QUALCOMM TECHNOLOGIES INC.,HYDERABAD vs. DCIT, CIRCLE- 3(1)(1), INTERNATIONAL TAXATION , NEW DELHI

Facts of the case, in brief, are that the assessee is a company incorporated in United States of America and is a wholly owned subsidiary of Qualcomm Incorporated USA(Qualcomm). QTI is engaged in the business of design, development and marketing of digital wireless telecommunications products and services based on Code Division Multiple Access (CDMA), Orthogonal Frequency Division Multiple Access(OFDMA) and other technologies. During the year, QTI has provided services to M/s. Sohamsaa Systems Pvt. Ltd. (Sohamsaa), Sistema Shyam Tele Services Ltd. (Sistema), Tata Tele Services Ltd (TTSL), Virgin Mobile India Ltd. (Virgin Mobile) and Alcatel Lucent India Ltd. (Alcatel). 3.1 The assessee filed its return of income on 30.09.2013 declaring nil income. However, the assessee company offered an income of Rs.44,46,767/- as royalty taxable at special rate of 10% as per IT Act 1961. The assessee company has revised its return of income on 31.03.2015 at the same income but the claim of TDS was raised from Rs.17,36,237/- to Rs.19,41,897/-. 3.2 During the course of assessment proceedings the assessee vide letter dated 12.2.2016 explained as under :- “Effective as of October 1, 2012 QUALCOMM incorporated completed an internal corporate reorganization, and in connection with the internal corporate reorganization Qualcomm transferred the assets relating to certain of its businesses to its wholly- owned subsidiary Qualcomm Technologies, Inc. The Qualcomm Internet Services'(QiS) division is now part of QTI. As a part of this transfer, QIS sent notice of assignment letters to its BREW customers, including Sistema Shyam Teleservices Limited and TATA Tele Services Limited. As a result of this assignment, we confirm, for the period of October 01, 2012 to March 31, 2013 (the applicable part for A.Y 2013-14) that:

The assessee gave the following details of taxable and non taxable income relevant to AY 2013-14. Amount S.No Customer Nature of Services Received Sohamsaa Systems 01 Royalty 44,46,767 Private Limited Alcatel Lucent India 02 Test tools 2,64,300 Ltd. Sistema Shyafrt 03 Test Tools 12,43,575 Teleservices Ltd. License of BREW Sistema Shyam 04 74,47,372 Teleservices Ltd software License of BREW Tata Teleservices 05 46,31,570 Limited software BREW License of Virgin Mobile India 06 4,62,404 Pvt. Ltd BREW software *The assessee has only offered the income mentioned in SI. No 1 to tax in India as royalty.

The Assessing Officer during the course of assessment proceedings asked the assessee to explain as :

Rejecting the various explanation given by the assessee the Assessing Officer held that the income of the assessee from licensing of BREW software to Tata Teleservices, Sistems Shyam and Virgin Mobile India Pvt. Ltd. is taxable under section 9 (1) (vi) of the I. T. Act and under article 12 of Indo – US-DTAA. The Assessing Officer accordingly determined the total income of the assessee at Rs.1,84,95,988/-.

In appeal, the ld.CIT(A) upheld the action of the Assessing Officer holding that the payment under consideration received by the assessee pursuant to the BREW Agreements is very much taxable not only u/s 9(1)(vi) of the IT Act but also under Article 12 of the Indo-USA DTAA. So far as the payment received in connection with Test Tools Agreement is concerned, he also upheld the action of the Assessing Officer in holding that the Test Tools Agreement formed part of the BREW Agreement and the nature of transaction under Test Tools Agreement is akin to the main transaction regarding supply of BREW system.

Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.

The Ld. Counsel for the assessee at the outset did not press ground of appeal No.2 for which the Ld. DR has no objection. Accordingly the ground No.2 is dismissed as not pressed.

So far as ground of appeal

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 88wherein Their Lordships have, inter alia, observed as follows:

The Licensing Agreement shows that the license is non-exclusive, non-transferable and the software has to be uses in accordance with the agreement. Only one copy of the software is being supplied for Page | 12 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 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 servicebureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft.

In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty.

The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred arespecific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory Page | 13 or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, wherethey do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7.

There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non - exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto.

The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do.

There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA.

The licensees are not allowed to exploit the computer software 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.

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.

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 Page | 15 in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty.

We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof f or the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial.

The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA.

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 DITv. M/s Nokia Networks OY(Supra) as not amounting to acquiring a copyright in the software.

In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a Page | 16 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 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.”

Respectfully following the order of the Tribunal in assessee’s own case and in absence of any distinguishable feature brought to our notice by the ld. DR, we hold that the royalty from BREW Operator Agreement is not chargeable to tax in the hands of the assessee u/s 9(1)(vi) of the IT Act as well as Article 12 of the Indo- USA DTAA. Following similar reasonings, we also hold that the CIT(A) is not justified in upholding the action of the Assessing Officer in bringing to tax the royalty from Test Tools Agreement. The grounds raised