TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 1289
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....hether the CIT(A) has erred both on facts and in law in treating Vega Industries (Middle East) FZC, UAE (Vega ME) as an independent body corporate/company Incorporated outside India Instead of the proprietary concern of the Appellant and deleting of addition of Rs. 44,98,11,000/- made by the Assessing Officer in the hands of the Appellant?. 2. Whether the CIT(A) has erred both on facts and in law in deleting the Disallowance of additional depreciation of Rs. 8,09,995/-, without appreciating the facts of the case?. 3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. 4. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored." 3. Ground No.1:- The Revenue vide Ground No.1 has agitated against the action of the Ld. CIT(A) in deleting the addition of Rs. 44,98,11,000/- made by the Assessing Officer (AO) by taxing the income of the offshore entity, Vega Industries (Middle East), FZC, UAE, treating the same as proprietary- concern of the assessee. 4. At the outset, the Ld. Counsel for the assessee has submitted that the issue is squarely covere....
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....avour of assessee in the own case of the assessee for earlier assessment years and he could not bring out any distinguishing fact or contrary decision for the year under consideration. Therefore, we do not find any infirmity in the order of the Ld. CIT(A) on this issue, the same is upheld. Thus, Ground No.1 of Revenue's appeal is dismissed. 6. Ground No.2:- Vide Ground No.2, the Revenue has contested the action of the CIT(A) in deleting the disallowance made by the AO on account of additional depreciation claim of Rs. 8,09,995/-. 6.1. The Ld. Counsel for the assessee, at the outset, has submitted that this issue also covered in favour of assessee and against the Revenue by the earlier decisions of the Tribunal in the own case of the assessee. He has further submitted that the Ld. CIT(A) while deleting the impugned addition on this issue has followed the decisions of the Tribunal in earlier assessment years. The assessee had claimed depreciation of Rs. 24,29,984/- being depreciation calculated @ 15% on electrical fittings. The AO, however, held that depreciation on electrical fittings was allowable @ 10%. He, therefore, disallowed the excess depreciation claimed of Rs. 8,09,99....
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....B of the Act. 5. The Ld. AO has erred in law and on facts of the case in initiating penalty proceedings u/s. 271(1)(c) of the Act. 6. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal." 11. The assessee, vide Ground Nos.1 & 2, has agitated against the action of the Ld. CIT(A) in confirming the disallowance of Rs. 31,11,00,000/- made by the AO u/s 37 of the Income Tax Act, 1961 (in short "the Act") on account of disallowance of compensation paid for settling the patent infringement dispute. 11.1. The brief facts relevant to the issue are that the assessee is engaged in the business of design, development, manufacture, installation and servicing of high chromium wear, corrosion and abrasion resistant casting used in the cement, mining and thermal power generation industries. The assessee sells such products in India as well as outside India. One of the class of assessee's product is part of machines or other devices that come into contact with abrasive materials such as rock or other hard, abrasive substances. These parts include those sold unde....
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....edure. However, the trial court held that the reconsideration of the decision based on new evidence can be done only after the decision of the District Court on the 'post-trial' motion petition. However, since the cost of litigation was expected to be exorbitant for the assessee and MI and MI at the risk of losing its patent also, both the parties mutually decided to settle the dispute amicably. Accordingly, a Settlement Agreement dated 28 August 2012 was signed to settle and adjust all differences and controversies. Pursuant to the said settlement agreement the assessee paid USD 6,000,000 to MI in consideration of the closure of the litigation and mutual release from claims/counter claims between the parties. In view of the above, the assessee sought RBI's permission vide letters dated 24 October 2013 and 31 October 2013 to allow the payment to be made to MI from the amount deposited with District Court. The RBI vide its letter dated 18 November 2013 granted desired permission to assessee. The assessee debited an amount of Rs. 31,11,00,000 (being the INR equivalent of abovementioned sum of USD 6,000,000) under the head exceptional items in Profit and Loss Account for year endi....
