENSEE in accordance with this Agreement and which are commercially necessary to use, make and/or sell Subscriber Units, Cordless Base Stations, Channel Units and/or CDMA Enabling Infrastructure Equipment, and any Improvements to any of such Commercially Necessary IPR developed or acquired during the Improvement Period; but the term QUALCOMM'S Commercially necessary IPR does not include any trade name, trademark, service mark or similar symbols, abbreviations, contractions or simulations identifying QUALCOMM (except as set forth in Section 9). "QUALCOMM's Technology Necessary IPR" means the following intellectual property of QUALCOMM: QUALCOMM's (and its Affiliate's) patents and patent applications (including divisions, reissues, renewals, continuations and continuations-in-part), copyrights, other ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 25 intellectual property rights, trade secrets, know-how and technical information, including but not limited to that intellectual properly that is incorporated into the CAI, which QUALCOMM (or its Affiliates) has acquired and is in possession of as of the Effective Date, which QUALCOMM (or its Affiliates) has the right to license to LICENSEE in accordance with this Agreement and which are technically necessary IPR developed or acquired during the Improvement Period; but the term QUALCOMM's Technically Necessary IPR does not include and trade name trademark, service mark or similar symbols, abbreviations contractions or simulations identifying QUALCOMM (except as set forth in Section 9). On Page No QC000505 "Subscriber Unit License" means a complete CDMA and/or Dual Mode CDMA telephone, including but not limited to mobile, transportable and portable telephones, which incorporates all or any part of QUALCOMM Intellectual Property and can be used, without any additional equipment or components being attached thereto, to initiate and receive Wireless telecommunications transmissions. On page No QC000507 Documentation: In full satisfaction of its obligations to deliver documentation to LICENSEE, QUALCOMM shall promptly deliver to LICENSEE after the Effective Date the documentation (and shall also promptly deliver to LICENSEE any updates to such documentation available during the Improvement Period) specified in Exhibit A attached hereto. Infrastructure and Subscriber Unit License and Technical Assistance Agreement on page No QCD00535 to QC000566 Recitals on Page no QC000535 WHEREAS, QUALCOMM has developed certain proprietary Code Division Multiple Access (CDMA) technology which may be useful in providing greater capacity and improved quality and reliability compared to other cellular telephone technologies; WHEREAS, LICENSEE has been selected by Agency Country to obtain a license from QUALCOMM to make and sell Subscriber Units and Infrastructure Equipment; WHEREAS LICENSEE desired to obtain from QUALCOMM a license to use QUALCOMM's Intellectual Property (as defined below) and technical assistance necessary for the manufacture and sell Subscriber Units and Infrastructure Equipment (as defined below) and QUALCOMM desires to provide LICENSEE with such license and technical assistance in exchange for the license fees, royalties and other provisions hereof, each in accordance with the terms and conditions set forth in this Agreement; and - WHEREAS, QUALCOMM desires to obtain a License of LICENSEE'S Intellectual Property (as defined below) to manufacture and sell Subscriber Units and Infrastructure Equipment and Licensee desires to grant such license in accordance with the terms and conditions set forth in this Agreement. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 26 Definition on Page no QC000537 Channel Units means a Base station module(s) implementing any of Qualcomm's Intellectual Property with or without radio baseband functions and having one or more voice or data channels for communication between a Base Station and Subscriber Units. Common Air Interface or CAI means the technical description of Qualcomm's CDMA digital an interface specification for communication between cell site or other Base Station transceivers and Subscriber Units as may become adopted as a standard by the Telecommunications Industry Association (TIA) and other international standard bodies. Components means application specific integrated circuits (ASICs), electronic devices, integrated circuits, including firmware thereon, and/or families of devices intended for use in Subscriber Units and/or Infrastructure Equipment for Wireless Applications. Cordless Base Station means a residential device that provides wireless receive and/or transmit functionality to and/or from Subscriber Units, which incorporates all or any part of Qualcomm Intellectual Property, and which is connected to a public or private switched telecommunications network. Dual Mode CDMA means, as applied to Subscriber Units, having a capability to operate with CDMA technology and existing analog FM cellular technology for such backward compatibility with currently existing cellular infrastructure and terminal as may be required by the marketplace. On Page No QC000540- "QUALCOMM Intellectual Property" means both QUALCOMM'S Technically Necessary IPR and QUALCOMM'S Commercially Necessary IPR. "QUALCOMM Commercially Necessary IPR" means the following intellectual property of QUALCOMM: Qualcomm's (and its Affiliate's) patents and patent applications (including divisions, reissues, renewals, continuations and continuations-in-part), copyrights, other intellectual property rights, trade secrets, knowhow and technical information which QUALCOMM (or its Affiliates) has acquired or developed and is in possession of as of the Effective Date, which QUALCOMM (or its Affiliate) has the right to license to LICENSEE in accordance with this Agreement and which are commercially necessary to use, make and/or sell Subscriber Units, Cordless Base Stations, Channel Units and/or CDMA Enabling Infrastructure Equipment, and any Improvements to any of such Commercially Necessary IPR developed or acquired during the Improvement Period; but the term QUALCOMM's Commercially necessary IPR does not include any trade name, trademark, service mark or similar symbols, abbreviations, contractions or simulations identifying QUALCOMM (except as set forth in Section 9). "QUALCOMM's Technology Necessary IPR" means the following intellectual property of QUALCOMM: QUALCOMM's (and its Affiliate's) patents and patent applications (including divisions, reissues, renewals, continuations and continuations-in-part), copyrights, other intellectual property rights, trade secrets, knowhow and technical information, including but not limited to that intellectual property that is incorporated into the CAI, which QUALCOMM (or its ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 27 Affiliates) has acquired and is in possession of as of the Effective Date, which QUALCOMM (or its Affiliates) has the right to license to LICENSEE in accordance with this Agreement and which are technically necessary IPR developed or acquired during the Improvement Period; but the term QUALCOMM's Technically Necessary IPR does not include and trade name trademark, service mark or similar symbols, abbreviations contractions or simulations identifying QUALCOMM (except as set forth in Section 9). On Page QC000541 "Subscriber Unit License" means a complete CDMA and/or Dual Mode CDMA telephone, including but not limited to mobile, transportable and portable telephones, which incorporates all or any part of QUALCOMM Intellectual Property and can be used, without any additional equipment or components being attached thereto, to initiate and receive Wireless telecommunications transmissions. Clause 5 on Page QC000545 on Qualcomm License — Subscriber Unit and Cordless Base Station License. Subject to the terms and conditions of this Agreement, including but not limited to timely payment of the license fees and royalties set forth herein, QUALCOMM, on behalf of itself and its Affiliates, hereby grants to LICENSEE a personal, no transferable, worldwide and nonexclusive license (without the right to sublicense, except to Affiliates of LICENSEE as permitted in Section 5.3) to use QUALCOMM's Intellectual Property solely for Wireless Applications to (a) make (and have made) Components that have been exclusively designed by LICENSEE (which design is owned exclusively by LICENSEE) and use, sell lease or otherwise dispose of Components, provided, however that if such Components incorporate any of QUALCOMM's CDMA Intellectual Property (e.g., CDMA AS/Cs, vocoder DSP, vocoder ASIC, etc.) then such Components may only be used, sold, leased or otherwise disposed by LICENSEE if they are Included and used, sold, leased or otherwise disposed of by LICENSEE as part of and within complete Subscriber Units and/or Cordless Base Stations Sold by LICENSEE(or as replacement pads for Subscriber Units previously sold by LICENSEE). No other, further or different license is hereby granted or implied. Infrastructure Equipment License Subject to the terms and conditions of this Agreement, including but not limited to timely payment by LICENSEE of Up-Front License Fee and royalties, QUALCOMM, on behalf of itself and its Affiliates, hereby grants to LICENSEE a personal, non transferable, worldwide and nonexclusive license (without the right of sublicense, except to Affiliates of LICENSEE as permitted in Section 5.3) to use QUALCOMM's Intellectual Property solely for Wireless Application to (a) make (and have made and use, sell, lease or otherwise dispose of Infrastructure Equipment and (b) to make (and have made)Components that have been exclusively designed by LICENSEE (which design is owned exclusive by Licensee and use, sell, lease or otherwise dispose of Components; provided, however that if such Components incorporate any of QUALCOMM's CDMA Intellectual Property (e.g., CDMA AS/C's vocoder DSP vocoder ASIC, etc.) then such Components may only be used , sold leassed or otherwise disposed by LICENSEE as part of and within complete Channel Units sold by LICENSSEE (or as replacements parts for Channel Units previously sold by LICNSEE). No other or different Lincese is hereby granted or implied. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 28 Clause 10 on Page QC000553 on Quality Control General Quality of Subscriber Units and Infrastructure Equipment. Throughout the term of this Agreement, LICENSEE shall maintain, for the Subscriber Units and Infrastructure Equipment manufactured or Sold by it, at least the same manufacturing, servicing and quality standards currently utilized by licensee in connection with its analog subscriber units and infrastructure equipment. Standards Compliance Testing. LICENSEE represents and warrants that the Subscriber units and Infrastructure Equipment that it makes or has made will adhere with and conform to, in all respects, the specifications contained in the CAI and/or the standard for Wireless Applications adopted in the applicable country that such Subscriber Units and Infrastructure Equipment are being sold for use in and that LICENSEE shall comply with the rules, regulations or other requirements set by such authorized standards body. LICENSEE shall, at QUALCOMM's reasonable written request, permit QUALCOMM or entities designated by QUALCOMM and accepted by LICENSEE, which acceptance shall not be unreasonably withheld or delayed, to perform tests of LICENSEE'S Subscriber Units and Infrastructure Equipment to ensure compliance and conformity with the CAI. If such tests indicate maternal noncompliance or nonconformity therewith, such tests shall be at LICENSEE cost and LICENSEE shall reimburse QUALCOMM for any such reasonable tests performed by QUALCOMM at QUALCOMM's Costs plus a twenty percent (20%) foe of the Costs. Nonconforming Subscriber Units and Infrastructure Equipment, if any, shall not be sold or marketing by LICENSEE until the non-conformity is corrected. Exhibit A- on page QC000565 License Agreement Documents Exhibit A Title D Base Station ASIC Questions and Answers Baseband Analog ASIC Questions and Answers CDMA Base Station ASIC User Manual, January 1993 CDMA Baseband Analog ASIC Data Sheet, December 1992 CDMA Baseboard System Document, Ver. 1.1. 03/10/92 CDMA Cell Processing, 09/09/92 CDMA Capacity 2.0 Test Report CDMA Cell Partition Trade-Offs, Ver. 1.2, 08/24/90 CDMA Data Analysis Tool Analysis Guide CDMA Data Analysis Tool User's Guide CDMA Digital Cellular DM Mobile Station HLD, Executive Overview, Ver. 1.1, 07/02/92 CDMA Digital Cellular Technology Forum February 1993 CDMA Digital Cellular Technology Forum January 1992 ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 29 CMDA Dual-Mode Mobile Cellular Telephone Operating Instructions CMDA Dual-Mode Mobile Terminal High Level Overview, VI.1 CDMA Mobile Station Modem ASIC Specification Sheet, August CDMA Network Engineering Handbook CDMA Portable Block Diagram and Architecture CDMA System Manual CDMA Training Documents Forward Channel Performance at Low Vehicle Speeds Memo Forward Channel Performance Simulation Memo, 03/28/91 Mobile Station — Base Station Compatibility Standard for DM Wideband Speed Spectrum Cellular Sys. Mobile Station Modem ASIC Questions and Answers Mobile Station Modem ASIC Exhibit B on Page QC000566 — Qualcomm CDMA Patents Title: Spread spectrum multiple access communication system using satellite or terrestrial repeaters U.S. Patent No. 4901307 Issued: February 13,1990 Title: Method and apparatus for controlling transmission power in a CDMA cellular telephone system U.S. Patent No. 5056109 Issued: October 8,1991 Title: Linear gain control Amplifier U.S. Patent No. 5099204 Issued: March 24,1992 Title: Method and system for providing a soft handoffin communications in a CDMA cellular telephone system U.S. Patent No. 5101501 Issued: March 31,1992 Title: System and method for generating signal waveforms in a CDMA cellular telephone system U.S. Patent No. 5103459 Issued: April 7, 1992 Title: High dynamic range closed loop AGC circut U.S. Patent No. 5107225 Issued: April 21,1992 Title: Diversity Receiver in a CDMA cellular telephone system U.S. Patent No. 5109390 Issued: April 28,1992 Exhibit Don Page QC000568- Certificate Contract between Qualcomm Incorporated and LICENSEE for the License of Certain Technology for the Manufacturing and Sale of Certain CDMA Subscriber Units on Page No QC000572 to QC000628 ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 30 Dual-Mode Subscriber Station (DMSS) Software: The DMSS Software controls the operation of QUALCOMM's Subscriber Unit Reference board incorporating QUALCOMM'S MSM CDMA ASIC. It is written in C and runs under the REX operating system on the ARM microprocessor that is contained in QUALCOMM's MSM CDMA ASIC. Specific release of DMSS Software to be selected by Licensee. Para-11.4 Analysis of the above Extracts I. Qualcomm holds ’patents"- which is defined in the Definitions Appendix on page QC000408 to mean every patent issued in any country of the world. Such patents are technically and commercially necessary for implementation of DS-CDMA in FNE, Components and Subscriber Units or which/s technically or commercially necessary for implementation of existing analog FM cellular technology in Dual Mode subscriber Units. II. The components have been defined on Page QC000411 to mean ASICs, electronic devices, integrated circuits, including firmware thereon, and/or families of devices incorporating DS- CDMA technology and intended for use in FNE (including Channel Units and DS-CDMA Enabling Infrastructure Equipment) and SUBSCRIBER UNITS, but the term does not mean any Channel Unit, FNE or SUBSCRIBER UNIT III. DS-CDMA has been defined to mean Direct Sequence Code Division Multiple Access technology. IV. The above extracts show that Qualcomm is in possession of certain patents which are technically and commercially necessary for use in Cellular Applications (defined on oaae QC000410). The licensee is granted various rights as mentioned in the Scope of the Agreement- to manufacture and sell the Licensed Products. V. Licensed Products are various products which are defined in the Definition Column of various agreements- some of which have been extracted above. Many of products which are licensed by Qualcomm are "Patented Products" VI. The Royalty arises, mainly, from Patents and not from Copyrights-referred to as Licensed Products in the agreements under review. The agreements always mention Patents and nowhere has it spoken about copyright. VII. For the purposes of the agreements under consideration, the alleged non resident OEMs and their Affiliates worldwide are considered one and the same. The Licensees as identified in the various agreements include the foreign entity as well as its Affiliates world over. VIII. Further, the royalty accrues when the licensed product is sold/used by the OEM to an independent purchaser. Sale to Affiliate is not recognized for purpose of computation of Royalty. IX. The business Connection of the alleged Non resident OEMs in India by way of their Affiliates in India cannot be denied. All the leading OEMs have affiliates and/or presence in some form or the other in India- like Huawei, ZTE, LG, Samsung etc which are even assessed to tax in India. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 31 X. The redactions in the agreements make it difficult for the Department to arrive at logical inferences from the, agreements under consideration regarding the taxability of income,' source of income as well as correct XI. quantification of the income (Licensee and/or its affiliate may be Indian entity; the "Affected Country" as appearing in certain places may be India) Para-11.5 From the above analysis it is clear that receipts of the assessee under this revenue stream is income arising out of licensing of various Patents and IPRs belonging to Qualcomm and is received from various OEMs. This clearly falls under the definition of Royalty under Explanation 2 to section 9(i)(vi) of Income Tax Act 1961 as well as under Article 12 of India - USA DTAA. The assessee also recognizes this receipts in its books of accounts as Royalty income only. Thus, there remains no dispute on the characterization of income under this revenue stream. It is undisputed as Royalty both under the Income Tax Act 1961 and under India - USA DTAA. What remains to be examined is as to whether this royalty income falls in any of the sub clauses of section 9(i)(vi) which are reproduced as under:- "(vi) by way of royalty payable by— a) the Government; or b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Para-11.6. First condition to be examined to decide whether the royalty income received by the assessee accrues or arises in India is to see who is the payer of royalty. In the case of receipts arising out of Patent licensing agreements which are entered between the assessee and the OEMs. Assessee has not submitted the list of OEMs with whom it has agreements. Assuming that most of the OEMs with whom the assessee has Patent licensing agreements are nonresidents or Foreign Companies the payers of royalty to the assessee are Non residents and therefore in the instant case applicability of section 9(i)(vi)(c) is required to be examined, Para-11.7 Next, it is required to be seen as whether the non resident payer is carrying on any business or profession? If yes, where such business or profession is carried on ?whether in India or outside India. If such person is carrying on business in India also, then it is required to be seen as to whether the Patents for which the royalties are paid are utilized in that business which the payer is carrying on in India. Under the Act ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 32 The chargeability of royalty income in the hands of the Assessee in India, has to be examined with reference to the provisions of section 9(0(4(c) read with section 5(2) of the Income Tax Act, 1961.with section 5(2) of the Income Tax Act, 1961. Para-11.8 Section 9(l)(vi)(c) raises a deeming fiction to bring to charge any income by way of royalty if such royalty is payable by a Non resident in respect of any right, property or information used either a) for the purpose of business carried on; by such non- resident person in India; b) for the purpose of making or earning ^ any income from any source in India. Para-11.9 Section 9(l)(4(c) and section 9(l)(vi0(c) of the Act are payment based taxations. The language employed in section 9(l)(vi) is used for the purpose of in contra distinction to "utilized in the business" as appearing in section 9(l)(vii)(c). The property maybe used anywhere i.e. in or outside India, but the use should be for the purpose of business or profession carried on in India and for the purpose of earning income from a source in India. The situs of the use of the property is not material what is material is the purpose of the use of the property, whether it is for business carried on in India or for a source in India. Para-11.10 For applying these tests on the facts of the instant case the foremost requirement is the names and residential status of the OEMs who have Patent licensing agreements with the assessee. Section 9(1) (vi) (c) - Payment from one NR to another NR In respect of any right, property or information used For the purpose of business or profession carried on by the latter in India Or For earning any income from any source in India The import of the above is that the/payer-AIR must have a business or any source of Income in India. Para-11.11. Whether OEMs carrying on business in India. a. Business as defined in section 2(13) of the Act, is admittedly