M/s. Sasken Technologies Limited, Bangalore V. Joint Commissioner Of Income Tax, Special Range - 6, Bangalore

ITA 2546/BANG/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 6622 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2016-2017
• Appeal Filed On: 16-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Capital asset; Business income; Opportunity of being heard; Cost of acquisition; Capital receipt; Capital expenditure; TDS; Set aside; Capital Gains
• Section: 154; 2(14); 142(1); 10AA; 234B; 192; 64; 48; 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER ITA No.2546/Bang/2019 Assessment year : 2016-17 M/s. Sasken Technologies Limited, No.139/25, Ring Road, Domlur, Bengaluru-560071. PAN : AAECS 6424 R Vs. JCIT, Special Range – 6, Bengaluru. APPELLANT RESPONDENT Appellant by:Shri. Padam Chand Khincha, CA Respondent by :Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru. Date of hearing:09.03.2022 Date of Pronouncement:16.03.2022 O R D E R Per N.V. Vasudevan, Vice President This is an appeal by the assessee against the order dated 27.11.2019 of CIT(A), Bengaluru -10, relating to Assessment Year 2016-17. 2. Ground No.1 raised by the assessee is general and calls for no specific adjudication. Grounds Nos.2 and 3 raised by the assessee is with regard to the issue whether the gain on sale / Assignment of Intellectual Property Rights (IPR) is assessable to tax at all and if so assessable to tax whether it has to be assessed to tax under the head “Income from Business or Profession” or “Capital Gain”. ITA No.2546/Bang/2019 Page 2 of 31 3. The facts and circumstances under which the aforesaid issue arises for consideration are that the assessee is in the business of rendering software development services (SWD services) and software development products (SWD products). This would be evident from Resources from Operations as shown in the profit and loss A/c which as described in Note 20 to the Notes to the financial statement which gives a break-up of revenue from operations as revenue from “software products” and from providing “SWD services” and SWD products in communications and devices. 4. Spreadtrum Communications Inc (Spreadtrum) Shangai, China, is a company incorporated in China and is engaged in manufacturing semiconductor mobile chipset platforms for smartphones. 5. In the year 2003, the Chinese Government chose Time Division Synchronous Code Division Multiple Access (TD – SCDMA) as the official Chinese 3G standard for the transmission of wireless transmission of voice and data and identified Spreadtrum as a chipset designer capable of implementing that standard. Spreadtrum commenced its efforts to develop and commercialize a chipset that world support and implement the TD-SCDMA standard. Part of that effect required the development of a protocol stack, which consists of several layers of hardware and software necessary for the exchange and transmission of data and voice within the TD-SCDMA cellular network. Spreadtrum entered into partnership with the assessee primarily for the reason that assessee had a fully developed Wideband Code Division Multiple Access (WCDMA) protocol stack and was willing to contribute the source code, documentation and testing documents of that protocol stack to the joint development efforts with Spreadtrum. The assessee and ITA No.2546/Bang/2019 Page 3 of 31 Spreadtrum also agreed to share the source code of the protocol stack that was to be jointly developed, i.e., the IPR in the software that would be developed. 6. An agreement dated 30.05.2005 was entered into between the assessee and Spreadtrum whereby it was agreed that the Spreadtrum will jointly develop protocol stack software for layers 2-4 of the protocol stack. The software that was to be so jointly developed was referred to as “Foreground IPR”. The assessee and Spreadtrum were to be regarded as joint owners of the “Foreground IPR”. The Assessee was required to contribute its WCDMA source code, together with technical and testing documents, to the joint development project ("JDP"). In addition, it was required to provide up to ten engineers in Shanghai, China to work with the Spreadtrum engineers on the project. The Agreement also called for the parties to develop a Statement of Work which would establish the scope of the JDP and each party's responsibilities. Finally, the Agreement set forth a payment schedule whereby Spreadtrum would pay a Development Fee to Sasken on various milestone dates, such as completion of critical testing, and would also pay a running royalty as follows: For 0-1500K units: no royalty For 1500K-2 million units: $0.50 per unit For 2-5 million units: $0.30 per unit Above 5 million units: $0.25 per unit The per unit payments were to be made for the shipment of each unit of the Spreadtram Product. Spreadtrum Product is defined by Section 1.12 of the Agreement as "a product shipped by Spreadtrum that contains the Spreadtrum Chipset and the Foreground IPR. ITA No.2546/Bang/2019 Page 4 of 31 7. The agreement between assessee and Spreadtrum was modified in 2007 and 2010. Spreadtrum did not report to assessee sales of chipsets containing Foreground IPR and failed to pay royalties arising from these sales. Arbitration proceedings were initiated by the assessee before the “International Centre for Dispute Resolution”, Sanfrancisco, USA, which by an Award dated 27.06.2014 allowed the claim of the assessee as follows: “IV. AWARD AND CONCLUSIONS 1.The Agreement remains in full force and effect. 