satyam_upaid

8/3/2019 Satyam_Upaid

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BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)NEW DELHI

12th Day of October, 2011

P R E S E N T

Justice Mr. P.K.Balasubramanyan (Chairman)Mr. V.K. Shridhar (Member)

A.A.R. No. 885 of 2010

Name and address of the applicant : Upaid Systems Limited,Trident Chambers,Wickhams Cay, Road Town,Tortola, British Virgin Islands.

Commissioner concerned : Director of Income-tax(International Taxation)

Hyderabad

Present for the applicant : Mr. P.J. Pardiwalla, Sr.AdvocateMr. Nitin Chaudhry, C.A.Mr. Himanshu Sinha, Advocate

Present for the department : Mr. Gangadhar Panda,Addl. DIT(Int. Taxation),Hyderabad

R U L I N G[By Justice P.K. Balasubramanyan]

The applicant is a company incorporated under the laws of British

Virgin Islands. It was previously known as In touch Technologies

Holdings Limited, the predecessor of which in turn was In Touch

Technology Limited. The applicant is engaged in the business of

providing and enabling Electronic Payment Services via mobile and fixed

line telecom and other telecom services networks. Over the years, the

applicant has been conceiving, designing and developing Software

Technology relating to payment processing platforms and services. In the

year 1966, a new framework for an advanced intelligent processing

platform was conceived of. In order to exploit that invention commercially,


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appropriate software had to be designed and developed. After developing

the design, the applicant outsourced the development of software to

Satyam Enterprise Solutions Limited. On 29.5.1997, a Memorandum of

Understanding was entered into in that behalf with Satyam Enterprise

Solutions Limited. Satyam Enterprise Solutions Limited subsequently

merged with its parent Satyam Computer Services Ltd. The obligations

under the MOU with the applicant were taken over by the parent Satyam

Computer Services Limited under the scheme of amalgamation. The

Memorandum of Understanding provided that Satyam would develop

certain Operation Support Systems software which included, inter alia,

products that came to be known as Call Manager and Net Manager.

2. On 11.9.1998 as Assignment Agreement effective from 1.1.1998

was executed between the parties whereunder Satyam, after receiving

good and valuable consideration, assigned to the predecessor of the

applicant in perpetuity all worldwide right, title and interest in the software

and Intellectual Property Rights and Copyright over the software

developed. The Assignment Agreement also assigned to the applicant the

right to seek patent protection for inventions and to own all patent

applications and letters patent or similar legal protection for such

inventions in all countries throughout the world. The Assignment

Agreement was executed in the United States of America and the

governing law was the law of the United States. On 15.9.1998, the

applicant filed a provisional patent application with the United States


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Patent and Trademark Office in respect of Call Manager and Net

Manager. Satyam, along with the Assignment Agreement had also

provided assignment letters from its employees who had worked on the

innovations sought to be patented. These letters were also relied on by

the applicant before the Patent Authority.

3. The Memorandum of Understanding entered into on 29.5.1997,

was then replaced by a Services Agreement dated 19.9.1999 made

effective from 15.9.1998 under which Satyam was to continue to provide

software development services to the applicant till the end of the year

2002. The Services Agreement reaffirmed that the predecessor of the

applicant would be the owner of the Intellectual Property Rights over the

software developed by Satyam.

4. There were some omissions in the application filed before the

Patent Authority. These omissions were rectified by Satyam at the

request of the applicant and a combined declaration was filed with the

Patent Authority. Being satisfied, the Patent Authority granted Patent

947 to the applicant on 20.11.2001. Other subsidiary applications in

respect of inventive work predicated in part upon 947 Patent were also

filed by the applicant before the Patent Authority. The entirety of the

patent portfolio of the applicant, according to it, is either wholly or partially

dependent upon 947 Patent.

5. During the interregnum, Satyam had acquired 22.06% equity in the

applicant as per the share issuance agreement executed in the year 1999


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in lieu of outstanding receivables. Disputes arose between the parties, a

settlement was arrived at and a Settlement Agreement dated 31.12.2002

was executed. By it, the share issuance agreement and the Services

Agreement between the parties were terminated. Satyam ceased to be

the contract software developer for the applicant. Satyam also almost

entirely divested itself of its shares in the applicant. The agreement

affirmed that the Intellectual Property Rights over the software shall be the

sole and exclusive property of the applicant. Satyam agreed to execute

any document that may be needed in furtherance of filing and maintaining

the applications relating to the Intellectual Property.

