TMI Blog2004 (8) TMI 623X X X X Extracts X X X X X X X X Extracts X X X X ..... n days after the effective date of the agreement. ( b ) $200,000 after the delivery of the source materials as described in Exhibit B and the completion of the initial assistance conducted for HCL by Tolerant, whichever is earlier, unless the source materials have not been delivered by such date, in which case the payment will be made immediately upon delivery of the source material; and ( c ) the final payment of $ 100,000 shall be due to Tolerant on 30th June, 1987 and payable to Tolerant by certain dates with which we are not concerned in this appeal. Clause 7 of the agreement provided for limitation of the liability of Tolerant. Clause 8.3.1 provided for the execution of a "Deposit Agreement" concurrently with the execution of the manufacturing and software license agreement in the form prescribed in Exhibit G, pursuant to which certain "deposit materials" as defined in the deposit agreement shall be deposited by Tolerant in escrow on the terms and conditions stated in the deposit agreement. In the event of release pursuant to the deposit agreement, the deposit materials may be used by HCL only for support of the software and may not be transferred or licensed to any other part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 23-2-1989, were to be provided immediately. ( v )Most importantly, in accordance with clause 8.3.1.1 of the agreement, Tolerant and HCL were to execute a deposit agreement for the fully commented source code which was to be deposited by Telerant in escrow. This has not been done. It was requested that the formalities in this behalf may be completed at the earliest. It was stated by HCL that Tolerant may give its reaction to the above, so that HCL can plan its manufacturing and also come up with a schedule for "clearance of the final payment". 5. After this letter, it appears that the disputes were referred to arbitration as per the arbitration clause in the agreement on 8-8-1990. Pursuant to the award, which was signed by Tolerant (which had become Viritas by that time) on 1-11-1990 and by HCL on 15-11-1990. According to the award, which is styled as "general release and settlement agreement" HCL was to pay Tolerant a sum of US $ 17,500 on receipt of which Tolerant would deliver to counsel for HCL one complete copy of the "fully commented source code from which the software was compiled in machine readable form on magnetic tape media in ASCII format, and on paper, alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 195(2) that no income element was embedded in the remittances cannot affect the claim now made that the amounts are not taxable. Several authorities were cited in support of the above points a few of which we shall advert to later. With reference to the specific disputes between the assessee and Tolerant which arose under the agreement, and their effect on the accrual of income, the following points were made on behalf of the assessee : (1)Delivery of the "deposit material" to an escrow agent was of the essence of the agreement. (2)The technology-provider (Tolerant) having defaulted in this, there was no compliance on its part with the terms of the agreement. (3)Amounts remitted were only in the nature of advance, which Tolerant had no right to appropriate as its income. (4)There was neither a debt owed by HCL, nor was a corresponding right to receive income vested in Tolerant. (5)In the case of a contractual liability, where disputes arise between parties to the contract, income accrues to the parties only at the point of time when the disputes are finally settled. (6)Therefore, there was no accrual of income in the relevant previous year. 8. On behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e controversy in the present appeal. 11. The question for consideration is whether the disputes between HCL, the assessee herein, and Tolerant (now Veritas) were such that they postponed the accrual of income in favour of the later till they were finally settled by arbitration. In the case of CIT v. Swadeshi Cotton Flour Mills P. Ltd. [1964] 53 ITR 134 , the Supreme Court held that income under a contract which gave rise to disputes between the parties thereto, can be said to have accrued only when the disputes were finally settled. In contrast, in the case of a statutory liability, the position is different. In that case the liability arises the moment the conditions necessary for attracting the statute have been fulfilled and the fact that the person subject to the statute disputes the liability does not postpone the same. It is on this principle that excise and customs duty liabilities can be deducted for purposes of assessment to income-tax the moment goods are manufactured or imported and the fact that a person manufacturing or importing the goods disputes the liability does not detract from the efficacy of the liability. Herein we are not concerned with a statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sit agent, compensation payable to the agent, indemnity and so on and so forth. The fact that the deposit agreement had to be executed concurrently with the licensing agreement and the further fact that the former was attached to the licensing agreement as Exhibit "G" are pointers to the importance thereof. Though it is a technical subject, it is not difficult to appreciate or infer that the fully commented source code, which is the deposit material subject to the elaborate terms and conditions prescribed in the deposit agreement, is of vital importance for the successful implementation of the licensing agreement, so far as HCL is concerned. We are inclined to agree with the submission of the learned counsel for the assessee that the execution of the deposit agreement concurrently with the licensing agreement and the delivery of the fully commented source code to the deposit agent were of the essence of the licensing agreement, the non-fulfilment of which would render the very licensing agreement useless to the assessee. Therefore, when Tolerant did not fulfil its obligations vis-a-vis the deposit agreement, the assessee (HCL) raised a dispute and withheld the final payment. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L in India. Unless the fully commented source code is delivered to the deposit agent, for being transmitted to HCL on the fulfilment of certain conditions it cannot be said that Tolerant had fulfilled all its obligations under the licensing agreement so that it can be said to have obtained a right to the income (contrasted with remittance). It is not in dispute that Tolerant defaulted in this, which created difficulties for HCL in successfully manufacturing and selling the computers in India. So it withheld the final payment. Disputes arose between the parties which were referred to arbitration as envisaged by the licensing agreement itself. They were resolved by the arbitration committee and HCL was asked to pay US $ 17,500 for obtaining the fully commented source code and a further sum of US $ 400 as royalty for use thereof. The disputes were referred to arbitration on 8-8-1990 and the award was given in October 1990 and signed by both the parties later in that year. In our opinion, Tolerant gets a right to receive the income only when the disputes were resolved by the arbitration award and not before. Only on performance of the conditions prescribed in the deposit agreement do t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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