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TMI Blog2022 (4) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... are 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 Inc (Spreadtrum) Shangai, China, is a company incorporated in China and is engaged in manufacturing semiconductor mobile chipset platforms for smartphones. 5. In the year 2003, the Chinese Government chose Time Division Synchronous Code Division Multiple Access (TD - SCDMA) as the official Chinese 3G standard for the transmission of wireless transmission of voice and data and identified Spreadtrum as a chipset designer capable of implementing that standard. Spreadtrum commenced its efforts to develop and commercialize a chipset that world support and implement the TD-SCDMA standard. Part of that effect required the development of a protocol stack, which consists of several layers of hardware and software necessary for the exchange and transmission of data and voice within the TD-SCDMA cellu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Pursuant to Section 3.03 of the Agreement, Spreadtrum is required on a quarterly basis to Sasken with a written report reflecting all shipments of Spreadtrum Products during the quarter ("royalty report"). Spreadtrum has breached the Agreement by failing to provide a royalty report since the first quarter of 2012. Spreadtrum is ordered to provide Sasken with the required royalty reports commencing with the second quarter of 2012, and it shall continue to do so until its obligation to provide royalty reports is terminated by an agreement of the parties or by the terms of the Agreement as defined herein. 5. Spreadtrum has breached Sections 3.02 and 3.03 of the Agreement by failing to pay Sasken $0.25 for each Spreadtrurn Product it has shipped since January 1, 2012; 6. The amount of unpaid royalties, together with appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship 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 of this settlement agreement, reads thus: 3.1. Contingent upon the payment of the amounts due, parties agree that the independently Owned IPR and rights in and to the Foreground Information will be independently owned by each party and to the extent a party has any ownership rights in any Independently owned IPR and such rights in and to Foreground information, such party hereby assigns to the other party an equal and undivided interest in all such independently owned IPR and rights in and to Foreground Independently Owned IPR or Foreground Information to the other party. 3.2. The parties agree that as a result of the assignment pursuant to the above, each party can use all or any portion of the Independently Owned IPR and Foreground Information under the rights so assigned, without payment of any compensation or having any other obligations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 in which the transfer took place. Income chargeable under the head capital gain accrues to an Assessee the moment, an Assessee effects transfer of a capital Asset. Sec.2(14) of the Income Tax Act, 1961 (Act) defines, "capital asset" to mean (a) property of any kind held by an assessee, whether or not connected with his business or profession. Explanation to Sec.2(14) of the Act clarifies that "property" includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever. For the purpose of Sec.45 of the Act, Sec.2(47) of the Act defines "Transfer" in relation to a capital asset to include (i) the sale, exchange or relinquishment of the asset or (ii) the extinguishment of any rights therein. Section 48 of the Act, provides the mode in which capital gain is to be comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation 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 subject matter of transfer is "assets" and in case of extinguishments, it is "rights". 13. The assessee entered into an agreement with Spreadtrum and accordingly the assessee assigned rights on both IPR and hence, the same is a transfer of capital asset u/s 2(47) of the Income tax act, 1961, and accordingly, any profit or loss arising from same will be subject to tax under the head "Income from the Capital Gain". 14. Without prejudice to the above submission, the assessee contended that the Supreme Court in the case of CIT v B.0 Srinivasa Setty (1981) 128 ITR(SC),while dealing with the taxation of capital gain on transfer of goodwill held that the charging section, i.e., Sec.45(1) and the computation provision i.e., Sec.48 together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission, 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 Act, 1872. Since the sum received as compensation or liquidated damages etc., could not be described as income falling under any of the heads, such sums were claimed to be not taxable under the Act. The Assessee relied on a decision in the case of Commissioner of Income Tax, Gujarat v Saurashtra Cement Ltd, 2010 192 Taxmann 300 (SC), wherein the Apex Court held that where amount received by the assessee is towards compensation for the sterlisation of the profit-making apparatus rather than a receipt in the course of the profit-earning process, it would be a capital receipt and hence not taxable. The Apex Court also observed that there cannot be a single infallible test to decide between capital and income. Reference was also made to similar decision of Hon'ble Delhi High Court in the case of Mrs. Tara Sinha (ITA No. 154/2015), held that compensation for loss of source of income is a capital receipt a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.com 351 (Bang. Trib.) wherein the Tribunal held that sum received from sub-licencing patents was held to be taxable as business income. 