6. According to the applicant, it subsequently discovered certain facts

which led it to believe that some of the signatures in the inventors

assignment purportedly signed by the inventor employees of Satyam and

furnished to the applicant and filed by the applicant before the Patent

Authority, were not genuine but were forgeries. This discovery was made

during the proceedings initiated by the applicant for infringement of patent,

in Texas, USA in June 2005, against Qualcomm Incorporated and Verizon

Wireless, two telecom companies on the ground that those companies

had infringed the applicants 947 patent and subsequent patents while

developing their software platforms. It was in defence of those

proceedings that the two companies produced declarations from two

employees of Satyam involved in the developing of the software, that they

had not signed the employee assignment or the combined declaration


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furnished by Satyam to the applicant based on which the patent had been

applied for and obtained by the applicant. Having failed to get any

assistance from Satyam in proving the documents as genuine, the

applicant was forced to settle the proceedings for infringement

commenced against Qualcomm and Verizon on unfavourable terms. This

was done in April 2007.

7. On 4.4.2007, the applicant filed a complaint against Satyam in the

District Court of Texas. One of the employees of Satyam was also

impleaded. The complaint underwent two amendments and the third and

final amended complaint was filed in October 2008. In its complaint, the

applicant contended that on account of forgery, fraud, misrepresentation

and breach of contractual covenants by Satyam and its employees, the

value of its entire patent portfolio had been impaired and it was forced to

settle the action against Qualcomm and Verizon for infringement of patent,

on most unfavorable terms. It accused Satyam of breach of contractual

covenants and forgery. It sought the relief of a declaration as to the

validity and enforceability of its patent under the laws of the United States,

damages resulting from fraud/negligent, misrepresentation and/or forgery

by Satyam in providing documents containing forged signatures and in

breach of contractual covenants, exemplary and punitive damages for

fraud and forgery and for interest and costs. In defence, Satyam

disowned any responsibility for the alleged forgeries and defended the

action.


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8. Satyam, challenging the jurisdiction of the District Court, Texas to

entertain the complaint, approached the Queens Bench Division of the

Commercial Court, London contending that in terms of the settlement

dated 31.12.2002, the applicant was barred from pursuing its complaint in

Texas since the agreement made in the complaint stood extinguished by

the settlement and that in any event, the complaint fell within the exclusive

jurisdiction of the English Courts. The trial judge by judgment dated

1.1.2008 dismissed the action, finding that the subject matter of the

complaint was not extinguished by the settlement and that the Texas

Court had jurisdiction to deal with the complaint. The appeal filed by

Satyam was dismissed by the Court of Appeal. A Petition for Leave to

Appeal to the House of Lords filed by Satyam was also rejected. Thus,

the applicant was enabled to pursue its complaint in the District Court,

Texas.

9. To reconcile the differences arising out of the complaint, an attempt

at Mediation was made. The attempt succeeded and the parties entered

into a Settlement Agreement on 18.7.2009 signed in Dallas, Texas, USA.

It provided for the parties to sever all ties with each other forever and for

settlement of all claims and disputes between the parties. In satisfaction

of all the claims of the applicant, Satyam agreed to pay to the applicant an

amount of $ 70 million in two installments. The first installment of $ 45

million was to be paid within 10 business days of Satyam getting the

approval of its Board of Directors and of the Boards of other companies as


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may be necessary, of getting Governmental or Regulatory approvals as

may be necessary under India law, after putting forward its best efforts for

getting them. All payments were to be made by wire transfer to a bank

of Upaids Choosing. Then followed a provision for Escrow of Funds.

The same is quoted below.

3. Escrow of Funds.

a. Within 10 business days of obtaining board approvals

referred in paragraph 9(a), Satyam will deposit the

equivalent in Indian Rupees of the First Payment and the

Final Payment in an interest bearing escrow account or

accounts in India at a reputed international bank or Indian

nationalized bank as reasonably and mutually agreed for the

purpose of securing the payment obligations in paragraph 2.

b. In the event the First Payment is made on or before 180

days from the date of this Settlement Agreement, then

Satyam shall be entitled to the principal in the amount of the

First Payment and all accrued interest thereto.

c. In the even the First Payment is made more than 180 days

after the date of this Settlement Agreement, then Satyam

shall be entitled to the principal in the amount of the First

Payment and Upaid shall receive all accrued interest with

respect to the First Payment.


