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BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW
DELHI
12th Day of October, 2011
P R E S E N T
Justice Mr. P.K.Balasubramanyan (Chairman) Mr. V.K. Shridhar
(Member)
A.A.R. No. 885 of 2010
Name and address of the applicant : Upaid Systems Limited,
Trident Chambers, Wickhams Cay, Road Town, Tortola, British
Virgin Islands.
Commissioner concerned : Director of Income-tax (International
Taxation) Hyderabad
Present for the applicant : Mr. P.J. Pardiwalla, Sr.Advocate Mr.
Nitin Chaudhry, C.A. Mr. Himanshu Sinha, Advocate
Present for the department : Mr. Gangadhar Panda, Addl. DIT(Int.
Taxation), Hyderabad
R U L I N G [By Justice P.K. Balasubramanyan]
The applicant is a company incorporated under the laws of
British
Virgin Islands. It was previously known as „In touch
Technologies
Holdings Limited‟, the predecessor of which in turn was „In
Touch
Technology Limited‟. The applicant is engaged in the business
of
providing and enabling Electronic Payment Services via mobile
and fixed
line telecom and other telecom services networks. Over the
years, the
applicant has been conceiving, designing and developing
Software
Technology relating to payment processing platforms and
services. In the
year 1966, a new framework for an advanced intelligent
processing
platform was conceived of. In order to exploit that invention
commercially,
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appropriate software had to be designed and developed. After
developing
the design, the applicant outsourced the development of software
to
Satyam Enterprise Solutions Limited. On 29.5.1997, a Memorandum
of
Understanding was entered into in that behalf with Satyam
Enterprise
Solutions Limited. Satyam Enterprise Solutions Limited
subsequently
merged with its parent Satyam Computer Services Ltd. The
obligations
under the MOU with the applicant were taken over by the parent
Satyam
Computer Services Limited under the scheme of amalgamation.
The
Memorandum of Understanding provided that Satyam would
develop
certain Operation Support Systems software which included, inter
alia,
products that came to be known as „Call Manager‟ and „Net
Manager‟.
2. On 11.9.1998 as Assignment Agreement effective from
1.1.1998
was executed between the parties whereunder Satyam, after
receiving
good and valuable consideration, assigned to the predecessor of
the
applicant in perpetuity all worldwide right, title and interest
in the software
and Intellectual Property Rights and Copyright over the
software
developed. The Assignment Agreement also assigned to the
applicant the
right to seek patent protection for inventions and to own all
patent
applications and letters patent or similar legal protection for
such
inventions in all countries throughout the world. The
Assignment
Agreement was executed in the United States of America and
the
governing law was the law of the United States. On 15.9.1998,
the
applicant filed a provisional patent application with the United
States
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Patent and Trademark Office in respect of „Call Manager‟ and
„Net
Manager.‟ Satyam, along with the Assignment Agreement had
also
provided assignment letters from its employees who had worked on
the
innovations sought to be patented. These letters were also
relied on by
the applicant before the Patent Authority.
3. The Memorandum of Understanding entered into on
29.5.1997,
was then replaced by a Services Agreement dated 19.9.1999
made
effective from 15.9.1998 under which Satyam was to continue to
provide
software development services to the applicant till the end of
the year
2002. The Services Agreement reaffirmed that the predecessor of
the
applicant would be the owner of the Intellectual Property Rights
over the
software developed by Satyam.
4. There were some omissions in the application filed before
the
Patent Authority. These omissions were rectified by Satyam at
the
request of the applicant and a combined declaration was filed
with the
Patent Authority. Being satisfied, the Patent Authority granted
„Patent
947‟ to the applicant on 20.11.2001. Other subsidiary
applications in
respect of inventive work predicated in part upon „947 Patent‟
were also
filed by the applicant before the Patent Authority. The entirety
of the
patent portfolio of the applicant, according to it, is either
wholly or partially
dependent upon „947 Patent‟.
