2023 (8) TMI 494 - AT - Income Tax

Income taxable in India - part attribution of compensation received towards royalty from Satyam in terms of section 9(1)(vi) of the Income-tax Act, 1961 - assessee is a non-resident corporate entity incorporated under the laws of British Virgin Island (BVI) engaged in the business of providing and enabling electronic payment services via mobile and fixed line telecom and other telecom services network - AAR held that this right to use the licence/patent is a valuable right acquired by Satyam and further referring to the settlement agreement, right in perpetuity over the licence/patent given to Satyam was a right acquired by the assessee over the software/literary work, it cannot be said that the recitals on the settlement agreement that the assignment of right is without consideration can only be viewed as an attempt to avoid payment of tax HELD THAT - 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, 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 domain knowledge on the subject, the AO has determined the value of royalty on purely ad-hoc/estimation basis not backed by proper reasoning. In any case of the matter, neither the AO, nor learned first appellate authority is competent to assume the role of an expert valuer. In case, AO 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 AO 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. AO 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. The data relied upon by the AO to estimate the value of royalty at 8% per annum on the reproduction cost is not based on any authentically sourced information. These facts are well brought out in assessee s rebuttal to Assessing Officer s observations. As regards the submissions of learned Departmental Representative that in the original return the assessee has attributed 25% of the compensation towards royalty, we must observe, the assessee has subsequently explained that at the time of original return of income, the assessee did not have the benefit of the Valuation Report of the expert, which was available to him subsequently. Hence, filing of revised return of income was necessitated. In absence of contrary material brought on record by the Revenue to finalize the aforesaid claim of the assessee, we are inclined to accept assessee s contention. Thus, in the ultimate analysis, we hold that since, the AO has rejected the Valuation Report of the expert on flimsy grounds and has proceeded to make the addition by determining the value of royalty on purely estimate basis, without being backed by any supporting evidence, we 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.

Summary

Issues Involved:
1. Valuation of License Fee
2. Addition to Total Income
3. Taxability of Compensation as Royalty
4. Admissibility of Additional Grounds

Summary:

1. Valuation of License Fee:
The assessee contended that the value of the license fee for a limited right to use its patents, granted to Satyam Computer Services Limited, was determined at Rs. 3,16,68,603/- based on a valuation report by an IP expert. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this valuation, leading to an addition of Rs. 156,13,84,785/- to the assessee's total income. The Tribunal noted that the expert valuer used internationally accepted methodologies and provided a range of values to account for estimation uncertainties. The AO's rejection of the valuation report and subsequent ad-hoc determination of the royalty value was found to be erroneous and unsupported by substantial evidence. The Tribunal emphasized that the AO should have sought a second opinion from another valuer rather than making an arbitrary estimation.

2. Addition to Total Income:
The AO made an addition to the total income by estimating the reproduction cost at USD 38,598,890/- and attributing 80% of this cost to the license fee, resulting in a significant increase in the royalty value. The Tribunal found that the AO's approach was arbitrary and lacked a logical basis. The AO's decision to double the reproduction cost and apply an 8% attribution rate was not supported by any cogent material. The Tribunal concluded that the AO's estimation was purely ad-hoc and not backed by proper reasoning.

3. Taxability of Compensation as Royalty:
The assessee argued that the compensation received from Satyam was not taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961. The Authority for Advance Ruling (AAR) had previously ruled that part of the compensation attributable to the grant of a perpetual world royalty-free non-assignable license on the patent to Satyam was in the nature of royalty. The Tribunal noted that the AAR's ruling was binding and had attained finality. The assessee's conduct of offering a part of the compensation as royalty income in the return of income indicated acceptance of the AAR's ruling. Therefore, the Tribunal declined to admit the additional grounds raised by the assessee challenging the taxability of the compensation as royalty.

4. Admissibility of Additional Grounds:
The Tribunal addressed the admissibility of additional grounds raised by the assessee, which disputed the attribution of compensation received from Satyam towards royalty. The Tribunal held that the AAR's ruling on the taxability of the compensation as royalty was binding and had attained finality. The assessee's conduct of offering a part of the compensation as royalty income in the return of income indicated acceptance of the AAR's ruling. Consequently, the Tribunal declined to admit the additional grounds raised by the assessee.

Conclusion:
The Tribunal concluded that the AO's rejection of the expert valuation report and subsequent ad-hoc determination of the royalty value was erroneous. The Tribunal directed that the royalty income offered by the assessee in the revised return of income should be accepted and deleted the addition made by the AO. The appeal was partly allowed.