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....mpound an offence under prevailing laws in India or outside India. The Ld. CIT(A) observed that the amount of Rs. 31,11,00,000/- paid by the assessee to MI was for violation of patent rights of MI and, hence, the said amount was not in nature of compensation, but penal charges which the assessee would have had to pay once the issue had been decided by the Higher Courts in USA. He observed that the District Court, based on the jury's determination holding that there was willful infringement of MI's reissue patent by the assessee, awarded compensatory damages to MI payable by the assessee. That, though on the request of the assessee in 'post-trial motion', the District Court agreed to re-examine the matter, but subject to the condition of deposit of cash security of $7,228,544.64 which included the original award plus attorney's fees and costs. That in view of these circumstances, the assessee entered into a Settlement Deed with MI to make a one time payment of USD 6 million to MI and thereby principally and evidently accepted that it had violated the patent rights of MI. The Ld. CIT(A), therefore, held that the payment made by the assessee to MI was clearly in lieu of illegal action....
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....d the judgement of Desiccant Rotors (supra) on ground that no patent rights are granted to assessee unlike that case where patent rights were granted post settlement. In fact, the assessee's case is better placed than Dessicant Rotors (supra) on this ground as the amount paid is not for acquiring any new capital asset (patent rights) but only for usage of the same and therefore purely revenue in nature. Payments in relation to violation of law outside India cannot be disallowed u/s. 37 of the Act during the year under consideration: • • Prior to introduction of Explanation 3 to S.37(1) w.e.f. 01.04.2022, it was a settled position that violation of "laws outside India" does not fall within the purview of disallowance u/s. 37. Reliance is placed on the following: • Mylan Laboratories Ltd. v. DCIT-[2020] 113 taxmann.com 6 (Hyd) • • In the present case, the settlement payment was made in FY 2013-14 and assessment was framed on 29.12.2017. Neither during the year under consideration nor during the year of framing the assessment was the Explanation 3 to S.37(1) present in the statue book and hence, disallowance....
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....en otherwise, the amendment in Finance (No. 2) Act, 2024 only covered the settlement payments in relation to contravention of "prescribed laws". CBDT has issued a notification dated 23.04.2025 (Legal P/b. Pg. 98) prescribing only four laws in this regard which do not include the "patent law. Had it been the intention of legislature to disallow the settlement payments made in relation to patent dispute, the legislature would have also notified the "patent law" under such notification. Payment made for settlement should be allowed as business loss a/s, 28 of the Act Alternatively and without prejudice, the settlement payment shall be allowed to assessee as a business loss u/s. 28 of the Act since the settlement has been made w.r.t. alleged patent infringement made during the course of business of the assessee. In view of above, the disallowance of settlement payment of Rs. 31,11,00,000/- deserves to be deleted." 17. The Ld. DR, however, has relied upon the findings of the lower authorities. 18. We have heard the rival contentions of the Ld. Representatives of the parties and gone through the record. 19. Before proceeding further, it will be r....
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.... law as may be notified by the Central Government in the Official Gazette in this behalf ]}." 20. As depicted above, the Explanation 3 has been inserted w.e.f. 1.4.2022, which is much after the relevant Assessment Year under consideration ( A.Y. 2014-15) and even after the passing of the impugned Assessment Order on 29.12.2017. Further, the clause (iv) to Explanation 3 has been inserted w.e.f. 01.04.2025, which shows that it has come into effect even after the date of passing of the impugned order of the CIT(A) on 13.01.2025. However, at this stage we take the provisions as are in operation as on today. We will discuss the issue of retrospective or prospective operation of the aforesaid amended provisions in the later part of this order. 21. The relevant provisions of the The U.S. Patent Act ( United States Code Title 35 - Patents), are hereby reproduced as under: "281 Remedy for infringement of patent. A patentee shall have remedy by civil action for infringement of his patent. 283 Injunction. The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the vi....