5. During the interregnum, Satyam had acquired 22.06% equity in
the
applicant as per the share issuance agreement executed in the
year 1999
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in lieu of outstanding receivables. Disputes arose between the
parties, a
settlement was arrived at and a Settlement Agreement dated
31.12.2002
was executed. By it, the share issuance agreement and the
Services
Agreement between the parties were terminated. Satyam ceased to
be
the contract software developer for the applicant. Satyam also
almost
entirely divested itself of its shares in the applicant. The
agreement
affirmed that the Intellectual Property Rights over the software
shall be the
sole and exclusive property of the applicant. Satyam agreed to
execute
any document that may be needed in furtherance of filing and
maintaining
the applications relating to the Intellectual Property.
6. According to the applicant, it subsequently discovered
certain facts
which led it to believe that some of the signatures in the
inventors
assignment purportedly signed by the inventor employees of
Satyam and
furnished to the applicant and filed by the applicant before the
Patent
Authority, were not genuine but were forgeries. This discovery
was made
during the proceedings initiated by the applicant for
infringement of patent,
in Texas, USA in June 2005, against Qualcomm Incorporated and
Verizon
Wireless, two telecom companies on the ground that those
companies
had infringed the applicant‟s „947 patent‟ and subsequent
patents while
developing their software platforms. It was in defence of
those
proceedings that the two companies produced declarations from
two
employees of Satyam involved in the developing of the software,
that they
had not signed the employee assignment or the combined
declaration
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furnished by Satyam to the applicant based on which the patent
had been
applied for and obtained by the applicant. Having failed to get
any
assistance from Satyam in proving the documents as genuine,
the
applicant was forced to settle the proceedings for
infringement
commenced against Qualcomm and Verizon on unfavourable terms.
This
was done in April 2007.
7. On 4.4.2007, the applicant filed a complaint against Satyam
in the
District Court of Texas. One of the employees of Satyam was
also
impleaded. The complaint underwent two amendments and the third
and
final amended complaint was filed in October 2008. In its
complaint, the
applicant contended that on account of forgery, fraud,
misrepresentation
and breach of contractual covenants by Satyam and its employees,
the
value of its entire patent portfolio had been impaired and it
was forced to
settle the action against Qualcomm and Verizon for infringement
of patent,
on most unfavorable terms. It accused Satyam of breach of
contractual
covenants and forgery. It sought the relief of a declaration as
to the
validity and enforceability of its patent under the laws of the
United States,
damages resulting from fraud/negligent, misrepresentation and/or
forgery
by Satyam in providing documents containing forged signatures
and in
breach of contractual covenants, exemplary and punitive damages
for
fraud and forgery and for interest and costs. In defence,
Satyam
disowned any responsibility for the alleged forgeries and
defended the
action.
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8. Satyam, challenging the jurisdiction of the District Court,
Texas to
entertain the complaint, approached the Queen‟s Bench Division
of the
Commercial Court, London contending that in terms of the
settlement
dated 31.12.2002, the applicant was barred from pursuing its
complaint in
Texas since the agreement made in the complaint stood
extinguished by
the settlement and that in any event, the complaint fell within
the exclusive
jurisdiction of the English Courts. The trial judge by judgment
dated
1.1.2008 dismissed the action, finding that the subject matter
of the
complaint was not extinguished by the settlement and that the
Texas
Court had jurisdiction to deal with the complaint. The appeal
filed by
Satyam was dismissed by the Court of Appeal. A Petition for
Leave to
Appeal to the House of Lords filed by Satyam was also rejected.
Thus,
the applicant was enabled to pursue its complaint in the
District Court,
Texas.
9. To reconcile the differences arising out of the complaint, an
attempt
at Mediation was made. The attempt succeeded and the parties
entered
into a Settlement Agreement on 18.7.2009 signed in Dallas,
Texas, USA.
It provided for the parties to sever all ties with each other
forever and for
settlement of all claims and disputes between the parties. In
satisfaction
of all the claims of the applicant, Satyam agreed to pay to the
applicant an
amount of $ 70 million in two installments. The first
installment of $ 45
million was to be paid within 10 business days of Satyam getting
the
approval of its Board of Directors and of the Boards of other
companies as
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may be necessary, of getting Governmental or Regulatory
approvals as
may be necessary under India law, after putting forward its best
efforts for
getting them. All payments were to be made “by wire transfer to
a bank
of Upaid‟s Choosing”. Then followed a provision for Escrow of
Funds.
