Part III: Qualcomm v. ACIT #Technology Supplement (CDMA)

Here I will be discussing the CDMA (Code Division Multiple Access’) tech. and its link with India.

As legal analysts, we only need to understand that the link between a technology and its relation with the tax jurisdiction is relevant in determining tax liability. This has been discussed in detail in Part I (A&B).

In other words, this piece is more of a supplementary piece for the enthusiastic reader who wishes to understand the underlying tech. to a greater depth and not incredibly relevant to the fundamental legal analysis. 

Note that the Tribunal discussed the tech. in considerable detail, but in all its wisdom, chose not to take a final call on the matter as it felt that the technical issues at hand were beyond its comprehension abilities. I too am no tech. expert and would implore you to understand that my understanding of the tech. is only as good as the Tribunal’s ability to articulate it.

With that, let us look at what the tech. constitutes.

A functioning CDMA mobile constitutes of the following:

i. SID: System Identification Code

A 5 digit numeral assigned to a carrier (E.g. Reliance) by the Gov. of India.
One numeral for each carrier.

ii. ESN: Electronic Serial Number

32 Bit numeral assigned by the manufacturer to each phone.
So, every handset has a unique ESN.

iii. MIN: Mobile Identification Number

10 digit numeral that can be used to identify the owner.

The only reason I used “numeral” instead of “number” was because it sounded somewhat fancier.

ESN is a permanent part of the phone, while the SID and MIN are programmed into the phone at the time of purchase of a service plan from any given service provider. If you change your service provider, then the SID and MIN will correspondingly change, but the ESN will remain the same, as long as you use the same handset.

So, let us get this straight.

Let us say you walk into a store and buy a handset.

At this point in time, the only numeral on your phone is the ESN.

Next, you go into an Airtel showroom and buy some blasted service plan ([email protected]₹1).

After the purchase of the service plan will the SID and MIN be programmed into your phone.

It is only after the programming, will your phone consist of all three essential codes.

When you turn on your phone, it searches for a particular SID on various frequencies. Upon finding a matching SID, it becomes capable of carrying out all those mind boggling functions that phone’s are known for. Unless of course you bought a Microsoft phone, in which case it would probably stop “responding” and blow up in your face. 

Of course, I am not being serious about the Microsoft phone. It just that I am a little miffed at Microsoft word, after it stopped “responding” and made me lose a whole day’s work.

Anyway, personal grievances aside, let us move on.

Now that we have got the basics right, let us look at how “locking” works.

You might have come across offers from service providers attempting to sell handsets at concessional rates on the condition that you purchase their service plans. These service providers ensure that consumers who take up these offers do not change service providers later by using a technical function called “locking”.

One way of doing this is by integrating the ESN with the MIN.

This disallows the consumer from changing his MIN and therefore, he has to stick to the service plan that he had bought at the time of taking up the offer.

In the Asifuddin AP HC case, a few individuals attempted to hack (technical term for “messed”) the phone and change the MIN by overcoming the technical constraint of the integrated ESN and MIN, thereby allowing the consumers to jump to another service provider.

The Andhra Pradesh High Court held this to be a criminal act. 

Now, let us look at the current case.

In the current case, the OEMs made technical modifications to make the handsets service provider specific.

Though the tribunal did not take a final call on the matter, it stated that, prima facie, the CDMA tech. seemed to be India specific. They formed their understanding on the basis that it was not only possible to use the tech. to make the handsets India specific but also changing the configuration was held to be a criminal offence.

What the Tribunal failed to notice was, that in Asifuddin,  the changing of configuration was criminal on account of arrangement between the consumer and the service provider in the specific case of composite offers (Phone + Service Plan). We need to note that it is upto the service provider to make a handset carrier specific or otherwise.

Further, the order also referred to a newspaper report that referred to a new technology (OMH; Open Market Handset) that allowed consumers to shift service providers. The Tribunal questioned the need for such a technology, if CDMA itself allowed for the same.

My Opinion

Qualcomm, merely provided the OEMs with chipsets.

The technology could then be used in any which way.

Qualcomm’s argument was essentially that since the provided tech. was not India specific and if they were going to be taxed in every jurisdiction in which the handsets were sold, then the royalty payable by the OEMs would be taxed in every jurisdiction that they sold handsets to. This, Qualcomm argues, would be double taxation (which is not acceptable). 

But this argument can be easily rebutted by arguing that only that royalty associated with handsets sold to a particular jurisdiction could be taxed under that particular jurisdiction. So, if 10 handsets each are sold to India and Japan, the Indian regime could only tax for the 10 handsets sold to India. Thereby, avoiding double taxation. 

While the CDMA tech. provided could be tweaked to make it India specific, the technology itself was not intrinsically India specific. This nuance was not brought forward by the Tribunal, but finally, I would agree with them if they held that the technology was India specific as, effectively, that was the final consequence.

Of course, one needs to understand that I am commenting with a very limited understanding of the subject matter. The Tribunal took the right step by referring the matter back to the Assessing Officer for further incorporation of expert opinion.

After all, trying to take decisions without full knowledge leads to products like Microsoft Word.

Chief Reference:
The Order

Cover image from here.


Prateek Surisetti

Alias: Suri Net Worth: 0$. NALSAR Batch of 2019. Characteristic Features: 1. Thinks he's funny. 2. Can't shut-up about having topped in Class II. 3. Takes deep personal offence when his cricketing talent is questioned. 4. Will definitely reference his status as World#1 @ Reflex Ball (A sport he invented), within 10 minutes of conversing with him. Notable Endeavours: 1. Founder Access Fitness (Movement at NALSAR that promotes utilization of public spaces for furtherance of sport and fitness) 2. Author "Good Morning Miss Hobby" 3. Travel Photographer (Antarctica, India) Details @ www.facebook.com/prateekss Contact: [email protected]

One comment.

  1. AvatarSantanu Mukherjee

    The case is that of IP exhaustion and typically international exhaustion, as practiced in India. Hence the argument that if royalty is not charged In India there cannot be tax on that royalty in India. Here is how I read it:

    1. Qualcomm provided OEMs with the chipsets and they licensed their IP so that the OEMs can use them to manufacture handsets.
    2. There is no country-specific patents licensed. The OEMs pay royalty for the proprietary technology used in the chipsets.
    3. Different OEMs sell them in different markets, some import the mobile handsets into India and sell them.
    4. These OEMs do not pay any royalty for selling them in Indian market based on international exhaustion of the IP. Of course if anyone would have imported handsets which were not licensed by Qualcomm anywhere in the world, that would have been an infringement and could have been restrained.
    5. Qualcomm’s argument is that if there is no royalty income (due to IP exhaustion) then why should their be tax on the royalty earned in another jurisdiction.
    6. Royalty calculated on the handset is on the IP and based on the first sale (which in this case was outside India) and not the second sale in India.
    7. If Qualcomm charged restrained the OEMs from tweaking the technology in India without paying extra royalty then definitely that extra royalty could have been taxed by Indian authorities. The argument of 10 phones sold in India can be taxed would thus not hold ground.


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