UPAID SYSTEMS LTD.,NEW DELHI vs. DCIT, CIRCLE- 3(1)(2), INTL. TAXATION, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI

BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA No.3460/Del/2018 Assessment Year: 2012-13

M/s. UPAID SYSTEMS LTD., Vs. DCIT, Mittal Chaudhry & Co., CA, Circle-3(1)(2), Intl. Taxation, S-108, LGF, Greater Kailash-1, New Delhi New Delhi PAN :AABCU3655P (Appellant) (Respondent)

Assessee by Sh. Ajay Vohra, Sr. Advocate Sh. Rohit Jain, Advocate Sh. Deepesh Jain, CA Sh. Nitin Choudhary, CA Department by Sh. Anand Kumar Kedia, CIT (DR) Sh. Sanjay Kuamr, Sr. DR Date of hearing 26.12.2022 Date of pronouncement 24.03.2023

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.

has raised the following effective grounds:

ITA No.3460/Del/2018 AY: 2012-13

2 . 1 That on the facts and in the circumstances of the case, the CIT(A) erred in confirming the action of the Assessing Officer of m a k i n g a n e s t i m a t e o f t h e r e p r o d u c t i o n c o s t a t U S D 38,598,890/ - on an adhoc and arbitrary basis by doubling the original reproduction cost of USD 19,299,445/- determined by the expert valuer.

2 . 2 That on the facts and in the circumstances of the case, the CIT(A) erred in upholding the action and order of the Assessing Officer in determining arbitrarily the attribution rate of 80% to the reproduction cost by enhancing the cost attribu tion / sharing rate to 8% and by further multiplying it for 10 future years of use for determining the value of the license fee for a limited right to use Appellant's patents granted to Satyam Computer Services Ltd., holding the same to be a valuable asset and right for the latter. It is categorically averred that the limited right to use license of Appellant's patents granted to Satyam was only a defensive right granted only for the purpose of protection against future litigation.

2 . 3 That the Assessing Officer and CIT(A) not having referred the issue of valuation to an expert were bound by the valuation report of an acknowledged expert, filed by the Appellant.

has raised the following additional grounds:

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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 3 | P a g e

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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’. After developing the software

Satyam entered into an assignment agreement with the assessee

in the year 1998, where under, Satyam assigned the right, title

and interest in the software and Intellectual Property Rights (IPR)

and copyright over the software development to the assessee in

perpetuity. The assignment agreement also authorized the

assessee to seek patent protection for inventions to own all

patent applications and letter patent or similar legal protection

for such inventions in all countries throughout the world. In

terms with the assignment agreement, the assessee filed a

professional patent application with the authorities in USA in

respect of ‘call manager’ and ‘net manager’. Subsequently, the

assessee discovered breach of patent due to certain acts and

deeds of the employees of Satyam and accordingly filed a

complaint against Satyam in USA. Ultimately, the dispute

between the assessee and Satyam was settled through an

agreement and in terms of the agreement, Satyam agreed to pay 4 | P a g e

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an amount of US $ 70 million (Rs.361,13,00,000/-) as

compensation. As per the terms of the settlement, the assessee

granted Satyam a perpetual world royalty free licence in respect

of its patent pending and future, subject to, Satyam not having a

right to assign the licence to anyone else. In the return of income

filed for the impugned assessment year originally on 29.09.2012,

the assessee declared total income of Rs.40,38,03,272/-,

including royalty of Rs.18,83,16,253/-. Subsequently, on

29.03.2014, the assessee filed a revised return of income,

declaring total income of Rs.24,71,55,622/-, including royalty

income of Rs.3,16,68,603/-.

4.2 In the meanwhile, to determine taxability of the

compensation received from Satyam, the assessee moved an

application before Authority for Advance Ruling (AAR). Before

the AAR, the assessee pleaded that the compensation received

from Satyam, being of capital nature, is not taxable in India.

While pronouncing its ruling, the AAR held that a part of

consideration paid under the settlement agreement attributable

to grant of perpetual world royalty free non-assignable licence on

patent to Satyam is in the nature of royalty. However, the AAR

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directed the Assessing Officer to quantify the amount of royalty

out of the compensation received. In course of assessment

proceeding, the Assessing Officer noticing that there is huge

difference 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.

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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 before the

Tribunal as the AAR has directed the Assessing Officer to

examine the taxability under section 9(1)(vi) of the Act.

