TMI Blog2023 (8) TMI 494X X X X Extracts X X X X X X X X Extracts X X X X ..... binding, both on the assessee and the Revenue. Being conscious of the aforesaid factual and legal position, the assessee filed its return of income for the impugned assessment year offering a part of the compensation received as royalty income. Even, in the revised return of income, the assessee again offered royalty income at a substantially reduced figure. Neither in course of assessment proceedings, nor before learned Commissioner (Appeals), the assessee took a stand that no part of the compensation received is taxable as royalty. Thus, the aforesaid conduct of the assessee clearly indicates that according to its own understanding of the ruling of AAR, a part of compensation received is taxable as royalty under the Act. Keeping the aforesaid facts in view, we hold that at this stage, the assessee, through the additional grounds, cannot rake up the issue again that no part of the compensation can be treated as royalty under section 9(1)(vi) of the Act Addition made on account of royalty over and above the amount offered by the assessee in the revised return of income - While the assessee has supported the value of royalty through a Valuation Report of an expert, having domai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are inclined to reject such valuation of the AO. Accordingly, we delete the addition made by the Assessing Officer on account of royalty. Royalty income offered by the assessee in the revised return of income should be accepted. Grounds are allowed. - BEFORE SHRI G.S. PANNU, HON BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER For the Appellant : Sh. Ajay Vohra, Sr. Advocate, Sh. Rohit Jain, Advocate, Sh. Deepesh Jain, CA, Sh. Nitin Choudhary, CA For the Respondent : Sh. Anand Kumar Kedia, CIT (DR) and Sh. Sanjay Kuamr, Sr. DR ORDER PER SAKTIJIT DEY, JM: Captioned appeal by the assessee arises out of order dated 28.02.2018 of learned Commissioner of Income Tax (Appeals)-43, New Delhi, pertaining to assessment year 2012-13. 2. In the memorandum of appeal filed in Form 36, the assessee has raised the following effective grounds: 1. That on the facts and circumstances of the case and in law, both the Learned Assessing Officer and the Learned CIT(A) have erred in not accepting the value of the license fee for a limited right to use Appellant's patents granted to Satyam Computer services Limited at Rs. 3,16,68,603/- determined on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issibility or otherwise of the additional grounds raised by the assessee. As could be seen from the grounds raised, the assessee is disputing part attribution of compensation received from Satyam Computer Services Ltd. (Satyam) towards royalty in terms of section 9(1)(vi) of the Income-tax Act, 1961. 4.1 Briefly the facts are, the assessee is a non-resident corporate entity incorporated under the laws of British Virgin Island (BVI). The assessee is engaged in the business of providing and enabling electronic payment services via mobile and fixed line telecom and other telecom services network. Sometime in the year 1996, the assessee was in the process of conceiving a new framework for an advance intelligence processing platform. For this purpose, the assessee wanted to design and develop software. After developing the design, the assessee outsourced the actual development of software to Satyam Enterprise Solution Ltd., a subsidiary of Satyam by entering into a memorandum of understanding (MoU) on 29.05.1997. Ultimately, Satyam Enterprise Solution Ltd. merged with Satyam and Satyam took over the work of development of software project known as call manager and net manager . Af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in royalty income offered by the assessee in the original return of income and revised return of income called upon the assessee to furnish the necessary details and also to explain why the quantum of royalty was reduced substantially in the revised return of income. In response to the query raised, the assessee furnished its submissions supported by a valuation report obtained from an expert to justify the royalty income offered in the revised return of income. The Assessing Officer, however, was not convinced with the submission of the assessee. Pointing out various defects and deficiencies in the valuation report, the Assessing Officer rejected it and proceeded to determine the value of royalty on his own by estimating at Rs. 159,30,53,388/- and added back to the amount to the income of the assessee. Though, the assessee contested the addition before learned Commissioner (Appeals) on various grounds, however, the addition was sustained. 4.3 Before us, Sh. Ajay Vohra, learned Senior Counsel appearing for the assessee submitted that whether a part of the compensation received is to be treated as royalty under section 9(1)(vi) of the Act is still a live issue for adjudication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. Therefore, he submitted, the assessee cannot be permitted to raise the additional ground at this stage for the first time. He submitted, the conduct of the assessee in offering a part of the compensation received as royalty income in the return of income and not raising any issue regarding taxability of such income as royalty, either before the Assessing Officer or before the first appellate authority clearly establishes the fact that as per the understanding of the AAR ruling by the assessee a part of the compensation is taxable as royalty. Thus, he submitted, the additional ground should not be entertained. 