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Facts
M/s Qualcomm Incorporated, a non-resident company, appealed against an assessment order for AY 2017-18 where additions were made for royalty income from non-resident OEMs. The assessee contended that this royalty income, pertaining to patents used in manufacturing processes outside India, was not taxable in India, despite sales being reported from India by these OEMs. The core dispute revolved around the taxability of this specific royalty income.
Held
The Tribunal relied on its prior consolidated order for AYs 2014-15 and 2015-16 in the assessee's own case, which held that royalty income from foreign OEMs without Permanent Establishments (PEs) in India, where manufacturing occurred outside India, was not taxable. Finding the factual situation unchanged for AY 2017-18 and the assessment based on a previously reversed order, the Tribunal directed the deletion of the additions made by the Assessing Officer under section 9(1)(vi)(c).
Key Issues
The key legal issue was the taxability of royalty income received by a non-resident company from non-resident OEMs for patent licensing, specifically when the patents are used in manufacturing processes outside India, under section 9(1)(vi)(c) of the Income-tax Act, 1961, and Article 12 of the India-US Double Taxation Avoidance Agreement.
Sections Cited
Section 147, Section 144C(13), Section 148, Section 148A(b), Section 148A(d), Section 151, Section 9(1)(vi)(b), Section 9(1)(vi)(c), Section 115A, Section 234B, Section 234C, Section 270A, Article 12 of India-US Double Taxation Avoidance Agreement, Article 12(7) of India-US Double Taxation Avoidance Agreement, Article 12(7)(b) of India-US Double Taxation Avoidance Agreement
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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI VIKAS AWASTHY & SHRI NAVEEN CHANDRA
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
The above captioned appeal by the assessee is preferred against the order of the Assessing Officer dated 20.03.2024 framed u/s 147 r.w.s 144C(13) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] pertaining to A.Ys 2017-18.
Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules. Relevant judicial decisions considered wherever necessary.
The grounds of appeal raised by the assessee read as under:
“1. The Ld. AO erred in initiating and completing the assessment without possessing information as required under explanation 1 to section 148 of the Act, rendering such assessment to be void ab initio and liable to be quashed.
2. The Ld. AO while issuing the notice under section 148 of the Act, 148A(b) of the Act and passing the order under section 148A(d) of the Act erred in not obtaining prior approval of the competent authority as specified under Section 151 of the Act 3 and therefore the said notices and order are void and liable to be quashed.
3. The Ld. AO erred in making additions to the total income of the Appellant for the subject AY in respect of royalty income received by the Appellant from the non-resident licensees from sale of licensed products under the Patent Licensing Agreement as per provisions of section 9(1)(vi)(c) of the Act and Article 12(7) of India-US Double Taxation Avoidance Agreement ('India-US tax treaty).
The Ld. AO erred in applying the provisions of Article 12(7)(b) of India-US tax treaty for bringing to tax, the royalty income received by the Assessee from the licensees without appreciating the fact that the patents are used in a contracting state outside of India.
5. The Ld. AO erred in conducting the entire assessment in haste without giving appropriate time to the Assessee to provide the information and disregarding the principles of natural justice.
The Ld. AO erred in concluding assessment proceedings based on references drawn from the following documents pertaining to earlier years and without independently reviewing the facts or distinguishing the submissions of the Assessee for the subject AY: Assessment order of AY 2005-06 to AY 2008-09 which was quashed by the Hon'ble ITAT as barred by limitation under the Act Technical Opinion issued by Technical Experts as part of remand proceedings of the Assessee for AY 2005-06 to AY 2008-09; and Extracts from Assessment Orders for AY 2012-13 and AY 2014-15.
7. The Ld. AO and the Hon'ble DRP erred in violating the principles of judicial discipline by notfollowing the decision of the Hon'ble ITAT in the Appellant's own case in AY 2000-01 to AY 2004-05, AY 2009-10 to AY 2012-13, AY 2014-15 and AY 2015-16, wherein the additions under dispute were held to be non-taxable.
8. The Ld. AO erred in concluding the assessment for the subject AY relying on the assessment proceedings for AY 2014- 15, wherein the Ld. AO concluded that the patent technology is used by the end-user in India without appreciating the fact that if the user was said to be the end user in India, then the charge under section 9(1)(vi)(c) of the Act should fail and the royalty earned by QCOM should not be taxable in India.
9. The Ld. AO erred in holding that provision of section 115A of the Act would not apply to royalty income received from licensees nor that the royalty income would be taxable under the Article 12 under the India-US tax treaty and taxing the said income at a higher rate of 40%.
10. The Ld. AO erred in levying interest under section 234B and 234C of the Act.
11. The Ld. AO erred in law on initiation of penalty proceedings under section 270A of the Act.”
5 4. M/s Qualcomm is a non-resident company incorporated under the laws of USA. It is engaged in the business of design, development, manufacture, marketing and licensing of digital wireless telecommunication products and services based on its code division multiple access (CDMA) technology. M/s Qualcomm Incorporated is a world leader in 3G, 4G, 5G and next generation wireless technologies. M/s Qualcomm Incorporated includes Qualcomm licensing business, QTL and the vast majority of it’s patent portfolio. QTL grants licenses or otherwise provides rights to use portions of their intellectual property portfolio, which among other rights include certain rights essential to and/or useful in the manufacture and sale of certain wireless products, including, without limitation, products implementing CDMA 2000, WCDMA, CDMA, TDD and/ or LTE standards and their derivatives.
