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TMI Blog2011 (10) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 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 boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Satya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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