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....of this section may file a civil action in a district court of the United States for recovery of damages adequate to compensate for the injury. (c) The marking of a product, in a manner described in subsection (a), with matter relating to a patent that covered that product but has expired is not a violation of this section. 37(1). A perusal of the above mentioned provisions would reveal that to attract disallowance under the Explanation 1 & Explanation 3 to Section 37(1) of the Act, the expenditure should be found to have been incurred by an assessee 'for any purpose' which is an offence or which is prohibited by law. Now the question here is that whether an assessee had made the aforesaid payment of Rs. 31,11,00,000/- 'for any purpose' which is an offence or prohibited by law ? 21.1. Admittedly, as noted above, the amount in question had been paid by the assessee as a compensation for the settlement of the civil dispute with MI. A perusal of the aforesaid relevant provisions of the US Patent Act/US Code 35 would reveal that section 281 expressly provides that remedy to a patentee for infringement of his patent is by civil action and further sections 283 provid....
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....ingement, the subject matter of the Litigation". The above facts and circumstances show that the payment of $6,000,000.00 to MI was neither on account of any fine imposed by any Court nor on account of any offence committed by the assessee. The said amount was paid to settle a long pending civil litigation with a private party (MI), wherein, both the parties to the litigation were of the bonafide belief that their claim before the Court of Law was a valid claim and that they were entitle4d to such rights/claims. Even the matter once decided by the District Court in favour of the assessee, however, the judgement of the District Court was reversed by the Federal Court whereupon the assessee filed post-trial motion petition and also deposited the necessary security amount as directed by the District Court. However, since both the parties realized that they would bear a hefty cost of litigation and further the dispute was more likely to be settled early as there were chances of moving to the higher courts by the unsuccessful litigant, therefore, they mutually decided to compromise the matter and settled the consideration payable by the assessee to MI at a lesser price than the aw....
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....aw" in our view, can not be given such a narrow interpretation to include in its ambit and scope every bonafide claim litigated before the courts/tribunals or other such authorities. 22. We have carefully considered the rival submissions and perused the materials on record. The central issue revolves around the disallowance of Rs. 31,11,00,000/- paid by the assessee to M/s. Magneco/Metrel, Inc. (MI) towards the settlement of a patent infringement dispute in the USA. The lower authorities disallowed the expenditure, treating it as a payment for a purpose prohibited by law, falling within the mischief of Explanation 1 to Section 37(1) of the Act. The issue is otherwise squarely covered by the decision of the Hon'ble Delhi High court in the case of " CIT v. Desiccant Rotors International P. Ltd. " 347 ITR 32 (Delhi), wherein it has been held that where a payment is made under a settlement to avoid the expenses and uncertainty of exorbitant litigation, the payment is to be treated as compensatory and not penal in nature. Moreover, the Hon'ble Delhi High Court has also emphasized that the remedy for patent infringement, under both US and Indian law, is a civil action for damage....
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....Explanation 3 widened the scope of disallowance to include violations of laws outside India. The Memorandum to the Finance Act, 2022, also clearly states that the amendment will take effect from April 1, 2022. Therefore, the CIT(A) was in error in applying this provision retrospectively to the assessment year 2014-15. The assessee succeeds in respect of its this alternate contention also. 23. Another interesting point for determination is about the payment made for settlement of dispute relating to infringement of patent rights whether, would be covered under the newly inserted clause (iv) to Explanation 3 to section 37(1) of the Act w.e.f. 1.4.2025 vide the Finance (No. 2) Act, 2024. The very insertion of this clause shows that prior to this amendment, bona fide settlement payments were not intended to be covered by the disallowance u/s 37(1) of the Act. As observed above, this newly inserted clause (iv) can not be applied retrospectively at this stage. 23.1. Further, this newly inserted clause (iv) to Explanation 3 applies only to settlements related to contraventions of laws notified by the Central Government. The CBDT, for this purpose, via Notification No. 38/2025 dated ....