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					                             AIT-2011-439-AAR
  BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI

                               12th Day of October, 2011

      Coram: 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

AIT Head Note: (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?




www.allindiantaxes.com                                                            Page 1
(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?

(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.

(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.



www.allindiantaxes.com                                                             Page 2
(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 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
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. (Para 29)

                                       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, appropriate software had
to be designed and developed. After developing the design, the applicant outsourced the

www.allindiantaxes.com                                                             Page 3
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 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 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



www.allindiantaxes.com                                                                   Page 4
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 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.

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.




www.allindiantaxes.com                                                               Page 5
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 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.

       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

www.allindiantaxes.com                                                              Page 6
       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 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 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‟)?




www.allindiantaxes.com                                                                Page 7
       (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?

       (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 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

www.allindiantaxes.com                                                                  Page 8
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 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 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.

www.allindiantaxes.com                                                                 Page 9
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.

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 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

www.allindiantaxes.com                                                               Page 10
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.

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 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 at least 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

www.allindiantaxes.com                                                                  Page 11
„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
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.

       (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 decision

www.allindiantaxes.com                                                                 Page 12
       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 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.




www.allindiantaxes.com                                                                Page 13

				
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