4.5 We have considered rival submissions and perused the materials on record. Undisputedly, by virtue of settlement agreement entered with Satyam, the assessee had received US$ 70 Million and Satyam was granted royalty free, non-transferable and non-exclusive licence in respect of software developed and subject patent. It is a fact on record, to get clarity on the taxability of the compensation received from Satyam in India, the assessee approached AAR for a ruling. Before the AAR, assessee pleaded that the entire compensation received US $ 70 Million as capital r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of the assessee that no part of IS $ 70 million was taxable was rejected by AAR. Thus, from the aforesaid observations of the AAR, it can be safely concluded that a clear ruling was given regarding taxability of a part of compensation received as royalty under the provisions of the Act. Admittedly, the aforesaid ruling of AAR has attained finality and in terms of section 245S(1), it is binding, both on the assessee and the Revenue. Being conscious of the aforesaid factual and legal position, the assessee filed its return of income for the impugned assessment year offering a part of the compensation received as royalty income. Even, in the revised return of income, the assessee again offered royalty income at a substantially reduced figure. Neither in course of assessment proceedings, nor before learned Commissioner (Appeals), the assessee took a stand that no part of the compensation received is taxable as royalty. Thus, the aforesaid conduct of the assessee clearly indicates that according to its own understanding of the ruling of AAR, a part of compensation received is taxable as royalty under the Act. Keeping the aforesaid facts in view, we hold that at this stage, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eading strategist on IP matters in the wireless industry and has advised clients with biggest portfolios in the world and worked with players across the wireless value chain. He submitted, he has been retained as an expert witness and advisor for some of the most prominent legal matters before International Trade Commission (ITC). He submitted, rejecting the valuation report of such an expert, the Assessing Officer not being an expert, could not have proceeded to determine the value of royalty on a purely estimate basis. Thus, he submitted, the royalty income offered by the assessee in terms with the valuation report should be accepted and the value of royalty determined by the Assessing Officer should be rejected. In support of his submission, learned counsel relied upon the following decisions: 1. G.L. Sultania and Anr. Vs. SEBI (AIR 2007 SC 2172) 2. CIT Vs. Bharti Cellular Ltd., 330 ITR 239 (SC) 3. Hindustan Lever Employees Union Vs. Hindustan Level Ltd., 1995 AIR (SC) 470 4. Shreyans Industries Ltd. Vs. JCIT, 277 ITR 443 (P H HC) 5. Cinestaan Entertainment (P.) Ltd. Vs. ITO, 170 ITD 809 (Delhi Trib.) 6. PCIT Vs. Cinestaan Entertainment Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of cost of the software to Satyam for acquiring the right in the IPR, the Valuer has assigned a range of 3 to 5% under the historical cost/reproduction cost method, which is not correct, as, the Valuer has wrongly held that Satyam cannot commercially exploit the licences. Whereas, Satyam, in reality, has right to use the software as a component in developing derivative software or products which can be sub- licensed or rented. He submitted, the license also protects vast use of software by Satyam for its clients. He submitted, in the original return of income, the assessee itself has taken 25% of the cost as royalty, chargeable from Satyam. Thus, he submitted, assessee s conduct itself shows that the value determined by the expert is not correct. 5.3 As regards attribution of 80% of estimated reproduction cost to Satyam, learned Departmental Representative relied upon the observations of the Assessing Officer. Further, he submitted, the decisions relied upon by assessee s counsel are case and fact specific, hence, would not apply. Without prejudice, learned Departmental Representative submitted, the valuation exercise may be referred back to the Assessing Officer with a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BBN and CNBC as a wireless data technology expert. (j) Mr. Chetan Sharma is an advisor to CEOs of some of the leading wireless technology companies on product strategy and intellectual property (IP) development and serves on the advisory board of several companies. (k) Mr. Chetan Sharma is a senior member of IEEE, IEEE Communications Society and IEEE Computers Society. He has Master of Science from Kansas State University and Bachelor of Science degree from Indian Institute of Technology, Rourkee. 7. Undisputedly, in the valuation report, the expert has determined the value of royalty by adopting a particular methodology. It is a fact on record that while delivering its ruling on application filed by the assessee, the AAR has negated the stand taken by the Department that the entire compensation of US $ 70 million received by the assessee is in the nature of capital gain, hence, taxable in India. 8. On the contrary, the AAR has accepted assessee s claim that major part of the compensation received, though, in the nature of capital receipt but is not capital gain, hence, not taxable in India. However, the AAR has observed that a part of the compensation received has to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt of range in the context of valuation of international transactions under transfer pricing norms. It is submitted that the expert cannot be expected to second guess with precise accuracy and certainty, the exact amount Satyam would agree to share in the cost of development of the IP. Being so, no adverse inference can be drawn from the fact that a precise range of valuation has been given by the expert valuer. As regards the amount offered by the appellant, the same undisputedly falls within the range determined by the valuer; it is higher than the base value suggested by the valuer. 