QUALCOMM INCORPORATED,SAN DIEGO, CALIFORNIA vs. DCIT CIRCLE 3(1)(1) INTERNATIONAL TAXATION, CIVIC CENTRE, NEW DELHI

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 and therefore the said notices and order are void and liable to be quashed.

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 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.

The Ld. AO and the Hon'ble DRP erred in violating the principles of judicial discipline by not following 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

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.

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%.

The Ld. AO erred in levying interest under section 234B and 234C of the Act.

The Ld. AO erred in law on initiation of penalty proceedings under section 270A of the Act.”

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

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.

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 64,43,51,386/- u/s 9(1)(vi)(b) of the 7 Income Tax Act and interest on income tax refund of Rs 3,03,82,210/- which has been offered as income as per Article 11 of India USA tax treaty.

What is under the dispute and contention with the Revenue is the treatment by the assessee of the Royalty Income amounting to Rs 8,84,08,62,665/- 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.

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].

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 10 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

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

Concluding the findings for AY 2014-15 and 2015-16, the Tribunal order [supra] reads at Para 16 as under:

We find that in the impugned assessment years, 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 2016-17, has also noted the DRP’s findings as under: “As per the submissions of the assessee and as per record, the statement of facts and grounds of objection are similar to that of earlier year i.e., AY 2015-16. Though the grounds of objection for AY 2015-16 are worded differently than grounds of objection for AY 2016-

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.