an expression of wide import. The business is not only manufacturing or trading but encompasses many other activities which together constitute a business. Example of MNCs was cited to prove the point that different activity of a composite business are carried out in different locations e.g. manufacturing in one jurisdiction and sales in another jurisdiction and that it cannot be said that business is done in one of the jurisdictions only. b. That handsets or equipments although manufactured outside India are not off shell products or standard product which can be sold to anyone in any location and that the sale by OEMs is India's specific. c. The entire supply of handsets/ equipments by the OEMs is India Specific. This is evident from the stipulations in the agreements that OEMs will manufacture the handsets/ equipments as per the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 33 design made by the OEMs and approved by a particular operator, at the technical standards and specifications and for an agreed price. d. That hand sets are manufactured with codes which are programmed to be specific to net work provider. These codes are not of the kind which can be put to the handsets after these are received in India. e. Reliance was placed in the case of Syed Asifuddin and another (AP) 200 L CR1LJ 4314 for the proposition that handsets provided by LG and Samsung to Reliance prior to 2005 was specifically designed and programmed for Reliance. Further, it was submitted that the following findings of the fact by the Hon'ble High Court leave no room for any doubt in this regard, i. Hand sets are proprietary to Reliance; ii. there is an agreement between Reliance and manufacturer of hand sets' Hi. that handsets are computer program (software) with source code within the meaning of Indian Copy Right Act and Indian Information Technology Act. f. The test is to determine whether the property has been used by OEMs "for the purpose of carrying on business in India" in terms of section 9(l)(vi)(c) and that it is not necessary to look at the arrangements between QCOM and OEMs. The use of technology by the OEMs for the purpose of carrying on business in India is sufficient nexus for the purpose of section 9(l)(v)(c) of the Act. The use of technology by QCOM in India or use of technology by OEMs in various other jurisdictions has no relevance or consequence for the purpose of applicability of section 9(l)(4(c) of the Act. g. That when handsets and equipments are manufactured for use of a specified service provider, then the OEMs have used the technology for the purpose of carrying on business in India. h. The license for use of technology embedded in a hand set/equipment is also granted to specific operators in India under the agreement and hence it is used by the OEMs for manufacturing India specific supplies. i. On the Assessee's argument that sale to different jurisdictions cannot be considered as a source i.e. each party to whom a product is sold by the manufacturer cannot be regarded as a source, it was submitted that this is of no consequence for the reason that products manufactured by the OEMs are not standard products which are sold anywhere and everywhere. Besides, one may have different source of income lying in different jurisdictions if the supplies differ in technical specifications, customization and are location specific. j. Regarding the taxability of royalty income under the Act, the assessee has submitted that the OEMs do not have a source of income in India. The assessee has also referred to the ITAT's consolidated order in assesses own case where in the ITAT for the AY 2000-01 to AY 2004-05 in ITA Nos. 3696, 3697, 3698, 3699 and 3700/Del/2009 has held that the royalty income received by Qualcomm ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 34 from the OEMs on manufacture of handsets and infrastructure equipment is not liable to tax in India under section 9(l)(vi)( c) of the Act. Further, Para 135 of the order the ITAT held that to tax the royalty income earned by Qualcomm, the Revenue must show that the OEMs have used Qualcomm's patents for a business carried on in India or for making or earning income from a source in India, which leads to the taxability of the OEMs. Therefore, the taxability of Qualcomm directly depends on the OEMs taxability in India': Accordingly, the ITAT has held that for the AY 2000-01 to AY 2004-05 the Revenue has failed to discharge this burden and hence the royalty income earned by Qualcomm cannot be brought to tax under section 9(l)(vi)(c) of the Act. k. However, this office is in possession of information, that the OEMs have presence in India, through a permanent, establishment in India and accordingly OEMs have a source in India. Further, as already mentioned earlier, there lies some factual in accuracy in considering the issues by Hon'ble ITAT in the aforesaid order which has been duly corrected by Hon'ble ITAT while passing the orders for the assessment years 2005-06 to 2008-09 vide their order dated 20.02.2015 through which Hon'ble ITAT has restored back for considering afresh the issue of taxability of Royalty from the OEMs in the hands of the assessee. Accordingly, the argument of the assessee is not tenable in law and on fact, due to the reasons mentioned above. I. To support the above conclusions, letters were sent by the AO during the assessments years (A. Y. 2010-11) during assessment proceeding to the Assessing Officers of the foreign companies (OEMs) who themselves or any of their AEs are manufacturing mobile handsets / telecommunication equipments and having patent licensing agreements with the assessee (i.e Qualcomm Inc). Being the same parties involved with identical facts and circumstances, I rely and follow the verifications made by the AO in this regard during the A.Y. 201011, which were also followed while completing the assessment for the AY 201112 too. All the following OEMs listed below have paid Royalty to the assessee and a portion of that pertains to the sale of handsets/equipments in India. Most of the above foreign companies (OEM's) are same with the list of companies from whom India specific Royalties are received by the assessee for the current relevant period too. During the course of assessment the AR also submitted some of the copies of agreements (although redacted versions) of all companies who are paying Royalty to Qualcomm for sale of equipments/handsets in India (other than those companies which are already on record, which were submitted by the assessee before the CIT(A) and also produced before the ITAT). However, during the course of assessment the AR confirmed that these agreements are in operation during the subject A. Y. AR also submitted the details of these OEMs from which it is seen that all the OEMs are Non-residents although some of them are having their Indian subsidiaries registered and doing the business in India. The relevant extracts of those letters sent to the various AOs in during the assessment proceeding for A.Y. 2010- 11, are as under :- Seeking information regarding assessment proceeding in the case of M/s Qualcomm Incorporated, FY 2009-10— Regarding- Please refer to the subject mentioned above. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 35 In continuation to this office letter No. F.No. Addl. DIT/Range-2/lntl. Tax./2012-13 dated 10.12.2012 on the subject mention above your requested to provide the following information On the basis of assessment completed in past years in the case of Huawei Technology Company Ltd. 1. Whether the OEM has a PE in India in respect of the sale of mobile handsets / equipments. 2. Whether the OEM's are manufacturing mobile handsets/equipment in India. 3. How the sale of mobile handsets/equipments in effected in India-whether through PE or subsidiary or direct. 4. Whether the co. has a business connection in India & in what form. 5. Please also provide the last assessment order of the OEM assessed in your charge. The information is being solicited and required to be furnished urgently as the case is getting time barred on 31.03.2013. m. The list of OEMs, the AOs of whom were sent these letters are as under:- s. No OEM AO 1 Ericson A.B Dy. Director of Income-Tax, Circle 1(2), International Taxation, New Delhi. 2 Huawei Technology Company Ltd. AddL. DIT Range 3 International Taxation, New Delhi 3 ZTE Corporation, China AddL. DIT Range 3 International Taxation, New Delhi 4 Samsung Electronics Ltd. Dy. Director of Income-Tax, Circle 2(2), International Taxation, 5 Nokia Corporation AddL. DIT Range 2, International Taxation, New Delhi 6 Nokia Siemens Networks Oy Addl.DIT Range 2, International Taxation, New Delhi 7 Sony Ericsson Mobile Communication Dy. Director of Income-Tax, Circle 2(2), International Taxation, New Delhi. 8 Motorola Solution Inc. Dy. Director of income-Tax, Circle 3(2), International Taxation, ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 36 n. The reply of DDIT Circle 1(2) International Taxation New Delhi is reproduced as under- In this regard, on the basis of records available, this is to submit that Ericsson AB manufactures and supplies GSM equipments. Further, as desired, kindly find the information as under- S. Query Reply 1. Whether the Ericsson AB has a PE in India in respect of the sale of mobile Yes, Ericsson AB has a PE in India in respect of the sale of equipments in the form of 2. Whether the Ericsson AB is manufacturing mobile handsets/equipments in India. Ericsson AB is not manufacturing equipments in India. However, EIL manufactures equipments in India. 3. How the sale of mobile handsets/equipments in effected in India whether through PE or subsidiary or direct Ericsson AB sells the equipments to EIL and to the Indian Cellular operators directly also. 4. Whether the co. has a business connection in India & in what form. Yes the co. has a business connection in India and a PE in India in the, form of Ericsson., India Ltd. The sale of equipments is attributable to PE directly. 5. Please also provide the last assessment order of the Ericsson AB assessed in your charge. Copy of the Ericsson AB assessment order for the A. Y. 08-09 is attached herewith a The reply of AddL. DIT Range 3 International Taxation, New Delhi is reproduced as under In this regard, on the basis of records available, this is to submit that Huawei Technology Company Ltd. manufactures and supplies GSM equipments. Further, as desired, kindly find the information as under:- S. Query Reply 1 Whether the Huawei Technology Company Ltd. has a PE in India in respect of the sale of mobile handsets/equipments Yes, Huawei Technology Company Ltd. has a PE in India in respect of the sale of equipments in the form of Huawei India (Indian) 2 Whether the Huawei Technology Company Ltd. is manufacturing mobile handsets/equipments in India. Huawei Technology Company Ltd. is not manufacturing equipments in India. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 37 3 How the sale of mobile handsets in effected in India whether through PE or direct. Huawei Technology Company Ltd. sells the equipments to EIL and to the Indian Cellular operators directly also. The sale of equipments is attributable to PE directly. 4 Whether the co. has a business connection in India & in what form. Yes, the co. has a business connection in India and a PE in India in the form of Indian Subsidiary. 5 Please also provide the last assessment order of the Huawei Technology Company Ltd. assessed in your charge. Copy of the Huawei Technology Company Ltd. assessment order for the A. Y. 08-09 is attached herewith p. The reply of DDIT Circle 3(2) International Taxation New Delhi is reproduced as under- in this regard, on the basis of records available, this is to submit that, Motorola Solution Inc. manufactures and supplies GSM equipments. Further, as desired, kindly find the information as under- S. No. Reply Query 1. Whether the, Motorola Solution Inc. has a PE in India in respect of the sale of mobile handsets/equipments Yes, Motorola Solution Inc., has a PE in India in respect of the sale of equipments in the form of Motorola Solution India (Indian 2. Whether the Motorola Solution Inc. is manufacturing mobile handsets/equipments in India. Motorola Solution lnc. is not manufacturing equipments in India. 3. How the sale cf mobile handsets/equipments in effected in India- whether through PE or subsidiary or direct. Motorola Solution Inc. sells the equipments to PE through which they are sold to the end user. 4. Whether the co. has a business connection in India &in what form. Yes,the co. has a business connection in India and a PE in India in the form of Indian Subsidiaries 5. Please also provide the last assessment order of the Motorola Solution lnc. Assessed in your charge. Copy of the Motorola Solution Inc. assessment order for the A.Y. 08-09 is attached herewith q. The reply of DDIT Circle 2(2) International Taxation New Delhi is reproduced as under:- ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 38 In this regard, on the basis of records available, this is to submit that, Samsung Electronics Ltd. manufactures and supplies GSM equipments. Further, as desired, kindly find the information as under:- S. No. Query Reply i. Whether the, Samsung Electronics Ltd. has a PE in India in respect of the sale of mobile handsets/equipments Yes, Samsung Electronics Ltd., has a PE in India in respect of the sale of.... 2. Whether the Samsung Electronics Ltd. is manufacturing mobile handsets/equipments in India. Samsung Electronics Ltd. is not Manufacturing 3. Now the sale of mobile handsets/equipments in effected in India- whether through PE or subsidiary or direct. Samsung Electronics Ltd. sells the equipments to Samsung Electronics India Pvt. Ltd. through which 4. Whether the co. has a business connection in India & in what form. Yes, the co. has a business connection in India and a PE in India in the form 5 - Please also provide the last assessment order of the Copy of the Samsung Electronics Ltd. In this regard, on the basis of records available, this is to submit that, Sony Ericsson Mobile Communication manufactures and supplies GSM equipments. Further, as desired, kindly find the information as under:- S. No. Query Reply 1. Whether the , Sony Ericsson Mobile Communication has a PE in India in respect of the s a 1 e of mobile handsets/equipments Yes, Sony Ericsson Mobile Communication, has a PE in India in respect of the sale of equipments in the form of Sony Ericsson Mobile Communication 2. Whether the Sony Ericsson mobile communication. is manufacturing mobile handsets/equipments in India. Sony Ericsson Ltd. is not Manufacturing equipments in India. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 39 3. How the sale of mobile handsets/equipments in effected in India-whether through PE or subsidiary or direct. Sony Ericsson Mobile Communication sells the equipments to PE through which 4. Whether the co. has a business connection in India & in what form. Yes, the co. has a business S. Please also provide the last assessment order of the Sony Ericsson Mobile Communication assessed in your Copy of the Sony Ericsson Mobile Communication assessment order for the A.Y. 08-09 is attached herewith The erstwhile AO of the assessee that time, happened to be also the Assessing officer of Nokia Corporation, Finland and Nokia Siemens Networks OY_ The information about these companies in the same tabular fashion is as under:- In this regard, on the basis of records available, this is to submit that, Nokia Corporation manufactures and supplies mobile handsets/ telecom equipments S. No. Query Reply 1 Whether the , Nokia Corporation has a PE in India in respect of the sale of mobile handsets/equipments Yes, Nokia Corporation has a PE in India in respect of the sale of equipments in the form of Nokia India Pvt.Ltd. 2 Whether the Nokia Corporation . is manufacturing mobile handsets/equipments in India. Nokia India Pvt. Ltd.. is not Manufacturing equipments in India. 3 How the sale of mobile handsets/equipments in effected in India-whether through PE or subsidiary or direct. Nokia Corporationsells the equipments to PE through which they are sold to the end user. 4 Whether the co. has a business connection in India & in what form. Yes, the co. has a connection in India and a PE in India in the form of Indian Subsidiaries t. In this regard, on the basis of records available, this is to submit that, Nokia Siemens Networks OY. manufactures and supplies GSM equipment ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 40 S. No. Query Reply i. Whether the , Nokia Siemens Networks Oy. has a PE in India in respect of the sale of mobile handsets/equipments Yes, Nokia Siemens Networks Oy.., has a PE in India in respect of the sale of equipments in the form of Nokia Siemens Networks India pvt. 2. Whether the Nokia Siemens Networks Oy. is manufacturing mobile handsets/equipments in India. Nokia Siemens Networks Oy..is not manufacturing equipments in India. 3. Now the sale of mobile handsets/ equipments in effected in India – whether through PE or subsidiary Nokia Siemens Networks sells the equipments to Nokia Siemens Networks India pvt.ltd. and through 4. Whether the co. has a business connection in India & in what form. Yes, the Co. has a business connection in India and a PE in India , in the form of Indian Subsidiary The facts narrated above makes it clear that the OEMs manufactured the equipments after incorporating the intellectual property of Qualcomm and selling the same in India to earn the revenue and the Royalty is paid to the assessee is accrued and arisen in India. Therefore, in simple words, the OEMs have used the CDMA technology for earning income from source in India. From the replies received from various AOs, it is amply clear that all the OEMs have a strong business connection and also the PE in India. The sale of handsets and equipments in which Qualcomm's patented technology is used is directly attributable to the PE of these OEMs in India. It may also be pertinent to mention here that in the Patent licensing agreements all the AEs of the OEMs are treated as a single entity and any sale between them is not considered for computation of Royalty. It is only when the handset/equipment is sold to an end user or a third party reseller, a mutually agreed proportion is computed as Royalty and become payable to Qualcomm. The business of these OEMs consists of manufacturing and selling of the handsets/ equipments . Only manufacturing of handsets/equipments can never be called as business, That can at best be one of the activities of the business of OEMs. As per the Act the technology to which the Patents relate should be used in the 'business' of OEM carried on in India. It is a matter of record as narrated in the replies of the AOs of OEMs that they are carrying on business in India through PE and the business revenues are connected to these PEs in India. Suppliers like Alcatel, ZTE, Huawei, Nokia, Samsung etc are assessed to tax in Delhi Charge and their cases are also well documented. Without prejudice to this, it must be emphasized that it is not the taxability of OEMs that is our concern at this point. The Act, in Section 9(l)(4(c) envisages that the NR payer of royalty must have some business c/source of income in India. As to the taxability of those OEMs in India, here, DTAAs of respective OEMs will come into play and that requires the business connection to cross a threshold (inform of PE) so as to become taxable. The assessee has only filed the copy of some amended agreements, which are also redacted and excluding some basic related information. During this current scrutiny proceedings, the AR has ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 41 also stated that the basic and modus operandi of the transaction of the assessee with the OEM's, remained same as that of the last year. Further, no details/deception regarding the changed/new clauses of the amended agreements vis a vis the earlier/original agreement, have been filed. Accordingly, the verifications made and information gathered by the AO for the A. Y. 2011-12 & 2010-11, are relied upon for the current assessment proceedings also. Para-11.12. Whether OEMs have source of income in India a. The agreement between the OEMs and the Indian operators demonstrate in no uncertain terms that what is sold by them is the hardware and the not the software embedded therein. b. OEMs are not only supplying the equipment but they are licensing the software, the ownership of which is not transferred to the operators in India. The software is licensed for the use of the operators. Thus, the intellectual property for which the payment is made by OEMs to Qualcomm is licensed for Use in India which yields income and becomes a source of income for the OEMs. c The two agreements which Indian operators entered with Motorola and ZTE make a categorical difference between the sale of the equipment and licensing of the software embedded in the firmware. The Indian operator has also agreed to purchase the equipment and license to use the software separately (Clause 2.1 of Motorola agreement). Clause 2.2 of the agreement with ZTE also clearly states the the;SIV3plier has agreed to "sell and license" and the Indian operators have agreed to purchase the equipment and take license for the software. Both OEMs and Indian operators treat the software embedded in the handset/equipment as distinct from hardware. d. Clause 19.5 (page 43) of ZTE agreement further records that all licensed material are the property of "the supplier or its suppliers". The supplier of OEMs is Qualcomm which has supplied the intellectual