TMI Blog2022 (4) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... are. This would be clear from the revenue recognition policy of the assessee as would be evident from Note 2(j) of the Notes to financial statement The revenue received by the assessee from licensing the IPR to Spreadtrum was at all times earlier offered to tax by the assessee as licence fee / royalty and declared as business revenue. The sum received under the Arbitration award was also offered to tax as business income. It is only the sum received under the Settlement Agreement that was claimed as not taxable. It is therefore clear that the independently owned IPR and Foreground Information which partakes the character of stock-in-trade for companies like that of the assessee was not a capital asset within the meaning of section 2(14) of the Act and therefore the sum received by the assessee cannot fall within the ambit of the head of Income from Capital Gain . The assessee did not receive the sum in question for giving up any source of income as the assessee was free to exploit independently owned IPR as well as Foreground information and therefore the argument that the sum received is capial receipt for losing a source of income and therefore not chargeable to tax, is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trading [ 2011 (6) TMI 251 - ITAT, MUMBAI] , the expense is to be allowed under section 36(1)(ii). Disallowing deduction of a sum paid to BSE Ltd., while computing income from business - HELD THAT:- The sum was paid to BSE Ltd., to give effect to a scheme of amalgamation of Sasken Network Engineering Ltd., with the assessee. The AO and CIT(A) held that the expenditure is capital expenditure and disallowed the claim of the assessee for deduction. The assessee contends that the expenditure is revenue in nature and in the alternative submitted that the assesee should be allowed deduction under section 35DD of the Act which allows expenditure on amalgamation at 1/5th of the expenditure over a period of 5 Assessment Years. After considering rival submissions, we are of the view that without going into the question whether the expenditure is capital or revenue in nature, it would be just and appropriate to direct the AO to allow 1/5th of expenditure under section 35DD of the Act. Thus, ground No.6 is partly allowed. Disallowance of profession fees paid - assessee claimed that it engaged the consultant for formulating business strategy for future growth - AO and CIT(A) held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluru. ORDER PER N.V. VASUDEVAN, VICE PRESIDENT This is an appeal by the assessee against the order dated 27.11.2019 of CIT(A), Bengaluru -10, relating to Assessment Year 2016-17. 2. Ground No.1 raised by the assessee is general and calls for no specific adjudication. Grounds Nos.2 and 3 raised by the assessee is with regard to the issue whether the gain on sale / Assignment of Intellectual Property Rights (IPR) is assessable to tax at all and if so assessable to tax whether it has to be assessed to tax under the head Income from Business or Profession or Capital Gain . 3. The facts and circumstances under which the aforesaid issue arises for consideration are that the assessee is in the business of rendering software development services (SWD services) and software development products (SWD products). This would be evident from Resources from Operations as shown in the profit and loss A/c which as described in Note 20 to the Notes to the financial statement which gives a break-up of revenue from operations as revenue from software products and from providing SWD services and SWD products in communications and devices. 4. Spreadtrum Communications In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... units: no royalty For 1500K-2 million units: $0.50 per unit For 2-5 million units: $0.30 per unit Above 5 million units: $0.25 per unit The per unit payments were to be made for the shipment of each unit of the Spreadtram Product. Spreadtrum Product is defined by Section 1.12 of the Agreement as a product shipped by Spreadtrum that contains the Spreadtrum Chipset and the Foreground IPR. 7. The agreement between assessee and Spreadtrum was modified in 2007 and 2010. Spreadtrum did not report to assessee sales of chipsets containing Foreground IPR and failed to pay royalties arising from these sales. Arbitration proceedings were initiated by the assessee before the International Centre for Dispute Resolution , Sanfrancisco, USA, which by an Award dated 27.06.2014 allowed the claim of the assessee as follows: IV. AWARD AND CONCLUSIONS 1. The Agreement remains in full force and effect. 2. Any Spreadtrum Product containing some portion of the Foreground IPR is royalty bearing pursuant to Section 3.02 of the Agreement. 3. Since January 1, 2012, the per unit royalty rate for all shipments of a Spreadtrum Product is $0.25 per unit. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MA protocol stack which was contributed by it towards development of Foreground IPR. The IPR so contributed by the assessee is referred to as Background IPR in this Settlement Agreement. We have also seen that the IPR in Foreground IPR that was agreed to be jointly developed by the Assessee and Spreadtrum was to be jointly owned by the assessee and Spreadtrum. In the course of joint development of Foreground IPR, both the assessee and Spreadtrum became aware of information other than Foreground IPR. The information is referred to as Foreground Information , in this Settlement Agreement, Spreadtrum paid assessee a sum of ₹ 2,98,96,35,130/- on 15.03.2016 to the assessee for becoming joint owner of independently owned IPR of assessee and Foreground Information Clause 3.1 of this Settlement Agreement provides for assignment of joint ownership of independently owned IPR and Foreground Information. Clause 3.2 provides that as a result of assignment pursuant to clause 3.1 each party can use all or any portion of the independently owned IPR and Foreground Information without payment of any compensation or any other obligation to the other party. The relevant clauses 3.1 to 3.3 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment dated 21.03.2016 to tax under the head Long Term Capital Gain (LTCG). In the books of accounts, the assessee had shown this receipt as exceptional item of income . In note 42 to the Note to the Financial Statements, the assessee has explained the receipt in question as towards royalty and interest income in respect of software licences to a Non-Indian Licensee, who had purportedly claimed non-usage of the licensed IPR after initial acceptance, which was successfully contested by the assessee. 10. The AO issued a notice under section 142(1) of the Act dated 31.08.2018 calling upon the assessee to show cause as to why the sum received from Spreadtrum should not be assessed as Income from Business . 11. The assessee in a reply dated 08.10.2018 to the above notice filed Note-3 as annexure to the said reply taking a stand that Sec.45(1) of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54. 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head Capital gains , and shall be deemed to be the income of the previous year i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... route permits for buses, tenancy rights, lease hold rights, copyrights, etc will also be covered under the definition of capital assets. The assessee had complete ownership of the background IPR and joint ownership of the foreground IPR and the same is capital asset for assessee as per section 2(14) of the Act. The transfer of capital asset definition incudes relinquishment of the asset ; or the extinguishment of any rights therein. Relinquishment means withdrawn from, abandoning or giving up anything. By relinquishment a person ceases to own the asset concerned through some act on his part. In other words, the owner withdraws himself from the property and abandons his rights hereto. The property, however, continues to exist and will become the property of someone else. Extinguishment is a word, of ordinary usage, but of widest import. It connotes total destruction, annihilation; termination or extinction of a capital asset. All destruction or extinction of a capital asset is not regarded as a transfer. In fact, there should be a destruction or extinction of rights in the capital asset as it may be noticed that in respect of the expression relinquishment or Exchange , the subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the self-generated assets specifically mentioned above are liable to capital gains. However, other self-generated assets like goodwill of a profession, Assignment of IPR etc. are still not subject to capital gains as for such assets cost cannot be identified or envisaged as per Supreme Court decision in CIT v B.C.Srinivasa Setty (1981) 128 ITR (SC). Further, an asset in the improvement of which it is not possible to envisage a cost, has also been held to be not subject to capital gain by the Bombay High Court in Evans Franser and Co. Ltd. V CIT (1982) 137 ITR 493 (Bom). Therefore the capital gain on transfer of Background IPR and Foreground Information, though offered to tax by the Assessee cannot be brought to tax in view of the fact that the computation provisions of Sec.48(1) of the Act cannot apply and hence the capital gain cannot be brought to tax. 15. Without prejudice to the above submission, it was contended that another argument against taxation of such compensation is that it is only a compensation for injury caused to the other party. The obligation to compensate the other party may arise out of the terms of contract itself or under other laws like the Contract Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. Therefore. compensation was capital receipt for consortium and as such assessee's share is also a capital receipt. Thus, compensation was in nature of capital receipt not taxable to business income. 16. The AO however did not agree with the aforesaid submission of the assessee. He held that the assessee continued to be the owner of independently owned IPR and foreground information and therefore there was no transfer of any right within the meaning of section 2(47) of the Act. He held that the independently owned IPR and foreground information were developed in the normal course of business and the expenditure of employees who had generated all intellectual properties were shown as revenue expense. The revenue received by the assessee from licensing the IPR to Spreadtrum was at all times earlier offered to tax by the assessee as licence fee / royalty and declared as business revenue. The sum received under the Arbitration award was also offered to tax as business income. It is only the sum received under the Settlement Agreement that was claimed as not taxable. The AO placed reliance on a decision of ITAT, Bengaluru, in the case of Bosch Ltd., (2017) 87 taxmann.co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that where assessee irrevocably