The same is quoted below.
“3. Escrow of Funds.
a. Within 10 business days of obtaining board approvals
referred in paragraph 9(a), Satyam will deposit the
equivalent in Indian Rupees of the First Payment and the
Final Payment in an interest bearing escrow account or
accounts in India at a reputed international bank or Indian
nationalized bank as reasonably and mutually agreed for the
purpose of securing the payment obligations in paragraph 2.
b. In the event the First Payment is made on or before 180
days from the date of this Settlement Agreement, then
Satyam shall be entitled to the principal in the amount of
the
First Payment and all accrued interest thereto.
c. In the even the First Payment is made more than 180 days
after the date of this Settlement Agreement, then Satyam
shall be entitled to the principal in the amount of the
First
Payment and Upaid shall receive all accrued interest with
respect to the First Payment.
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d. After the First Payment is received, Satyam shall have
the
right to replace the escrowed funds securing the Final
Payment with either a bank guarantee or letter of credit in
the same amount pending receipt of the Final Payment at
which time security shall no longer be necessary.
e. After the Final Payment is received, Satyam shall be
entitled
to the principal in the amount of the Final Payment and all
accrued interest thereto.”
10. The settlement agreement reiterated that they intended it to
be a
full and final settlement of all disputes between the parties
and that the
parties intended it to sever all ties between them and to end
their
relationship forever. It then proceeded to provide:
“Subject to the fulfillment of paragraph 9 of the Settlement
Agreement, all prior agreements or understandings between
the
parties or any of their respective present or past officers,
directors
or employees, regarding any matters whatsoever are
extinguished, including the Assignment dated September 11,
1998, the Services Agreement effective as of September 15,
1998, the Share Issuance Agreement dated September 1, 1999,
the previous Settlement Agreement between the parties
effective
as of December 31, 2002, any assignments between or among
Satyam, Upaid and/or individual present or former employees
of
Satyam and any amendments to such agreements.
Notwithstanding this provision, Upaid shall retain whatever
intellectual property rights have already been transferred to
it
under any assignment or agreement strictly on an “as is” or
quitclaim basis without Satyam or its present or former
employees
making any representation or warranty about such transfer or
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having any further obligation to perfect such transfer. Upon
dismissal with prejudice of this action, Satyam waives its
rights to
preclude former employees from having contact with Upaid
under
any nondisclsoure agreements signed during the pendency of
this
action to the extent necessary for Upaid’s patents.”
It was also provided:
“8. Upaid will grant a perpetual worldwide, royalty free license
on
all of its patents, pending patents and any future patents
to
Satyam and its affiliates, including Tech M and M&M.
Such
royalty free license shall not be assignable. In addition,
Upaid
covenants not to sue British Telecommunications (“BT”) and
AT&T
for patent infringement or any other claim related to its
patents.”
11. Thus, the payment made was for extinguishment of all rights
and
obligations between the parties, for severing their business
relationship
arising out of prior agreements, towards compensation for
deficiency in
its patent found to exist by the applicant, for grant of
perpetual world
wide royalty free licence by the applicant on all its patents,
pending and
future to Satyam, subject to Satyam not having a right to assign
the
licence. An undertaking of forbearance to sue two of the
affiliates of
Satyam by Upaid was also incorporated.
12. Satyam did not pay the amount by wire transfer to a Bank
of
Upaid‟s choosing, but it deposited the amount into an escrow
account.
Satyam seems to have insisted that it was entitled to deduct the
taxes
from the amounts to be paid and that the responsibility for tax
was that of
the applicant. The applicant adopted the stand that the
compensation
agreed to be paid was liable to be paid without deduction of tax
and the
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liability for tax, if any, should be borne by Satyam. To
establish its
stand, Satyam moved the Supreme Court of the State of New
York
seeking a declaration that it was entitled to deduct the taxes
from the
amount to be paid. The applicant resisted that claim. It was in
this
context that the applicant approached this Authority for an
Advance
Ruling by invoking Section 245Q of the Income-tax Act. This
Authority
allowed the application for giving a Ruling on the following
questions:
(i) Is the amount receivable by the applicant from M/s.
