Qualcomm Incorporated vs. ADIT (ITAT Delhi)

S. 9(1)(vi)(c): Royalty earned by non-resident from another non-resident is not taxable in India even if payer uses the know-how for sale of products to India

The assessee, a USA based company, held patents to the CDMA mobile technology which it licensed to various unrelated wireless Original Equipment Manufacturers (OEMs) located outside India. The OEMs used the assessee’s technology to manufacture CDMA handsets outside India which were sold to telecom companies in India (e.g. Reliance Com). The Indian telecom companies sold the handsets to Indian consumers. The AO and CIT(A) held that as the OEMs sold the handsets to customers in India, they were “carrying on a business in India” or had a “source of income in India” and so the royalty paid by them to the assessee was taxable in India u/s 9(1)(vii)(c). On appeal by the assessee to the Tribunal, HELD by the Tribunal allowing the appeal:

(i) U/s 9(1)(vi)(c) royalty payable by a person who is a non-resident is deemed to arise in India where the royalty is payable in respect of any right etc utilised for the purposes of a business carried on by such person in India or for the purposes of earning any income from any source in India. S. 9(1)(vi)(c) is a deeming provision and the burden is on the Revenue to prove that the payer has a business/ source of income in India. What is important for s. 9(1)(vi)(c) is not whether the 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”;

(ii) The first question is whether the OEMs have carried on business in India and used the assessee’s patents for that purpose. The mere fact that the products manufactured by the OEMs outside India were sold to parties in India does not mean that the OEM’s carried on business in India. For a business to be carried out in India there should be some activity carried out in India. A mere purchase and sale with an Indian party is not sufficient. The fact that the OEMs customized the handsets so as lock them to a specific operator and included Hindi and regional languages, etc was irrelevant as such customization was not connected with the assessee’s patents. There was no customization of the hand set qua the CDMA technology. Further, even if the OEM customized the handsets to Indian specifications that did not mean that the OEM was “carrying on business in India”. The assessee’s role ended when it licensed its patents to the OEMs and the OEMs role ended when they sold the handset to the Indian customer. The sale was of a chattel as a chattel and though the product is a combination of hardware and technology, the revenue’s attempt to break down the sale into various components is not supported by the terms of the agreement and the facts and it cannot be said that every item other than software was sold and that the embedded software has been separately licensed. There is also no evidence on record to show that title to the handsets passed in India or that certain further activity was done by the OEMs in India after the sale. On the other hand, title to the equipment passed to the Indian customer on high seas and the profits made by the OEMs would not be chargeable to tax in India. The taxability of the assessee directly depends on the taxability of the OEMs and if the OEM is not taxable, the assessee cannot be made taxable (Ericsson AB 246 CTR 433 (Del), Skoda Export, Nokia Net Works followed). Even otherwise, the mere passing of title in imported goods in India does not mean that the OEM is carrying on business in India. It is “business with India” and not “business in India”;

(iii) The second question is whether the OEMs have used the asssessee’s technology to earn or make income from a “source” in India. A “source of income” is the activity that gives raise to income. The source of the royalty income for the assessee is the activity of manufacturing by the OEMs, which is carried out outside India (Rhodesia Metals 9 ITR (Suppl) 45 & Havells India followed). The department’s argument that the assessee had made available the CDMA technology (software) to the OEMs in the form of chip sets and that OEMs have inserted these chip sets into the handsets 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 is contrary to the facts. It is also not the basis on which the assessment was made by the AO & CIT(A). What was brought to tax is the royalty earned from the licensing of patents and not royalty earned on software embedded in the chip sets.