2011 (10) TMI 20 - AAR - Income Tax

TDS on payment - Capital receipt versus revenue receipt - nature of the payment made or to be made by Satyam to the applicant under Settlement - . Regularisation of unauthorized usages of software IPRs by Satyam and its affiliates till the date of settlement - 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; - Continued usage of patents after the date of settlement, including usage of future patent rights. - Held that - 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 - the amount less that portion attributable to royalty, cannot be treated as income under any of the specified heads under the Income-tax Act. - 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. - 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. Interest from escrow account - The amount deposited in the Escrow account by Satyam has earned interest. The interest is earned in India. - Held that - his interest portion is taxable in India as that is income arising in India.

Issues Involved:
1. Nature of the amount receivable by the applicant under the settlement agreement.
2. Taxability of the amount under the Income-tax Act, 1961.
3. Determination of the taxability and method of computation of taxable income.
4. Applicability of Section 195A of the Income-tax Act.
5. Taxability of interest earned on the escrow account.

Detailed Analysis:

1. Nature of the Amount Receivable:
The applicant, a company incorporated under the laws of the British Virgin Islands, entered into a settlement agreement with Satyam Computer Services Ltd. (Satyam) on 18.7.2009. The settlement agreement was meant to resolve disputes arising from allegations of forgery, fraud, and breach of contractual covenants by Satyam. Under the settlement, Satyam agreed to pay the applicant $70 million, partly for the grant of a perpetual worldwide, royalty-free license on all its patents to Satyam. The applicant contended that the compensation was a capital receipt, not a revenue receipt. The Revenue agreed it was a capital receipt but argued it should be taxed under the head "Capital Gains."

2. Taxability Under the Income-tax Act, 1961:
The Authority found that the compensation included various components: regularization of unauthorized use of software IPRs, indemnification for damages from misrepresentation, and continued usage of patents. It concluded that the compensation for the grant of a perpetual license to use the patented software should be considered royalty, which is taxable under the Income-tax Act, 1961. The rest of the compensation was deemed a capital receipt but not a capital gain, thus not taxable in India.

3. Determination of Taxable Income and Method of Computation:
The Authority directed the Assessing Officer to determine the portion of the $70 million attributable to royalty and to decide the taxable income and applicable tax rate after considering relevant materials and hearing the applicant. The ruling emphasized that the royalty portion of the compensation is taxable in India, while the remaining amount, being a capital receipt, is not taxable.

4. Applicability of Section 195A:
The Supreme Court of New York had ruled that Satyam was entitled to deduct taxes from the settlement amount. The Authority clarified that the parties would be governed by this adjudication, subject to any appeal. The applicant suggested, and the Authority agreed, that 10% of the $70 million could be deducted as an interim measure to safeguard both parties' interests, with the balance released to the applicant.

5. Taxability of Interest Earned on Escrow Account:
The interest earned on the escrow account was deemed taxable in India as it was income arising in India. The Authority ruled that this interest is taxable in the hands of the applicant.

Conclusion:
The Authority ruled that the compensation of $70 million paid by Satyam to the applicant is a capital receipt, with a portion attributable to royalty being taxable. The Assessing Officer is to determine the taxable portion. The interest earned on the escrow account is also taxable in India. The ruling was pronounced on 12th October 2011.

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