The Revenue has made recurring additions in earlier and subsequent years primarily pertaining to Royalty on subscriber units and Royalty on infrastructure equipment, both of which have been held to be taxable as Royalty in India as per provisions of section 9(1)(vi)(c) of the income tax act as well as article 12(7) of the DTAA between India and USA.
6 6. The assessee, in the instant year, has declared taxable income on account of Royalty income earned from licensing of patents to an Indian resident amounting to Rs 6,44,83,62,431/- u/s 9(1)(vi)(b) of the Income Tax Act.
What is under the dispute and contention with the Revenue is the treatment by the assessee of the Royalty Income amounting to Rs 9,55,98,86,189/- received from non-resident OEMs, who have reported their sales from India, as non-taxable as these non-resident OEMs have no manufacturing in India.It is this Royalty Income which has not been offered for taxation and is the core of contention between the Revenue and the assessee.
At the very outset of the opening of the arguments, the ld. counsel for the assessee stated that the issue raised vide Ground Nos. 3 to 9 pertaining to royalty income being taxable u/s 9(1)(vi)(c) of the Income-tax Act, 1961 [the Act, for short] and not to be added in the hands of the assessee, is covered in favour of the assessee by the decision of the coordinate bench which passed a consolidated order in assessee’s own case in & Others for A.Ys 2014- 15 and 2015-16 vide order dated 13.06.2023.
On the other hand, the ld. DR could not bring any distinguishing facts or decision in favour of the Revenue for the impugned AYs. He relied upon the orders of the Assessing Officer and contended that the coordinate bench has passed a consolidated order allowing the appeals of the assessee for the A.Y 2014-15 and 2015-16.
Ground Nos. 1 and 2 have not been argued by the ld. counsel for the assessee as the case has been decided on merits, hence dismissed as such.
Ground No. 10 and 11 pertaining to levy of interest u/s 234B and 234C of the Act and initiation of penalty proceedings u/s 270A of the Act are consequential in nature and needs no separate adjudication.
We have heard the rival submissions for ground no. 3 to 9 and have perused the relevant material on record. We have also perused the Tribunal order dated 13.06.2023 relied upon by the ld. counsel for the assessee. We find force in the submissions of the ld. counsel for the assessee that the issue is squarely covered in favour of the assessee and against the Revenue by the order of the Tribunal [supra].
8 The Tribunal has given a categorical finding at Para 11 to 16 at page 36-56 of its order which reads as under:
“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.
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 9 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.
It is relevant to observe, identical issues 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 OEM’s located outside. India is not taxable in India. However, when identical nature of addition again came up for consideration years 2005-06 to 2008 -09. The revenue filed certain additional evidences before the Tribunal to demonstrate that certain OEMs have PE 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
10 for re-examination after obtaining reports from the technical experts.
14. On carefully going through the two orders of the tribunal in assesses own cases one for assessment year 2000-01 to 2004-05 and second one for assessment years 2005-06 to 2008-09, it is observed in the order passed for the AY 200-01 to 2004-05, the Tribunal has categorically held that foreign OEM’s since have not carried on any business in India, it cannot be said that such OEMs have used assesses 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 assessment years 2004-05 to 2005-06, the Tribunal has agreed with the observation made in the 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.
As could be 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 subscribers units to make it India-specific or network carrier-specific was discontinued in AY 2020-11 and thereafter
11 subscriber units available were for open market handsets not locked in any specific service provider,in our view, the Report of the technical Experts do not have any relevance in so far as impugned assessment year is concerned. In any case of the matter, the assessment order makes it clear that driven by the assessment order passed for assessment year 2012-13, the assessing officer has concluded that the royalty income received from OEM’s located outside India is taxable in India. Pertinently while deciding the appeals for the assessment year 2009-10 to 2012-13 arising out of ITA number 5353/Del/2012 and others, in order dated 16.04. 2018, Qualcomm Incorporated versus Dy DIT(International Taxation), [2018] 93 taxmann.com 80(Delhi- Trib), the tribunal, having taken note of the relevant facts and earlier decisions on the issue has held that the royalty income received from OEM’s located outside India is not taxable in India.”
13. Concluding the findings for AY 2014-15 and 2015-16, the Tribunal order [supra] reads at Para 16 as under:
“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.”
We find that in the impugned assessment year, the factual matrix remains unchanged from the facts as was in AYs 2009-10 to 2012-13, as well as AY 2014-15 and 2015-16 and the earlier assessment years. The assessing officer himself admits that he has relied on earlier assessment orders passed by his office on the grounds that the facts of the case have remained same in the year under consideration also. The assessing officer, for the instant AY 2017-18, has also noted the DRP’s findings as under: “Since both the AY 2016-17 and 2017-18 are together with the DRP, directions given by the DRP for AY 2014-15 are being issued for both the AY 2016-17 and 2017-18.As per the submissions of the assessee and as per record, the statement of facts and grounds of objection are similar to that of AY 2015-16. Though the grounds of objection for AY
13 2015-16 are worded differently than grounds of objection for AY 2016- 17 and 2017-18, in essence issues are same for both years. For AY 2017-18, to maintain consistency, DRP is using same orders mutatis mutandis”.
15. Respectfully following the decision of the co-ordinate bench [supra]that ‘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’, this grievance is allowed in favour of the assessee and against the Revenue. Accordingly, we direct the Assessing Officer to delete the additions made u/s 9(1)(vi)(c). Accordingly, Ground Nos. 3 to 9 are allowed.
The order is pronounced in the open court on 29.08.2024.