Satyam
Computer Services Ltd. (“Satyam”), in accordance with
Paragraph
2 of the settlement agreement entered between the applicant
and
Satyam on July 18, 2009 at Dallas, USA, a capital receipt in
the
hands of the applicant?
(ii) If the answer to question (i) is in the affirmative, can
the said
amount be treated as income under any of the specified heads
provided in the Income-tax Act, 1961 (“Act‟)?
(iii) If the answer to questions (i) and (ii) are in the
affirmative, can the
said amount be considered to accrue or arise or deemed to
accrue or arise in India or upon its receipt, can it be
considered to
have been received or deemed to have been received in India?
(iv) If the answers to all the above questions are in the
affirmative,
what would be the basis and method of determination of
taxable
income and applicable tax rate thereon?
(v) If the answer to question (i) is in the negative, i.e. the
said amount
is found to be in the nature of revenue receipt, can the
said
amount be considered to accrue or arise or deemed to accrue
or
arise in India or upon its receipt, can it be considered to
have
been received or deemed to have been received in India?
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(vi) If the answer to question (v) is in the affirmative, is the
said
amount taxable under the Act?
(vii) If the answer to question (vi) is in the affirmative, what
would be
the basis and method of determination of taxable income,
applicable tax rate and applicable rate of deduction of tax
at
source thereon?
(viii) If the said amount is held to be taxable under the Act,
and if the
court of competent jurisdiction in New York, USA holds that
Satyam is contractually bound to bear the tax payable on the
said
amount, would Section 195A of the Act be applicable for the
purpose of determination of income on which tax deduction at
source will be effected?
(ix) Even if said amount is held to be taxable under the Act,
and
regardless of the outcome of the adjudication given by the court
of
competent jurisdiction in New York, is Satyam legally bound
to
satisfy the judgment-debt arising from the afore-mentioned
settlement agreement by paying the entire amount specified
in
Paragraph 2 of the aforesaid settlement agreement without
any
deduction of tax to the applicant?
(x) Is the interest receivable by the applicant in terms of
Paragraph
3.c of the afore-mentioned settlement agreement taxable
income
under the Act and would such income be subject to tax
deduction
at source under the Act?
13. Before proceeding to consider the various questions posed,
it
seems proper to set down some of the findings by the Courts
which may
have a bearing on the questions falling for our Ruling. The
Court of
Appeal has noticed that the trial “judge found that the
Assignment
Agreement undoubtedly assigned the inventions and intellectual
property
rights which were the subject of the provisional patent
application filed
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on that date and contained co-operation obligations upon Satyam
which
were intended to enable Upaid to protect those conventions and
rights”.
It further noticed the finding that:
“the Assignment Agreement was not the „subject matter‟ of the
Settlement Agreement, but was expressly preserved in full by its
terms.”
The Court of Appeal then recorded its finding:
“My conclusion on this short point is that the object of clause
3.1
was to ensure that Upaid retained all relevant intellectual
property,
and clause 3.1.(b) is not limited to confirmation of past
assignments
in the sense of transfers of property. The relevant term is
„will
survive and shall be governed‟ and I am satisfied that that
means
that the assignments will continue to apply in accordance with
their
terms.”
14. On how the right was dealt with under the Settlement
Agreement,
the Court of Appeal held:
“The construction point is a short one, and I agree with the
Judge. I accept Mr. Foxton’s submission that it is plain (and
common ground) that in commercial terms intellectual property was
very important to the parties and was treated separately in the
Settlement Agreement. Since the Assignment Agreement was concerned
exclusively with intellectual property it made commercial sense not
to include it within the releases.”
15. Thus, it is clear from this interparties judgment, which has
become
final, that the parties dealt with separately the intellectual
property rights
which was important to both and which had been taken assignment
of
earlier by the applicant.