property to be used under a license for manufacturing of handsets/equipment. e. The agreement between Qualcomm and OEM states in the preamble itself that OEM desires to obtain a license of Qualcomm's intellectual property chipsets and other definition of "CDMA ASIC" appearing on page 231 clearly shows that OEMs have been given license to use chipset/ASIC purchased from Qualcomm in manufacturing equipment/handsets. The CDMA technology belonging to Qualcomm is embedded in chipsets which are used by OEMs and licensed to Indian customers for further use by them. There is absolutely no material to, suggest that Qualcomm has not licensed its technology to OEMs. f. Clause 5.1 states that Qualcomm has guaranteed worldwide licenses under Qualcomm intellectual property to make, import, use, sell, or lease or otherwise dispose of subscriber units and (b) to make components and use and sell such components. This clause does not make any reference to what kind of intellectual property is being licensed. OEMs do riot need any license to manufacture handsets/equipment unless there is an intellectual property belonging to Qualcomm, which is going to be used by OEMs. These intellectual properties have to be used for making the chipsets going to be embedded in the handsets/equipment. g. In common understanding, Qualcomm has made available to OEMs its patented technology of CDMA in the form of chipsets/ASIC. OEMs have incorporated these chipsets/ASIC in the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 42 handsets/equipment manufactured by them and have in turn licensed these to Indian operators. Therefore, it is not only OEMs who are using the intellectual property of Qualcomm in manufacturing the equipment/handsets, the Indian operators are also using the technology embedded in the hardware under a license from OEMs. h. There is no dispute on the fact that the patent portfolio of Qualcomm is licensed to the OEMs. This patent portfolio mainly consists of the essential patents required to manufacture any handset/equipment, which will be compatible in CDMA network environment. Qualcomm owns all essential patents for CDMA . It is not clear so far from the facts gathered as to where these patents are used. They are definitely used by the OEMs in their business in India at the point of manufacturing of handsets/equipment. The CDMA equipment is installed in India. The CDMA handsets are sold in India. Both are separate hardware items in which essential CDMA patents owned by Qualcomm are used. Both need to communicate to each other for making the CDMA system functional. This communication is not possible without the use of some appropriate technology. Without this technology the CDMA system cannot function or rather it cannot achieve the purpose for which it is meant. Whatever be the name of this technology, it has to be patented and should form part of the essential patents required for making the CDMA system functional. Undoubtedly, such technology patents should be part of Qualcomm's patent portfolio. This technology has to be used in India as without it the CDMA network cannot be made operational in India . It cannot be disputed that CDMA network is successfully in operation in India. As a corollary, the technology referred above and the essential patents of CDMA belonging to Qualcomm is also getting used in India . In view of this discussion , it is clear that, the Qualcomm's Patents are used for the business in India. i. The Finance Act of 2012 has introduced explanation 4 to section 9(l)(vi) to clarity for removal of doubts that transfer of any right in an intellectual property includes transfer of any right for use of a computer software irrespective of the medium through which such right is transferred. The amendment comes into operation with retrospective effect from 1.6.1976. In view of this clarificatory amendment it is immaterial that the properties or rights are embedded in handsets/equipment. The entire argument to the effect that OEMs sell copyrighted article and do not give any right in the copyright is of no consequence post this amendment. j. Qualcomm is in not giving license to OEMs for manufacturing some engineering or mechanical products. Qualcomm is having its patents for wireless technology, which has to have software and computer programs to transmit or receive data/signals and provide connectivity and make the network functional. This activity is possible only through the use of software, which are in other words only computer programs. Handsets are dumb equipment unless software providing connectivity to the networks embedded in if so is the case with equipment. Therefore, when OEMs license the intellectual property for a consideration (forming part of the overall consideration) to Indian operators, they definitely have a source of income in India, k. Reliance was placed on the decision of the Privy Council in the case of Rhodesia Metals Limited reported-9AR45 (Sup) where the Privy Council held the view that the source does not mean a legal concept but something which a practical man would regard as a real source of income. It is ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 43 not in doubt that in commercial parlance, OEMs definitely have a source of income in India in the given facts and circumstances and all technical argument about the nature of use etc. is really of no consequence. l. The source of income in terms of monies received is in the form of the Indian carriers. Such source, in terms of spring or fount from which a clearly defined channel of income flows- or activity giving rise to income, can also be traced to India in form of supply of equipments having CDMA technology to the Indian carriers. The activity includes the whole gamut of operations starting from manufacturing and ending in the installation/commissioning/sale of the CDMA equipment. Therefore there exists sufficient nexus between the activities of the OEMs and the Indian Territory so as to qualify the definition of source of Income. Para-11.13. whether the title passes in India or outside India a. Section 19(1) of the Sale of Goods Act provides in a contract for the sale of goods, the property is transferred to a buyer at such time as the parties to the contract intend it to be transferred. However section 19(2) of the Act provides that for the purpose of ascertaining the intention of the parties, regard shall be had to; i. the terms of the contract; ii. the conduct of the parties; and iii. the circumstances of the case b. The contract has to be read as a whole to ascertain the intention of the parties. In the Motorola agreement, Clause 14.1 provides that the title and the risk shall pass upon delivery in accordance with the CIP Inco terms 2000 port of shipment. The word delivery has been defined on page 44 of the agreement to mean physical delivery by the supplier of the equipment ordered by TTSL on CIP terms at airports/ seaports mutually designated by the parties" CIP has been defined on the page 43 of the agreement to mean "cost, insurance paid to airport/seaport in India" as defined in Incoterms2000. c The definition of these terms clearly indicates that the entire risk is borne by the supplier and carnage and insurance charges paid till their delivery at airport/ seaport in India. The repeated reference by the Assessee to Incoterms 2000 does not alter the situation because the expression by its very definition in the agreement means the obligation to bear the carriage and insurance charges upto airport/ seaport in India. It would be illogical to read that the parties particularly Tata in India, can agree to the delivery at any airport/ seaport outside India: This becomes further evident from the definition of "Site" on page 47 of the agreement which reads to mean "the land building and/or any other place where the equipment is to be delivered". It is obvious that the reference to the "sites" is to the place where the network is to be installed and commissioned. d. Clause 4.15 of the agreement further provides that the supplier shall ensure that the equipment is "as per agreed scope of the purchase order". Clause 7.5 gives the right to buyer to ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 44 change the location at which the equipment is originally required to be delivered. It further provides that the purchase order given by the buyer does always mention the location of the delivery of the equipment. e. In view of all the above referred clauses, if the agreement is read as a whole, the intent of the parties is clear that the title to the equipment passes in India at the site where the deliveries are made or in a worst scenario at the airports/seaports in India. f. In the agreement between Tata and ZTE, Clause 14.1 on page 33 it is stated that the "title shall pass in high seas before arrival in India and the risk of loss shall pass upon provisional acceptance". Under normal circumstances, the risk and title would go together. In the present case, the terms of the agreement read as whole and the conduct of the parties go to indicate that the terms indicated in clause 14.1 do not demonstrate the true intent of the parties. The fourth preamble to the agreement on page 2 of the agreement provides that buyer has asked the supplier to supply/deliver the "equipment in full and guaranteed working condition to the full satisfaction of TTSL". This condition of the supply cannot be met if the goods are delivered on High seas. The "full satisfaction" can be reached only in India after the provisional acceptance. Clause 2.8 of the agreement on page 3 defines the scope of the supplies and includes various task including, network planning and RF optimization. The provisional acceptance is referred to in clause 4.1 of page 16 to define the supplier's obligation and clause goes on to provide that the supplier shall manufacture, supply, deliver, all the equipment "to achieve provisional acceptance and final acceptance of the equipment in accordance with schedule A". This clause further indicates that supplies and delivery of equipments is subject to achieving provisional acceptance. One cannot pick up one part of supply obligation and contend that the title has passed with the discharge of that obligation. g. The definition of 'delivery" on page 5 of the agreement stipulates "physical delivery by the supplier of the equipment ordered by TTSL on DDU terms at the site". DDU is defined on the same page to mean "site or sites in India" as defined in Incoterms 2000. The clause goes on further to state that it means the supplier fulfils his obligation "when goods had been made available at the named sites in the Country of importation". The word "site" has been defined on page 9 of the agreement to mean "the land, building and/or any other places where the equipment is to be delivered. Carrying out of the deliveries as directed by TTSL in writing': It is obvious that the reference is to the "sites" in India and delivery obligation is on the supplier for delivering the goods to a site in India. It is needless to repeat that Incotenns 2000 only refer to the terms of the agreement generally acceptable between the contracting parties with regard to obligation to bear the cost of transportation, insurance till the point of delivery. Thus, if the agreement is viewed as a whole, it demonstrates that the supplier has the obligation to deliver the goods at the relevant sites in India and the declaration in clause 14.1 that the title passes in High seas does not reflect the actual mode and delivery of the supply nor the true intent of the parties. Section 19(2) of Sales of Goods Act provides for the factors to determine the intent of the parties and if despite the declaration to the contrary under the section 19(1), if it is found as a matter of fact that the deliveries had been made in India it would be open to Revenue to assert that title to the goods had passed in India. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 45 h. Section 21 of the Sales of Goods Act provides that where there is contract for sale of specific goods and seller is bound to do something to goods for the purpose of putting them in a deliverable state the property does not pass until such thing is done and the buyer has notice thereof In the present case, the sale is not of standard goods but of components of a wireless network. Unless the compatibility of the handsets and equipment is established with CDMA network setup in India, these supplies would be worthless. These handsets and equipment reached the deliverable state only when their compatibility with existing network is established through the provisional or final testing. The supplier has definite obligation to achieve this milestone and unless this is done the property cannot pass. Unlike other kinds of overseas supplies where the supplier has no other obligation beyond the point of shipment, in the present case, the obligation of the supplier extends to the geographical limits of India where he has to put the supply into a deliverable state. In CDMA technology, handsets and equipment are integral part of the wholesome technology and these cannot be viewed independently. i. In view of the above, there is no room for any doubt that the title to the goods has passed in India despite the declaration in clause 14.1 to the contrary. In this scenario, it is not open to argue that OEMs do not carry out business in India. If one leg of the business operations is in India and other is in Korea, it cannot be said that OEMS carry business only in Korea and not in India. j. It is evident that the OEMs have used the property for the purpose of carrying out business in India and the first limb of 9(l)(vi) (c) of the Act stands satisfied. Further, the sample contracts produced before the ITAT between OEMs like Motorola and ZTE and TTSL, adds strength to the argument that source of income lies in India. Ref is invited to the Preamble between TTSL and ZTE contract which says that TTSL is desirous of equipment in full and guaranteed working condition for establishing CDMA based wireless networking services in accordance with the agreed technical specifications. Such specifications are met once the installment is done on Site in India. (Ref is invited to definition of site in the contract). The risk of loss does not pass to TTSL unless Provisional Acceptance is given by TTSL. Such PAT is also done in India on Site. The installation is done by an entity recommended and approved by the OEM thereby indicating that installation is done by the OEM. Ref is invited to the Sale of Goods Act, section 19(2) and Section 20- 24. Section 21: Specific goods to be out into a deliverable state.- Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof. K. Further regarding Acceptance of goods by buyer - Contract of Sale is completed not by mere delivery of goods but by acceptance of goods by buyer. 'Acceptance' does not mean mere receipt of goods. It means checking the goods to ascertain whether they are as per contract. — Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract (Section 41(1)] ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 46 l. Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract (Section 41(2)] M. Further Suppliers scope as per clause 2.8 includes of TTSL/ZTE contract spells out the following: Supply of Hardware/Software/Firmware for 4GVC 1. Supply of Hardware/Software/Firmware for number portability 2. Network planning and RF optimization for EV DO deployment including Radio network optimization 3. Setting up and running a specific team In R&D Organization exclusively for TTSL for CDMA Equipment research and evaluation in order to improve services; 4. Ensuring that the Equipment supplied/ to be supplied will support prepaid and postpaid convergence feat res: 16 ether with other network elements required in TSNL network e.g. HLR&IN and up gradation thereon from time to time during the Term of this Agreement; N. It is necessary to decide whether property in goods has been transferred to buyer to determine rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in goods passes, risk also passes. The clause 14.1 of agreement says Extract from Contract Without prejudice to TTSILs right to reject as set forth in article 6.4 of this agreement the title of all equipment sold hereunder shall pass from TTSIL in high seas before arrival in India and the risk of loss to the hardware portion of all equipment shall pass from supplier to TTS1 upon provisional acceptance. m. It is seen that title of all Equipment sold was to pass from suppliers in high seas before arrival in India but the risk of loss shall pass only upon provisional acceptance by TTSL. However when we examine the terms of the contract, the conduct of the parties and the circumstances of the case. (Section 19(2)1 it is seen that this is a Composite Equipment Purchase Agreement dated: 19.02.2007 for supply/delivery of equipment in full and guaranteed working condition for establishing CDMA based wireless networking services in accordance with the agreed technical specifications. n. This clearly shows that operational utilization and full and guaranteed working condition in accordance with technical specifications are the requirements for the contracted goods to be put into a deliverable state and the property does not pass until such thing is done i.e. working condition as per technical specifications and the buyer has notice thereof though the provisional acceptance test. Note that final Acceptance tests which are conducted after one year of the successful completion of the probation period of one year in service post the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 47 event of achieving provisional acceptance (pg. 5 of 65) thus conforming to the guaranteed working condition part of the contract. o. A reading of the aforesaid sections of the Sale of Goods Act will show that where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof. p. In view of the discussion above, the OEMs (the payers of royalty) are found to have used the property for carrying on business in India and also for earning income from a source in India. Therefore the royalty income shall be deemed to have arisen in India and would be chargeable to tax and that nothing further needs to be established for the chargeability under the domestic law. The two limbs of S.9(l)(vi)© carrying on business in India and having the source of income in India are not inter dependent on each other and may operate independent of each other. q Accordingly, the above submissions of the assessee that the OEMs do not have a source of income in India deserve to be rejected and the royalty income received from the non-resident OEMs on sale of CDMA handsets and CDMA infrastructure equipment is deemed to have accrued or arose in India and therefore taxable in India Para-12. UNDER THE INDIA- USA DTAA Article 12 of the India-US DTAA defines royalty as follows- 3. The term ’royalties" as used in this article means: payments of any kind received as a consideration for the use of, or the right to use, any copyright or 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, trade mark, 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 properly which are contingent on the productivity, use, or disposition thereof; and Para-12.1. Applicability of Article 12(7) (b) - Indo- US DTAA The definitions of term "royalty" as appearing in Explanation 2 to section 9(1)(4 and paragraph 3 of Article 12 of lndo-US DTAA are identical. The relevant article 12 (7)(b) 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." ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 48 Para-12.2 As per Paragraph 7(b) the royalties relate to the use of or the right to use, the right or property, in one of the contracting States, the royalties shall be deemed to are initial Contracting State. The considerations received by the non-resident assessee are for the use of or the right to use copyright, patent, invention or process in India and consequently liable to tax in India u/s 9(l)(w) of income tax Act, 1961. Para-12.3 The patented technology is being utilized by the OEMs for their business of telecom network equipments in India- thus royalty is accruing/arising in India. As Per Explanation inserted by the Finance Act, 2010 w.e.f. 1.4.1976 the income by way of royalty of a non-resident shall be deemed to accrue or arise in India under clause (vi) irrespective of the fact whether the non-resident has a residence or a place of business or business connection in India. Para-12.4 The assessee's argument that the technology license is used by OEMs outside India and what Indian Carriers are using is only copyrighted items is misplaced. There is no such thing as copyrighted article either in DTAA or any domestic legislation in India. Further, if any term is not defined in DTAA, then domestic legislation must be referred to. Indian Income tax Act has done away with the distinction between copyright and copyrighted article vide Explanation 5 to the Section 9. Para-12.5. OEMs use the technology and design developed and owned by Qualcomm [pls refer the preamble of sample agreements b/w OEMs and Qualcomm] to manufacture, commission, install and sell various CDMA architectural equipments. It can be seen that other than mobile station i.e. the handset, all other network equipments enumerated in the pars above require specialized technical expertise for installation, commissioning and making them compatible with the handsets. Therefore the sale of these network equipments cannot be said to be completed unless they are properly installed and tested. All these network equipments use the technology developed by QUALCOMM which is also required for their installation and commissioning. Therefore OEMs use of QUALCOMM technology extends very much into the territory of India where these equipments are installed. [Please refer to the relevant clauses in the Agreement between equipment OEMs and Qualcomm wherein Qualcomm is required to render requisite technical support to OEMs as and when required.] Para-12.6 The Indian carriers also use the design and technology owned and developed by Qualcomm for their network operations in India. This is done by way of procurement of various components of CDMA Architecture and installing those equipment and then running and maintaining them. Here, Qualcomm's involvement does not stop with granting license for its technology to OEMs. Qualcomm goes a step further and provides a gamut of technical assistance to the India carriers in their business of setting up and operating the CDMA based wireless communication business. This is evident from the Technical services Agreement between Indian carders and Qualcomm and also the MOU furnished in the paper book. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 49 Para-12.7 The use of licensed material is further evident from the clauses on IPRs in the sample contract between Indian Carrier and OEM (ZTE/TTSL contract). It says that the licensed material will remain the property of the Supplier or its suppliers and TTSL has received only right to use this property in India. Further, the EULA agreement terms between TTSL and ZTE also strengthen Revenue's argument- such EULA says that " CDMA technology licensedis used by TTSL for its business in India..... " Para-22.8 The assessee has tried to argue that the licensed material which is subject matter in the above clause does not belong to Qualcomm Inc because it has only licensed technology and not any software to the OEMs for use. Further, it tries to argue that the software licensing has not been sought to be taxed by Indian Revenue Authorities. Its software business is distinct and what has been sought to be taxed by Revenue Authorities is royalty accruing from patent division. With respect to the revenue's argument w.r.t EULA clause, the assessee appears to be silent. Para-12.9 Here it may be mentioned that the four principal business units of Qualcomm are as follows: Qualcomm CDMA Technologies (’QCT) — QCT develops and supplies CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning system products. Qualcomm Technologies Licensing ('QTL') — QTL grants licenses to manufacturers of wireless products for the right to use portions of Qualcomm's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and safe of certain wireless products. Qualcomm Wireless & Internet ('QWI') — QWI is comprised of: Qualcomm Internet Services ('QIS) — QIS provides technology to support and accelerate the convergence of the wireless data market, including in it BREW, QChat and QPoint products and services; Qualcomm Government Technologies ('QGOV) — QGOV provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies; and Qualcomm Wireless Business Solutions ('QWBS) — QWBS provides satellite- and terrestrial- based-„two, way data messaging, position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 50 (d) Qualcomm Strategic Initiatives (QSI) — QSI manages the Company's strategic investment activities, and makes strategic investments to promote the worldwide adoptions of CDMA-based products and services. Para-12.10. Perusal of earlier year assessment orders would show that the AO observed that two important streams of the assessee's income are from Qualcomm CDMA Technologies (’QCT) which develops and supplies CDMA based integrated circuits and systems software for wireless voice and data communications, multimedia functions and global positioning system products and Qualcomm Technologies Licensing ('QTL') which grants licenses to manufacture of wireless products for the right to use Qualcomm's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products. AO sought to tax revenues of these units and quantified it in form of income from CDMA handsets and CDMA infrastructure equipments. Attention is invited to the profile of QCT which develops and supplies CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning system products. The assessee's attempt to distinguish between its patent division and software division is artificial constructed and does not hold water. Para-12.11. In the earlier year assessment proceedings, the income from CDMA handsets and CDMA infrastructure equipments has been taxed by the AO after observing that: 1. 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. 2. Section 9(l)(vi) of the I. T. Act is a deeming provision seeking to tax royalty payable by one non resident to another non resident in relation to income earned from a source in India. Under the provisions of section 9(1) (vi) (c) of the I.T. Act, it is not mandatory to bring the payer to tax before initiating the proceedings against the person receiving royalty income. 3. In this case, we are concerned Dilly with the royalty paid by the OEMs to Qualcomm based on network equipment/ handsets sold by them to parties in India. It is not the Department's case to tax the royalty arising out of the global contract between OEM's and Qualcomm but only so much of royalty which pertains to sales made in India. The source of income of OEM's is sales made to parties in India based on which royalties are paid to Qualcomm. Thus in terms of section 9(1) (vi) (c) of the I.T. Act royalties payable to Qualcomm are deemed to accrue or arise in India. In terms of Article 12(7) (b) of the DTAA between India and USA, the royalty arising to Qualcomm is clearly taxable in India. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 51 4. It is not a case, where the royalty has been paid lump sum for the use of CDMA technology but is an ongoing payment dependent on the volume of sales. The relevant clause of the agreement is as under: а. "Sold", "Sale", "Sell" means sold, leased or otherwise transferred or put into use and a sale shall be deemed to have occurred upon first shipment, invoicing or putting into use, which ever shall first occur. Notwithstanding the forgoing, a Licensed Product shall not be deemed to have been sold by Licensee For purposes of paying royalties to Qualcomm under this Agreement until such time as such Licensed Product has been (a) sold, leased, shipped or otherwise transferred to a person or entity outside of the definition of Licensee or (b) put into use by anyone, including but limited to by... Licensee whichever shall first occur." 5. 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. б. 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 CDM A 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, it was observed that the same does not alter the position of taxability of the royalty income in India under the provisions of Section 9(1) (vi) (c) of the Act as it is still an admitted fact that royalty arises to Qualcomm only when the customer is identified by the OEMs. In the Indian situation since the customers (Tata and Reliance) are based in India, they necessarily constitute a source of income for the OEMs in India and the taxability under the deeming provisions of Section 9(1) (vi) (c) cannot be denied/ overlooked. 7. The above position is strengthened in the view of the assessee's own submissions that the Indian Carriers may request specific features to be incorporated in the phones to be sold in India. Therefore, whether the specific features are driven by the assessee's technology or not is immaterial since the phone will then unequivocally be saleable only to India thereby bringing creating a strong Indian nexus for source based taxation. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 52 8. In view of the above discussions, royalties arising to Qualcomm from the sale of infrastructure equipment and handsets by the OEMs to Indian customers is taxable in India as per section 9(1) (vi) and article 12(7) (b) of the India- US tax treaty. Para-12.12. Regarding taxability of the royalty income under the treaty, the assessee vide submissions dated 07 March 2013 has submitted as follows: "In the facts of the instant case, it is undisputed that the royalty income earned by Qualcomm from non-resident OEMs does not accrue or arise in India. Consequently, it is not under dispute that the Article 12(7)(a) of the India-USA tax treaty is irrelevant for the purposes the present assessment. Article 12(7)(b) of the treaty provides as follows: "Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, MO: 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." Qualcomm wishes to submit that for the royalty to relate to the use of or right to use the right or property in India, the agreement between Qualcomm and the OEM should: a) Be confined to India or (b) India should be one of the countries where the right or property must be specified as being used. In Qualcomm's case, neither of the aforementioned conditions is satisfied. Hence, the royalty cannot be regarded to have deemed to arise in India. In light of this, it is submitted that Article 12(7) does not apply in Qualcomm's case and hence, royalty does not "arise" in India. In light of the detailed technical submissions outlined in Annexure 3, it is submitted that for the royalty income of Qualcomm to be taxable in India under Article 12(7)(b) of the treaty, the patents licensed by Qualcomm to the OEMs situated outside India must be used in India. It is clear from the facts and our submissions that sale of products to Indian carriers cannot be treated as use of the patents in India. Hence under the treaty, royalty paid outside India for the use of patents outside India cannot be held as taxable in India under the treaty." Para-13. DISTINCTION WITH DECISION OF HON'BLE HIGH COURT OF DELHI IN THE CASE OF ERICSSON A. B Further, the Jurisdiction High Court decision in the case of Ericsson A.B. [246 CTR 422 (Del)), is totally inapplicable to the facts of the present case . That in the case of Ericsson, the issues under consideration were: i.Whether Foreign Company has any business connection in India or-not? ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 53 ii. Whether Foreign Company has PE in India or not? iii. Whether the income from the supply contract can be treated as 'royalty' under section 9(l)(vi)? Para-13.1 In this case it was held that the Foreign co. has no business connection in India and it was also held that if the assessee did not have any business connection in India, it is not necessary to go into the issue whether the assessee had any Permanent Establishment in India or not during the relevant period. However, in the present case, we are not into determination of taxability of "OEMs" but the taxability of "Qualcomm Incorporated" which is to determined having regard to section 9(l)(vi)( c). It has nothing to do with the taxability of "OEMs". The provisions of section 9N(i) on which the decision was rendered by the High Court is totally out of context in the present case. Para-13.2 Further, if a non resident (OEM) is paying royalty to another non resident (Qualcomm) in respect of any right, property or information used or services utilized for the purpose of a business carried on by such non resident (OEM) in India or earning any income from any source in India would not necessarily give rise to taxable income in the hands of such non resident (OEM) since the taxability would depend upon other factors also such as whether such non - resident has PE in India or not and whether there is any exclusion in the respective treaty etc. Source of income is distinct from the place of accrual of Income. In the case of Ericsson, the other issue before the Hon'ble Delhi High court was whether the income from the supply contract can be treated as 'royalty' under section 9(l)(vi) read with Explanation 2 of the Act. But in the present case the nature of payment is not in dispute. The royalty is paid by a non resident to another non- resident, which would be taxable under clause (c) of section 9(0(vi) and not under clause (b) of S. 9(0(4 of the Act. Para-13.3 Further, in the case of Ericsson, the fact that the title of the goods passed outside India was not in dispute whereas in the present case it is under serious dispute. In the case of Ericsson, it was an admitted position that installation and commissioning of the equipment was done by two separate corporate entities where as in the present case it is still in dark who did the installation and commissioning of the equipment. The mere fact that the agreement does not cast obligation for installation and commissioning on the OEMs does not throw adequate light as to who else was competent to install and commission such highly technical equipment Several provisions of Sale of Goods Act were not discussed by the Delhi High Court like section 19(2), 9(3), 20- 24, 41. In Ericsson, the installation part was already contracted out to another entity. In ZTE's case, the installation part would be done by supplier recommended and approved entity and there is no separate contract for that as per records available. Further, subsequent amendments in Act have done away with the distinction between copyright and copyrighted article. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 54 Para-14. DISTINCTION WITH DECISION OF HON'BLE HIGH COURT OF DELHI IN THE CASE OF NOKIA The assessees have relied upon the decision of High Court of Delhi in the case of Nokia for the following reasons:- i. Softwqre was integrated, to .GSM Equipment and incapable of independentuse and hence the transaction was for Supply or goods. ii. Payment was not taxable under India Finland DTAA as it was for Copy righted article and not for a Copyright. iii. The definition of "royalty" under the said DTAA differs from the amended definition of Royalty under the Act. 2. In the context, Question raised before Hon'ble High Court of Delhi as responded on Page 7 of the Judgment were: Questions 1 and 2 on whether Nokia has any business connection and/or PE in India. Question no.3 on whether the amount was Taxable as royalty. 3. Hon'ble High Court observed on Page 16 (Para 9) that the liaison office cannot be regarded as PE. After, coming to this finding again in Para 22 (Page 26), the High Court discussion the amendments and observed on Page 29 that the amendments can the Treaty. Questions No 1 and 2 were accordingly decided in favour of the assessee. 4. Hon’ble High Court proceeded to discuss Questions No. 3 and 5 on page 29 (para 25). After reproducing extracts from the earlier judgment in the case of Ericsson the Hon’ble Court observed that Software had no independent existence leading to the finding that the payment cannot be regarded as royalty 5. On the other hand, on the facts of this case, there is no dispute the nature and character of payment but the dispute raised is only with regard to situs of income or situs of accrue/ of such income. 6. The issues are entire different in this case. While in Nokia or Ericsson. The nature of income being Royalty was in dispute here, there is no dispute that the income is by way of royalty. In Nokia or Ericsson taxability of OEMS in India was under dispute but in the case of assessee the taxability of licensor’sn of OEMs is in dispute. The scope of sub section 9(1)(i) and 9(1)(vii) are entirely different. Hence a decision which is wholly out of context is sought to be pressed into service. The taxability of licensor may arise even if the OEM is not found to have PE in India (and hence not taxable). The taxability under 9(1) (vi) depends,6n the 'intellectual property being used for a business be taxable in the hands of OEM due to non-existence of PE etc. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 55 7. A look at the facts in the case of the assessee goes to indicate that Qualcomm is deriving income from license of patented technology. The use of Copyright ( as in the case of Nokia/ Ericsson) not being even remotely suggested. 8. Unlike Copyright Act, the Patents Act 1970 defines not only "patent" but also "patented article" and 'patented process" to mean respectively an article or process in respect of which a patent is in force.(sub-clause (o) of section 2). A computer programmer per se is not patentable (clause k) of section 3). The rights of patentees are explained in section 48 as the right to prevent third parties from act of making, using, selling, or imparting those products or processes without the consent of the licensor. 9.Qualcomm's "Chipset and ASIC" which contain the core patented technology are sold to OEMs which get embedded in the handsets and equipments manufactured by them and, in turn, sold to India. OEMs can not use these chipsets and ASIC without the consent of Qualcomm which is given under agreements with OEMs. Tata/ Reliance also cannot use these patented articles without the consent of Qualcomm and OEMs and that is the reason these find place in the agreement by the use of the expression 'licensing of software". 'Software" is defined in the agreement between Tata and OEM to mean man and machine readable instruction including firmware. Firmware is also defined to mean a combination of hardware and software. The "Equipment" is also defined to mean and include CDMA Equipment. Thus, the network operators in India are given the right to use the patented products and processes of Qualcomm through OEMs. The agreement between Qualcomm and OEM defines "CDMA ASIC" to mean Qualcomm mobile station modem and integrated circuit etc. and "chipset" is defined to means" Qualcomm's baseband analog, ASIC, AGC Tx, AGC Rx ASIC and CDMA ASIC" (all patented products or processes) 10. These facts raised an altogether different questions in this case-different from those in the cases' of Nokia or Ericsson. i. What are the patented technologies that Qualcomm has got patented which go to make CDMA technology, ii. Whether or not these patents being used in a business carried out in India, iii. Whether Indian operations have the necessary authority in law to make use of such patents. iv.Whether use of such patents would full within the meaning of the expression "Royalty" as used in the DTAA and the domestic law. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 56 11. It is a very significant and important fact that up to the year 2004, Qualcomm had already got nearly 400 patents registered in India which figure has swelled up to roughly over 1300 patents by now. 12.lt is highly illogical for the assessee to rely on cases pertaining to software and draw distinction between Copyright and Copyrighted article when, according to their assertion, their case is in the realm of patents which is an altogether genre of intellectual property. 13.Had it been the case of the use of patent, the Hon'ble High Court of Delhi could not have reached the same conclusion as it did in the case of Nokia (or Ericsson). Para-14.1. Reference is also invited to Nokia Special bench decision wherein inspite of title being passed outside India, PE/BC was upheld considering the activities of Indian subsidiary in Network planning Marketing and installation. In the case of OEMs and Indian carder, installation is done by OEM recommended and approved party therefore responsibility lay with OEM and network planning is also done by OEM along with a host of other activities set out in Supplier's scope. Para-14.2 In the impugned case, the question under review is whether the Non-resident payer has business /source of income in India and whether Qualcomm is earning royalty from use of technology, which is patented in its name, in India. So, we have to answer two questions: The Non-resident payer has business connection/source of income in India The technology which is held by Qualcomm is used in India. The whole arrangement between the Qualcomm and OEMs and OEMs and Indian carriers and the Indian carriers and Qualcomm should not be looked at in isolation. Each stage is part and parcel of the bigger arrangement wherein Qualcomm owns CDMA technology, it Licenses it to OEMs for manufacture of equipments, renders services to them, OEMs Supply these to Indian carriers which with the help of Qualcomm are able to deploy these equipments and exploit the technology for their business. (Refer to agreement between (i) Qualcomm and OEM (ii) Mob' between Reliance and Qualcomm) (Hi) OEM and Indian Carrier (iv) Technical services agreement as also BREW agreement between TTSL/RCL and Qualcomm. The Supreme Court in the latest Vodafone decision has re-iterated the look at principle enunciated in Ramsay case, in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole, and not adopt a dissecting approach. The Supreme Court's judgment favors a "look at" test in which Revenue looks at the entire arrangement, holistically, and not adopt a dissecting approach. 