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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 ..... n 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. - A.A.R. No. 885 of 2010 - - - Dated:- 12-10-2011 - Mr. P.K.Balasubramanyan, Mr. V.K. Shridhar, JJ. Present for the applicant : Mr. P.J. Pardiwalla, Sr.Advocate Mr. Nitin Chaudhry, C.A. Mr. Himanshu Sinha, Advocate Present for the department : Mr. Gangadhar Panda, Addl. DIT(Int. Taxation), Hyderabad R U L I N G [By Justice P.K. Balasubramanyan] The applicant is a company incorporated under the laws of British Virgin Islands. It was previously known as In touch Technologies Holdings Limited‟, the predecessor of which in turn was In Touch Technology Limited‟. The applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into on 29.5.1997, was then replaced by a Services Agreement dated 19.9.1999 made effective from 15.9.1998 under which Satyam was to continue to provide software development services to the applicant till the end of the year 2002. The Services Agreement reaffirmed that the predecessor of the applicant would be the owner of the Intellectual Property Rights over the software developed by Satyam. 4. There were some omissions in the application filed before the Patent Authority. These omissions were rectified by Satyam at the request of the applicant and a combined declaration was filed with the Patent Authority. Being satisfied, the Patent Authority granted Patent 947‟ to the applicant on 20.11.2001. Other subsidiary applications in respect of inventive work predicated in part upon 947 Patent‟ were also filed by the applicant before the Patent Authority. The entirety of the patent portfolio of the applicant, according to it, is either wholly or partially dependent upon 947 Patent‟. 5. During the interregnum, Satyam had acquired 22.06% equity in the applicant as per the share issuance agreement executed in the year 1999 in lieu of outstanding receivabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portfolio had been impaired and it was forced to settle the action against Qualcomm and Verizon for infringement of patent, on most unfavorable terms. It accused Satyam of breach of contractual covenants and forgery. It sought the relief of a declaration as to the validity and enforceability of its patent under the laws of the United States, damages resulting from fraud/negligent, misrepresentation and/or forgery by Satyam in providing documents containing forged signatures and in breach of contractual covenants, exemplary and punitive damages for fraud and forgery and for interest and costs. In defence, Satyam disowned any responsibility for the alleged forgeries and defended the action. 8. Satyam, challenging the jurisdiction of the District Court, Texas to entertain the complaint, approached the Queen‟s Bench Division of the Commercial Court, London contending that in terms of the settlement dated 31.12.2002, the applicant was barred from pursuing its complaint in Texas since the agreement made in the complaint stood extinguished by the settlement and that in any event, the complaint fell within the exclusive jurisdiction of the English Courts. The trial judge by judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the right to replace the escrowed funds securing the Final Payment with either a bank guarantee or letter of credit in the same amount pending receipt of the Final Payment at which time security shall no longer be necessary. e. After the Final Payment is received, Satyam shall be entitled to the principal in the amount of the Final Payment and all accrued interest thereto. 10. The settlement agreement reiterated that they intended it to be a full and final settlement of all disputes between the parties and that the parties intended it to sever all ties between them and to end their relationship forever. It then proceeded to provide: Subject to the fulfillment of paragraph 9 of the Settlement Agreement, all prior agreements or understandings between the parties or any of their respective present or past officers, directors or employees, regarding any matters whatsoever are extinguished, including the Assignment dated September 11, 1998, the Services Agreement effective as of September 15, 1998, the Share Issuance Agreement dated September 1, 1999, the previous Settlement Agreement between the parties effective as of December 31, 2002, any assignments between or among ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the applicant approached this Authority for an Advance Ruling by invoking Section 245Q of the Income-tax Act. This Authority allowed the application for giving a Ruling on the following questions: (i) Is the amount receivable by the applicant from M/s. Satyam Computer Services Ltd. ( Satyam ), in accordance with Paragraph 2 of the settlement agreement entered between the applicant and Satyam on July 18, 2009 at Dallas, USA, a capital receipt in the hands of the applicant? (ii) If the answer to question (i) is in the affirmative, can the said amount be treated as income under any of the specified heads provided in the Income-tax Act, 1961 ( Act‟)? (iii) If the answer to questions (i) and (ii) are in the affirmative, can the said amount be considered to accrue or arise or deemed to accrue or arise in India or upon its receipt, can it be considered to have been received or deemed to have been received in India? (iv) If the answers to all the above questions are in the affirmative, what would be the basis and method of determination of taxable income and applicable tax rate thereon? (v) If the answer to question (i) is in the negative, i.e. the said amount i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of clause 3.1 was to ensure that Upaid retained all relevant intellectual property, and clause 3.1.(b) is not limited to confirmation of past assignments in the sense of transfers of property. The relevant term is will survive and shall be governed‟ and I am satisfied that that means that the assignments will continue to apply in accordance with their terms. 14. On how the right was dealt with under the Settlement Agreement, the Court of Appeal held: The construction point is a short one, and I agree with the Judge. I accept Mr. Foxton s submission that it is plain (and common ground) that in commercial terms intellectual property was very important to the parties and was treated separately in the Settlement Agreement. Since the Assignment Agreement was concerned exclusively with intellectual property it made commercial sense not to include it within the releases. 15. Thus, it is clear from this interparties judgment, which has become final, that the parties dealt with separately the intellectual property rights which was important to both and which had been taken assignment of earlier by the applicant. 16. Clause 5 of the Settlement Agreement dated 18.7.2009 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment had to be attributed to the grant by the applicant of a license to Satyam to use the patent for all times to come and that part was liable to be taxed as royalty. It is asserted that the payment by Satyam to the applicant has three components. 1. Regularisation of unauthorized usages of software IPRs by Satyam and its affiliates till the date of settlement. 2. 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; 3. Continued usage of patents after the date of settlement, including usage of future patent rights. 21. Of the above, the second component would spell in the realm of capital receipt and components 1 and 3, payment for the earlier use and the right to use the software in future might amount to royalty. 22. The settlement agreement, no doubt, recites that the liecense granted to Satyam on all its patents, pending patents and any future patents was royalty free. Does this recital by itself conclude the issue? According to the applicant, it does and according to the Revenue, it does not. It remains for us to consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and it later assigned to the applicant, would amount to an infringement of the patent rights and the copyright of the applicant. This license to use in perpetuity, is thus a valuable right secured by Satyam. 26. The settlement Agreement dated 18.7.2009 recits that this grant of perpetual worldwide right is without consideration. It is submitted that the recital is conclusive and the Revenue cannot go behind it. On going through the settlement deed, it is clear that the rights acquired and secured by the applicant over the software, a literary work, and according to the Revenue, a process as well, is acknowledged and reaffirmed. In turn, the applicant gives a right to Satyam to use that right in perpetuity. The recital that it is done for no consideration can only be viewed as an attempt to avoid payment of tax on that part 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected. 28. Other than the royalty segment of the $ 70 million to be paid by Satyam to the applicant, we find that the rest of the compensation will be capital receipt, but not a capital gain. It is not shown that any part of such capital receipt is taxable under the Income-tax Act. Therefore, it has to be ruled that the compensation paid other than the portion attributable to royalty will not be taxable in India. 29. In the light of the above reasoning, we rule as follows on the questions: (i) 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. (ii) In the light of the ruling on question no.(i) and the finding that no capital gain is involved, the ruling is that the amount less that portion attributable to royalty, cannot be treated as income under any of the specified heads under the Income-tax Act. (iii) 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. (iv) The issue is as to what would be the basis and method of determ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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