2.Any Spreadtrum Product containing some portion of the Foreground IPR is royalty bearing pursuant to Section 3.02 of the Agreement. 3.Since January 1, 2012, the per unit royalty rate for all shipments of a Spreadtrum Product is $0.25 per unit. 4.Pursuant to Section 3.03 of the Agreement, Spreadtrum is required on a quarterly basis to Saskenwith a written report reflecting all shipments of Spreadtrum Products during the quarter (“royalty report”). Spreadtrum has breached the Agreement by failing to provide a royalty report since the first quarter of 2012. Spreadtrum is ordered to provide Sasken with the required royalty reports commencing with the second quarter of 2012, and it shall continue to do so until its obligation to provide royalty reports is terminated by an agreement of the parties or by the terms of the Agreement as defined herein. 5.Spreadtrum has breached Sections 3.02 and 3.03 of the Agreement by failing to pay Sasken $0.25 for each Spreadtrurn Product it has shipped since January 1, 2012; 6.The amount of unpaid royalties, together with appropriate interest, due and owing by Spreadtrum to Sasken from January 1, 2012 through April 18, 2014 is $31,771,282. Spreadtrum is ordered to pay this amount to Sasken within thirty days from the issuance of this Final Award, Spreadtrum is further ITA No.2546/Bang/2019 Page 5 of 31 ordered to continue to pay royalties, together with interest if appropriate, to Sasken until such time as its royalty obligation under the Agreement is terminated by an agreement of the parties or by the terms of the Agreement as defined herein. 7.Spreadtrum is ordered to within thirty days from the issuance of this Final Award provide Sasken with the source code for the Foreground IPR as it existed on June 30, 2007. Spreadtrum has no further obligation to provide or flow back Foreground IPR source code to Sasken and Sasken's Claim to have Sasken do so is denied. 8.It is no longer commercially feasible for Spreadtrum to use Foreground IPR in its baseband chipsets. Spreadtrum may at its discretion replace all Foreground IPR with new, independently developed code. Spreadtrum's royalty obligations shall continue until such time as it replaces all of the Foreground IPR currently being used in its chipsets or until such time as the obligation is terminated by an agreement of the parties or by the terms of the Agreement as defined herein.” 8. Even after this award, assessee and Spreadtrum had disputes. Assessee Spreadtrum decided to put an end to these disputes and mutually entered into a Settlement Agreement dated 21.03.2016. We have already seen that assessee held IPR in WCDMA protocol stack which was contributed by it towards development of Foreground IPR. The IPR so contributed by the assessee is referred to as “Background IPR” in this Settlement Agreement. We have also seen that the IPR in “Foreground IPR” that was agreed to be jointly developed by the Assessee and Spreadtrum was to be jointly owned by the assessee and Spreadtrum. In the course of joint development of Foreground IPR, both the assessee and Spreadtrum became aware of information other than Foreground IPR. The information is referred to as “Foreground Information”, in this Settlement Agreement, Spreadtrum paid assessee a sum of Rs.2,98,96,35,130/- on 15.03.2016 to the assessee for becoming joint owner of independently owned IPR of assessee and Foreground Information Clause 3.1 of this Settlement Agreement provides for assignment of joint ownership of ITA No.2546/Bang/2019 Page 6 of 31 independently owned IPR and Foreground Information. Clause 3.2 provides that as a result of assignment pursuant to clause 3.1 each party can use all or any portion of the independently owned IPR and Foreground Information without payment of any compensation or any other obligation to the other party. The relevant clauses 3.1 to 3.3 of this settlement agreement, reads thus: 3.1. Contingent upon the payment of the amounts due, parties agree that the independently Owned IPR and rights in and to the Foreground Information will be independently owned by each party and to the extent a party has any ownership rights in any Independently owned IPR and such rights in and to Foreground information, such party hereby assigns to the other party an equal and undivided interest in all such independently owned IPR and rights in and to Foreground Independently Owned IPR or Foreground Information to the other party. 