14.3. The contentions of the assessee are not acceptable as, undoubtedly the technology is used in India and therefore the provisions of Article 12 (7) (b) are attracted. Further, the ITAT did not examine the taxability of the royalty income under Article 12 (7) (b). The Hon'ble ITAT also did ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 57 not consider the fact that the OEM's were held taxable in India. Accordingly, the position adopted during the earlier years survives in the case of the assessee for taxability of the income under the provisions of the India-USA DTAA." 13. Further, during the year under consideration, the AR of the assessee has filed the copies of different agreements. As per Subscriber Unit License agreement dated 13.01.2012 between assessee and Unique Mobinet Surfers Private Limited (now known as Data wind Innovation Private Limited the following definitions elaborate the actual business module of the assessee company a. The agreement says that the assessee has developed certain proprietary code division technology which may be useful in providing greater capacity, higher data rates and improved quality and reliability compare to other cellular wires technologies and it manufactures and sells CDMA components and equipments. b. It explains that CDMA Access Point means a complete device which (i) incorporates all or any part of Qualcomm's Intellectual Property,(ii) connects to CDMA network infrastructure equipment over a CDMA wireless network utilizing a wireless air interface in compliance with the CAI, (Hi) does not incorporate a speaker or keypad c. It explains that CDMA means either a complete module, modem car, or other electronic assembly (a "Module") which (a) incorporates all or any part of Qualcomm's Intellectual Property, and (b) solely when embedded within, coupled with, or connected JO a 'Communications Device, is capable of being used to implement wireless communications transmissions in mince with any wireless air interface standard include/id in the definition of CAI. d. It explains that Embedded application means the use of any assembly, module or modern card, Including a CDMA Modem, embedded within another product in such a way that such assembly, module or modem card is rio4 attachable to or detachable from such other product by an end-user consumer without the use of a tool. e. It explains that Embedded CDMA Module means a CDMA Modern which is capable of being used to implement wireless communications transmissions h accordance with any wireless air Interface standard included in the definition of CAI when used in an Embedded Application. 14. From the above, It is clear that the intellectual property of the assessee company i e. assembly, module, modem card including CDMA modem etc, is not manufactured by OEMs but it is manufactured by the assessee company with its patent technology. The said intellectual property is provided to OEMs to incorporate or to embed in the equipments such as modem, etc manufactured by OEMs. The patent technology is not used by the OEMs but the same is used by the end-user. In the it instant case the end- user is in India, Hence, the technology is used in India and the royalty paid by the OEMs to the assessee company which was calculated on the number and sale consideration of subscribers units i.e. modem, etc. and equipments in India is sourced from India. Therefore, the royalty on Subscriber Units i.e. module, assembly, modem card, CDMA modem, etc., earned from India and paid by OEMs to the assessee company, is accrued ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 58 and arisen in India and is taxable in India. Further, the network infrastructure equipments are also used in India by way of supporting the connectivity of intellectual property of the assessee company. Therefore, the royalty on infrastructure equipments is accrued or arisen in India and is taxable in India. Para-14.1 In view of above, the royalty on Subscriber Units and Royalty on infrastructure equipments is taxed as Per of section 9(l)(vi)(c) of IT Act as well as Article 12(7) of DTAA between India and USA. " 4.5 In view of the clear finding of the AO in regard to taxability of Royalty relating to use of patent on the handsets sold by the service provider in India, the observation made by Hon'ble ITAT in respect of its ruling for AY 2005-06 to 2008-09 has been complied with. These Assessment orders for these Assessment years, however could not be adjudicated by the Hon'ble Bench due to allowing of the appeals on technical ground but not on merit. Thereafter the assessment orders for assessment years 2014-15 and 2015-16 dealt with in detail the compliance of the Hon'ble ITAT directions taking into a account the technical experts report, the additional facts and the applicability of both the limbs of section 9(l)(vi)(c) in regards to OEMs business in India and income on from a source located in India, and also on the issue of applicability of Article 12(7)(b) of the Indo-US DTAA. Therefore, during the course of the current hearing the revenue vehemently, argued before the Hon'ble Bench regarding taxability of Royalty income received by the appellant towards sale of handsets in India to the Indian customer/the service providers, by relying on the aforesaid sets of facts and law. 4.6 During the course of hearing, in response to Hon'ble Bench's specific query to explain is to how the transaction leads to earning of Royalty by the applicant from a non-resident for the purpose of making or earning any income from any source in India, it is submitted that the source of income is always link to the source of payment to complete a transactions. The Hon'ble Supreme Court has given a clear ruling as to what constitute a source of income in the case of M/s GVK Industries wherein it is held that income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. In the present case it is not in dispute that the payment of royalty to the assessee has been made by the OEMs in respect of business carried on by them in India as well as for the purpose of earning Income from a source located in India as the payment of royalty is exclusively related to the handsets sold by the OEMS in India. It is in material whether the OEMs are having any permanent establishment in India or their income is chargeable to tax under the provisions of income tax in India or not, the carrying of a business activity in India alone suffices. 4.7 In view of above, and taking into an account the finding of the AO and the direction of the Hon'ble DRP, it is submitted before the Hon'ble Bench that the royalty paid by the assessee, which is directly linked to the number of handsets which are sold by the OEMs for commercial use is taxable in the India i.e. the tax jurisdiction where the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 59 handsets are used by the customer after exclusive facilitation for its use by the Indian service providers and therefore, the royalty on Subscriber Units and Royalty on infrastructure equipments is taxed as Per of section 9(l)(vi)(c) of IT Act as well as Article 12(7) of DTAA between India and USA. " 11. We have considered rival submissions in the light of decisions relied upon and perused the materials on record. As could be seen from the facts on record, the assessee has offered the royalty income received from OEMs carrying on business in India through their PEs. Whereas, in respect of royalty received from OEMs located outside having no PE in India, the assessee has not offered royalty income to tax. It is the say of the assessee that it has granted patent license of subscriber units/equipments to OEMs, who manufacture them by incorporating/embedding the patents license given by the assessee. The manufactured handsets/equipments also incorporate/embed the chipsets sold by the QCT Division of the assessee, containing the CDMA technology. Whereas, the Assessing Officer has observed that since the subscriber units(handsets/equipments) containing CDMA technology/patent is ultimately used in India by subscribers, the royalty connected to such patent would be taxable in India as the OEMs selling the subscribers units/equipments have PEs in India. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 60 12. From the facts on record, it is evident that the assessee has offered the royalty income in respect of OEMs having PEs in India. In so far as the other OEMs located outside India are concerned, the Assessing Officer has not brought any material on record to demonstrate that they have PEs in India. While treating the royalty income received from foreign OEMs as taxable in India, the Assessing Officer has applied section 9(1)(vi)(c) of the Act. On a careful perusal of the impugned assessment order, it becomes very much clear that except relying upon the assessment order passed in case of the assessee for the assessment year 2012-13 and the report of technical experts obtained by the Assessing Officer while complying to the directions of the Tribunal in assessee’s case for the assessment years 2004-05 to 2008-09, the Assessing Officer has done precious little himself to establish accrual of royalty income in India. In fact, the assessment order clearly reveals that his entire decision making process, while bringing to tax the royalty income received by the assessee from OEMs located outside India, is based on the assessment order passed in the assessment year 2012-13 and the report of the technical experts relating to the assessment year 2004-05 to 2008-09. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 61 13. It is relevant to observe, identical issue of taxability of royalty income received from OEMs located outside India came up for consideration before the Tribunal in assessee’s own case for the assessment years 2000-01 to 2004-05. While deciding the issue, the Tribunal held that royalty received from OEMs located outside India is not taxable in India. However, when identical nature of addition again came up for consideration before the Tribunal in assessee’s own case for assessment years 2005-06 to 2008-09, the Revenue filed certain additional evidences before the Tribunal to demonstrate that certain OEMs have PEs in India and are being assessed to tax in India. Based on the additional evidences filed by the Revenue, the Tribunal restored the issue of taxability of royalty income to the Assessing Officer for re- examination after obtaining report of the technical experts. 14. On carefully going through the two orders of the Tribunal in assessee’s own cases, one for assessment years 2000-01 to 2004-05 and second one for the assessment years 2005-06 to 2008-09, it is observed, in the order passed for the assessment years 2000-01 to 2004-05, the Tribunal has categorically held that foreign OEMs, since, have not carried on any business in India, it cannot be said that such OEMs have ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 62 used assessee’s patents for the purpose of any business by them in India. The Tribunal has further held that by utilizing the patents of the assessee, OEMs have not earned any income from a source in India. Therefore, the royalty income cannot be taxable under the first limb of section 9(1)(vi)(c) of the Act. Even, in the second order passed for the assessment years 2004-05 to 2005-06, the Tribunal has agreed with the observations made in earlier order to the effect that as long as patents are used in the manufacturing process, which has taken place outside India, such royalty income cannot have tax implications in India. 15. As could been seen, the Assessing Officer, as discussed earlier, has laid much emphasis on the report of technical experts for the assessment year 2004-05 to 2008-09. However, the crucial issue, which arises is, whether that technical report can be utilized for deciding the issue in the impugned assessment years. Considering the submission of the ld. Counsel for the assessee that locking of CDMA subscriber units to make it India-specific or network carrier-specific, was discontinued in assessment year 2010-11 and thereafter, subscriber units available were open market handsets not locked in any specific service provider, in our view, the report of the technical expert do not have any relevance ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 63 in so far as the impugned assessment years are concerned. In any case of the matter, the assessment order makes it clear that driven by the assessment order passed for the assessment year 2012-13, the Assessing Officer has concluded that the royalty income received from OEMs located outside India is taxable in India. Pertinently, while deciding the appeals for the assessment years 2009-10 to 2012-13, arising out of ITA No. 5353/Del/2012 & others, in order dated 16.04.2018, the Tribunal, having taken note of the relevant facts and earlier decisions on the issue, has held that the royalty income received from OEMs located outside India is not taxable in India. For the ease of reference, we reproduce the following observations of the coordinate Bench in this regard : 44. Therefore in view of above facts and circumstances, facts of impugned appeals before us are similar to the facts and issues decided by the coordinate bench in the first order for AY 2000-01 to 2004-05 dated 31/01/2013 in ITA No 3696 to 3700/Del/20109. The coordinate bench decided the issue as under :- “On merits : 127. We now proceed to dispose of the merits : Whether the 'royalty' income earned by Qualcomm from OEMs is taxable under sec. 9(1)(vi)(c) of the IT Act 1961 : The issue in question is whether the said "royalty" is taxable under sec. 9(l)(vi)(c) of the Act. For ready reference sec. 9(l)(vi) of the Act is extracted below. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 64 "(vi) income by way of royalty payable by— The Government; or a person who is a resident except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or a person who is a non-resident where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India." 128. Sec. 9(l)(vi)(c) is a deeming provision and has to be construed strictly. A plain reading of this section shows that any income by way of royalty is taxable in India, if such royalty is payable by a non-resident in respect of any right, property or information used or services utilized : for the purposes of business, or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India. 129. When an assessee claims that it is covered by exceptions to cl. (b) to sub-cl. (vi) to sec. 9(1), the burden lies on the taxpayer to prove that it falls within those exemption provisions. In comparison, when it is claimed by Revenue that the income falls under cl. (c) to sub-cl. (vi) of sec. 9(1) the burden is on the Revenue to prove the same. 130. Thus to tax the royalty income earned by Qualcomm from OEM's located outside India, under the deeming provision of sec. 9(l)(vi)(c) of the Act, the burden is on the Revenue to prove that the OEMs carry on business in India and that they have used Qualcomm's patents for the purposes of such business in India; or that they have used Qualcomm's patents for the purpose of making or earning income from a source in India. Thus we agree with the arguments of the learned counsel for the appellant that the burden of proof when it falls within the exceptions to sec. 9(l)(vi)(b) is on the assessee and on the contrary the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 65 burden is on the Revenue when they chose to invoke sec. 9(l)(vi)(c). This proposition was also accepted by the Revenue. 131. The learned special counsel for the Revenue submitted that the language employed in sec. 9(l)(vi)(c) is "used for the purpose of" in contradistinguished from "utilized in the business" used in sec. 9(l)(vii)(c). Relying on the language employed in both the sections, he submitted that the situs of the use of intellectual property is not material. It may be used anywhere (in or outside India). He submitted that what is material is the purpose of the use of the property, whether it is used for the purpose of business carried on in India or for the purpose of earning income from a source in India, then sec. 9(l)(vi)(c) of the Act is attracted. 132. In our view what is important is not whether right to property is used "in" or "for the purpose of" a business, but to determine whether such business is "carried on by such person in India". 133. The other issue is whether the Indian Carriers constitute a source of income for the OEMs in India and whether licensing the patented intellectual property to the OEMs, has resulted in making available the patented IPs to the Indian telecom operators for commercially exploiting the CDMA technology in India. In our view neither the AO nor the CIT(A) have demonstrated, that for the years under appeal, the OEMs have used Qualcomm's right/information/property (i.e. patents) for the purpose of carrying on business in India or for the purpose of making or earning income from a source in India. 134. The learned AO as well as the learned CIT(A) have based there findings only on the 16 licensing agreements between OEMs and the assessee. The learned special counsel. Mr. G.C. Srivastava for the first time before this Tribunal filed the following agreements as additional evidence to substantiate the case of Revenue to tax the royalty income earned by Qualcomm under sec. 9(1)(vi)(c) of the Act: Equipment purchase agreement between the Tata Tele Services and Motorola Inc. dt. 8th Dec., 2007; Equipment purchase agreement between the Tata Tele Services and ZTE Corporation dt. 19th Feb., 2007. 135. We agree with Mr. Dastur, that cognizance cannot be taken of these agreements as they relate to the financial year 2006-07 relevant to asst. yr. 2007-08 and asst. yr. 2007-08 have no relevance to the case on hand. The learned special counsel sought to make out a new case with the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 66 aid of these additional agreements. 136. Nevertheless we consider Mr. G.C. Srivastava's submission that these agreements of Tata Tele Services can be relied upon for the limited purpose of understanding the business model of the OEMs in relation to sale of CDMA products to India. The plea that similar agreements would have been entered into by the India Telecom operators with the OEMs for purchase of network equipment, cannot be accepted as it would be a conjecture and surmise. 137. The AO as well as the CIT(A)'s order are based on 16 license agreements entered into by Qualcomm with OEMs. Redacted copies of the license agreements were filed before us. The appellant during the course of the hearing filed an affidavit disclosing the names of the OEMs along with the dates of execution of the license agreements. Admittedly these agreements were entered into on 13th Aug., 1993 and certain other dates. Majority of the agreements were executed prior to year 2000 i.e. before CDMA services were launched in India. We are basically concerned with these agreements only. For ready reference we extract relevant clauses from the following agreements : i. Subscriber Unit License agreement by and between Qualcomm and the OEM; ii. Subscriber unit and infrastructure equipment license agreement between Qualcomm and the OEM; iii. We also extract the clauses relied upon by the Revenue in the following agreements to consider the without prejudice arguments of the assessee. iv. Equipment purchase agreement between the Tata Tele Services and Motorola Inc. dt. 8th Dec, 2007; v. Equipment purchase agreement between the Tata Tele Services and ZTE Corporation dt. 19th Feb., 2007. 