TaxTMI 
TaxTMI 
2026 (8) TMI 1717
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.... bench's order dated 24th March, 2023 had accepted it in part; vide following detailed discussions: "2. In the memorandum of appeal filed in Form 36, the assessee has raised the following effective grounds: 1. That on the facts and circumstances of the case and in law, both the Learned Assessing Officer and the Learned CIT(A) have erred in not accepting the value of the license fee for a limited right to use Appellant's patents granted to Satyam Computer services Limited at Rs. 3,16,68,603/- determined on the basis of a valuation report of an IP expert, one of the leading strategist in the world on IP matters in the wireless industry and mobile communication space. 2. Without prejudice to the above Ground, on the facts and in the circumstances of the case, CIT(A) erred in confirming the action of the Assessing Officer in making an addition of Rs. 156,13,84,785/- to the total income of the appellant by rejecting the valuation carried out by the third party expert valuer without any basis whatsoever, based purely on surmise and conjecture. 2.1 That on the facts and in the circumstances of the case, the CIT(A) erred in confirming the action of t....
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.... 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 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 app....
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....he 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. 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-excl....
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....round 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 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 giv....
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....ed and specifically provided for it. An attempt to avoid ascribing of a consideration for grant of a perpetual license over a patent and a copyright by a mere recital that it is royalty free cannot pass the test of the Ramasay principle or the McDowell principle on the non-countenance of such avoidance by a Tribunal or Court. As observed in Ramasay (1982) AC 300 by Lord Wilberforce "While obliging the court to accept documents or transactions found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs'. Adopting this approach, we find that at least a portion of the compensation paid by Satyam to the applicant, must be ascribed to or earmarked as consideration for licensing of the right to use the patent and the software comprised therein. This consideration paid for granting of a license in respect of a patent or obtaining the right to use the patent or a process protected by copyright, is royalty as defined in the Income-tax Act. We are therefore satisfied that a part of the $ 70 million paid as compensation by Satyam takes in also royalty paid by Satyam for obtaining the ....
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....t year offering a part of the compensation received as royalty income. Even, in the revised return of income, the assessee again offered royalty income at a substantially reduced figure. Neither in course of assessment proceedings, nor before learned Commissioner (Appeals), the assessee took a stand that no part of the compensation received is taxable as royalty. Thus, the aforesaid conduct of the assessee clearly indicates that according to its own understanding of the ruling of AAR, a part of compensation received is taxable as royalty under the Act. Keeping the aforesaid facts in view, we hold that at this stage, the assessee, through the additional grounds, cannot rake up the issue again that no part of the compensation can be treated as royalty under section 9(1)(vi) of the Act. Accordingly, we decline to admit the additional grounds raised by the assessee. The additional grounds are dismissed. 5. Insofar as, the main grounds are concerned, they relate to 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....
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....ome 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: 1. G.L. Sultania and Anr. Vs. SEBI (AIR 2007 SC 2172) 2. CIT Vs. Bharti Cellular Ltd., 330 ITR 239 (SC) 3. Hindustan Lever Employees' Union Vs. Hindustan Level Ltd., 1995 AIR (SC) 470 4. Shreyans Industries Ltd. Vs. JCIT, 277 ITR 443 (P & H HC) 5. Cinestaan Entertainment (P.) Ltd. Vs. ITO, 170 ITD 809 (Delhi Trib.) 6. PCIT Vs. Cinestaan Entertainment Pvt. Ltd., ITA No.1007/2019 (Delhi HC) 7. Urmin Marketing Pvt. Ltd. Vs. DCIT, [2020] 122 taxmann.com 40 (Ahd.) 8. Pramila M Desai, HUF Vs. DCIT, ITA No.04/Ahd./2012 (Ahd. Trib.) affirmed by Gujarat High Court in [2014] 221 Taxman 158 9. CIT Vs. Manjulaben M. Unadkat, 229 Taxman 531 (Gujarat) 10. Shri Rajendra H. Seth Vs. ACIT, ITA No1495/Ahd/2007 (Ahd. Trib.) 11. Sosamma Paulose Vs. JCIT, 79 TTJ 573 (Coch.) 12. Rameshwaram Strong Glass (P.) Ltd. Vs. ITO, [2018] 172 ITD 571 (Jaipur) ....