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d. After the First Payment is received, Satyam shall have the

right to replace the escrowed funds securing the Final

Payment with either a bank guarantee or letter of credit in

the same amount pending receipt of the Final Payment at

which time security shall no longer be necessary.

e. After the Final Payment is received, Satyam shall be entitled

to the principal in the amount of the Final Payment and all

accrued interest thereto.

10. The settlement agreement reiterated that they intended it to be a

full and final settlement of all disputes between the parties and that the

parties intended it to sever all ties between them and to end their

relationship forever. It then proceeded to provide:

Subject to the fulfillment of paragraph 9 of the Settlement

Agreement, all prior agreements or understandings between the

parties or any of their respective present or past officers, directorsor employees, regarding any matters whatsoever are

extinguished, including the Assignment dated September 11,

1998, the Services Agreement effective as of September 15,

1998, the Share Issuance Agreement dated September 1, 1999,

the previous Settlement Agreement between the parties effective

as of December 31, 2002, any assignments between or among

Satyam, Upaid and/or individual present or former employees of

Satyam and any amendments to such agreements.Notwithstanding this provision, Upaid shall retain whatever

intellectual property rights have already been transferred to it

under any assignment or agreement strictly on an as is or

quitclaim basis without Satyam or its present or former employees

making any representation or warranty about such transfer or


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having any further obligation to perfect such transfer. Upon

dismissal with prejudice of this action, Satyam waives its rights to

preclude former employees from having contact with Upaid under

any nondisclsoure agreements signed during the pendency of this

action to the extent necessary for Upaids patents.

It was also provided:

8. Upaid will grant a perpetualworldwide, royalty free license on

all of its patents, pending patents and any future patents to

Satyam and its affiliates, including Tech M and M&M. Such

royalty free license shall not be assignable. In addition, Upaid

covenants not to sue British Telecommunications (BT) and AT&T

for patent infringement or any other claim related to its patents.

11. Thus, the payment made was for extinguishment of all rights and

obligations between the parties, for severing their business relationship

arising out of prior agreements, towards compensation for deficiency in

its patent found to exist by the applicant, for grant of perpetual world

wide royalty free licence by the applicant on all its patents, pending and

future to Satyam, subject to Satyam not having a right to assign the

licence. An undertaking of forbearance to sue two of the affiliates of

Satyam by Upaid was also incorporated.

12. Satyam did not pay the amount by wire transfer to a Bank of

Upaids choosing, but it deposited the amount into an escrow account.

Satyam seems to have insisted that it was entitled to deduct the taxes

from the amounts to be paid and that the responsibility for tax was that of

the applicant. The applicant adopted the stand that the compensation

agreed to be paid was liable to be paid without deduction of tax and the


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liability for tax, if any, should be borne by Satyam. To establish its

stand, Satyam moved the Supreme Court of the State of New York

seeking a declaration that it was entitled to deduct the taxes from the

amount to be paid. The applicant resisted that claim. It was in this

context that the applicant approached this Authority for an Advance

Ruling by invoking Section 245Q of the Income-tax Act. This Authority

allowed the application for giving a Ruling on the following questions:

(i) Is the amount receivable by the applicant from M/s. Satyam

Computer Services Ltd. (Satyam), in accordance with Paragraph

2 of the settlement agreement entered between the applicant and

Satyam on July 18, 2009 at Dallas, USA, a capital receipt in the

hands of the applicant?

(ii) If the answer to question (i) is in the affirmative, can the said

amount be treated as income under any of the specified heads

provided in the Income-tax Act, 1961 (Act)?

(iii) If the answer to questions (i) and (ii) are in the affirmative, can the

said amount be considered to accrue or arise or deemed to

accrue or arise in India or upon its receipt, can it be considered to

have been received or deemed to have been received in India?

(iv) If the answers to all the above questions are in the affirmative,

what would be the basis and method of determination of taxable

income and applicable tax rate thereon?

(v) If the answer to question (i) is in the negative, i.e. the said amount

is found to be in the nature of revenue receipt, can the said

amount be considered to accrue or arise or deemed to accrue or

arise in India or upon its receipt, can it be considered to have

been received or deemed to have been received in India?