138. In addition, certain clauses from the following two agreements are also extracted as reliance was placed on the same : i. MoU dt. 26th March, 2001 by and between Reliance and Qualcomm (Revenue paper book dt. 29th June, 2012) ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 67 ii. Technical services agreement between Qualcomm and Reliance dt. 16th Oct., 2001. Subscriber unit license agreement between Qualcomm and the OEMs for manufacture of CDMA handsets (Agreement reference page No. 226 to page No. 263 of the appellant's paper book) Extract of relevant clauses from the agreement in relation to grant of license. Clause 5.1 Grant of License "Subject to the terms and conditions of this agreement, including but not limited to timely payment of the royalties set forth herein, Qualcomm hereby grants to licensee a personal, non-transferable, worldwide and non- exclusive license under Qualcomm's Intellectual property solely for wireless applications to (a) make (and have made), import, use and sell, lease or otherwise dispose of subscriber units, and (b) to make (and have made) components (provided such components have been exclusively designed by licensee and which design is owned and used exclusively by licensee) and import, use and sell, lease and otherwise dispose of components but only if such components are included as part of and within subscriber units sold by licensee or as replacement parts for subscriber units previously sold by licensee. No other, further or different license is hereby granted or implied." Qualcomm's Intellectual property (page No. 236 of the paper book) 'Qualcomm's Intellectual Property' means Qualcomm's Technically Necessary IPR and Qualcomm's Included Commercially Necessary IPR and company 3 patents; provided that, notwithstanding the foregoing, the term 'Qualcomm's Intellectual Property' shall not include any intellectual property, including but not limited to patents, owned by Snap Track. Inc. Subscriber unit (page No. 238 of the paper book) : 'Subscriber unit' means a complete CDMA telephone, a cordless base station and/or a CDMA subscriber knockdown kit and 'subscriber units' means a complete CDMA telephone, a cordless base station and CDMA subscriber knockdown kits. Components (page No. 233 of the paper book) : ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 68 Components' means application specific integrated circuits ('ASIC's'), electronic devices, integrated circuits, including firmware thereon and accompanying software, and or families of devices for use in wireless subscriber equipment. CDMA ASIC (page No. 231) : 'CDMA ASIC' means Qualcomm's mobile station modem (MSM) CDMA application specific integrated circuit, and any revision, generation, modifications or integration to or of the MSM, purchased by licensee from Qualcomm. (ii) Subscriber unit and infrastructure equipment license agreement between Qualcomm and licensee (i.e. OEM). (Agreement reference-page No. 264 to page No. 316 of the appellant's' paper book) Extract of relevant clauses from the agreement in relation to grant of license Clause 4.1- Grant of license from Qualcomm (page No. 279) : Subject to the terms and conditions of this agreement, including but not limited to timely payment of the license fees and royalties set forth herein, on the effective date, 'Qualcomm hereby grants to licensee, solely for wireless applications, a personal, 'non-transferable, worldwide and non- exclusive license (without the right to sublicense) (1) under Qualcomm's applicable subscriber patents to (a) make (and have made), import, use, sell, offer to sell, lease or, otherwise dispose of subscriber units and radiomodules and (b) to make (and have made) components and import, use, sell, offer to sell, lease and otherwise dispose of components but only if such components are included as part of and sold within licensee subscriber units or .licensee radiomodules or as replacement parts for subscriber units or radiomodules previously sold by licensee and (2) under Qualcomm's applicable infrastructure patents to (a) make (and have made), import, use sell, offer to sell, lease or otherwise dispose of infrastructure equipment and (b) to make (and have made) components and import, use, sell, offer to sell, lease and otherwise dispose of components but only if such components are included as part of and sold within licensee infrastructure equipment or as replacement parts for infrastructure equipment previously sold by licensee. No other, further or different license is hereby granted or Implied. Notwithstanding the foregoing, licensee, may exercise its 'have made' rights above with respect to components not designed by or for licensee (according to specifications provided by licensee) only to the extent that the third party benefiting from such ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 69 'have made' rights does not assert, through itself or its affiliated entities patent infringement litigation against Qualcomm or licensee and Qualcomm agrees that it will not charge royalties to any third party with restrict to the sale by such third party of components to licensee to the extent that such third party is making such sale under licensee 'have made' rights and is not using or otherwise infringing upon any of Qualcomm's patents not the subject of such 'have made' rights.' Qualcomm's applicable subscriber patents (page No. 275) : 'Qualcomm's applicable subscriber patents' means Qualcomm's early patents and only if licensee elects under sec. 4.4.6, either Qualcomm's later patents or Qualcomm's other patents, as the case may be. Subscriber unit (page No. 278) : 'Subscriber unit' means a complete CDMA and/or multi-mode CDMA user terminal, including but not limited to mobile, transportable, and portable telephones, which can be used, without any additional equipment or components being attached thereto, to transmit and/or receive transmissions for wireless applications. Radiomodule (page No. 277) : 'Radiomodule' means an electronics sub-assembly for wireless applications which (i) includes, at a minimum, a printed circuit board, multiple individually packaged integrated circuits mounted on the printed circuit board, a CDMA component, and any embedded software, and (ii) provides RF/analog and digital and baseband processing necessary to implement the functions of a CDMA subscriber unit such as to initiate and/or receive wireless telecommunications transmissions; provided that a Radiomodule shall not be capable of initiating and/or receiving wireless telecommunication transmissions without being incorporated into or attached to the product of which it is intended to be a sub- assembly. Components (page No. 271): 'Components' means application specific integrated circuits (ASIC's), electronic devices, multi-chip modules, integrated circuits and/or families of devices, including firmware thereon and software associated therewith, for use in wireless applications. Qualcomm's applicable infrastructure patents (page No. 275) : 'Qualcomm's applicable infrastructure-patents' means (i) every patent ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 70 issued or to be issued to Qualcomm in any country of the world which claims priority from a patent application filed anywhere in the world on or prior to the effective date and (ii) every patent issued or to be issued to Qualcomm in any country of the world which (a) claims priority from a patent application filed anywhere in the world during the life of the applicable CDMA wireless standard and (b) are technically necessary to use, make and/or sell Infrastructure Equipment compliant with such standard. Infrastructure equipment (page No. 272) : 'Infrastructure equipment' means network equipment for use as a part of any land mobile radio-telephone system for wireless applications, including but not limited to BTSs, BSCs and system switches (and equipment and software for corporation therein), but the term does not include, by way of example and not by way of limitation, components, subscriber units, radiomodules or any other subscriber equipment. 2. Agreement between Tata Teleservices Ltd. and ZTE Corporation for supply of CDMA equipment (reference-agreement 2 filed by the Revenue as additional evidence) Extract of relevant clauses from the agreement on transfer of title and risk of the equipment Clause 14.1 - Title and risk of loss (page No. 33) : 'Without prejudice to TTSL's right to reject as set forth in art. 6.4 of this agreement, the title of all equipment sold hereunder shall pass from the supplier to TTSL in high seas before arrival In India and the risk of loss to the hardware portion of all equipment shall pass from supplier to TTSL upon provisional acceptance.' 3. Agreement between Tata Teleservices Ltd. and Motorola Inc. for supply of equipment (agreement 1 filed by the Revenue) Extract of relevant clauses from the agreement in relation to transfer of title and risk of the equipment Clause 14.1- Title and risk of loss (page No. 14): 'Without prejudice to TTSL's right to reject as set forth in art. 6.4 of this agreement, the title and the risk of loss to the hardware portion of all Equipment sold hereunder shall pass from supplier to TTSL upon delivery in accordance with CIP Incoterms 2000 port of shipment.' ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 71 139. Based on the above, we now proceed to answer the first question as to whether the OEMs have carried on the business in India and that they have used the appellants for the purpose of carrying on such business in India. 140. What is licensed in these 16 agreements is the use of "intellectual property" owned and patented by Qualcomm for the purpose of manufacture of subscriber units and infrastructure equipment. These agreements were entered much before CDMA, technology- was introduced in India. A perusal of these agreements does not demonstrate that these are India specific. In fact they are not specific to any particular country. The OEMs manufactured products outside India and sold them to not only service providers in India but also to number of others in other countries. The license to manufacture products by using the patented intellectual property of the assessee has not been used in India as the products are manufactured outside India and when such products are sold to parties in India it cannot be said that OEMs have done business in India. 141. The Revenue heavily relied on the equipment purchase agreement entered by Tata with Motorola and ZTE to prove that the OEMs carry on business in India and that they have used the Qualcomm patents for the purpose of carrying on such business in India. His contention that the OEMs carry on business in India is mainly based on the following : The word "business" defined under the Act is of wide import and encompasses a host of activities. He contended that if manufacturing is done in one jurisdiction and sale in the other, it cannot be said that business is done in one and not in the other jurisdiction. OEMs carry out installation of equipment in India for the Indian Telecom operators; The entire supply of handsets and equipments though manufactured outside India are India specific and not off the shelf products which can be sold to anyone in any location. The technology is used by the OEMs to manufacture India specific supplies. Hence there is a certain degree of use of the property for the purpose of carrying on business in India; Placing reliance on the decision of the Hon'ble Andhra Pradesh High Court in the case of Syed Asifuddm (supra), he submitted that the handsets ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 72 are specifically designed and programmed for Reliance. Relying on various clauses in the equipment purchase agreement entered by Tata with ZTE and Motorola, he contended that despite the declaration in cl. 14.1 to the agreements, the agreement has to be read as a whole to ascertain the intent of the parties. He submitted that if the agreement is read as a whole, the intent of the parties is amply clear that the title of the equipment passes in India at the site where the deliveries are made or in a worst scenario at the airport/seaports in India. 142. We are unable to agree with the contention of the learned special counsel for the following reasons : Accepting such a proposition would lead to a situation where every purchase and sale of goods made by any party in India with any party in other countries would be considered as if those parties are doing business in India and sale to India without any operations being carried out in India would amount to business with India and not business in India. For the business to be carried out in India there should be some activity carried out in India. Thus the argument that if manufacturing is done in one jurisdiction and sales in the other jurisdiction, then there is business in another jurisdiction is devoid of merit. Further on the facts of the case, for the reasons given later in this order, even the sale cannot be said to have been done in India. The contention of the Revenue that OEMs (i.e. Motorola and ZTE) carries out installation work for Tata and hence there is some business activity being carried by the OEM in India is factually incorrect and contrary' to the clauses in the equipment purchase agreement which clearly states that installation of the equipment is carried out by a third party appointed by the purchaser (i.e. Tata) in consultation with the supplier. Even presuming for a moment that the installation of the equipment is done by the OEMs in India, the Revenue has failed to demonstrate/prove that the patents licensed by Qualcomm are used by Motorola/ZTE for carrying out such installation activities in India. The next contention of the Revenue (is) that the patented technology is used by the OEMs to manufacture India specific products and that the handsets are customized and programmed to include a code assigned to a specific operator. Hence there is a certain degree of use of the property for the purpose of carrying on business in India. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 73 143. This argument cannot be accepted for the following reasons : During the course of hearing it is admitted that handsets in question embody two technologies (a) technology with respect to the functionality of the handsets and technology with respect to CDMA connectivity. The patents of Qualcomm are admittedly for manufacture of handsets and infrastructure equipment which are sold worldwide. There are no patents of Qualcomm which are used for customization of handset with respect to CDMA connectivity. The patents in question, on which royalty is sought to be taxed, have nothing to do with the functionality of the handsets. Functionality of the handsets may be customer specific or operator specific or India specific but technology with respect to CDMA connectivity, is a universal technology and is not customer specific. Customisation such as locking the handset to enable operation only with a specific operator and other operators with whom reciprocal or other arrangements are available, inclusion of Hindi or other regional languages, calculator, music, ring tones, browsers and numerous other features are no way connected .with patents of Qualcomm in these 16 agreements which are for manufacture of CDMA handsets and equipments. In fact in each handset a number of patented technologies other than patents with respect to CDMA connectivity are also used. Hence the argument that patents relating to CDMA, technology are customer specific, service provider specific or country specific is factually incorrect. There is no customization of handset qua the CDMA connectivity. Coming to the argument that handsets are programmed to a particular network service provider and hence it is India specific is not tenable. As rightly pointed out by Mr. Dastur locking of a handset to network is a requirement of the network service provider depending upon its business plans and exigencies and does not affect the ability of the handset to operate on any CDMA telecom network, which is evident from the fact that once the network lock is broken the handset can operate on any network. This fact is also supported by the decision of the Andhra Pradesh High Court in the case of Asifuddin (supra). Hence it cannot be concluded that CDMA technology was service provider specific. Network locks are requested by network service providers to keep the subscribers with them for an extended period. There is no dispute that the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 74 locked handset is capable of working anywhere in the world. This is evident from the scheme on international roaming using CDMA handsets downloaded from the website of Reliance Communications. Further there is also no dispute that all telecom operators permit International roaming. Though handsets that may have been purchased under certain terms are locked with a particular network service provider, the handset is capable of working in any country of the world with which that particular network service provider has commercial understanding. This clearly demonstrates that the CDMA connectivity of the phone is in no manner connected with the locking of the phone with a network service provider. Hence, in our view the decision of the Andhra Pradesh High Court in the case Syed Asifuddin (supra) is not relevant. 144. Even otherwise, we are unable to understand as to how sale of India specific handsets can be a basis of coming to the conclusion that the OEMs are carrying on business in India. There are numerous patented IPRs belonging to not only 'Qualcomm- but also to a number of other parties, as well as the OEM's themselves and all these patented IPRs are used for manufacturing certain products which are sold to parties in India. The purchaser may have the option to choose the technologies available or even specify certain additional requirements. Sale of such customised products by no stretch of imagination can be considered as business being done in India. A buyer of a product may specify his requirements and when the product is manufactured to such specification it does not tantamount to carrying on business in India. It does not cease to be a sale of a product. No such allegation was made with respect to network equipment being India specific. Technology for manufacturing products is different from products which are manufactured from the use of the technology for which Qualcomm has patents. The role of Qualcomm ends when it licensed its patents on IPRs pertaining to CDMA products for manufacture and when it collects royalty from OEMs on these products, when they are shipped out of the country of manufacture. There is no activity for Qualcomm after this sale and shipment under these 16 agreements. For the OEMs it is a sale of a product which is the end of the activity. The revenues are generated on sale only. There are no revenues either to the OEMs or to Qualcomm after the sale of the products. The sale is of a chattel as a chattel. The product is a combination of hardware, integrated circuits, designs multiple application software, CDMA components, chipsets with embedded software etc. The Revenue attempt to break down the sale into various components is not supported by the terms of the agreements and the facts of this case. It cannot be said that every item other than software was ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 75 sold and that software which is embedded has been separately licensed. It is not the case of the Revenue that the OEMs have income in India from these sales or that they have income from licensing of software in these products which is assessable to tax. There is no finding that the OEMs have carried on business in India much less that a part of the sale consideration is attributable to any sale or licensing of software carried out in India. When OEMs itself are not brought to tax, to hold that Qualcomm is taxable is not correct. This is not a case of the OEMs being not taxed due to a lapse of the officer concerned or being let off by the Revenue by mistake or oversight. It is not brought to our notice that the OEMs have been brought to tax in any of the subsequent years. Thus the argument that two wrongs do not make a right does not apply to the situation on hand. 145. Regarding passing of the title in the equipment, there is no evidence with the Revenue, for any assessment years before us that the title passed in India and that certain further activity was done by the OEMs in India after the sale. As already stated the burden is on Revenue to prove that business is carried on in India by the OEMs. Arguments have been made without the support-of any-document or evidence pertaining to these years. The Revenue contended that the title in the goods passed to Tata at the port of destination i.e. India based on agreements of-2007. Though these documents have no relevance for the years under consideration, on a perusal of these 2007 agreements we find that there there is no clause in both the agreements to support the contention of the Revenue that the title in the goods passes at the "port of destination." Clause 14.1 of the agreement between Tata and ZTE read as under "Without prejudice to TTSL's right to reject as set forth in art. 6.4 of this agreement, the title of all equipment sold hereunder shall pass from the supplier to the TTSL in high seas before arrival in India and the risk to loss to the hardware portion of all equipment shall pass from supplier to TTSL upon provisional acceptance". 146. From the above clause, it is evident that title of the equipment has passed to Tata in high seas before arrival in India. The fact that the risk to the equipment shall pass on provisional acceptance is not relevant for determining where the title in the equipment passed, which in this case is clearly outside India as per the specific understanding of the parties. The plea to infer otherwise is to be rejected as it is against the express intent of the parties. 147 In our view this issue stands covered by the decision of the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 76 Hon'ble Delhi High Court in the case of Ericssion A.B (supra). Ericssion and Nokia's was the case of the OEMs who are into supply of GSM equipment to Indian telecom operators for use in fixed/mobile GSM telecommunication. The equipment was manufactured and supplied from overseas; installation was carried out by their respective affiliates in India. Along with hardware, perpetual license was granted by all the three companies for use of software. Software was inseparable and integral part of hardware, without which hardware could not function. Significant restrictions were placed on the Indian telecom operators on use of software (the Indian telecom operators could not onward sell the software independently without sale of the hardware, etc.). There were distinct agreements with an overall agreement for supply and installation of GSM systems, though split into separate agreements, one for supply and the other for installation which was left to the subsidiaries. The facts of this case are similar to the facts of the case of Ericsson A.B. (supra). The Hon'ble Delhi High Court held as under : Para 41. "We find that the terms of contract make it clear that acceptance test is not a material event for passing of the title and risk in the equipment supplied. It is because of the reason that even if such test found out that the system did not conform to the contractive parameters, as per art. 21.1 of the supply contract, the only consequence would be that the cellular operator would be entitled to call upon the assessee to cure the defect by repairing or replacing the defective part .If there was delay caused due to the acceptance test not being complied with, art. 19 of the supply contract provided for damages. Thus, the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test was not determinative of this factor. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. In Skoda Export (supra), the Andhra Pradesh High Court dealt with this issue in the following manner. 