16. Clause 5 of the Settlement Agreement dated 18.7.2009
recognised
the right of the applicant to retain all intellectual property
rights in the
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software created and under clause 8 the applicant granted to
Satyam a
license on all its patents, pending and future to use the
patents. No doubt,
it was described to be royalty free license.
17. The question that arises is what is the nature of the
payment made
or to be made by Satyam to the applicant under this Settlement.
It is
clear that various claims were involved in the complaint leading
to the
settlement. The breach of obligations on the part of Satyam,
complaint of
fraudulent conduct, compensation for a dent in their patent
right by having
to concede the right to Qualcomm and Verizon and the costs
involved in
the litigation with them and the grant of a license to Satyam to
use its
patents perpetually, all formed components of the compensation
agreed
upon.
18. During the hearing under section 245R(4) of the Act, it was
first
submitted on behalf of the applicant that the Supreme Court of
the State of
New York has upheld the claim of Satyam by holding that it was
entitled to
withhold the taxes from out of the amount to be paid to the
applicant under
the Settlement Agreement. This was subsequently re-affirmed
by
communication dated 11.8.2011 with a prayer to withdraw question
no.
(viii) from the questions admitted for a ruling. The court has
decreed,
“Adjudged and declared that the Settlement Agreement requires
that
Upaid Systems Ltd., must cooperate with IDBI Bank to allow IDBI
Bank to
withhold taxes from the $ 70 million Settlement Account in the
Settlement
Agreement in anticipation of there being a tax obligation on
Upaid‟s part to
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the Indian Government authorities.” We think that the proper
course to
adopt is to clarify that the parties will be bound by the
adjudication of Court
inter-parties now rendered, subject to any modification thereof
in appeal or
further appeal therefrom.
19. Learned counsel for the applicant submitted that the
compensation
to be paid by Satyam to the applicant is in the nature of a
capital receipt
and not revenue receipt. We find that the Revenue has not joined
issue
with the applicant on this aspect. It has also taken up the
position that it
is a capital receipt, but has contended that it has to be taxed
under the
head Capital Gains and that the gain has accrued in India.
20. Alternatively, it is contended that a part of the payment
had to be
attributed to the grant by the applicant of a license to Satyam
to use the
patent for all times to come and that part was liable to be
taxed as royalty.
It is asserted that the payment by Satyam to the applicant has
three
components.
1. Regularisation of unauthorized usages of software IPRs by
Satyam and its affiliates till the date of settlement.
2. Indemnification of damages suffered by Upaid on account
of,
misrepresentation by Satyam and its employees in relation
to IPRs that are the subject matter of the settlement
agreement and;
3. Continued usage of patents after the date of settlement,
including usage of future patent rights.
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21. Of the above, the second component would spell in the realm
of
capital receipt and components 1 and 3, payment for the earlier
use and
the right to use the software in future might amount to
royalty.
22. The settlement agreement, no doubt, recites that the
liecense
granted to Satyam on all its patents, pending patents and any
future
patents was royalty free. Does this recital by itself conclude
the issue?
According to the applicant, it does and according to the
Revenue, it does
not. It remains for us to consider it.
23. In the application, the applicant has set down the various
heads as
comprised in its claim against Satyam made in the Taxes Court
leading to
the mediation and settlement. The first is a declaration on the
authenticity
of the signatures furnished by Satyam and a declaration of the
legal status
of all its patents. The second is actual damages arising from
fraud and/or
negligent misrepresentation involved in its having to give up
its claim for
patent violation against Qualcomm and Verizon. The third is
based on
alleged breach of the Assignment Agreement by Satyam resulting
in
pecuniary loss. The fourth is damages for the defect in title to
the patents
conveyed to it by Satyam. The fifth and sixth counts are for
actual and
statutory damages under the concerned US Federal statute.
The
seventh head of claim was punitive and exemplary damages for
alleged
forgery and the eighth was for costs of all legal proceedings
having to be
waived by Upaid including in the proceeding that was initiated,
leading to
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the settlement. It was in the context of these claims that the
settlement in
question was arrived at and Satyam agreed to pay $ 70 million
while
obtaining a license for use of the patents of Upaid, world wide
and in
perpetuity as it were. This was obviously something bargained
for and
secured by Satyam.