2. Nature of compensation duly analyzed by AAR and by the expert valuer In para 9.4 (ii) [page 21], the assessing officer observed that: - Damages were awarded, inter alia, for failure of Satyam to process and convey good title to the right to the appellant. Accordingly, the appellant was not able to freely transfer and assign the right to others. The observation of the assessing officer that the appellant is not able to freely transfer and assign the rights to others is factually incorrect. In terms of the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause 8 of the Settlement Agreement). The said perpetual right in patent was given simply as a mutual release and was a covenant not to sue each other. ft was given simply as protection from litigation as opposed to any commercial benefit accruing to Satyam (refer clause 7- 8 of the Settlement Agreement). The expert valuer Shri Chetan Sharma in his report had also opined that Satyam had no way to generate revenue from the appellant's exclusive right in the patents; the license granted by appellant to Satyam was intended solely to protect each other from future litigation between the parties and not as a generator of revenue. Satyam is not in a position to exploit the license commercially. Thus, the expert valuer concluded that the commercial value of the license rights to Satyam is de-minimus (of minimum value). Most importantly, the factum that the aforesaid right in patents granted to Satyam was not of any commercial value to Satyam is also evident from the fact that the said damages/ compensation paid by Satyam has been written off as expenditure in the profit and loss account by Mahindra Satyam Ltd. in profit and loss account for year ending 31.03.2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer has primarily observed: - that the data used in the valuation report either contains a lot of assumptions or is based on the unverified information fed by the owner of the software. - that the valuer has not Considered costs of idea generation. The allegations made are completely baseless. The information given by management to the valuer is fully verified on the basis of documents and information available with the appellant and the underlying assumptions have been clearly documented and based on cogent material and references mentioned in report. For ease of reference, enclosed is basis for cost numbers used by the expert valuer: Particulars Amount USD Basis of calculation/ valuation Historical Cost Of Development 12,684,982 Basis of calculation/valuation Historical Cost Of Development 12,684,982 Based on the invoices of Satyam. Detail of all invoices along with copies of material invoices at pages 314 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unication Services was conceived by Mr. Simon James Joyce, the Chairman CEO of Upaid Systems, Limited. Mr. Joyce has been named as Chief Inventor of Upaid's Patents in both filing as well as the grant of patents. In relation to the relationship management with Satyam, it was managed by: (i) Chairman CEO, (ii) Senior Vice President Technology, (iii) Chief Platform Architect, (iv) Product Development Manager. Pertinently, the cost for the above have been considered and incorporated in the valuation report. Further, upon execution of the Agreement with Satyam, it was clearly mentioned and stipulated that Satyam will provide research and development services for software and system integration projects related to software products. 6. While applying the Cost Method, the Historical cost considered by the expert valuer are as under: In para 9.5 [page 24 onwards], the assessing officer has alleged following infirmities in respect of some of the variables adopted by the valuer: Each aspect dealt s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were at boom till 2009 The IP Expert Valuer has exercised abundant care and diligence to include all costs pertinent and germane to the Valuation of License Fee for a Limited Right to use Upaid's Patents. It is respectfully submitted that - Costs of Chairman CEO have been taken till 1997 to 1999 as it was only then was he actively involved in interacting with Satyam on the Development Contract. Thereafter, other people were employed by the appellant to perform this function and the Chairman CEO shifted his time and energy on other functions of the organization such as on overall strategy and management, fund raising and on patent portfolio. - The salary of VP-Technology was not taken prior to 1999-2000 .as he was engaged for the first time during 1999-00 - The Salary of Chief Platform Architect was not considered prior to 2000-01as this position was created for the first time in that year. - The Product Development Manager was appointed for the first time in 2001-02 and thus his cost was captured for the first time in 2001- 02. - The standard methodology under reproduction cost is to adopt a rationale and consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no elaboration that the Bond yields in India are historically higher than that the USA These amounts were paid to a law firm, M/s Staas Halsey LLP in Washington D.0 who were patent attorneys responsible for patent registrations and filings. Detail of invoices filed before lower authority is at pages 335 to 