Conceding to the fact that the assessee has not challenged the

decision of AAR before any higher court, he, nevertheless,

submitted that since, the AAR has not determined the issue, the

assessee can raise the issue of taxability of even a part of the

compensation received as royalty. He submitted, as per the terms

of the settlement agreement, the copyright, propriety in the

patent still remains with the assessee and same has not been

parted away while granting non-exclusive, non-assignable

perpetual licence to use in favour of the Satyam. Thus, he

submitted, the receipt will not fall within the ambit of royalty

under Explanation 2 to section 9(1)(vi) of the Act. Further, he

submitted, Explanation 4 to section 9(1)(vi) of the Act, which

provides that transfer of all or any rights in respect of any right,

property or information includes transfer of all or any right for

use or right to use a computer software including grant of a 7 | P a g e

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licence was inserted to the Statute by Finance Act, 2012 with

retrospective effect from 01.06.1976. He submitted, though, the

amendment was brought to the statute with retrospective effect,

however, it will not apply to the impugned assessment year as

the amendment is not clarificatory in nature. Therefore, he

submitted, the amount received towards compensation cannot be

treated as royalty under section 9(1)(vi). In support, he relied

upon the judgment of Hon’ble Supreme Court in case of

Engineering Analysis Centre of Excellence Private Ltd. Vs. CIT,

(2021) 432 ITR 471. He submitted, merely because, in the return

of income the assessee has offered a part of the compensation as

royalty income, the Revenue does not get a right to tax the

income, in case, it does not fall under the definition of royalty.

Thus, he submitted, the assessee can raise the issue for the first

time before the Tribunal.

4.4 Vehemently opposing admissibility of the additional ground,

learned Departmental Representative submitted that AAR in its

ruling has categorical held that part of the compensation received

from Satyam is towards transfer of right to use a

licence/patent/copyright, hence, it will be royalty under the Act.

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He submitted, the decision of AAR is binding both on the

assessee and the Revenue in terms of section 245S(1) of 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

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pleaded that the entire compensation received US $ 70 Million as

capital receipt. After considering, the submission of the assessee,

the AAR while accepting that part of the compensation is capital

receipt, but does not give rise to capital gain to be taxed in India,

however, observed that the compensation also includes the

consideration paid by Satyam to the assessee for enabling it to

use the particular patent and all subsequent patents. Thus, the

AAR held that this right to use the licence/patent is a valuable

right acquired by Satyam. Further, referring to the settlement

agreement, the AAR held that the right in perpetuity over the

licence/patent given to Satyam was a right acquired by the

assessee over the software/literary work. Therefore, 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. Proceeding further, AAR

held that a part of the compensation received of US $ 70 million

is in the nature of royalty paid by Satyam for obtaining the right

to use the patented software for all times to come. The crucial

observations of the AAR in this regard are as under:

“25. The amount quantified as compensation takes within its fold the consideration paid by Satyam to the applicant for 10 | P a g e

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enabling it to use ‘947 Patent' and all subsequent patents based on it. This is a valuable right. Its importance has been stressed by the Court of Appeal in its judgment. But for this license, the use by Satyam of the software or any of its components, it created for the applicant for a consideration 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.

ITA No.3460/Del/2018 AY: 2012-13

also royalty paid by Satyam for obtaining the right to use the patented software for all time to come.

4.6 From the aforesaid observations of AAR, it is very much

clear that in no uncertain terms AAR has given a ruling that part

of US $ 70 million paid as compensation should be attributable

to royalty as defined in the Act. What the AAR has directed the

Assessing Officer to do is to examine the quantification part as to

how much out of the compensation received can be attributed

towards royalty. The observations of AAR to the effect that “in the

absence of adequate material available before us, we think that

will be appropriate to accept this suggestion made by the counsel

for the applicant” in Paragraph 27 of the order cannot be read in

isolation but has to be read in the context of the entire

observation made by AAR. It is further relevant to observe, while

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concluding on the issue, the AAR has made it clear that the

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, the

assessee, through the additional grounds, cannot rake up the 13 | P a g e

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issue again that no part of the compensation can be treated as

royalty under section 9(1)(vi) of the Act. Accordingly, we decline

to admit the additional grounds raised by the assessee. The

additional grounds are dismissed.

the addition made on account of royalty over and above the

amount offered by the assessee in the revised return of income.