24. There is no divestiture of title of Upaid to the patent and
the
Intellectual Property Rights over it, earlier assigned to it by
Satyam. It
does not, therefore, appear that any capital gain arises to the
applicant out
of this transaction. What it has obtained is compensation for
the imperfect
title to the patent earlier conveyed to it by Satyam and also
for the conduct
of Satyam in leading to that situation and the costs that had to
be incurred
by it in initiating legal proceedings against Satyam itself.
Thus, it is not
possible to accept the argument that the applicant has earned an
income
by way of capital gains taxable in India.
25. The amount quantified as compensation takes within its fold
the
consideration paid by Satyam to the applicant for enabling it to
use „947
Patent‟ and all subsequent patents based on it. This is a
valuable right.
Its importance has been stressed by the Court of Appeal in its
judgment.
But for this license, the use by Satyam of the software or any
of its
components, it created for the applicant for a consideration and
it later
assigned to the applicant, would amount to an infringement of
the patent
rights and the copyright of the applicant. This license to use
in
perpetuity, is thus a valuable right secured by Satyam.
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26. The settlement Agreement dated 18.7.2009 recits that this
grant of
perpetual worldwide right is without consideration. It is
submitted that the
recital is conclusive and the Revenue cannot go behind it. On
going
through the settlement deed, it is clear that the rights
acquired and
secured by the applicant over the software, a literary work, and
according
to the Revenue, a process as well, is acknowledged and
reaffirmed. In
turn, the applicant gives a right to Satyam to use that right in
perpetuity.
The recital that it is done for no consideration can only be
viewed as an
attempt to avoid payment of tax on that part of the transaction.
This
Authority has necessarily the power to see whether there is an
attempt to
avoid the net of taxation. In the commercial world it is not
normal to part
with such a valuable right for no consideration unless
special
circumstances exist. Here, as a matter of fact, the applicant
and Satyam
were severing all business relationship between them by entering
into this
settlement. In the circumstances, the plea that the valuable
right was
given away is not acceptable. The Court of Appeal has noticed
how the
two parties wanted to keep this valuable right secured and
specifically
provided for it. An attempt to avoid ascribing of a
consideration for grant
of a perpetual license over a patent and a copyright by a mere
recital that
it is royalty free cannot pass the test of the Ramasay principle
or the
McDowell principle on the non-countenance of such avoidance by
a
Tribunal or Court. As observed in Ramasay (1982) AC 300 by
Lord
Wilberforce “While obliging the court to accept documents or
transactions
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found to be genuine, as such, it does not compel the court to
look at a
document or a transaction in blinkers, isolated from any context
to which it
properly belongs‟. Adopting this approach, we find that atleast
a portion of
the compensation paid by Satyam to the applicant, must be
ascribed to or
earmarked as consideration for licensing of the right to use the
patent and
the software comprised therein. This consideration paid for
granting of a
license in respect of a patent or obtaining the right to use the
patent or a
process protected by copyright, is royalty as defined in the
Income-tax Act.
We are therefore satisfied that a part of the $ 70 million paid
as
compensation by Satyam takes in also royalty paid by Satyam
for
obtaining the right to use the patented software for all time to
come.
27. Then arises the question, as to what part of the
compensation paid
by Satyam to the applicant ought to be attributed to the license
of the right
to use the patented software and any improvement to be made on
it.
Counsel for the applicant while standing firm in his argument
that no
portion is taxable, suggested, in case we come to the view now
taken, that
the assessing officer may be directed to determine the portion
that may be
attributable to „royalty‟ and thereafter he may be directed to
consider the
question whether that will be taxable in terms of Section
9(1)(vi) of the Act.
In the absence of adequate material available before us, we
think that it
will be appropriate to accept this suggestion made by counsel
for the
applicant. We reiterate that this suggestion was made by counsel
without
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prejudice to his main contention that no part of the $ 70
million was
taxable, which contention we have rejected.