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(vi) If the answer to question (v) is in the affirmative, is the said

amount taxable under the Act?

(vii) If the answer to question (vi) is in the affirmative, what would be

the basis and method of determination of taxable income,

applicable tax rate and applicable rate of deduction of tax at

source thereon?

(viii) If the said amount is held to be taxable under the Act, and if the

court of competent jurisdiction in New York, USA holds that

Satyam is contractually bound to bear the tax payable on the said

amount, would Section 195A of the Act be applicable for the

purpose of determination of income on which tax deduction at

source will be effected?

(ix) Even if said amount is held to be taxable under the Act, and

regardless of the outcome of the adjudication given by the court of

competent jurisdiction in New York, is Satyam legally bound to

satisfy the judgment-debt arising from the afore-mentioned

settlement agreement by paying the entire amount specified in

Paragraph 2 of the aforesaid settlement agreement without any

deduction of tax to the applicant?

(x) Is the interest receivable by the applicant in terms of Paragraph

3.c of the afore-mentioned settlement agreement taxable income

under the Act and would such income be subject to tax deduction

at source under the Act?

13. Before proceeding to consider the various questions posed, it

seems proper to set down some of the findings by the Courts which may

have a bearing on the questions falling for our Ruling. The Court of

Appeal has noticed that the trial judge found that the Assignment

Agreement undoubtedly assigned the inventions and intellectual property

rights which were the subject of the provisional patent application filed


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on that date and contained co-operation obligations upon Satyam which

were intended to enable Upaid to protect those conventions and rights.

It further noticed the finding that:

the Assignment Agreement was not the subject matter of theSettlement Agreement, but was expressly preserved in full by itsterms.

The Court of Appeal then recorded its finding:

My conclusion on this short point is that the object of clause 3.1

was to ensure that Upaid retained all relevant intellectual property,

and clause 3.1.(b) is not limited to confirmation of past assignments

in the sense of transfers of property. The relevant term is will

survive and shall be governed and I am satisfied that that means

that the assignments will continue to apply in accordance with their

terms.

14. On how the right was dealt with under the Settlement Agreement,

the Court of Appeal held:

The construction point is a short one, and I agree with the Judge. Iaccept Mr. Foxtons submission that it is plain (and common ground) thatin commercial terms intellectual property was very important to the partiesand was treated separately in the Settlement Agreement. Since theAssignment Agreement was concerned exclusively with intellectualproperty it made commercial sense not to include it within the releases.

15. Thus, it is clear from this interparties judgment, which has become

final, that the parties dealt with separately the intellectual property rights

which was important to both and which had been taken assignment of

earlier by the applicant.

16. Clause 5 of the Settlement Agreement dated 18.7.2009 recognised

the right of the applicant to retain all intellectual property rights in the


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software created and under clause 8 the applicant granted to Satyam a

license on all its patents, pending and future to use the patents. No doubt,

it was described to be royalty free license.

17. The question that arises is what is the nature of the payment made

or to be made by Satyam to the applicant under this Settlement. It is

clear that various claims were involved in the complaint leading to the

settlement. The breach of obligations on the part of Satyam, complaint of

fraudulent conduct, compensation for a dent in their patent right by having

to concede the right to Qualcomm and Verizon and the costs involved in

the litigation with them and the grant of a license to Satyam to use its

patents perpetually, all formed components of the compensation agreed

upon.

18. During the hearing under section 245R(4) of the Act, it was first

submitted on behalf of the applicant that the Supreme Court of the State of

New York has upheld the claim of Satyam by holding that it was entitled to

withhold the taxes from out of the amount to be paid to the applicant under

the Settlement Agreement. This was subsequently re-affirmed by

communication dated 11.8.2011 with a prayer to withdraw question no.

(viii) from the questions admitted for a ruling. The court has decreed,

Adjudged and declared that the Settlement Agreement requires that

Upaid Systems Ltd., must cooperate with IDBI Bank to allow IDBI Bank to

withhold taxes from the $ 70 million Settlement Account in the Settlement

Agreement in anticipation of there being a tax obligation on Upaids part to


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the Indian Government authorities. We think that the proper course to

adopt is to clarify that the parties will be bound by the adjudication of Court

inter-parties now rendered, subject to any modification thereof in appeal or

further appeal therefrom.