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....ts. 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. 6. We have considered rival submissions in the light of 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 bench about the credentials of the expert, the assessee has taken us through the valuation report and the information available in publ....
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....r of Science degree from Indian Institute of Technology, Rourkee. 7. Undisputedly, in the valuation report, the expert has 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. 8. On the contrary, the AAR has accepted assessee's claim that 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 by rejec....
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....n the base value suggested by the valuer. 2. Nature of compensation duly analyzed by AAR and by the expert valuer In para 9.4 (ii) [page 21], the assessing officer observed that:- Damages were awarded, inter alia, for failure of Satyam to process and convey good title to the right to the appellant. Accordingly, the appellant was not able to freely transfer and assign the right to others The observation of the assessing officer that the appellant is not able to freely transfer and assign the rights to others is factually incorrect. In terms of the clause 5 of the Settlement Agreement (pages 134 to 149 @ page 136-137 of the paperbook], the intellectual property rights shall be retained by the appellant on as is basis. Thus, the appellant is the owner of the rights in the patents and is entitled to freely transfer or commercially exploit the same right. Further, the said fact has also been noticed by the AAR. As regards the comment of the assessing officer on the component to the compensation, it would be noticed that the AAR has, after analyzing the nature of damages received having various components, held the same to be capital receipt not liable to tax, except to....
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.... Thus, the expert valuer concluded that the commercial value of the license rights to Satyam is de-minimus (of minimum value). Most importantly, the factum that the aforesaid right in patents granted to Satyam was not of any commercial value to Satyam is also evident from the fact that the said damages/ compensation paid by Satyam has been written off as expenditure in the profit and loss account by Mahindra Satyam Ltd. in profit and loss account for year ending 31.03.2012; the license has not been recognized as an intangible asset by the said company. By not creating any such asset in its books and by not amortizing the same, Mahindra Satyam Ltd. has confirmed that the 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 ....
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....ices along with copies of material invoices at pages 314 to 322 of supplementary paperbook. Productivity Factor for determination of reproduction cost Increase/ decrease in Development cost for determination of reproduction cost In relation to Productivity factor, the expert valuer considered Six Sigma methodologies and various advanced statistical and non-statistical tools. In relation to increase/decrease in software development cost, the expert valuer relied upon the analysis published on the website of livemint.com. The reference of website is given in the valuation report. Historical cost - PersonnelCost of Development 293,291 Based on management representation. Historical cost - Personnel Cost for Patent Invention 1,088,506 This comprises of cost of the Chairman & CEO - Mr. 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 of supplementary paperbook Historical Legal cost 1,365,480 Based on the invoices if Law firm M/s. Staas & Halsey LLP Washington D.C. engaged by the appellant company in relation to....
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....rnal page 19 of the report or page 43 of paperbook). Further, the invoice wise detail and copies of material invoices was placed before the CIT(A)- refer pages 314 to 322 of supplementary paperbook; The assessing officer never asked invoices of Satyam during the assessment proceedings. Detailed research and analysis was carried out by the expert valuer across similar industries and he found that productivity have been enhanced in the range of 3% to 5% per annum through path breaking and innovative changes in technology and manpower planning. The expert valuer thought it fit to err on the side of caution and take the lower range of productivity level at 3% per annum (refer 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. 2A. Personal Cost Development: - It was doubted as to why the salary of Chairman & CEO has been taken only for the period 1997-99 and not thereafter;....