As discussed earlier, in the revised return of income the assessee

had offered royalty income of Rs.3,16,68,603/- as against

Rs.18,83,16,253/- offered in the original return of income. While

explaining the reason for revising the royalty income offered to

tax, the assessee submitted that while offering the royalty income

in the original return of income, the assessee did not have the

benefit of exact value of the royalty determined by an expert.

Subsequently, based on valuation report of an expert the

assessee filed the revised return of income reducing the royalty

income. The Assessing Officer was not convinced with the

submissions of the assessee. After rejecting the valuation done

by expert the Assessing Officer proceeded to determine the value

of the royalty himself and made the disputed addition. The

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addition so made was confirmed by learned Commissioner

(Appeals).

5.1 Before us, learned counsel appearing for the assessee

submitted that the royalty income offered by the assessee in

revised return of income is based on valuation report of a world

renowned expert, Mr. Chetan Sharma. He submitted, while

determining the value of royalty, the expert has considered

various factors, including the nature of compensation,

reproduction cost etc. He submitted, the valuation by the expert

is based on internationally accepted methodology. He submitted,

the expert valuer has adopted cost method for valuation over

income and market approach method, backed by proper

reasoning. He submitted, while applying cost method, the valuer

has also considered the historical cost taking note of

development cost, personnel cost, legal cost etc. Whereas, he

submitted, the Assessing Officer after rejecting the valuation

report without any valid reason has adopted a purely ad-hoc

approach and determined the value on estimate basis. He

submitted, the credentials of the valuer cannot be doubted as he

is one of the leading strategist on IP matters in the wireless

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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:

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5.2 Per contra, learned CIT(DR) strongly relied upon the

observations of the Assessing Officer and learned Commissioner

(Appeals). He submitted, the expert from whom the assessee has

obtained the valuation report may be having some knowledge of

telecom sector but that does not make him world renowned. He

submitted, royalty is nothing but capture of cost of developing

software and the profit margin of IPR owner. He submitted, if the

IPR is to be shared in a geography, the value of royalty will be

equal to the cost of software multiplied by the share of the IPR

which is being transferred to that particular geography. He

submitted, under the cost method of valuation of IPR, two

components need to be examined, i.e., the reproductive cost of the

IPR and how much of the total IPR cost is attributable to the 17 | P a g e

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licensee (Satyam). He submitted, reproduction cost of the IPR has

been worked out by the valuer at US $19.29 million, whereas, the

historical cost has been taken by him at US $15.43 million. He

submitted, the Assessing Officer in a very detailed and exhaustive

manner pointed out the deficiencies in the value determined by

the valuer. In this context, he drew our attention to the relevant

observations of the Assessing Officer. He submitted, though, the

assessee has rebutted some of the contentions of the Assessing

Officer, however, most of the contentions of the Assessing Officer

are still valid, as, the assessee has been unable to rebut them. In

this regard, he specifically referred to the observations of the

Assessing Officer with regard to software designing cost, stamp

duty cost, ESOP cost, productivity improvement rate and wrong

application of US Treasury rates, which are much lower compared

to Indian tax rates. Thus, he submitted, the rejection of the

valuation report of the expert is based on proper reasoning. He

submitted, while allocating a 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, 18 | P a g e

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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 direction to

get the value of royalty determined by a second valuer.

decisions relied upon and perused the materials on record. It is a

fact on record that to support the value of royalty offered as

income in the revised return of income, the assessee had

furnished a valuation report from an expert. To appraise the 19 | P a g e

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bench about the credentials of the expert, the assessee has taken

us through the valuation report and the information available in

public domain, which are as under:

(a) Mr. Chetan Sharma is one of the leading strategists on JP matters in the wireless industry and has advised clients with biggest patent portfolios in the world and worked with players across the wireless value chain. (b) Mr. Chetan Sharma has been retained as an expert witness and advisor for some of the most prominent legal matters in front of the International Trade Commission (ITC) such as Qualcomm vs. Broadcom and Ericsson vs. Samsung. (c) Mr. Chetan Sharma is a chief curator of the popular Mobile Breakfast Event Series and the Mobile Future Forward Executive Summits. (d) Mr. Chetan Sharma is advisor to CEOs and CTOs of some of the leading wireless technology companies on product strategy and IP development. Mr. Chetan Sharma also advises some of the largest financial institutions on wireless technology and companies in the sector. (e) Mr. Chetan Sharma is regularly invited by various US government agencies to speak on wireless data and security related matters. (f) Mr. Chetan Sharma has served as an advisor to senior executive management of several Fortune 100 Companies in the wireless space and is probably the only industry strategist who has advised each of the top 6 global mobile data operators. (g) Mr. Chetan Sharma is the author or co-author of a dozen bestselling books on wireless including Mobile Advertising and Wireless Broad Band: Conflict and Convergence. (h) Mr. Chetan Sharma is also the editor of Mobile Future Forward Book Series. His books have been adopted in several corporate training programs and university courses at NYU, Stanford and Tokyo University. (i) Mr, Chetan Sharma is interviewed frequently by leading international media publications such as Time Magazine, Wall Street Journal, Business Week, Mobile Communications International, BBC and TechCrunch and appeared on NPR, WBBN 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.

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(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.

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.

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 be attributed towards royalty for assignment of

right to use the patent in perpetuity. However, the AAR has made

it clear that the value of such royalty has to be determined

through a proper exercise. The assessee, on its part, has

furnished a valuation report from an expert to support the value

of royalty offered as income. Whereas, the Assessing Officer

himself has taken up the task of determining the value of royalty

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by rejecting the valuation report of the expert. While doing so, the

Assessing Officer has proceeded on a purely ad-hoc basis by

estimating the reproduction cost to double the amount of

reproduction cost taken by the expert valuer. On what basis such

a quantum jump in the reproduction cost was arrived at has not

been reasoned out by the Assessing Officer. He has also rejected

the range of 3 to 5% per annum adopted by the expert valuer

towards value of royalty and has applied the rate of 8% per

annum on the estimated reproduction cost. The Assessing Officer

has also made general observations regarding deficiency in the

Valuation Report furnished by the assessee. In this regard,

specific rebuttal by the assessee on various observations of the

Assessing Officer on the Valuation Report are as under:

Sl. Valuation Comments of the Rebuttal/ Remarks/ Submissions No. method by assessing expert valuer officer (Para no. of AO) Expert valuer has In para 9.2 and 9.4 The expert has adopted a very scientific approach 1. given a range of (i) [page 21], the of first determining the cost of production and value — US assessing officer then, determined the fair value to Satyam. The $5,78,983 to observed that: expert provided a range to obviate risk of any US $9,64,972. The - there is no basis in estimation, uncertainty that may be inherent in assessee has adopting $6,13,810 the exercise of valuation. The concept of adopted a value which is 6% higher than estimation/uncertainty is very well recognized and of US $6,13,810 lower side of range by elucidated in commercial law and finds special expert valuer; reference in Accounting Polices in Accounting GAAPs throughout the world. The Act itself - the valuation is recognizes the concept of range in the context of liable to be rejected valuation of international transactions under transfer pricing norms. since it does not provide exact number It is submitted that the expert cannot be but range of value. guessewith expected to second precise accuracy and certainty, the exact amount

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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.

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license fee. 8 of the Settlement Agreement). . The expert valuer Shri Chetan Sharma in his - Entire cost of developing report had also opined that Satyam had no way software or it's to generate revenue from the appellant's reproduction c o st exclusive right in the patents; the license s hou ld hav e granted by appellant to Satyam was intended be e n considered for solely to protect each other from future litigation valuation of software between the parties and not as a generator of license rather than revenue. Satyam is not in a position to exploit 3-5% as considered the license commercially. Thus, the expert in the report valuer concluded that the commercial value of submitted. the license rights to Satyam is de-minimus (of - License is granted minimum value). to Satyam and all its affiliates which are . Most importantly, the factum that the located at different aforesaid right in patents granted to locations i.e., 16 countries, which Satyam was not of any commercial value to factor is not Satyam is also evident from the fact that the considered while said damages/ compensation paid by Satyam concluding has been written off as expenditure in the valuation profit and loss account by Mahindra Satyam - Satyam has been Ltd. in profit and loss account for year ending granted the license to 31.03.2012; the license has not been use the software recognized as an intangible asset by the said without any time limits thus it can use company. By not creating any such asset in its the software for its use books and by not amortizing the same, till perpetuity Mahindra Satyam Ltd. has confirmed that the without incurring any cost. said license did not have any economic value to Satyam and was only a defensive right meant to be used in the event of litigation and not an income generating asset. In this regard, relevant of audited financial statements of Mahindra Satyam Ltd. for FY 2011-12 is placed at pages 308 to 313 @ 311 of paperbook (refer Note 27 of the annual report). Further, the basis of adopting 3-5% cost sharing on part of Satyam has been explained in detail by the expert valuer in the valuation report. Summarily, Satyam's sharing of cost can only be a very small percentage of appellant cost as appellant is the owner and licensor of the software & patents whereas Satyam is only a licensee with no further rights of assignment or sub-license; Satyam's rights are severely truncated and ringfences and is thus of de-minimus value. The issue is d i s c u s s e d i n d e t a i l i n f r a . . 4. Theexpert valuer hasIn para 9.4 (iv) [page The allegation made by the assessing officer is 24 | P a g e