17. The CIT(A)confirmed the order of the AO. Aggrieved by the order of CIT(A), the assessee is in appeal before the Tribunal. 18. The learned Counsel for the assessee submitted that the source code and technical documents in the Foreground and Background IPR constitutes an IPR. Accordingly, the same is a capital asset under section 2(14) of the Act. He pointed out that the jurisdictional High Court in DCIT Vs. BPL Sanyo Finance Ltd 312 ITR 63, has held that a capital asset may be corporeal or incorporeal. He submitted that as per the settlement agreement, the assessee assigned the rights in the background IPR to Tsinghua, prior to which agreement, the assessee enjoyed exclusive rights in the Background IPR. He drew our attention to the excerpts of the settlement agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enants 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 right of the appellant. Dilution in ownership is also transfer under section 2(47) based on the Jurisdictional High Court decision in the case of CIT v. M.J. Siwani [2014] 366 ITR 356 (Kam.). Where the owner of the intangible asset like know-how sells in or grants an exclusive license to another which pro-tanto disentitles the owner from exercising its rights therein, the transaction amounts to an assignment of capital rights and the payment to be regarded as a capital receipt. Reliance is placed on the following decisions: - CIT v Ralliwolf Ltd 143 ITR 720 (Bom.)-[Para 18- Para 32-Page No. 1048-1054] - Pro Cruip Corporation v CIT 255 ITR 354 (AAR) [Page 1108-1118of CLC-I] - Srira m Bearings Limited 224 ITR 724 (SC) [Page 1119]. 19. The learned DR reiterated the stand of the Revenue as contained in the order of the AO and CIT(A). 20. We have carefully considered the rival submissions. The subject m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 The Company derives its revenues from software services, product and technology licensing and installation and commissioning services. Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company, the revenue can be reliably measured and the collection is probable. in all cases revenue is recognized only when no further vendor obligations remain upto the stage of revenue recognized and collection is probable. The following specific recognition criteria must also be met before revenue is recognized. Licensing revenue is recognized when the product or technology is delivered and accepted. Revenue from time and material service contracts is recognized as the services are provided. Revenue from fixed price service contracts and customized products or technology developments is recognized based on the proportionate completion method, determined based on the achievement and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute 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 they arise under identical facts and circumstances. We have already seen that assessee received a sum of Rs. 2,98,96,35,130/- from Spreadtrum under a Settlement Agreement. According to the assessee, it wanted to share the windfall it received on settlement agreement with spreadtrum with its stakeholders and employees and therefore made a provision of Rs. 28,84,38,000/- and claimed the said sum as deduction in computing income from business. The details of the sum of Rs. 28,84,38,000/- and the basis of the assessee's claim that the liability was ascertained liability was as follows: Designation Amount in INR Lakhs Chairman and Managing Director 5,22.92 Whole Time Director and CFO 2,61.46 Other Employees 21,00.00 Total 28,84.38 25. As far as the sum of Rs. 7,84,38,000/- which was shown as payable to Chariman and Managing Director and WTD and CFO in the chart above, is concerned, as per the Accounting Standards, if any item in the financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay were not for any services rendered. It is an ex-gratia payment received because of their control over the company. The amount paid was nothing but distribution of profits and therefore cannot be allowed as a deduction. The order of the AO was confirmed by the CIT(A) and hence ground No.5 by the assessee before the Tribunal. 