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....osts have been considered in the entire period of 19982007. He was also involved in other CEO functions including fund raising, general administration, marketing and high-level decision making. As per management estimates a general assumption of 25% of his total time and cost has been made to Patent Costs. In so far as appellant's advisor was concerned, he was engaged for the first time in 2002 and therefore there were no cost prior to 2002. 50% of time is not considered in reproduction costs as the same was for patent litigation and enforcement strategy which is not pertaining to development of software. In relation to advisor - Mr. Patrick Nunally, details of his invoices as considered by the expert valuer is placed at pages 323 to 334 of supplementary paperbook. 10. 3. Legal Cost: - Historical Cost Method: Professional fee paid by Upaid for the year 2000 to 2007 has been taken in report without elaborating the person to whom it was paid and if the amount captures the full value. The amount captured is understated for the reason that the material on record suggests that litigation with Satyam continued even after 2007 and the initial settlement agreement....
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....cost has to be seen from opportunities that are available for a foreign company in foreign markets. 11. 5, Final Cost: - Cost sharing ratio has been taken between 3% to 5% of the reproduction cost computed at USD 19,299,445. To come to this figure of 3% to 5%, no comparable cases have been given and therefore, the figure adopted in the report is unsupported by factual cases. The value derived by Satyam was the right granted was de-minimus (minimal value) because of the following factors: -The limited right to use appellant patent is not a valuable right for Satyam. - Right granted to Satyam was not assignable or transferable. * -Satyam could not have commercially exploit the licenses given to it. Should they choose to do so, their ultimate client would be infringing the appellant's patents. -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 truncated and ring fenced; 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 liti....
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....valuer In para 9.7 [page 29-30], the assessing officer, inter alia, observed as under: - The appellant has permitted Satyam to utilize the IP; Satyam has made onetime payment to the assessee whereas Satyam will be using the software / patents for perpetuity without any payment in future. - Accordingly, the rate of 8% per annum will have to be aggregated for future years of use. Considering that the said software / patent will be used without any limit, it would be fair and reasonable to multiply it by at least ten. This multiple of ten will take care of onetime lump sum payment for say about fifteen years and will also account for the discounting for down payment by Satyam to the assessee. Thus, the rate applied would be 80% of the estimated reproduction cost of USD 38,598,890. It is submitted that the contention of the assessing officer is absurd on the face itself as the assessing officer has attributed 20% of the value of the license to the owner of the IP, i.e., the appellant and 80% to the licensee whose rights are severely truncated. The reasoning adopted by the assessing officer is that the license granted by the appellant to Satyam is a very valuable right fo....
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....on factor of 10 is completely baseless. 14. On bottom of page 30 of the assessment order, the assessing officer has mentioned that the claim of the assessee in the revised return is based on valuation report of Mr. Chetan Sharma is unsubstantiated since the valuation report of Mr.Chetan Sharma is of November 2014 while revised turn was filed in March 2014. The doubts raised by the assessing officer is completely baseless. The valuation was conducted by the expert valuer in March 2014 as has been confirmed by the valuer himself in certificate placed at page 259 of paperbook. The: valuer had mentioned that he was engaged by the appellant in December 2013 for valuation, which was completed around 25th March 2014 which was communicated to the management on the same date as it was needed to filed tax return in India. The signed report was, on request, sent in. November 2014. Being so, there cannot be any basis to doubt the action of the assessee in relying on the valuation report for filing the revised return. Be that as it may, even if the report is stated to be post facto, no adverse inference could be drawn on the valuation determined by the expert valuer on ....
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....y to the AAR order. 9. We find substantial merit in the aforesaid submissions of 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 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 evid....
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....rejected valuation report of expert on flimsy grounds is perverse, when in fact the AO has given logical reasons and detailed basis for rejecting the same in the assessment order? 2. This appeal is directed against the order of the ITAT dated 24 March 2023. The dispute appears to have arisen in the context of a valuation report which was submitted before the AO by the assessee. The AO for reasons recorded chose to debunk that report and made an ad hoc addition. It is this, which led to the ITAT to come to conclude that the assessment would not sustain. 3. We find from a perusal of the impugned order that the ITAT had also taken note of the rebuttal remarks and submissions as submitted by the assessee while seeking to assail the view taken by the AO and seeking re-affirmation of the valuation made by the expert valuer. 4. The ITAT has upon hearing submissions ultimately, proceeded to hold as follows: "9. We find substantial merit in the aforesaid submissions of 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 Offic....