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22-23], the assessing bald and baseless. The expert valuer has given adoptionCost Method for valuation of officer, inter alia, detailed reasons to select the Cost Method as patent/right observed that the the most appropriate method for 'Valuation of granted to expert valuer has not Satyam over a License Fee for a Limited Right to Use Income and given verifiable basis Upaid's Patents'. The valuer has discussed Market approach for adoption of method. in detail the 'CHOICE OF THE MOST cost-based APPROPRIATE METHOD' in his report (Please approach as most refer internal pages 8 to 16 of the valuation appropriate on the report or pages 25-72 @ 32 to 40 of facts of the case. paperbook). Further, it is interesting to note that the assessing officer has himself principally accepted the said method in computing the value of royalty and has merely changed the quantum of parameters (cost of attribution percentage) to arrive at a different value.

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statistical and non-statistical tools. In relation to Increase/ increase/decrease in software decrease in development cost, the expert valuer Development relied upon the analysis costfor published on the determination website of livemint.com. The reference of of reproduction website is given cost in the valuation report. Based on 293,291 management Historical cost — representation. PersonnelCost of Development Historical cost 1,088,506 This comprises — of cost of the Personnel Cost Chairman & for Patent CEO — Mr. Invention Simon Joyce and Advisor — Mr. Patrick Nunally for the period 1998 to 2007. The detail of invoices of Mr.Patrick Nunally alongwith copies of material invoices placed pages 323to 334 supplementary paperbook Historical 1,365,480 Based on the Legal cost invoices lf Law firm M/s. Staas & Halsey LLP Washington D.C. engaged by the appellant company in relation to registration etc. of patent. Detail of all invoices alongwith copies of material

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invoices are placed at pages 335 to 382 of supplementary paperbook Opportunity 6,334,891 In accordance Cost with valuation principles and on the basis of various studies e.g., Traditional IntangibleAssets Techniques,Weston Anson,The Intangible Assets Handbook - etc. — references given in Valuation report. Further, the internal costs incurred by the apofficer, has not been fully considered for valuation are- (i) Costs incurred in Idea Generation; and (ii) Relationship Management and Learning Curve costs.

As regards Idea generation, the idea for the technology for Telephony Platform and Method for providing Enhanced Communication 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

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development services for software and system integration projects related to software products.

While applying In para 9.5 [page 24 6. Each aspect dealt separately below: the Cost onwards], the Method, the assessing officer Historical cost has alleged following considered by infirmities in respect of the expert some of the variables valuer are as under: adopted by the valuer:

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internal page 20-23 of valuation report at pages 44-47 of paperbook). In so far, the billing rate of USD 21 per hour in 2009 is concerned, the expert valuer has provided his reliable source in his report clearly outlining where he has obtained his research from (refer internal page 23-24 of valuation report at pages 47-48 of paperbook). 8. The IP Expert Valuer has exercised abundant care 2A. Personal Cost and diligence to include all costs pertinent and Development: germane to the Valuation of License Fee for a Limited Right to use Upaid's Patents. - It was doubted as to why the salary of It is respectfully submitted that Chairman & CEO - Costs of Chairman & CEO have been taken till has been taken only 1997 to 1999 as it was only then was he actively for the period involved in interacting with Satyam on the 1997-99 and not Development Contract. Thereafter, other people thereafter; why were employed by the appellant to perform this salary of Sr. VP— function and the Chairman & CEO shifted his Technology has time and energy on other functions of the been, taken only for 2 organization such as on overall strategy and years and not prior management, fund raising and on patent to 1999-00 and portfolio. after 2000-01; why salary of Chief _ The salary of VP-Technology was not taken Platform Architect prior to 1999-2000 .as he was engaged for the has not been first time during 1999-00 considered prior to - The Salary of Chief Platform Architect was not 2000-01; and why considered prior to 2000-01as this position was salary of Product created for the first time in that year. Development Manager has not - The Product Development Manager was been prior to 2001- appointed for the first time in 2001-02 and thus 02 his cost was captured for the first time in 2001- 02. - The reproduction cost cannot be - The standard methodology under reproduction computed merely cost is to adopt a rationale and consistent basis adjusting historical which is designed to eliminate extreme tendencies cost to and limits. The selection of consumer price index i n f l a t i o n and cost inflation index tends to find a regular e s p e c i a l l y median which is free from wide fluctuations and considering that the subjective assumptions. In any case actual cost salaries in IT industries have been taken and adjusted for inflation, which were at boom till 2009 is an internatonaly accepted method. 9. 2B. Personal Cost The Chairman & CEO was involved in the broad Patents strategy and vision of the Upaid's IP Patent Portfolio. His costs have been considered in the 29 | P a g e

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entire period of 19982007. He was also involved in other CEO functions including fund raising, general - The reports states administration, marketing and high-level decision that salary of making. As per management estimates a general Chairman & CEO prior to 2001 is assumption of 25% of his total time and cost has considered on best been made to Patent Costs. estimate basis. Thus, In so far as appellant's advisor was concerned, he it shows that prior was engaged for the first time in 2002 and to 2001, even the therefore there were no cost prior to 2002. 50% of Upaid is not clear time is not considered in reproduction costs as the of the extent of same was for patent litigation and enforcement salary which strategy which is not pertaining to development of deserves to be software. In relation to advisor — Mr. Patrick captured on this Nunally, details of his invoices as considered by account. The the expert valuer is placed at pages 323 to 334 component of 25 % of supplementary paperbook. in t he c ase of Chairman & CEO and 50% no rational basis. 10. 3. Legal These amounts were paid to a law firm, M/s Staas Cost: & Halsey LLP in Washington D.0 who were patent attorneys responsible for patent registrations and - Historical Cost Method: filings. Detail of invoices filed before lower Professional fee authority is at pages 335 to 382 paid by Upaid for supplementary paperbook. the year 2000 to 2007 has been taken The reason for considering costs only till 2007 in report without was because the last patent US7308087 was filed elaborating the on 11.12.2007 (refer internal page 6 of valuation person to whom it report page 30 of paperbook). was paid and if the amount captures As regards litigation and settlement cost, it may be the full value. The noted that the same bears connection and amount captured is correlation with registration and 'development of understated for the patents/ software license granted to Satyam and reason that the thus cannot be attributed to value of the license. material on record Substantial legal expense were incurred by the suggests that appellant in respect of suits against Satyam, litigation with Verizon and Qualcomm etc. The payments were Satyam continued made to various attorney's/ law firms such as even after 2007 Foley & Lardner LLP, Patton Boggs LLP, and and the initial Freshfields Bruckhaus Deringer LLP for such settlement agreement litigation which cannot be attributed to was arrived on development, of software. 18.07.2009. • - Reproduction The summary of major legal expenses are as cost: same as 2A under: above

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Name of Law Perio Cost not Cost Firm d related related to to Patent patent develop developm ment ent (USD) (USD) Stass & 2000 - 1,365,480 Halsey LLP to 2007 Foley & 2005 3.44 Larder LLP to million 2006 Patton Boggs 2007 7.55 LLP to million 2009 Freshfields 2007 3.07 Bruckhaus to million 4. Opportunity Cost: Deringer LLP 2008 Total 14.06 1,365,480 - The rate applied million should have been The agreements between the appellant and with reference to Satyam were never subject to Indian law; initial Indian perspect ive IDC Agreement entered was per laws of Washington w here t he D.C. USA; final settlement agreement software was (18.07.2009) and supplementary settlement developed rather agreement (06.01.2012) were also entered into as than the US per the laws of New York, USA. Treasury Bond Rates. Upaid was the entity that made payments to It needs no Satyam for development of software. Has this not elaboration that been done, it would have possibly deployed the the Bond yields in funds in US Treasury Bonds being a foreign India are historically company. Being so, it is abundantly clear that higher than that the the opportunity cost has to be seen from USA opportunities that are available for a foreign company in foreign markets. 5, Final Cost: 11. The value derived by Satyam was the right granted was de-minimus (minimal value) - Cost sharing ratio because of the following factors: has been taken between 3% to 5% of t he re pro d u c t io n -The limited right to use appellant patent c os tc o m p u t e d is not a valuable right for Satyam. a t U S D 19,299,445. To - Right granted to Satyam was not come to this figure assignable or transferable. of 3 % to 5%, no comparable cases -Satyam could not have commercially exploit the licenses given to it. Should have been given