3.2. The parties agree that as a result of the assignment pursuant to the above, each party can use all or any portion of the Independently Owned IPR and Foreground Information under the rights so assigned, without payment of any compensation or having any other obligations to the other party. Such use includes but is not limited: (a) making, having made, copying, using, selling, offering for sale, licensing, importing, exporting, or otherwise disposing of all or any portion of the Independently Owned IPR to Foreground Information whether on a stand-alone basis or as entirely or partially contained in or embodied by any products; (b) licensing others to make, have made, copy, use, sell, offer for sale, license, import, export, or otherwise dispose of all or any portion of the Independently Owned IPR or Foreground Information whether on a stand-alone basis or as entirely or partially contained in or embodied by any products; and (c) making derivative works from the Independently Owned IPR or Foreground Information and making, having made, copying , using, selling, offering for sale, licensing, importing, exporting or otherwise disposing of all or any portion of such derivative works whether on a stand-alone basis or as entirely or partially contained in or embodied by any products. 3.3. Contingent upon payment of the amounts pursuant to the agreement, and except as otherwise provided in this agreement, the 2005 agreement is hereby terminated and the parties agree that neither party has any further ITA No.2546/Bang/2019 Page 7 of 31 obligations under the 2005 agreement, provided that the confidentiality obligations of Article 8 of the 2005 agreement will survive such termination. 9. In the return of income filed for Assessment Year 2016-17, the assessee offered the sum received under Settlement Agreement dated 21.03.2016 to tax under the head “Long Term Capital Gain” (LTCG). In the books of accounts, the assessee had shown this receipt as ‘exceptional item of income’. In note 42 to the Note to the Financial Statements, the assessee has explained the receipt in question as towards “royalty and interest income” in respect of software licences to a Non-Indian Licensee, who had purportedly claimed non-usage of the licensed IPR after initial acceptance, which was successfully contested by the assessee. 10. The AO issued a notice under section 142(1) of the Act dated 31.08.2018 calling upon the assessee to show cause as to why the sum received from Spreadtrum should not be assessed as “Income from Business”. 11. The assessee in a reply dated 08.10.2018 to the above notice filed Note-3 as annexure to the said reply taking a stand that Sec.45(1) of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54. 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. Income chargeable under the head capital gain accrues to an Assessee the moment, an Assessee effects transfer of a capital Asset. Sec.2(14) of the Income Tax Act, 1961 (Act) defines, “capital asset” to mean (a) property of any kind held by an assessee, whether or not connected with his business or profession. Explanation to Sec.2(14) of the Act clarifies that "property" includes and shall be deemed to have always ITA No.2546/Bang/2019 Page 8 of 31 included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever. For the purpose of Sec.45 of the Act, Sec.2(47) of the Act defines “Transfer” in relation to a capital asset to include (i) the sale, exchange or relinquishment of the asset or (ii) the extinguishment of any rights therein. Section 48 of the Act, provides the mode in which capital gain is to be computed and it provides that income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :— (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto: Sec.55(2) (a) of the Act provides that for the purposes of sections 48 and 49, "cost of acquisition",— (a) in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business 97 [or profession], tenancy rights, stage carriage permits or loom hours,— (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and (ii) in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 491, shall be taken to be nil ; 12. It was submitted by the Assessee that the expression “Property of any kind” used in section 2(14) are of widest amplitude and include not only tangible assets but also intangible rights. It may be either corporeal or incorporeal. Corporeal ITA No.2546/Bang/2019 Page 9 of 31 Means of a material nature i.e., physical things like land, jewellery, shares, cars, scooters, etc. Not only these assets but non-corporeal assets like route permits for buses, tenancy rights, lease hold rights, copyrights, etc will also be covered under the definition of capital assets. The assessee had complete ownership of the background IPR and joint ownership of the foreground IPR and the same is capital asset for assessee as per section 2(14) of the Act. The transfer of capital asset definition incudes relinquishment of the asset ; or the extinguishment of any rights therein. Relinquishment means withdrawn from, abandoning or giving up anything. By relinquishment a person ceases to own the asset concerned through some act on his part. In other words, the owner withdraws himself from the property and abandons his rights hereto. The property, however, continues to exist and will become the property of someone else. Extinguishment is a word, of ordinary usage, but of widest import. It connotes total destruction, annihilation; termination or extinction of a capital asset. All destruction or extinction of a capital asset is not regarded as a transfer. In fact, there should be a destruction or extinction of "rights" in the capital asset as it may be noticed that in respect of the expression "relinquishment or Exchange", the subject matter of transfer is "assets" and in case of extinguishments, it is "rights". 