28. Other than the royalty segment of the $ 70 million to be
paid by
Satyam to the applicant, we find that the rest of the
compensation will be
capital receipt, but not a capital gain. It is not shown that
any part of such
capital receipt is taxable under the Income-tax Act. Therefore,
it has to
be ruled that the compensation paid other than the portion
attributable to
royalty will not be taxable in India.
29. In the light of the above reasoning, we rule as follows on
the
questions:
(i) The answer is that (subject to taxability of a portion
as
royalty) the compensation of the $ 70 million paid by
Satyam to the applicant would be capital receipt in the
hands of the applicant.
(ii) In the light of the ruling on question no.(i) and the
finding that no capital gain is involved, the ruling is that
the
amount less that portion attributable to royalty, cannot be
treated as income under any of the specified heads under
the Income-tax Act.
(iii) Other than the part of the compensation attributable
to royalty, the balance cannot be considered to be income
accruing or arising in India to the applicant.
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(iv) The issue is as to what would be the basis and
method of determination of the taxable income and the
applicable rate of tax thereon. The question regarding the
apportionment of the compensation and earmarking a
portion of it towards royalty has been left to be decided by
the Assessing Officer as suggested by senior counsel for
the applicant. The Assessing Officer will decide that
question. The determination of the taxable income and the
applicable tax rate will be decided by the assessing officer
after considering the relevant materials, if necessary after
calling upon the applicant to produce the same and after
hearing the applicant.
(v) Does not arise since other than the royalty segment of
the compensation, the rest is capital receipt not taxable in
India.
(vi) is also ruled on the same lines as (v).
(vii) Will be determined by the Assessing Officer, after
hearing the applicant.
(viii) In the light of the decision rendered by Supreme
Court of New York holding that Satyam is entitled to deduct
the tax payable on the compensation to be paid, the ruling
on this question is that the parties will be governed by
that
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decision subject to any appeal they may have against the
decision in the appropriate court.
Counsel for the applicant submitted that the applicant
has not been able to withdraw any portion of the amount in
the Escrow account because of the dispute and as a
measure of safeguarding the interests of both sides, as an
interim measure, it may be directed that 10% of the amount
of $ 70 million may be deducted, without prejudice to the
contention of the applicant that no portion of the amount is
taxable and the balance released to the applicant. We
find that adopting such a course would not prejudice the
revenue because ultimately what would be taxable, would
only be the royalty element and interest as ruled in answer
to question (x) in the total compensation and deduction of
10% of $ 70 million would be adequate to cover the tax that
may be found to be due if the liability to tax a portion is
ultimately found. Therefore, we rule that the concerned
bank will be free to deduct 10% of the entire amount in
terms of Section 195 of the Act and release the balance to
the applicant from the Escrow account.
(ix) Though it was initially argued that what was involved
was a judgement debt and hence the entire amount was
liable to be paid to the applicant without deduction of any
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tax, it was not shown to us that the settlement arrived at
by
the parties was made a rule of Court and hence the liability
metamorphosed into a judgement debt. We, therefore,
decline to rule on this question.
(x) The amount deposited in the Escrow account by
Satyam has earned interest. The interest is earned in
India. The applicant is now entitled to receive that
interest
alongwith the principal in two instalments. We accept the
contention of the Revenue that this interest portion is
taxable in India as that is income arising in India. It is,
therefore, ruled that the interest earned on the deposit in
Escrow is taxable in the hands of the applicant.
30. Accordingly, the ruling is pronounced on this 12th day
of
October, 2011.
Sd/- Sd/- (V.K. Shridhar) (P.K. Balasubramanyan) Member Chairman
F.No. AAR/885/2010 Dated, the This copy is certified to be a true
copy of the Ruling and is sent to: 1. The applicant. 2. The
Director of Income-tax (International Taxation),Hyderabad 3. The
Joint Secretary, (FT&TR-I/II), CBDT, New Delhi. 4. The Guard
File.
Sd/-
(Nidhi Srivastava) Addl. Commissioner of Income-tax, AAR
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