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and therefore, the they choose to do so, their ultimate client figure adopted in the would be infringing the appellant's report is p a t e n t s . unsupported by factual cases. -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 Satyam. In fact, benchmark for 5% to 6% is also available in the reports of KPMG. and Tim Hebersden @ pages 187-238 of paperbook. The rate of 3% to 5% adopted by the world- renowned expert is sufficient and reasonable considering the peculiar facts and has been justified by the expert valuer in detail. 12. Reproduction In para 9.6 [page As explained in detail supra, the expert valuer has 29], the assessing duly considered all the expenses relevant for the \cost is officer has doubled purposes of development of the software and computed the reproduction cost patenting of the same. Further, the allegations made $19,299,445 by $38,598,890 observing by the aforesaid with respect of items of cost and its that the attribution are completely baseless as has been there could be several expert valuer dealt supra. as under: other expenditures which Further, the ad-hoc exercise of the assessing - Development have not officer in doubling the expenditure taken by the Cost: been captured by the expert valuer is grossly perverse and not based on $9,769,036 32 | P a g e

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valuer and are any logical or rational basis. It is reiterated that - Personnel relevant for one must not doubt the report of the technical Cost- purposes of expert on the subject, that too one of the best in Development: development of the world, on basis of mere conjectures and $422,068 software, its - Personnel surmises. Being so, the same deserved to be patenting and related Cost- reversed at all threshold. litigation and thus the valuation suffers from Patents: inconsistencies and $1,220,719 inaccuracies. - Legal Costs: $1,552,731 - Opportunity Costs: $6,334,891 Cost attribution 13. In para 9.7 [page 29- It is submitted that the contention of the rate 30], the assessing assessing officer is absurd on the face itself as taken at 3% to 5% officer, inter alia, the assessing officer has attributed 20% of by the expert observed as under: the value of the license to the owner of the IP, valuer i.e., the appellant and 80% to the licensee - The appellant has whose rights are severely truncated. permitted Satyam to utilize the IP; The reasoning adopted by the assessing officer is that Satyam has made the license granted by the appellant to Satyam is a onetime payment to very valuable right for Satyam which the latter can use the assessee whereas in perpetuity and forever. This fundamental premise Satyam will be using is completely flawed for the reasons explained above the software / summarized hereunder: patents for perpetuity -The right cannot be transferred or assigned by Satyam; without any -It cannot be commercially exploited or lead to payment in future. generation of revenue as opined by the valuer; - Accordingly, the rate of 8% per annum will Satyam's admission that the license granted by have to be aggregated appellant had no enduring economic benefit to it for future years of use. is evident-from the treatment in their annual report Considering that the said where the amount paid has been expensed off, software / patent will be used without any limit, instead of recognition of asset in terms of it would be fair and Accounting Standard 26 had there been an reasonable to multiply it expectation of flow of any economic benefit from by at least ten. This the license received by Satyam. multiple of ten will take care of onetime lump In view of the aforesaid, the aforesaid attribution sum payment for say made by the assessing officer is completely baseless about fifteen years and and alien to any logical basis. will also account for the discounting for Further, the rate of 8% adopted by the assessing down payment by officer has no justifiable basis and shall be Satyam to the disregarded. The license granted as de-minimus assessee. Thus, the value which can be computed by attributing rate applied would maximum of 3%-5% of reproduction cost, as opined be 80% of the by the expert valuer. estimated 33 | P a g e

