M/s. Upaid Systems Ltd. vs DCIT, Circle-3(1)(2), International Taxation

At the outset, we proceed to deal with the admissibility or 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.

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 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 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/-.

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 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.

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 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.

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. 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.

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 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:

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 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 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.

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 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 addition so made was confirmed by learned Commissioner (Appeals).

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 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:

G.L. Sultania and Anr. Vs. SEBI (AIR 2007 SC 2172)

CIT Vs. Bharti Cellular Ltd., 330 ITR 239 (SC)

Hindustan Lever Employees' Union Vs. Hindustan Level Ltd., 1995 AIR (SC) 470

Shreyans Industries Ltd. Vs. JCIT, 277 ITR 443 (P & H HC)

Cinestaan Entertainment (P.) Ltd. Vs. ITO, 170 ITD 809 (Delhi Trib.)

PCIT Vs. Cinestaan Entertainment Pvt. Ltd., ITA No.1007/2019 (Delhi HC)

Urmin Marketing Pvt. Ltd. Vs. DCIT, [2020] 122 taxmann.com 40 (Ahd.)

Pramila M Desai, HUF Vs. DCIT, ITA No.04/Ahd./2012 (Ahd. Trib.) affirmed by Gujarat High Court in [2014] 221 Taxman 158

CIT Vs. Manjulaben M. Unadkat, 229 Taxman 531 (Gujarat)

Shri Rajendra H. Seth Vs. ACIT, ITA No1495/Ahd/2007 (Ahd. Trib.)

Sosamma Paulose Vs. JCIT, 79 TTJ 573 (Coch.)

Rameshwaram Strong Glass (P.) Ltd. Vs. ITO, [2018] 172 ITD 571 (Jaipur)

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 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, 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.

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.

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 public domain, which are as under:

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.

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.

Mr. Chetan Sharma is a chief curator of the popular Mobile Breakfast Event Series and the Mobile Future Forward Executive Summits.

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.

Mr. Chetan Sharma is regularly invited by various US government agencies to speak on wireless data and security related matters.

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.

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.

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.

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.

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.

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.

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.

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 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:

supplementary paperbook Opportunity Cost6,334,891In accordance with valuation principles and on the basis of various studies e.g., Traditional Intangible Assets Valuation 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 development services for software and system integration projects related to software products.

While applying the Cost Method, the Historical cost considered by the expert valuer are as under:In para 9.5 [page 24 onwards], the assessing officer has alleged following infirmities in respect of some of the variables adopted by the valuer:Each aspect dealt separately below: 7.-Development Costs: $12,684,982 - Personnel Costs Development: $293,291 - Personnel Cost— Patents: $1,088,506 - Legal Costs: - $1,365,4801. Development cost: No detailed break-up with reference to invoice has been given and therefore, the Veracity of amount USD 12,684,982 is not proved - No basis for adopting productivity level @ 3% - Billing rates of Infosys and Wipro @ USD 21 per hour in 2009 is difficult to accept as cost of USD 23.5 per hour was paid in 1998-2000The year-wise break- up of the aggregate amount of $12,684,982 is given in the valuation report (refer internal 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; why salary of Sr. VP— Technology has been, taken only for 2 years and not prior to 1999-00 and after 2000-01; why salary of Chief Platform Architect has not been considered prior toThe IP Expert Valuer has exercised abundant care and diligence to include all costs pertinent and germane to the Valuation of License Fee for a Limited Right to use Upaid's Patents. It is respectfully submitted that - Costs of Chairman & CEO have been taken till 1997 to 1999 as it was only then was he actively involved in interacting with Satyam on the Development Contract. Thereafter, other people were employed by the appellant to perform this function and the Chairman & CEO shifted his time and energy on other functions of the organization such as on overall strategy and management, fund raising and on patent portfolio. _ The salary of VP-Technology was not taken prior to 1999-2000 .as he was engaged for the first time during 1999-00 2000-01; and why salary of Product Development Manager has not been prior to 2001-02 - The reproduction cost cannot be computed merely by adjusting historical cost to inflation especially considering that the salaries in IT industries were at boom till 2009 - The Salary of Chief Platform Architect was not considered prior to 2000-01 as this position was created for the first time in that year. - The Product Development Manager was appointed for the first time in 2001-02 and thus his cost was captured for the first time in 2001-02. - The standard methodology under reproduction cost is to adopt a rationale and consistent basis which is designed to eliminate extreme tendencies and limits. The selection of consumer price index and cost inflation index tends to find a regular median which is free from wide fluctuations and subjective assumptions. In any case actual cost have been taken and adjusted for inflation, which is an internationally accepted method. 9. 2B. Personal Cost Patents - The reports states that salary of Chairman & CEO prior to 2001 is considered on best estimate basis. Thus, it shows that prior to 2001, even the Upaid is not clear of the extent of salary which deserves to be captured on this account. The component of 25% in the case of Chairman & CEO and 50% no rational basis. The Chairman & CEO was involved in the broad strategy and vision of the Upaid's IP Patent Portfolio. His costs have been considered in the entire period of 1998-2007. 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 These amounts were paid to a law firm, M/s Staas & Halsey LLP in Washington D.O who were patent attorneys responsible for patent registrations and filings. Detail of invoices filed before lower authority is at pages 335 to 382 supplementary paperbook. The reason for considering costs only till 2007 was because the last patent US7308087 was filed on 11.12.2007 (refer internal page 6 of valuation report page 30 of paperbook). As regards litigation and settlement cost, it may be noted that the same bears connection and correlation with registration and 'development of patents/ software license granted to Satyam and thus cannot understated for the reason that the material on record suggests that litigation with Satyam continued even after 2007 and the initial settlement agreement was arrived on 18.07.2009. - Reproduction cost: same as 2A above 4. Opportunity Cost: - The rate applied should have been with reference to Indian perspective where the software was developed rather than the US Treasury Bond Rates. It needs no elaboration that the Bond yields in India are historically higher than that the USA be attributed to value of the license. Substantial legal expense were incurred by the appellant in respect of suits against Satyam, Verizon and Qualcomm etc. The payments were made to various attorney's/ law firms such as Foley & Lardner LLP, Patton Boggs LLP, and Freshfields Bruckhaus Deringer LLP for such litigation which cannot be attributed to development, of software. The summary of major legal expenses are as under: Name of Law FirmPeriodCost not related to Patent development (USD) Stass & Halsey LLP2000 to 2007- Foley & Larder LLP2005 to 20063.44 million Patton Boggs LLP2007 to 20097.55 million Freshfields Bruckhaus Deringer LLP2007 to 20083.07 million Total14.06 million The agreements between the appellant and Satyam were never subject to Indian law; initial IDC Agreement entered was per laws of Washington D.C. USA; final settlement agreement (18.07.2009) and supplementary settlement agreement (06.01.2012) were also entered into as per the laws of New York, USA. Upaid was the entity that made payments to Satyam for development of software. Has this not been done, it would have possibly deployed the funds in US Treasury Bonds being a foreign company. Being so, it is abundantly clear that the opportunity 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 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.