13. The assessee entered into an agreement with Spreadtrum and accordingly the assessee assigned rights on both IPR and hence, the same is a transfer of capital asset u/s 2(47) of the Income tax act, 1961, and accordingly, any profit or loss arising from same will be subject to tax under the head "Income from the Capital Gain". 14. Without prejudice to the above submission, the assessee contended that the Supreme Court in the case of CIT v B.0 Srinivasa Setty (1981) 128 ITR(SC),while ITA No.2546/Bang/2019 Page 10 of 31 dealing with the taxation of capital gain on transfer of goodwill held that the charging section, i.e., Sec.45(1) and the computation provision i.e., Sec.48 together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. All transactions encompassed by section 45 must under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. What is contemplated by section 48(1) is an asset in the acquisition of which it is possible to envisage a cost. It must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions of which no cost at all can be conceived. When goodwill generated in a new business is sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain. Further, the date of acquisition of the asset is a material factor in applying the business it is not possible to determine the date when it comes into existence. Thus, it was held that the cost of acquisition of a self-generated asset is indeterminate. Capital gain cannot be computed when a self-generated asset is transferred. The above judgement shall now apply only to certain self-generated assets in view of the amendment made in section 55. As per section 55 for the following capital assets, the cost will be NIL in case same are self generating assets. a.Goodwill of business b.Trademark or brand name c.Right to manufacture, produce or process d.Right to carry on the business The effect of the amendment is that the self-generated assets specifically mentioned above are liable to capital gains. However, other self-generated assets like goodwill of a profession, Assignment of IPR etc. are still not subject to capital gains as for ITA No.2546/Bang/2019 Page 11 of 31 such assets cost cannot be identified or envisaged as per Supreme Court decision in CIT v B.C.Srinivasa Setty (1981) 128 ITR (SC). Further, an asset in the improvement of which it is not possible to envisage a cost, has also been held to be not subject to capital gain by the Bombay High Court in Evans Franser and Co. Ltd. V CIT (1982) 137 ITR 493 (Bom). Therefore the capital gain on transfer of Background IPR and Foreground Information, though offered to tax by the Assessee cannot be brought to tax in view of the fact that the computation provisions of Sec.48(1) of the Act cannot apply and hence the capital gain cannot be brought to tax. 15. Without prejudice to the above submission, it was contended that another argument against taxation of such compensation is that it is only a compensation for injury caused to the other party. The obligation to compensate the other party may arise out of the terms of contract itself or under other laws like the Contract Act, 1872. Since the sum received as compensation or liquidated damages etc., could not be described as income falling under any of the heads, such sums were claimed to be not taxable under the Act. The Assessee relied on a decision in the case of Commissioner of Income Tax, Gujarat v Saurashtra Cement Ltd, 2010 192 Taxmann 300 (SC), wherein the Apex Court held that where amount received by the assessee is towards compensation for the sterlisation of the profit-making apparatus rather than a receipt in the course of the profit-earning process, it would be a capital receipt and hence not taxable. The Apex Court also observed that there cannot be a single infallible test to decide between capital and income. Reference was also made to similar decision of Hon’ble Delhi High Court in the case of Mrs. Tara Sinha (ITA No. 154/2015), held that compensation for loss of source of income is a capital receipt and not taxable. Reliance was also placed on a decision of ITAT Delhi in the case of Aerens Developers and Engineers Ltd. vs. ACIT, ITA No. ITA No.2546/Bang/2019 Page 12 of 31 5054/De1/2011. wherein it was held that Compensation received for loss of business activity is a Capital Receipt as it is injury to the profit making apparatus and not the loss of profits. Therefore, non-supply of land by supplier which was to be used by the consortium was injury to profit making apparatus and hence capital receipt. In the judgement, the ITAT observed that It is well settled position of law that there cannot be a standard test to determine the nature of receipt as to whether it is capital or Revenue in nature which depends on the facts of case. In the present case the injury was caused to the profit making apparatus as the land which was profit making apparatus for the assessee was not supplied by JMA