19. Learned counsel for the applicant submitted that the compensation

to be paid by Satyam to the applicant is in the nature of a capital receipt

and not revenue receipt. We find that the Revenue has not joined issue

with the applicant on this aspect. It has also taken up the position that it

is a capital receipt, but has contended that it has to be taxed under the

head Capital Gains and that the gain has accrued in India.

20. Alternatively, it is contended that a part of the payment had to be

attributed to the grant by the applicant of a license to Satyam to use the

patent for all times to come and that part was liable to be taxed as royalty.

It is asserted that the payment by Satyam to the applicant has three

components.

1. Regularisation of unauthorized usages of software IPRs by

Satyam and its affiliates till the date of settlement.

2. Indemnification of damages suffered by Upaid on account of,

misrepresentation by Satyam and its employees in relation

to IPRs that are the subject matter of the settlement

agreement and;

3. Continued usage of patents after the date of settlement,

including usage of future patent rights.


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21. Of the above, the second component would spell in the realm of

capital receipt and components 1 and 3, payment for the earlier use and

the right to use the software in future might amount to royalty.

22. The settlement agreement, no doubt, recites that the liecense

granted to Satyam on all its patents, pending patents and any future

patents was royalty free. Does this recital by itself conclude the issue?

According to the applicant, it does and according to the Revenue, it does

not. It remains for us to consider it.

23. In the application, the applicant has set down the various heads as

comprised in its claim against Satyam made in the Taxes Court leading to

the mediation and settlement. The first is a declaration on the authenticity

of the signatures furnished by Satyam and a declaration of the legal status

of all its patents. The second is actual damages arising from fraud and/or

negligent misrepresentation involved in its having to give up its claim for

patent violation against Qualcomm and Verizon. The third is based on

alleged breach of the Assignment Agreement by Satyam resulting in

pecuniary loss. The fourth is damages for the defect in title to the patents

conveyed to it by Satyam. The fifth and sixth counts are for actual and

statutory damages under the concerned US Federal statute. The

seventh head of claim was punitive and exemplary damages for alleged

forgery and the eighth was for costs of all legal proceedings having to be

waived by Upaid including in the proceeding that was initiated, leading to


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the settlement. It was in the context of these claims that the settlement in

question was arrived at and Satyam agreed to pay $ 70 million while

obtaining a license for use of the patents of Upaid, world wide and in

perpetuity as it were. This was obviously something bargained for and

secured by Satyam.

24. There is no divestiture of title of Upaid to the patent and the

Intellectual Property Rights over it, earlier assigned to it by Satyam. It

does not, therefore, appear that any capital gain arises to the applicant out

of this transaction. What it has obtained is compensation for the imperfect

title to the patent earlier conveyed to it by Satyam and also for the conduct

of Satyam in leading to that situation and the costs that had to be incurred

by it in initiating legal proceedings against Satyam itself. Thus, it is not

possible to accept the argument that the applicant has earned an income

by way of capital gains taxable in India.

25. The amount quantified as compensation takes within its fold the

consideration paid by Satyam to the applicant for 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.


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26. The settlement Agreement dated 18.7.2009 recits that this grant of

perpetual worldwide right is without consideration. It is submitted that the

recital is conclusive and the Revenue cannot go behind it. On going

through the settlement deed, it is clear that the rights acquired and

secured by the applicant over the software, a literary work, and according

to the Revenue, a process as well, is acknowledged and reaffirmed. In

turn, the applicant gives a right to Satyam to use that right in perpetuity.

The recital that it is done for no consideration can only be viewed as an

attempt to avoid payment of tax on that part of the transaction. This

Authority has necessarily the power to see whether there is an attempt to

avoid the net of taxation. In the commercial world it is not normal to part

with such a valuable right for no consideration unless special

circumstances exist. Here, as a matter of fact, the applicant and Satyam

were severing all business relationship between them by entering into this

settlement. In the circumstances, the plea that the valuable right was

given away is not acceptable. The Court of Appeal has noticed how the

two parties wanted to keep this valuable right secured 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


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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 atleast 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 right to use the patented software for all time to come.

27. Then arises the question, as to what part of the compensation paid

by Satyam to the applicant ought to be attributed to the license of the right

to use the patented software and any improvement to be made on it.

Counsel for the applicant while standing firm in his argument that no

portion is taxable, suggested, in case we come to the view now taken, that

the assessing officer may be directed to determine the portion that may be

attributable to royalty and thereafter he may be directed to consider the

question whether that will be taxable in terms of Section 9(1)(vi) of the Act.