382 supplementary paperbook. The reason for considering costs only till 2007 was because the last patent US7308087 was filed on 11.12.2007 (refer internal page 6 of valuation report page 30 of paperbook ). As regards litigation and settlement cost, it may be noted that the same bears connection and correlation with registration and 'development of patents/ software license granted to Satyam and thus cannot be attributed to value of the license. Substantial legal expense were incurred by the appellant in respect of suits against Satyam, Verizon and Qualcomm etc. The payments were made to various attorney's/ law firms such as Foley Lardner LLP, Patton Boggs LLP, and Freshfields Bruckhaus Deringer LLP for such litigation which cannot be attributed to development, of software. The summary of major legal expenses are as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tyam could not have commercially exploit the licenses given to it. Should they choose to do so, their ultimate client would be infringing the appellant's patents. - No revenue could be generated by Satyam from the right granted to it by the appellant. -Satyam' s rights of the license granted is severely truncat appellant was the owner of the patent and had substantially superior rights to that of Satyam. -The license was granted to Satyam merely as a protection right again future litigation and not as a generator of revenue (which is the primary basis of deriving the value). - In fact, Satyam did not recognize the license granted as income generating asset; rather it expensed off the amount paid to the appellant thus proving that the license granted by the appellant to Satyam was of no economic value to the latter. Mahindra Satyam Ltd. would have, in terms of mandatory Accounting Standard 26, would have capitalized the license had there been an expectation of flow of any economic benefit from the license received from the appellant. It is, in view of the aforesaid, a rate of 3% to 5% has been applied to attribute cost to the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ten will take care of onetime lump sum payment for say about fifteen years and will also account for the discounting for down payment by Satyam to the assessee. Thus, the rate applied would be 80% of the estimated reproduction cost of USD 38,598,890. It is submitted that the contention of the assessing officer is absurd on the face itself as the assessing officer has attributed 20% of the value of the license to the owner of the IP, i.e., the appellant and 80% to the licensee whose rights are severely truncated. The reasoning adopted by the assessing officer is that the license granted by the appellant to Satyam is a very valuable right for Satyam which the latter can use in perpetuity and forever. This fundamental premise is completely flawed for the reasons explained above summarized hereunder: - The right cannot be transferred or assigned by Satyam; -It cannot be commercially exploited or lead to generation of revenue as opined by the valuer; Satyam's admission that the license granted by appellant had no enduring economic benefit to it is evident-from the treatment in their annual report where the amount paid has been expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the expert valuer in March 2014 as has been confirmed by the valuer himself in certificate placed at page 259 of paperbook. The: valuer had mentioned that he was engaged by the appellant in December 2013 for valuation, which was completed around 25th March 2014 which was communicated to the management on the same date as it was needed to filed tax return in India. The signed report was, on request, sent in. November 2014. Being so, there cannot be any basis to doubt the action of the assessee in relying on the valuation report for filing the revised return. Be that as it may, even if the report is stated to be post facto, no adverse inference could be drawn on the valuation determined by the expert valuer on sound and logical basis. 15 Expert valuer has given a range of value US $5,78,983 to US $9,64,972. The assessee has adopted a value of US $6,13,810 Assessing officer has, After applying, 80% to reproduction cost of USD 38,598,890 worked value of license granted as $30,879,112 (-30 million) As explained above, the reproduction cost doubled by the assessing officer on adhoc basis; and rate of 80% applied is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by proper reasoning. In any case of the matter, neither the Assessing Officer, nor learned first appellate authority is competent to assume the role of an expert valuer. In case, the Assessing Officer was not satisfied or convinced with the Valuation Report of the expert valuer, proper course for him would have been to seek opinion of a second valuer on the Valuation Report furnished by the assessee. Instead of doing that, the Assessing Officer has taken it upon himself to undertake the exercise on valuation of the royalty. This, in our view, is totally erroneous and against settled legal principles. The Assessing Officer cannot reject the Valuation Report done by an expert in the field, when he has no such expertise. The decisions relied upon by learned counsel appearing for the assessee clearly support this view. It is evident, after rejecting the Valuation Report of the expert on flimsy grounds, the Assessing Officer eventually has proceeded to value the royalty on purely estimate basis without bringing on record any cogent material to support such estimate. There is no valid reason, why he estimated the reproduction cost to twice the amount determined by the expert valuer. F ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