Reproduction cost is computed at $19,299,445 by the expert valuer as under: - Development Cost: $9,769,036 - Personnel Cost- Development: $422,068 - Personnel Cost- Patents: $1,220,719 - Legal Costs: $1,552,731 - Opportunity Costs: $6,334,891In para 9.6 [page 29], the assessing officer has doubled the reproduction cost to $38,598,890 observing that there could be several other expenditures which have not been captured by the valuer and are relevant for purposes of development of software, its patenting and related litigation and thus the valuation suffers from inconsistencies and inaccuracies.As explained in detail supra, the expert valuer has duly considered all the expenses relevant for the purposes of development of the software and patenting of the same. Further, the allegations made by the aforesaid with respect of items of cost and its attribution are completely baseless as has been dealt supra. Further, the ad-hoc exercise of the assessing officer in doubling the expenditure taken by the expert valuer is grossly perverse and not based on any logical or rational basis. It is reiterated that one must not doubt the report of the technical expert on the subject, that too one of the best in the world, on basis of mere conjectures and surmises. Being so, the same deserved to be reversed at all threshold. 13.Cost attribution rate taken at 3% to 5% by the expert valuerIn 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. ThisIt 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 for Satyam which the latter can use in perpetuity and forever. This fundamental premise is completely flawed for the reasons explained above summarized hereunder: -The right cannot be transferred or assigned by Satyam; -It cannot be commercially exploited or lead to generation of revenue as opined by the valuer; Satyam's admission that the license granted by appellant had no enduring economic benefit to it is evident from the treatment in their annual report where the amount paid has been expensed off, instead of recognition of asset in terms of Accounting Standard 26 had there been an expectation of flow of any economic benefit from the license received by Satyam. 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.In view of the aforesaid, the aforesaid attribution made by the assessing officer is completely baseless and alien to any logical basis. Further, the rate of 8% adopted by the assessing officer has no justifiable basis and shall be disregarded. The license granted as de-minimus value which can be computed by attributing maximum of 3%-5% of reproduction cost, as opined by the expert valuer. 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.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 ofThe 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 paperback. The: valuer had mentioned that he was engaged by the appellant in December 2013 for valuation, which was completed around 25^th 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. November 2014 while revised turn was filed in March 2014.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 sound and logical basis. 15.Expert valuer has given a range of value — US $5,78,983 to US $9,64,972. The assessee has adopted a value of US $6,13,810Assessing officer has, After applying, 80% to reproduction cost of USD 38,598,890 worked value of license granted at $30,879,112 (-30 million)As explained above, the reproduction cost doubled by the assessing officer on adhoc basis; and rate of 80% applied is ex-facia and patently erroneous. It is further submitted that as per the aforesaid attribution 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. (ix) Grant to Satyam a royalty free, non-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.