'We may also mention that learned standing counsel for the Department challenged the finding of the Tribunal that the sale of machinery was completed outside India. According to him, the sale was completed only in India, inasmuch as the assessee was entitled to and satisfy itself about the quality and standard of the machinery supplied. We do not see any substance in this contention. The various clauses in the agreement referred to above make it clear that the sale of machinery was FOB, European port, and the time of fulfilment of delivery was prescribed as the date of the bills of lading. The payment was also to be made outside ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 77 India. The agreement further makes it clear that the insurance risk during the course of the journey was that of the assessee and it paid for the same; even the freight charges from the European port to the place of destination were paid by the assessee. Thus, judged from any angle, the sale of machinery, which are 'goods' within the meaning of the Sale of Goods Act, was completely outside India. A mere provision in the agreement that the assessee is entitled to satisfy itself about the quality and standard of the machinery in India cannot, in the circumstances of this case, detract from the fundamental position that the sale took place outside India. In such a situation, one has to apply the test of predominance and decide where the sale took place ? On a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India'." 149. We would discuss the propositions laid down in this case in greater detail later in this order. 150. Coming to cl. 14.1 of the agreement between Tata and Motorola it reads as under : Clause 14.1- Title and risk of loss (page No. 14) : "Without prejudice to TTSL's right to reject as set forth in art. 6.4 of this agreement, the title and the risk of loss to the hardware portion of all equipment sold hereunder shall pass from supplier to TTSL upon delivery in accordance with CIP Incoterms 2000 port of shipment." Delivery (page No. 44) is defined to mean "delivery" or "delivered" or "deliveries" shall mean the physical delivery by the supplier, of the equipment ordered by TTSL on CIP terms (as defined above), at airports/seaports mutually designated by the parties. CIP (page No. 43) : "CIP" means "cost, insurance paid" to airport/seaport in India as defined in Incoterms 2000. It means that supplier shall pay and bear the cost of packing/loading/unloading, transportation, carriage, freight, unloading charges, insurance and any other cost of any nature at any time prior to delivery. 151. It is the submission of the Revenue that entire risk is borne by Motorola and the carriage, insurance is paid till the delivery at seaports/airports in India. Hence, the sale concludes in India. The reference by the appellant to CIP Incoterms 2000 does not alter the situation because the expression by its very definition in the agreement means obligation to bear carriage and insurance charges upto airports/seaports in India. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 78 152. At this stage, we find it relevant to extract the definition of CIP from Incoterms 2000 : CIP "carriage and insurance paid to means that the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. This means that the buyer bears all risks and any additional costs occurring after the goods have been so delivered. However, in CIP the seller also has to procure insurance against the buyer's risk of loss or damage to the goods during the carriage. "Carrier" means any person who, in a contract of carriage, undertakes to perform or to procure the performance, of transport, by rail, road, air, sea, inland waterway or by a combination of such modes. "Delivery" - The seller must deliver the goods to the carrier contracted in accordance with the contract of carriage or, if there are subsequent carriers to the first carrier, for transport to the agreed point at the named place on the date or within the agreed period. . 153. On conjoint reading of the agreement with the-definitions from Incoterms 2000, it is very clear that the title and risk of loss passes to the buyer, on the physical delivery of the equipment by the OEM to the carrier, at the port of shipment. The term "port of shipment" is definitely not a port in India.' CIP Ineoterms-2000 provides that the delivery from the seller to the buyer concludes at the port of shipment upon delivery to the carrier. The obligation on Motorola to bear the cost of delivery upto the port of destination (i.e. India) is irrelevant to decide where the title passes. This is merely a contractual term between the parties to clarify who is to bear the cost of transshipment, insurance etc. The argument that the contract has to be read as whole to ascertain the intention of the parties as to when the title and the risk passed in goods is devoid of merit in the present case as the agreement itself is very specific as to when the title and the risk were to pass. 153A As already stated under identical facts in the case of Ericsson A.B (supra) the Delhi Special Bench in Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Del.)(SB) held that the title of the GSM equipment passed outside India. The order of the Delhi Special Bench decision in the case of Ericsson (supra) was latter affirmed by the Delhi High Court in Ericsson A.B. (supra). Regarding the applicability of Ericsson and Nokia ruling, we are unable to appreciate the argument that the propositions in these judgments would not be applicable to the facts of the present easel To tax the royalty income earned by Qualcomm, the Revenue must show that ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 79 the OEMs have used Qualcomm patents for a business carried on in India or for making or earning income from a source in India, which leads to the taxability of the OEMs. Therefore, the taxability of Qualcomm-directly depends on the OEMs taxability in India. 154. Ericsson was a company incorporated in Sweden. It was engaged in the business of supply of hardware and software. It entered into an agreement with 10 cellular operators in India for supply of telecommunication systems. These were installed and commissioned in India by two sister concerns of Ericsson, one being a branch of non- resident group company, and the other being resident company of the same group. There was an overall agreement with the operators for supply and installation of GSM systems. The supply of equipment was made on continuous basis. The supply had to satisfy the acceptance test. The issue before the Court was the taxability of such supplies in respect of which title and risk in the goods passed to the customers before the goods were delivered in India. The AO held that the assessee company had a business connection under domestic law and that it had a PE under the DTAA between India and Sweden. Business profits were estimated. Entire consideration for supply of software was brought to tax. Income from hardware was estimated at 26 per cent of the billed supplies of hardware. The Hon'ble High Court held that: The title in the goods passed to the buyer before the goods reached the Indian shores and hence no profit could accrue to the non-resident. Sec. 19 of the Sale of the Goods Act would have application. The fact that the contract itself is signed in India or that the freight charges are borne by the importer would make no difference to the inference as was pointed out by the Hon'ble Andhra Pradesh High Court in the case of Addl. CIT v. Skoda Exports. The fact that the insurance risk was with the supplier before landing does not alter the situation. Acceptance test cannot also lead to a different conclusion as it was meant for ensuring that the supply conforms to the contract parameters. The right to get back the goods after landing, if the importer does not take delivery for whatever reason, could also make no difference since the title has passed to the buyer before landing. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 80 Since the installation was also not undertaken by the assessee company, no income therefrom can be brought to tax. The issue whether the assessee had a PE in India during the year is academic in the light of the fact that the assessee has no business connection. That since software is loaded on the hardware in terms of contract, it did not have any independent existence, so as to justify the inference that there has been supply of software. The decision of the Hon'ble Supreme Court in the case of Tata Consultancy Services v. State of A.P. [2004] 192 CTR (SC) 257 making a distinction between assignment of "copyright right" and sale of "copyrighted product" could not be disregarded. Computer programmes are goods and merely because the software was unloaded from dumb CD from the computer, usable only when it is activated, it does not cease to be goods. The payment to the assessee cannot be split up as between supply and royalty/technical fees. There is no assignment of any copyright in the facts of the case, in the sense contemplated under sec. 14 of the Copyrights Act, 1957 as a consequence of either the overall agreement or the supply contract. The difference between acquisition of a "copyright right" and a "copyrighted product" was pointed out. 155. In the case of Nokia Networks (supra) the relevant facts are: The assessee, a company incorporated under the laws of Finland, was a leading manufacturer of advanced telecommunication systems and equipment (GSM equipment), which were used in fixed and mobile phone networks. During the previous years, the assessee maintained a LO and also had a subsidiary in India, known as, Nokia India (P.) Ltd. (NIPL). Its activities involved supply of hardware and software as well as installation and commissioning and also after sale services. It entered into ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 81 agreements with various Indian telecom/cellular operators and entered into three contracts with them, namely, (1) overall agreement, (2) supply agreement and (3) installation agreement. The assessee supplied GSM equipment, i.e. both hardware and software manufactured in Finland to Indian telecom operators from outside India on a principal to principal basis under independent buyer/seller arrangements. Installation activities were undertaken by NIPL under its independent contracts with Indian telecom operators. The AO held that the assessee was carrying on business in India through a PE. Both the LO and NIPL constituted a PE of the assessee in India. 70 per cent of the total equipment revenue attributed to sale of hardware. The remaining 30 per cent of the equipment revenue attributed towards supply of software and the same was taxed as royalty both under sec. 9(l)(vi) and under art. 12 of DTAA between India and Finland holding that software was not sold but licensed to the Indian telecom operators. The Hon'ble High Court held as follows : if supply agreement is taken as a standalone agreement, the property in the goods passes to the buyer outside India and hence not taxable in India. Sec. 19 of the Sale of Goods Act, 1930 makes it clear that property in the goods passes when the parties intend it to pass. The intention of the parties is manifest in art. 13 of the supply contract/and provisions of art. 15 in no manner militate against such intention. There is nothing in the conduct of the parties, which would suggest that the express provision of art. 13 have been given a go by. The fact that the supply contract was signed in India does not change the circumstance. Acceptance test, which was performed in India, is not a relevant circumstance for determining as to whether income has accrued in India. Acceptance test is not material even for passing of title and risk in the equipment supplied. The submission of the Revenue that the /three agreements, namely overall agreement, supply agreement and installation agreement, are to be taken to form an integrated business arrangement between the parties which was governed by the overall agreement proceeded on the basis that the assessee had entered into contracts with cellular operators in India for setting up of GSM system in India, the hardware and software for which were supplied by the assessee, and the installation thereof was ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 82 also overseen by the assessee. who was to ensure that it was carried out to the satisfaction of Indian buyers in accordance with the terms of the contract. This was also considered by the Court and it was held that the taxable event took place outside India with the passing of the property from seller to buyer. The decision might have been different if the buyer had the right to reject the equipment on failure of acceptance test. The overall agreement does not result in the income accruing in India. The execution of the overall agreement is prompted by pure commercial considerations. Board Instruction No. 1829, dt. 29th Jan., 1989 must continue to govern the assessment for the relevant years, despite withdrawal of this Instruction by CBDT by virtue of Circular No. 7 of 2008 (sic-of 2009), dt. 22nd Oct.. 2009 [(2009) 226 CTR (St) 57]. The place of negotiation, the place of signing of agreement, or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances as the transaction relates to the sale of goods and the relevant factor and determinating factor would be as to where the property in the goods passes. In the instant case the property passed on the high seas. Even if it is a case of a composite contract, the supply has to be segregated from the installation and only then the question of apportionment would arise. That the amendment to sec. 9 vide Finance Act, 2012 wherein Explns. IV, V and VI have been added to s. 9 seeking to clarify the scope of cl. (vi) of sub-sec. (1) of sec. 9, it was held that the amendment cannot be read into the treaty. The reasoning given in Ericsson A.B.'s case (supra) would apply to Nokia Net Work OY. 156. In the facts of the present case, Motorola and ZTE are OEMs Supplying CDMA equipment to the Tata an Indian telecom operator. Their business model and supply contract for CDMA equipment is similar to the supply contract entered by the Ericsson and Nokia for supply of GSM ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 83 equipment. Hence, we are of the view that the propositions laid by the Hon'ble Delhi High Court with respect to taxability of GSM equipment with embedded software would be squarely applicable to taxability of OEMs supplying CDMA handsets and equipment. 157. Applying these principles laid down in Ericsson's case (supra), to the facts of the case on hand we have to hold that the title in the goods in this case has passed outside India as per the clauses in the agreement. When read with CIP Incoterms 2000. 158. Even otherwise mere passing of title in goods imported into India, in India, at the port of destination cannot lead to a conclusion that the OEMs carry on business in India. It is business with India and not business in India. The mere passing of the title with no other activity does not result in any income being attributable in India. 159. For all aforesaid reasons, we uphold the arguments of Shri Soli Dastur, the learned senior counsel, that OEMs have not carried on business in India, and that the OEMs cannot be said to have used Qualcomm patents for the purpose of such business in India. 160. Before we come to the second limb of argument, we agree with the argument of Mr. Dastur that : Limb (i) covers cases where the right property or information has been used by the non-resident payer (OEM) itself and is so used in a business carried on by OEMs in India. Limb (ii) covers a case where the right property or information has not been used by the non-resident payer (OEM) itself in the business carried on by it, but the right property or information has been dealt with in such a manner as would result in earning or making income from a source in India. Any other interpretation to our mind would not be harmonious, as it would make limb (i) otiose. 161. Now we come to the second limb of the issue that is, whether the OEMs have used Qualcomm's patents for the purpose of making or earning income from a source in India. The Revenue once again heavily relied on the CDMA equipment purchase agreement between Tata and ZTE and Tata and Motorola to demonstrate that OEMs have used the Qualcomm's patents for the purpose of making or earning income from a source in India On the basis of the equipment purchase agreement of 2007, it was submitted that the two agreements between Indian operators and OEMs make a distinction between sale of equipment and licensing of software embedded in the firmware. It was submitted ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 84 that Indian operators have agreed to purchase the equipment and take licenses for the software. In addition, the Revenue has also contended that Indian operators constitute a source of income for the OEMs in India. 162. Reliance was placed on cl. 19.5 of the agreement with ZTE dt. 19th Dec. 2007, wherein it is recorded that all licensed material are the property ol the supplier of its suppliers. Hence it is argued that the supplier of OEMs is Qualcomm which supplied the intellectual property to be used under license for manufacturing of handsets/equipment. It was further submitted that the agreement between Qualcomm and the OEMs, which was the basis for the AO to assess the income, states in the preamble that OEMs desired to obtain licenses of Qualcomm's intellectual property to manufacture and sell subscriber units. 163. Reliance was placed on the definition of the term 'chip sets' in the agreement, as well as other definitions such as "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 use by them. He further submitted that, if this basic proposition is under dispute, relying on the decision of the Hon'ble Supreme Court he submitted that the matter needs a more critical examination by someone who understands CDMA technology. 164. Clause 5.1 of the license agreement is 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. 165. Reliance was also placed on Finance Act, 2012 wherein Expln. IV to sec. 9(1)(vi) has been inserted. It was submitted that the argument that OEM sell copyrighted article or thing and the argument that they do not give any right in the copyright, is of no consequence post this amendment as the transfer of any rights in an intellectual property includes transfer of any right to use of a computer software irrespective of the medium through which it is transferred. 166. In a nutshell the submissions of the Revenue are that ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 85 Qualcomm has made available to the OEMs its patented intellectual property relating to CDMA technology in the form of chip sets/ASIC and that OEMs have inserted these chip sets into the handsets/network equipment manufactured by them and that these in turn have been licensed to Indian operators for which OEMs have received a consideration and hence they have a source of income in India. 167. (These arguments of the Revenue are in our view not acceptable for the following reasons : i. The AO assessed the royalty arising from licensing of CDMA patents by Qualcomm to OEMs. The royalty which is brought to tax by the AO does not refer to any software being provided. It is not demonstrated by the Revenue that the software is provided as part of the licensing of Qualcomm patents. ii. The software embedded in the hardware sold to Indian Carriers by the OEMs belong to the OEMs. The software may have been self- generated or procured by the OEMs. iii. None of the 16 agreements between Qualcomm and OEMs which form the basis for assessment in these cases, refer to licensing of software. Thus to argue that software is licensed by Qualcomm to OEMs and which are in turn sub-licensed to the Indian Carriers is contrary' to the facts of the case. The software which is licensed at best relates to the functionality aspect of the product and has nothing to do with the capability to provide CDMA connectivity. 168. The Revenue for the first time before the Tribunal argued that chipsets are purchased by OEMs from Qualcomm and these chipsets which have embedded software and help in function of the hardwares. This is not the basis on which either the AO or the CIT(A) proceeded to tax in this case. 169. It is not necessary for the OEMs to purchase chipsets from Qualcomm only. The OEMs can also purchase the chipsets from a third party other than Qualcomm. In fact, the AO in his assessment order had specifically held that the income, of QCT division from the sale of chipsets 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 chipsets. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 86 170. Regarding the request made by the Revenue for remand of the case or examination by a technical expert, we do not find it necessary at this stage as there is no dispute that the software is embedded in the chipset he same is installed in the CDMA equipment. Selling of the chipsets is a part of appellant's QCT division activity and what is brought to tax by the AO is the income of QTL division. 171. Even otherwise the software is embedded in the chipset and is an integral part of the chipset. Further, the chipset is embedded in the handset/equipment and these are sold outside India. Further, the total price is fixed for the equipment as a whole and there is no separate consideration for the licensed material. 