Buildcom (P) Ltd. as per the agreement entered into between the assessee and associates, and JMA Buildcom (P) Ltd. Appreciating the same, compensation was awarded in the arbitration proceedings initiated against JMA Buildcom Pvt. Ltd. Here, the basis of reward of compensation remained the lost profit due to non-supply of the land and not on loss of profit. Further, before the business of the consortium would have commenced the deal got spoiled and the business was demolished completely even before the setting up of the business. It is the loss of business to consortium as a whole not a sole loss to assessee. Therefore. compensation was capital receipt for consortium and as such assessee's share is also a capital receipt. Thus, compensation was in nature of capital receipt not taxable to business income. 16. The AO however did not agree with the aforesaid submission of the assessee. He held that the assessee continued to be the owner of independently owned IPR and foreground information and therefore there was no transfer of any right within the meaning of section 2(47) of the Act. He held that the independently owned IPR and foreground information were developed in the normal course of business and the expenditure of employees who had generated all intellectual properties were ITA No.2546/Bang/2019 Page 13 of 31 shown as revenue expense. The revenue received by the assessee from licensing the IPR to Spreadtrum was at all times earlier offered to tax by the assessee as licence fee / royalty and declared as business revenue. The sum received under the Arbitration award was also offered to tax as business income. It is only the sum received under the Settlement Agreement that was claimed as not taxable. The AO placed reliance on a decision of ITAT, Bengaluru, in the case of Bosch Ltd., (2017) 87 taxmann.com 351 (Bang. Trib.) wherein the Tribunal held that sum received from sub-licencing patents was held to be taxable as business income. 17. The CIT(A)confirmed the order of the AO. Aggrieved by the order of CIT(A), the assessee is in appeal before the Tribunal. 18. The learned Counsel for the assessee submitted that the source code and technical documents in the Foreground and Background IPR constitutes an IPR. Accordingly, the same is a capital asset under section 2(14) of the Act. He pointed out that the jurisdictional High Court in DCIT Vs. BPL Sanyo Finance Ltd 312 ITR 63, has held that a capital asset may be corporeal or incorporeal. He submitted that as per the settlement agreement, the assessee assigned the rights in the background IPR to Tsinghua, prior to which agreement, the assessee enjoyed exclusive rights in the Background IPR. He drew our attention to the excerpts of the settlement agreement and submitted that an assignment of right as above in the IPR to Spreadtrum was a transfer as envisaged under section 2(47) of the Act. The consideration received being towards transfer of title is taxable as capital gains. Furthermore, as it is taxable as capital gains, it is excluded from being regarded as royalty and in this regard drew our attention to Explanation 2 to the definition of royalty in section 9(1)(vi), which provides that any lump sum amount paid towards transfer of right is royalty. However, it excludes any consideration which is ITA No.2546/Bang/2019 Page 14 of 31 chargeable under the head capital gains. He relied on the decision of the Mumbai Tribunal in Bharat Serums & Vaccines Ltd. v. ACIT [2017] 78 taxmann.com 188 (Mumbai - Trib.)- & Bharat Serums & Vaccines Ltd v. ACIT [2019] 112 taxmann.com 316 (Mumbai Trib.) wherein it was held that amount received for assignment of patent is taxable as capital gain under section 55(2)(a) and its cost has to be taken at Rs. Nil. Reference was made to a decision of the Bangalore Tribunal in Jayaprakash Mady v. ITO [2001] 79 ITD 1 (Bang.) wherein it was held that where the inventors sold their know-how for a lumpsum amount and the inventors were not entitled to sell or pass the said know-how to others as they were no more owner of the know-how. Therefore, the said receipt was a capital receipt and not a revenue receipt. Reliance was placed on decision in the case of DCIT vs. Chander Mohan [1999] 70 ITD 33 (Chd.)(TM) wherein it was held that where assessee irrevocably assigned the patent rights, amount received would be capital receipt, not taxable in the hands of the assessee. Dilution in ownership is synonyms with a sale transaction. In support of the above, one may refer the OECD commentary in Article 12 which states that if payment is made for transfer of rights that constitute a distinct and specific property, such payments cannot be held as payment towards royalty. When consideration is towards alienation of ownership rights, the same cannot be considered as for the use of rights. Reliance was also placed on Crane Software International Ltd v DCIT [Page 1132-1151 of CLC-I], and Swadeshi Polytex Ltd v ITO [1991] 38 ITD 328 (Delhi). It was poined out that the settlement agreement accorded exclusivity with respect to the usage of the IPR. This would entail usage of the IPR earlier exclusively owned by the assessee without any covenants i.e., in