29. As far as ground No.4 is concerned, the contention of the learned Counsel for the assessee is that the liability of the assessee is certain and not contingent and, in this regard, reference was made to a decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Vs. CIT 245 ITR 248 (SC). We are of the view that the liability in question was not certain and was contingent. No basis for the claim being certan has been given by the assessee, especially when the payment itself is voluntary and in the nature of an incentive. The fact that part of the sum claimed as deduction was revised in the subsequent year also lends credence to the conclusion of the AO that the liability was contingent in nature. Hence, the ground of appeal of the assessee is held to be without any merit. However, we direct that the sum reversed in subsequent year and offere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 36(1)(ii) provide the following conditions to be fulfilled when a payment of Bonus and Commission is made to an employee before it can be claimed as deduction in computing income from business viz., (i) the payment must be on account of bonus; (ii) paid to an employee; (iii) for services rendered; (iv) is not in lieu of payment of dividend. The case of the Revenue is that the payment in question was not for any services rendered and was motivated by the fact that the MD and WTD were in a position to control the affairs of the company and instead of paying as profits or as dividend, the same will not go to reduce taxable profit and can be only as an appropriation of taxable profit. In the case of payment of dividend, the assessee will also have to pay Dividend Distribution Tax (DDT). The above being the purpose behind the provisions of section 36(1)(iiv) of the Act, let us examine the facts in the present case. 32. In the present case, the provision of Rs. 784.38 lakhs has been made for payment to two whole-time Directors. The shareholders of the company, in the Annual General Meeting of the Company held on Sep 14, 2015 have, inter alia, approved payment of Variable Pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company also will be treated as distribution of profits. Companies Act, 2013 itself permits payment of managerial remuneration as a percentage of net profits of a company. Thus. the provision for managerial remuneration amounting to Rs. 784.38 lakhs cannot he treated as distribution of profit at all. In addition, the assessee being a company, whose shares are listed in the BSE and NSE, cannot selectively distribute dividend to selected shareholders who hold the same class of shares. Such distribution, if ever done, will be in violation of the Companies Act. 34. The decision rendered in the case of Dalal Broacha Stock Trading (2011) 140 TTJ 280 (Mum-SB) is distinguishable on facts. In the caselaw the said assessee in the case law was a private limited company whereas the Assessee in the present appeal is a listed company. Accordingly, the said assessee in the case law is allowed to provide for remuneration in a manner agreed within themselves however Sasken is a listed company and is mandated to follow rules and procedures for approval of remuneration of the managerial group by constitution of a NRC.In the caselaw, the director had not provided any services to be eligible for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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. 37. The next issue raised in ground No.7 by the assessee is with regard to disallowance of profession fees paid to M/s. Mckinsey and Co., USA, amounting to Rs. 3,50,07,500/-. The assessee claimed that it engaged the consultant for formulating business strategy for future growth. The AO and CIT(A) held that strategy for future business growth cannot be regarded as revenue expenditure and disallowed the claim for deduction. 38. We have heard the rival submissions. Consultancy services were procured from a consultant regarding the growth opportunities available in the embedded and digital space. The Study was to help Sasken evaluate whether the market size where we operate is large enough and whether it was a growing market. This exercise was undertaken since the company had been de growing for the last 5 years. The scope and deliverables of services were as follows: - Identification of opportunities. - Market Strategy. - Talent Management. a) The report in the present case pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Foreign Tax credit in the case of Wipro Ltd (supra):- "56. Therefore, it follows that the income under Section 10A is chargeable to tax under Section 4 and is includible in the total income under Section 5, but no tax is charged because of the exemption given under Section 10A only for a period of 10 years. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax. The said exemption granted under the statute has the effect of suspending the collection of income tax for a period of 10 years. It does not make the said income not leviable to income tax. The said exemption granted under the statute stands revoked after a period of 10 years. Therefore, the case falls under Section 90(1)(a)(ii)." On a careful perusal of the decision rendered by Hon'ble Karnataka High Court, we are of the view that, what is required to be seen is whether the income u/s 10AA is chargeable to tax u/s 4 and is includible in the total income u/s 5. The fact that the assessee is not paying tax due to exemption or deduction granted under the Act is not relevant. Accordingly, we set aside the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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