172. Clause 19 of both the agreements which deals with provisions applicable to licensed materials places significant restrictions (listed below) on Tata for use of the licensed material i. The object code version of the software and related documentation could only be used along with the equipment; ii. Tata has no right to sell or sub-license the licensed materials or modify, decompile or disassemble the software furnished as object code to generate the corresponding source code (part of firmware ) embedded in the equipment; iii. Tata shall hold the licensed materials in confidence and shall not, without Motorola and ZTE's consent, disclose, provide or otherwise make available, in whole or in part, any licensed material to anyone, except to its employees having a need-to- know. Tata shall not copy software' embodied in the firmware. iv. Tata is obligated to return all copies of the licensed materials to Motorola and ZTE when the licensed materials are no longer needed by Tata or if Tata's license in respect thereof is cancelled or terminated by the supplier. v. Further, equipment has been defined under the agreement to mean and include certain CDMA equipment, including but not limited to the hardware, the software, the firmware, the licensed material, and parts thereof and related spares to be supplied by the supplier to Tata under the agreement. vi. Further firmware and software have, been defined in the agreements as ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 87 under : "Firmware" shall mean a combination of hardware and software represented by a pattern of bits contained in such hardware. "Software" shall mean a set of man and machine readable instructions on magnetic or other appropriate media, including firmware, which is necessary for the control, operation and performance of the equipment in accordance with the requirements of the specification contained in the agreement. 173. In view of the specific clauses in the agreement, it is clear that the software does not have an independent use and is an integral part of the hardware without which the hardware cannot function. The software supplied was a copyrighted article and not a copyright right. 174. Applying the propositions laid down by the jurisdictional High Court in the case of Ericsson (supra), Nokia (supra) the income from embedded software cannot be taxed in India. The software is only used with the hardware and is not independent of the equipment or the chipset. Further, no separate consideration is paid by Tata for licensing of the software under the equipment purchase agreement Consideration is paid only for the equipment which has numerous patented technologies, chipsets and software which enables the hardware to function. The sale cannot be bifurcated or broken-down into different components. 175. Under the 16 licensed agreements between Qualcomm and the OEM which is the basis for the AO as well as the CIT(A) to raise a demand, what is licensed is the right to manufacture "subscriber units". Under these agreements subscriber unit is defined as "complete CDMA telephone of which chipset is only one part". Hence the argument of the Revenue is devoid of merit. 176. Coming to the argument that the Indian telecom operators in India constitute a source for the OEMs, the Privy Council in the case of Rhodesia Metals Ltd. (supra) and the jurisdictional High Court in the case of Havells India Ltd. (supra) have laid down that the source is the activity that gives rise to income. In the present case, the right property or information licensed to OEMs relates to the manufacture of the products and hence the source of royalty is the activity of manufacturing. Though cited by the Revenue, Rhodesia Metals (supra) in our view entirely supports the appellant's case. In that case Rhodesia Metals Ltd. carried on the business of developing mines in Southern Rhodesia and then selling rights therein. The head seat and directing power of the company was situated in England, the contracts of purchase and sale of the mining ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 88 rights were entered into in England and the consideration for sale of the mining rights was received in England (para 2 at p. 50 of the order). Despite all this, the Privy Council upheld the contention of the company that the amount earned on sale of such mining rights was not chargeable to tax in England since the source of income was the development of the mines, which activity was carried out in Southern Rhodesia Applying this principle to the facts of the case at hands it becomes clear that the source of the royalty is the place where patent (right property or information) is exploited, viz. where the manufacturing activity takes place, which is outside India. Hence, we are unable to accept the contention that Indian telecom operators would constitute source of income for the OEMs. 177. Coming to the insertion of Expln. 4 to sec. 9(l)(vi) of the Act, we find that the amendment has no effect in the present case as the controversy in this case is taxability of royalty on patents relating to intellectual property for manufacture of CDMA handsets and equipment and does not relate to royalty on licensing of any computer software. The OEMs received no income from licensing in computer software. The OEMs sell handsets/equipments to the service providers, outside India and hence the OEMs have no source of income in India. 178. Thus, for all these reasons, we are of the considered opinion that the assessee was right in his argument that the Revenue has not proved that the OEMs have carried on the business in India and that they have used Qualcomm's patents for carrying on such business in India nor the Revenue has proved that the OEMs have used Qualcomm's patents for the purpose of making/earning income from a source in India. Thus we hold that the royalty in question cannot be brought to tax under sec. 9(1)(vi) (c) of the Act. 179. The next issue is whether the royalty paid to Qualcomm by OEMs can be taxed in India under art. 12(7)(b) of the DTAA between India and USA. 180. As we have held that the royalty in question cannot be brought to tax under the IT Act. 1961, we need not go into the question of applicability under DTAA between India and USA as it would be an academic exercise. 181. Before we part, we observe that the Revenue in its effort to support the order of the AO as well as the CIT(A) brought in agreements entered into by Tata in later years i.e. in the financial years 2006-07 and 2007-08. It further widened the grounds of assessment by bringing in not only new material but fresh submissions like licensing of ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 89 software, chip sets etc. Further, it also brought in a fresh argument that CDMA is a wholesome technology and that Qualcomm is the exclusive owner of the JDMA technology. Revenue submitted that CDMA technology works on certain scientific principles and cannot be broken into handsets and network and this technology is provided by Qualcomm to Reliance/Tata for earning royalty from third party. 182. On the issue as to whether the CDMA technology is a wholesome technology and whether Qualcomm per se is the exclusive owner of this technology we find the following from the information gathered by us. 183. CDMA is a channel access method used by various radio communication technologies. It is a method of wireless data communication that was originally invented during World War II in England to thwart German wire interference. CDMA history can be directly linked back to the 1940s when this form of transmission was first envisaged. This technology has been used in many communication systems, including the global positioning system and in the Omni Tracs. The other form of digital technologies currently used to transmit in a wireless transmission is Frequency Division Multiple Access (FDMA) and Time Division Multiple Access (TDMA). TDMA is the primary commercial form of GSM phones (source : Wikepedia, http://www.radio- electroics.com/info/rf- technologydesign/cdma/what-is-cdma-basics- tutorial.php) l84. Qualcomm was the first company to commercialize this technology in OmniTracs (a fleet management system). Qualcomm publicly introduced the concept that CDMA a digital communication technique method could be commercially successful in cellular wireless communication applications. Qualcomm was joined by US network operators Nynx and Ameritch to develop the first generation of CDMA telecommunication system. Later this team was joined by Motorola and AT&T. As a result of this it was possible to start writing of specification for CDMA in 1990. It was then a standard group was set up with the support of Cellular Telecommunications Industry Association (CTIA) and the Telecommunication Industry Association (TIA). This group then published the standard of first CDMA system in the form of IS 95 resulting in the formal publication of IS 95A in 1995 (Source: Wikepedia). The first GDMA system was launched in September, 1995 by Hutchson Telephone Co. Ltd. in Hong Kong and SA Telecommunications in Korea soon to be followed along with the networks in the USA. Later CDMA 2000 series of standards were developed. The standards for CDMA are specified by 3GPP2. (Source: http://www.radio-elecironies.com/info/rf- technology ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 90 design/cdma/what-is-cdma-basics tutorial.php, http://webopedia.com/TERM/C/CDMA.html) A look at Wikipedia discloses the following : "3GPP2 is the standardization group for CDMA 2000, they set 3G standard based on earlier 2G CDMA technology. The participating associations are five officially recognized Standard Development Organizations ('SDOs'). They are : ARIB-Association of Radio Industries and Businesses (Japan) CCSA-China Communications Standards Association (China) TIA-Telecommunications Industry Association (North America) TTA-Telecommunications Technology Association (Korea) TTC-Telecommunications Technology Committee (Japan) These SDOs are known as the project's organizational partners. 3GPP2 requires that a participating individual member company be affiliated with at least one of the organizational partners. In addition, the project has welcomed market representation partners (MRPs) who offer market advice to 3GPP2 and bring a consensus view of market requirements (e.g.. services, features and functionality) falling within the 3GPP2 scope. They are : The CDMA Development Group (CDG) IPv6 Forum and Femto Forum The work of producing 3GPP2's specifications resides in the project's four technical specification groups (TSGs) comprised of representatives from the project's individual member companies. The TSGs are : TSG-A (Access network interfaces) TSG-C (Cdma2000ilil) TSG-S (Services and systems aspects) TSG-X (Core networks) Each TSG meets, on average, ten times a year to produce technical specifications and reports. Since 3GPP2 has no legal status, ownership and copyright of these output documents is shared between the organizational partners. The documents cover all areas of the project's charter, including CDMA 2000 and its enhancements." 185. In view of the above, it would be incorrect to say that Qualcomm is the owner of CDMA technology. What Qualcomm owns are essential patents in, respect of numerous intellectual properties based on CDMA technology. This fact is evident from the clauses in the license agreements. A perusal of the license agreements shows that Qualcomm ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 91 itself obtains licenses from certain third parties to use their CDMA patents, (pp. 247 and 292 of the paper book filed by the appellant). Thus the argument that CDMA is a technology owned by Qualcomm is devoid of merit. All that Qualcomm owns is essential patented intellectual properties developed under CDMA technology. To put it in simple words a mobile phone or a cellphone is a wireless data communication device which work on wireless technology, while phone is a device that can make and receive telephone calls over a radio link while moving around a wide geographic area. It does so by connecting to the cellular network provided by a mobile telephone operator. This would allow access to the public telephone network. In addition to voice data transmission modern mobile phones also support a wide variety of other services such as text messaging, MMS, e-mail, internet access, short range wireless communication, blue tooth, business applications, gaming and photography. Such mobile phones are also referred to as 'smart phones'. The other forms of wireless data communication technologies currently in use are WiFi, global positioning system (GPS), blue tooth, gig B. satellite television, wireless USB etc. From the above it is clear that there are many digital technologies used to transmit data in wireless form. Hence the argument that CDMA is a wholesome technology and that Qualcomm is the exclusive owner of such technology cannot be accepted. 186. There are a number of simple wireless technologies that are used by us in our daily life. A TV remote or an AC remote have wireless technology and it transmits signals between two points. Many other devices such as washing machines, microwaves, cars, computers and even fixed landline telephones, fax machines etc. have chipsets with embedded software which enable the equipment to work. Technology in a "sense, the patent of which is owned by someone, is being used in India. All these devices which have chipsets with some embedded software when operated may in a way result in use of licensed software or IPRs in India. The use of such equipment cannot result in a source of income for the as it is sale of the equipment is as a "chattel", the title of which gets transferred. The software is embedded in the chipset and the chipset is part of the equipment. Hence this argument is devoid of merit and hence cannot be accepted. 187. In the result this issue of taxability of the "royalty" paid by OEMs to the assessee is decided in favour of the assessee. Hence these grounds are allowed.” (underline supported by us to show the various ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 92 arguments covered by the bench.) 45. Therefore respectfully following the decision of the coordinate bench in assessee‘s own case for Ay 2000-01 to 2004-05, that royalty income of the appellant earned from OEMs situated outside India for the patents licensed to OEMS for manufacture of CDMA Network outside India we hold that same is not chargeable to tax u/s 9 (1) (vi)(c) of the ACT. [As the revenue is not chargeable to tax in India as per Income tax Act 1961 requirement of looking at the provision of article 12 (7) of Indo USA DTAA is futile. Accordingly, we allow ground No 1 and 2 of the appeal of the assessee. 46. Now we come to ground No. 3 of the appeal of the assessee with respect to revenue received by appellant under BREW operator agreement and BREW carrier agreement what is taxed as ̳Royalty‘ income in India u/s 9(1)(vi)(c) of the Act and article 12 of the India-US Treaty. This issue has been dealt with extensively by the coordinate bench in second order for Assessment Year 2005-6 to 2008-09 dated 20 th February 2015 in paragraph No. 102 to 108 as under:- “102. That takes us to ground no. 4, as raised by the assessee, against holding that the revenues received by the Appellant under the BREW Operator Agreement and BREW Carrier Agreement is taxable as royalty income in India under section 9(1)(vi) of the Act and Article 12 of the India-USA tax treaty. The assessee contends that in doing so, the AO has failed to appreciate that the provision of BREW software to Tata and Tata Teleservices (Maharashtra) Limited and Reliance Communications Infrastructure Limited results in sale of 'Copyrighted Article' and not licensing of a 'Copyright'. 103. So far as this grievance of the assessee is concerned, only a few facts are required to be taken note of. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has invoiced an amount of Rs 2,52,70.569 to Tata Teleservices Limited under BREW (Binary Runtime Environment for Wireless) agreement. It was noted that it is an application development platform, developed by Qualcomm, for mobile phones that enables users to download and run applications for playing games, sending messages and sharing photos etc. It was also noted that this platform runs between the application and wireless device's chip operating system so that programmers can develop applications for wireless device without the code for system interface or understanding operating systems. It was also noted that end users of BREW customers are the carriers who pay an enablement fees based on ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 93 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 ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 94 copyright. Therefore arguments of the assessee regarding applicability of OECD commentary fail on this count as well 104. The assessee did raise a grievance before the DRP but without any success. The assessee is not satisfied and is in appeal before us. 105. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 106. We find that the payment in question is admittedly the payment is for a software which is for a copyrighted article and not the copyright itself. There is nothing on record to suggest that the payment is for the copyright itself. In this view of the matter, the issue is clearly covered, in favour of the assessee, by Hon'ble Delhi High Court's judgment in the case of DIT v. Infrasoft Ltd. [2014] 220 Taxman 273/[2013] 39 taxmann.com 88 wherein Their Lordships have, inter alia, observed as follows: '85. The Licensing Agreement shows that the license is non- 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. 86. 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 ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 95 site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisat ion device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any 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. 87. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible 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. 88. 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 these 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 ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 96 purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7. 89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non -exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer 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 co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. 90. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. 91. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted 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. 92. The licensees are not allowed to exploit the computer software ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 97 commercially, they have acquired under licence agreement, only the copy righted 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. 93. 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. 94. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the 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. 95. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof f or the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial. 95. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 98 96. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. 97. We are not in agreement with the decision of the Andhra Pradesh High Court in the case of Samsung Electronics Co. Ltd. (supra) that right to make a copy of the software and 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. 98. 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.' 107. Learned Departmental Representative, even as he vehemently relied upon and supported the stand of the authorities below, could not point out any distinguishing feature in this case. 108. In view of the above discussions, and respectfully following the esteemed views of Hon'ble jurisdictional High Court, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned addition of Rs 2,52,70.569. The assessee gets the relief accordingly.” 47. Therefore, respectfully following the second order of the coordinate bench we hold that royalty from BREW operator agreement of Rs. 67848685/- and 15% thereof amounting to Rs. 10177303/- is not chargeable to tax in the ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 99 hands of the assessee u/s 9(1)(vi) of the Act as well as Article 12 of the Indo-USA Tax Treaty. Accordingly, ground No. 3 of the appeal of the assessee is allowed.” 16. The factual position in the impugned assessment years is not different from the assessment years 2009-10 to 2012-13 and the earlier assessment years. In fact, in the assessment order passed for the impugned assessment years, the Assessing Officer has accepted that the facts involved in impugned assessment years are identical to the past assessment years. Thus, when the entire edifice of the present additions made by the Assessing Officer is based on the assessment order passed for the assessment year 2012-13, which now stands reversed by the Tribunal (supra), in our view, the addition made by the Assessing Officer are not sustainable. Accordingly, we direct the Assessing Officer to delete the addition. 17. In so far as ITA No. 7559/Del/2018, being appeal for the assessment year 2015-16 is concerned, our decision in ITA No. 7894/Del/2017 will apply mutatis mutandis. Accordingly, we direct the Assessing Officer to delete the addition. 18. In view of our decision in the appeals, the stay applications become infructuous, hence, dismissed. ITA Nos. 7894/Del/2017 & 7559/Del/2018 and SA Nos. 309 & 304/Del/2020 100 19. To sum up, both the appeals are allowed. Whereas, stay applications are dismissed. Order pronounced in the open court on 13/06/2023. Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER *aks/-