assigned the patent rights, amount received would be capital receipt, not taxable in the hands of the assessee. Dilution in ownership is synonyms with a sale transaction. In support of the above, one may refer the OECD commentary in Article 12 which states that if payment is made for transfer of rights that constitute a distinct and specific property, such payments cannot be held as payment towards royalty. When consideration is towards alienation of ownership rights, the same cannot be considered as for the use of rights. Reliance was also placed on Crane Software International Ltd v DCIT [Page 1132-1151 of CLC-I], and Swadeshi Polytex Ltd v ITO [1991] 38 ITD 328 (Delhi). It was poined out that the settlement agreement accorded exclusivity with respect to the usage of the IPR. This would entail usage of the IPR earlier exclusively owned by the assessee without any covenants i.e., in any manner without need for any permissions or without subject to any terms and conditions. Thereby, the Background IPR which was solely owned by Sasken came to be jointly owned by Sasken and Spreadtrum. This dilution in ownership results in abrogation of absolute r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or profession of the assessee s falling within clause (i) of exception to section 2(14) of the Act that defines capital asset. The same reasoning would be applicable to the Foreground Information which the assessee was privy to in the course of joint development of Foreground IPR. 21. The contention of the learned Counsel for assessee was that the assessee was not in the business of buying and selling IPR s and was only engaged in creating and exploiting IPRs. This argument is devoid of any merit. The business of the assessee is developing software for telecom companies. The revenue that the assessee derives in its business is from software services, product and technology licencing and commissioning services. In the course of its business, it develops software and becomes owner of the copyright therein, depending on the contract with its customer. The assessee licences software and derives income in the form of license fee or sells software and derives income from sale of software. This would be clear from the revenue recognition policy of the assessee as would be evident from Note 2(j) of the Notes to financial statement, which reads thus: (j) Revenue Recognition T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. It is therefore clear that the independently owned IPR and Foreground Information which partakes the character of stock-in-trade for companies like that of the assessee was not a capital asset within the meaning of section 2(14) of the Act and therefore the sum received by the assessee cannot fall within the ambit of the head of Income from Capital Gain . The assessee did not receive the sum in question for giving up any source of income as the assessee was free to exploit independently owned IPR as well as Foreground information and therefore the argument that the sum received is capial receipt for losing a source of income and therefore not chargeable to tax, is devoid of any merits. In view of the above conclusion, we have not discussed the cases cited by the learned Counsel for assessee on the basis that the assessee transferred capital asset and that capital gain cannot be brought to tax due to the fact that it was not possible to compute capital gain and thefore the machinery provisions fail and therefore the charge itself fails. 23. Consequently, the relevant grounds of appeal 2 to 3 of the assessee are dismissed. 24. Ground Nos.4 and 5 can be decided together as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows: RESOLVED THAT pursuant to the provisions of Section 178 and other applicable provisions, if any, of the Companies Act, 2013 and Rules made thereunder, decision of the Nomination Et Remuneration Committee be and is hereby accorded that the balance exceptional provision of ₹ 2,025 lakhs is no longer required in the books and recommends to the Audit Committee of the Board to consider reversing the said provision. 27. In so far as the sum of ₹ 21 Crores shown as payable to other employees is concerned, the AO and CIT(A) held that the liability was contingent and hence cannot be allowed as a deduction. The assessee has challenged the same in ground No.4. 28. As far as the remaining sum of ₹ 7,84,38,000/- payable to Chairman and MD and wholetime Director and CFO is concerned, the AO examined the claim for deduction under section 36(1)(ii) of the Act which provides that any sum paid to employee as bonus or commission for services rendered would not be allowed as a deduction where sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission. The sum could not be disallowed as continent because the payees w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been paid in the shareholding ratio of the executives. For a limited company, the Nomination and Renumeration Committee (`NRC'), determines the compensation payable to executive directors within the overall limits as provided by the Companies Act, 2013. This committee consists of a majority of independent directors. It was pointed out that CBDT Circular No. 6P dated 6th July 1968 [Page 1617-1645 of CLC-II], states that once the remuneration is approved by the company law administration, no disallowance could be made under the Act for the same. Bonus paid to shareholders in their managerial capacity cannot be questioned merely on the basis of speculation