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....n purely estimate basis, without being backed by any supportive evidence, we are inclined to reject such valuation of 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." 5. It is the aforesaid observations which appear to have fallen for adverse comment, albeit on a prima facie evaluation, by this Court as would be evident from the order dated 17 November 2023 wherein the following was observed: "3. A perusal of Paragraph 9 of the impugned order shows that while the Tribunal has deprecated the approach of the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [in short, "CIT(A)"] in donning the role of an expert valuer, the Tribunal has thereafter gone on to analyze the errors in the orders of the aforementioned authorities without the benefit of an expert. 4. Prima Facie, according to us, every adjudicating authority is entitled to reach its own conclusion after perusing the report of an expert. It is not mandatory, always, to deal with a valuer's ....
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.... no final directions have been received from the PCCIT on the names of the valuers and prayed for some more time. At the request of Department, appeal was adjourned to 07.08.2025. On the said date again, the Id. DR prayed for time stating that the Department is in the process of empaneling valuer for valuation of IPR. At the request of Department, appeal was adjourned to 24.09.2025. While adjourning the appeal, it was made clear that no further adjournment shall be granted on this issue to the Department. Despite specific directions, the Department neither appointed any valuer nor gave its consent to any "of the names proposed by the assessee. On the date fixed appeal was adjourned on the request of Department to 07.10.2025, 27.10.2025 and finally to 27.11.2025. More than sufficient opportunities have been granted to the Department to either propose the name of valuer or to select one of the names proposed by the assessee. The Department is silent and no action is visible on this front. Hence, we are now constrained to select one of the valuers from the names proposed by the assessee. The assessee has proposed the names of two valuers i.e. Shri Rajiv Singh, FCA a registere....
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....ented core. Software is like a body. Just as brain represents a tiny fraction of the body's total weight (approx. 2%), yet it controls 100% of the body's coordinated movement and intelligence. Without that 10% of patented code, the other 90% has zero functional or commercial utility. 2) The report applies a 60% Functional Obsolescence discount. It argues that the software was built between 1997-2002. By the Valuation Date in 2009, technology had shifted dramatically (rise of iPhones, cloud computing, etc.). Therefore, 60% of the original development cost is wiped out because the old code is considered obsolete and inefficient by 2009 standards. Further, the report concludes the technology was effectively dead by 2012 (3 years after the settlement), despite the patents being legally enforceable until 2019. Report argues that economic life of the technology was practically dead. AO's comments- If technology was economically exhausted, why would a commercial entity like Satyam Computers would pay $70 millions for a dead technology. Satyam is basically the developer of software. To Satyam, this patent allowed them to continue their existing global....
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.... the AO settled on 8% as a 'middle ground. He also cited the Tim Heberden report, which suggests a 'routine margin' of 8% for royalty and 4% for patents (totaling 12%). Here Satyam made a one-time, lump-sum payment for a perpetual license. Valuer report calculates value based on 3 years of life, Perpetual License requires a 'Capitalization of Earnings' approach. By applying an 8% fair return over a 10-year capitalization period, the 80% of the Reproduction Cast (i.e. 80% of $38M $30.8M) is the only figure that reflects the true economic transfer of a worldwide, irrevocable right. Based on the findings of the Assessing Officer, the valuation report is rejected for the reasons mentioned above, and the valuation of the patent is held to be US$ 30,879,112 as determined in the Assessment Order." 6. Both the parties reiterate their respective stands against and in support of the impugned royalty income addition of Rs. 159,30,53,388/- made in the Assessing Officer's assessment order as upheld in the lower appellate discussion. We deem it appropriate to emphasize here that the assessee had declared its royalty income at Rs. 3,16,68,603/- going by the above former val....