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reproduction cost of USD 38,598,890. Further, the assessing officer has arbitrarily and on an ad hoc basis erroneously assumed that the license granted by the assessee to Satyam has a future useful life and thus multiplication factor of 10 years from the date of grant of license must be applied. As submitted above, it is absolutely erroneous to assume that the license granted to Satyam was in the nature of an intangible asset having an economic life in the absence of any evidence to the contrary. Even otherwise, even if one is to assume for the sake of argument (and without conceding) that the license led to creation of an intangible asset, the useful life of the asset would begin from the date of the grant of patent and not from the date of signing of the license agreement/ settlement agreement. The useful life of a technology has nothing to do with the date of execution of the license. agreement but runs from the date it comes into existence. In this case, the mother patent, i.e. Patent No. US6320947 was granted on November 20, 2001 (as against the date of settlement of being 18.07.2009. Accordingly, it follows that eight (8) years had elapsed on the date of settlement and that the unexpired life of the patent (even as per assessing officer's erroneous logic) was only two (2) years. Thus, application of multiplication factor of 10 is completely baseless. 14. The doubts raised by the assessing officer is On bottom of page 30 completely baseless. The valuation was conducted of the assessment by the expert valuer in March 2014 as has been order, the assessing confirmed by the valuer himself in certificate officer has mentioned placed at page 259 of paperbook. The: valuer had that the claim of the mentioned that he was engaged by the appellant in assessee in the December 2013 for valuation, which was revised return completed around 25th March 2014 which was Sharma is communicated to the management on the same unsubstantiated since date as it was needed to filed tax return in India. the valuation report The signed report was, on request, sent in. Mr.Chetan November 2014. Sharma is of November 2014 while Being so, there cannot be any basis to doubt the revised turn was filed action of the assessee in relying on the valuation in March 2014. report for filing the revised return. Be that as it may, even if the report is stated to be

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post facto, no adverse inference could be drawn on the valuation determined by the expert valuer on sound and logical basis.

Expert valuer has Assessing officer has, 15. As explained above, the reproduction cost doubled by the given a range of After applying, 80% to value — US assessing officer on adhoc basis; and rate of 80% applied reproduction cost of $ 5 , 7 8 , 9 8 3 t o is ex-facia and patently erroneous. USD 38,598,890 U S $9,64,972. worked value of license The assessee has granted at $30,879,112 adopted a value It is further submitted that as per the aforesaid attribution of US $6,13,810 (-30 million) done by the assessing officer, around 44% of the total compensation ($70 million) received has been attributed towards limited license granted to Satyam.

In this regard, it would be noticed that the AAR categorically analyzed ,the nature of compensation, which is on account of:

(i) Declaration of authenticity of the signatures furnished by Satyam and a declaration of the legal status of all its patents.

(ii) Actual damages arising from fraud and/or negligent misrepresentation involved in having to give up its claim for patent violation against Qualcomm and Verizon.

(iii) Damages on account of losses suffered for alleged breach of the Assignment Agreement by Satyam.

(iv) Damages for the alleged defect in title to the Patents conveyed by Satyam to Upaid

(v) Actual damages under concerned Federal statute.

(vi) Statutory damages under concerned Federal statute.

(vii) Claim for punitive and exemplary damages for alleged forgery.

(viii) Cost of all legal proceedings borne by Upaid on account of litigation and legal proceedings against Verizon & Qualcomm.

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assignable, non-exclusive, non- transferable license to all patents of Upaid. Item no. (i) to (viii) were held by the AAR to be capital receipts, not deemed to accrue or arise in India and hence non-taxable. It was only item no. (ix) was adjudicated to be in the nature of royalty where attribution was required to determined. The assessee's consistent position has been that the aforementioned item no. (ix) represents a de minimis commercial value of license rights to Satyam as it is primarily meant as a protection against litigation and not as a generator of revenue. Thus, attributing major component of around 44% of total compensation received towards license fee granted to Satyam is ex-facia erroneous and even contradictory to the AAR order.

the assessee. It is quite evident, while the assessee has supported

the value of royalty through a Valuation Report of an expert,

having domain knowledge on the subject, the Assessing Officer

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 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

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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. Further, the data relied upon by the Assessing Officer 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.

Representative that in the original return the assessee has

attributed 25% of the compensation towards royalty, we must 37 | P a g e

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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 Assessing Officer 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 Assessing Officer. Accordingly, we delete the addition made by

the Assessing Officer on account of royalty. In other words, the

royalty income offered by the assessee in the revised return of

income should be accepted. Grounds are allowed.

Order pronounced in the open court on 24th March, 2023 Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 24th March, 2023. RK/- 38 | P a g e

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