In the absence of adequate material available before us, we think that it

will be appropriate to accept this suggestion made by counsel for the

applicant. We reiterate that this suggestion was made by counsel without


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prejudice to his main contention that no part of the $ 70 million was

taxable, which contention we have rejected.

28. Other than the royalty segment of the $ 70 million to be paid by

Satyam to the applicant, we find that the rest of the compensation will be

capital receipt, but not a capital gain. It is not shown that any part of such

capital receipt is taxable under the Income-tax Act. Therefore, it has to

be ruled that the compensation paid other than the portion attributable to

royalty will not be taxable in India.

29. In the light of the above reasoning, we rule as follows on the

questions:

(i) The answer is that (subject to taxability of a portion as

royalty) the compensation of the $ 70 million paid by

Satyam to the applicant would be capital receipt in the

hands of the applicant.

(ii) In the light of the ruling on question no.(i) and the

finding that no capital gain is involved, the ruling is that the

amount less that portion attributable to royalty, cannot be

treated as income under any of the specified heads under

the Income-tax Act.

(iii) Other than the part of the compensation attributable

to royalty, the balance cannot be considered to be income

accruing or arising in India to the applicant.


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(iv) The issue is as to what would be the basis and

method of determination of the taxable income and the

applicable rate of tax thereon. The question regarding the

apportionment of the compensation and earmarking a

portion of it towards royalty has been left to be decided by

the Assessing Officer as suggested by senior counsel for

the applicant. The Assessing Officer will decide that

question. The determination of the taxable income and the

applicable tax rate will be decided by the assessing officer

after considering the relevant materials, if necessary after

calling upon the applicant to produce the same and after

hearing the applicant.

(v) Does not arise since other than the royalty segment of

the compensation, the rest is capital receipt not taxable in

India.

(vi) is also ruled on the same lines as (v).

(vii) Will be determined by the Assessing Officer, after

hearing the applicant.

(viii) In the light of the decision rendered by Supreme

Court of New York holding that Satyam is entitled to deduct

the tax payable on the compensation to be paid, the ruling

on this question is that the parties will be governed by that


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decision subject to any appeal they may have against the

decision in the appropriate court.

Counsel for the applicant submitted that the applicant

has not been able to withdraw any portion of the amount in

the Escrow account because of the dispute and as a

measure of safeguarding the interests of both sides, as an

interim measure, it may be directed that 10% of the amount

of $ 70 million may be deducted, without prejudice to the

contention of the applicant that no portion of the amount is

taxable and the balance released to the applicant. We

find that adopting such a course would not prejudice the

revenue because ultimately what would be taxable, would

only be the royalty element and interest as ruled in answer

to question (x) in the total compensation and deduction of

10% of $ 70 million would be adequate to cover the tax that

may be found to be due if the liability to tax a portion is

ultimately found. Therefore, we rule that the concerned

bank will be free to deduct 10% of the entire amount in

terms of Section 195 of the Act and release the balance to

the applicant from the Escrow account.

(ix) Though it was initially argued that what was involved

was a judgement debt and hence the entire amount was

liable to be paid to the applicant without deduction of any


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tax, it was not shown to us that the settlement arrived at by

the parties was made a rule of Court and hence the liability

metamorphosed into a judgement debt. We, therefore,

decline to rule on this question.

(x) The amount deposited in the Escrow account by

Satyam has earned interest. The interest is earned in

India. The applicant is now entitled to receive that interest

alongwith the principal in two instalments. We accept the

contention of the Revenue that this interest portion is

taxable in India as that is income arising in India. It is,

therefore, ruled that the interest earned on the deposit in

Escrow is taxable in the hands of the applicant.

30. Accordingly, the ruling is pronounced on this 12th day of

October, 2011.

Sd/- Sd/-(V.K. Shridhar) (P.K. Balasubramanyan)

Member Chairman

F.No. AAR/885/2010 Dated, the

This copy is certified to be a true copy of the Ruling and is sent to:

1. The applicant.2. The Director of Income-tax (International Taxation),Hyderabad3. The Joint Secretary, (FT&TR-I/II), CBDT, New Delhi.4. The Guard File.

Sd/-(Nidhi Srivastava)

Addl. Commissioner of Income-tax, AAR


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