I write to discuss the case of Qualcomm. v. ACIT.
For better comprehensibility, I will be covering the issues over three parts.
Part I (A&B): Applicability of S. 9 (1)(vi)(c) of the Income Tax Act.
Part II: Distinction between “copyright” and “copyrighted article”.
Part III: Explanation of Relevant Technology (CDMA Tech.).
At the outset itself, note that the order is of a slightly different kind.
While it clearly establishes the manner in which the rules are supposed to function, it doesn’t apply the law to the facts on account of a dearth of clarity upon their veracity. Therefore, most of the key questions were referred back to the Assessing Officer for further excavation of facts.
In other words, the significance of the order lies more in the Coordinate Bench’s analysis of the legal provisions, rather than the direct consequence of the order on the parties.
Now, the relevant facts.
Qualcomm (Based in U.S.) licensed chipsets to a manufacturer (Based Outside India).
Now onwards, I will refer to the manufacturer as an “OEM” (Original Equipment Manufacturer).
The OEM incorporated the chipsets into mobile handsets and sold the handsets to Indian service providers (Tata and Reliance).
The OEM paid a royalty ‘X’ to Qualcomm for the chipsets.
The manner in which the afore mentioned royalty ‘X’ was arrived at is relevant as it establishes a bit of a link between the sale of handsets in India and Qualcomm’s royalty receipts.
The royalty was conceptualized not only as a lump sum, but also as a percentage of the proceeds of the OEM through the sale of handsets and was “due when the handset (was) invoiced, shipped, sold, leased, or put to use – whichever (was) earlier”.
All relevant agreements were entered into outside India.
The key question is:
Can ‘X’ be taxed in India?
But before that, let us have a look at the Section 9 of the Income Tax Act.
“ (1) The following incomes shall be deemed to accrue or arise in India-
(vi) income by way of royalty payable by–
(a) …; or
(b) …; 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 utilised 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.
The first question that we need to answer is:
Why is Section. 9 applicable?
The answer is quite straightforward.
Income can only be taxed in India if it is either received or accrued in India (S. 5 ITA).
‘X’ was neither received in India, nor did the Qualcomm’s right in the amount arise in India. Therefore, the only manner in which ‘X’ could fall under the Indian tax jurisdiction was if the right in it was deemed to have arisen in India. Given that the only relevant deeming provision under the ITA is Section. 9, the Indian tax regime will not have jurisdiction unless it brought ‘X’ under the said provision.
Additionally, the provision under S. 9 dealing with royalty is (1)(vi).
Next question we need to deal with is:
What are the key issues in the text of the provision that need to be noted?
Let us now breakdown each of the relevant parts of the statute:
- “utilised for the purposes of a business … carried on by such person in India or”
- “for the purposes of making or earning any income from any source in India.”
Who needs to be a “Non-Resident”? Qualcomm or the OEM?
9 (1)(vi) contains the words “payable by”.
Meaning, royalty payable by entities fulfilling the conditions above will be taxed.
Since the OEM is paying the royalty, we need to check if the OEM has cleared all the conditions laid down in 9(1)(vi)(c) and not Qualcomm.
So, let us check if the OEM meets all the conditions.
It is definitely a “Non-Resident”. Take it as a given.
Now, let us check if the OEM clears either of the other conditions.
#1 “utilised for the purposes of a business … carried on by such person in India or”
The Tribunal held that the OEMs need not wholly carry out business in India for tax liability to arise. Even if they were conducting business in India partly, tax liability would arise as long as the patent was used for carrying out such business.
It further held that manufacturing, though an essential aspect of a business, could not constitute the whole of it. Therefore, though the entire manufacturing was outside India, one could not emphatically say that the business had got nothing to do with India.
“65. However, what this diagram does not enlighten us about is whether the business of the assessee was carried out entirely outside India. No doubt, manufacturing is an important part of business but the business per se is little more than manufacturing. To give an example, in a situation, in which the core manufacturing activity, with respect to a product, is carried out in China but the sales and manufacturing activity in respect of the same product is carried out is another jurisdiction or other jurisdictions, it cannot be said that the business is not carried by the assessee in that another or those other jurisdictions. Of course, when it comes to taxation of profits from manufacturing activities, such profits can only be taxed in China in this example, but that is not the issue before us. We are not concerned about taxation of any business profits. We are not even concerned about taxation of royalties used in the manufacturing process which is carried out, as in this example in China, in another jurisdiction. We are only concerned about the taxability of royalties to the extent such royalties are used in “a business or profession carried on by him (i.e. a non-resident) in India”. Therefore, in our considered view, even when an income is partly carried out in India but the royalties are payable in respect of such part of the business as is carried on in India, it would be taxable in India.”
Then, what are the relevant factors for determining place of business?
Two key facts were considered for determining whether the OEMs carried business in India.
- The link between the CDMA technology and India. (Discussed in Part III)
- The existence of OEM’s Permanent Establishments.
From a close reading of the order and even by resorting to logic, one could conclude that both of the above conditions will have to be met for tax liability to arise.
The Tribunal, finally, referred the matter back to the Assessing Officer for ascertainment of facts.
We shall discuss the last prong of the statute in Part IB (click here).