by the revenue that such payment was to avoid tax. Arihantam Infraprojects (P.) Ltd v JCIT [2015] 64 taxmann.com 404 (Pune-Trib.), AMD Metplast (P.) Ltd. v DCIT [2012] 341 ITR 563 (Delhi), Chryscapital Investment Advisors (India) (P) Ltd. v. DCIT [2015] 56 taxmann.com 417 (Delhi). Even otherwise, the adequacy of services is not a relevant consideration. It is not necessary that payment should be made commensurate to the rendering of services. The only requirement is that services have to be rendered by the directors. Rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oved by the shareholders who are the ultimate authority in approving the Directors remuneration as per the Companies Act and overseen by the NRC. Subsequently, in the meeting held by the Nomination and Remuneration Committee on 22.4.2016. VPP was determined based on net profits of the Group, which was within the overall limits laid down under the Companies Act, 2013 and the audited accounts of the company. The provision for managerial remuneration of ₹ 784.38 lakhs is not a sham transaction. The word sham' means 'a thing that is not what it is purported to be. Provision for managerial remuneration of ₹ 784.38 lakhs was made in accordance with the mandate of Accounting Standards. Companies Act, etc. The same was also approved by the shareholders in the AGM. It was approved by the statutory auditors as well. It was within the overall limits under the Companies Act, 2013. It was also actually paid and thus, it cannot be treated as a sham transaction at all. 33. Similarly, the provision for managerial remuneration cannot be re-characterised as a dividend as it was not a distribution of profit. Merely for the reason that the said provision was made with a view to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was only supervisory in nature. Therefore, the AO has himself conceded that the CEO or CFO has rendered services towards the arbitration proceedings, however remote. Whereas the CEO and CFO cannot take a hands-off approach and had played a significant role in strategizing and providing inputs to the lawyers. The lawyers themselves cannot guide the legal matters Hence, applying the ratio in the case of Dalal Broacha Stock Trading (supra), the expense is to be allowed under section 36(1)(ii). 35. For the reasons given above, we allow ground No.5 raised by the assessee. 36. The next issue that requires adjudication is Ground No.6 in which the assessee has challenged the action of the Revenue authorities in disallowing deduction of a sum of ₹ 18 lakhs paid to BSE Ltd., while computing income from business. The sum was paid to BSE Ltd., to give effect to a scheme of amalgamation of Sasken Network Engineering Ltd., with the assessee. The AO and CIT(A) held that the expenditure is capital expenditure and disallowed the claim of the assessee for deduction. The assessee contends that the expenditure is revenue in nature and in the alternative submitted that the assesee shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaken in relation to an existing business is revenue in nature. [CIT v. Manganese Ore India Ltd [2016] 67 Taxmann.com 268 (Bombay), ITO v. Dodsal Mfg P Ltd [1984] 19 Taxman 27 (Ahmedabad), CIT v. Priya Village Roadshows Ltd [2009] 185 Taxman 44 (Delhi). 39. In the light of the above discussion, we are of the view that the plea of the assessee to allow deduction deserves to be accepted. Ground No.7 is accordingly allowed. 40. As far as ground No.8 raised by the assessee is concerned, the same relates to non-grant of credit for Foreign Taxes (FTC). The assessee has 3 business segments. Non-SEZ (in which no deduction under section 10AA of the Act had been claimed by the assessee because of losses in this unit) and two SEZ units on which deduction under section 10AA of the Act had been claimed by the assessee. The credit for Foreign Taxes paid were in relation to foreign branches and overseas customers of the non-SEZ units for which no deduction under section 10AA of the Act was claimed by the assessee. The AO denied benefit of FTC for the reason that since the non-SEZ unit was incurring loss, no tax was payable in India. The CIT(A) confirmed the order of the AO. 41. At th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 011-12 wherein no rules governing FTC credit were applicable. 9.4 The learned AO has erred in upholding that an addition can be made in the absence of a specific mandate provided by any law or rule. 44. The parties prayed that a direction to the AO to give MAT credit as per the earlier years orders for Assessment Year 2013-14 as per the final orders passed therein would be sufficient. In this regard, it is seen that due to an order under section 154 dated 04.10.2018 for Assessment Year 2013-14 wherein MAT credit was reduced by ₹ 37.23 lakhs, the MAT credit for Assessment Year amounting to ₹ 12.34 lakhs were disallowed. The final order in Assessment Year 2013-14 on the issue will have consequential effect and the AO is directed to give consequential relief. 45. Ground No.6 raised by the assessee reads as follows: 6. Grounds relating to disallov$ ance of processing fees paid to BSE Ltd amounting to ₹ 18 lakhs 6.1 The learned AO has erred in disallowing the processing fees paid to BSE Ltd towards amalgamation of Sasken Network Engineering Ltd with the assessee company, amounting to ₹ 18,00,000 as capital expenditure and the learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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