any manner without need for any permissions or without subject to any terms and conditions. Thereby, the Background IPR which was solely owned by Sasken came to be jointly owned by Sasken and Spreadtrum. This dilution in ITA No.2546/Bang/2019 Page 15 of 31 ownership results in abrogation of absolute right of the appellant. Dilution in ownership is also transfer under section 2(47) based on the Jurisdictional High Court decision in the case of CIT v. M.J. Siwani [2014] 366 ITR 356 (Kam.). Where the owner of the intangible asset like know-how sells in or grants an exclusive license to another which pro-tanto disentitles the owner from exercising its rights therein, the transaction amounts to an assignment of capital rights and the payment to be regarded as a capital receipt. Reliance is placed on the following decisions: -CIT v Ralliwolf Ltd 143 ITR 720 (Bom.)-[Para 18- Para 32-Page No. 1048-1054] -Pro Cruip Corporation v CIT 255 ITR 354 (AAR) [Page 1108-1118of CLC-I] -Srira m Bearings Limited 224 ITR 724 (SC) [Page 1119]. 19. The learned DR reiterated the stand of the Revenue as contained in the order of the AO and CIT(A). 20. We have carefully considered the rival submissions. The subject matter of the Settlement Agreement dated 21.03.20216 was independently owned IPR and Foreground Information that both the parties were privy to in the course of joint development of Foreground IPR but excluding Foreground IPR. We have already reproduced clause 3.1 and 3.2 of the Settlement Agreement in the earlier part of this order. The assessee and Spreadtrum were recognized as joint owners of the independently owned IPR and Foreground Information. In this regard, we may recollect that when the assessee and Spreadtrum entered into Agreement dated 30.05.2005, for joint development of Foreground IPR, the assessee agreed to contribute its WCDMA Source Code together with technical and testing documents in addition to deputing engineers to Shanghai, China, to work with Spreadtrum engineers on the project. This was the independently owned IPR that was ITA No.2546/Bang/2019 Page 16 of 31 recognized as joint property of assessee and Spreadtrum under the Settlement Agreement. This is clear from the term “Independently Owned IPR” as understood under the Settlement Agreement which means background IPR which in turn means that is owned or controlled by a party existing prior to the beginning of the joint development project or resulting from activities which are independent from and concurrenet with the joint development project. This source code was not a capital asset of the assessee and was clearly in the nature of stock-in-trade consumable stores or raw material held for the purpose of business or profession of the assessee’s falling within clause (i) of exception to section 2(14) of the Act that defines capital asset. The same reasoning would be applicable to the Foreground Information which the assessee was privy to in the course of joint development of Foreground IPR. 21. The contention of the learned Counsel for assessee was that the assessee was not in the business of buying and selling IPR’s and was only engaged in creating and exploiting IPRs. This argument is devoid of any merit. The business of the assessee is developing software for telecom companies. The revenue that the assessee derives in its business is from software services, product and technology licencing and commissioning services. In the course of its business, it develops software and becomes owner of the copyright therein, depending on the contract with its customer. The assessee licences software and derives income in the form of license fee or sells software and derives income from sale of software. This would be clear from the revenue recognition policy of the assessee as would be evident from Note 2(j) of the Notes to financial statement, which reads thus: “(j) Revenue Recognition ITA No.2546/Bang/2019 Page 17 of 31 The Company derives its revenues from software services, product and technology licensing and installation and commissioning services. Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company, the revenue can be reliably measured and the collection is probable. in all cases revenue is recognized only when no further vendor obligations remain upto the stage of revenue recognized and collection is probable. The following specific recognition criteria must also be met before revenue is recognized. Licensing revenue is recognized when the product or technology is delivered and accepted. Revenue from time and material service contracts is recognized as the services are provided. Revenue from fixed price service contracts and customized products or technology developments is recognized based on the proportionate completion method, determined based on the achievement and acceptance of the milestone, provided collection is probable. Revenue from maintenance contracts is recognized ratably over the term of the maintenance arrangement. Revenue from royalty is recognized on an accrual basis based on customer confirmation of shipment volumes, provided collection is probable. Revenue related to post contract customer support is recognized rateably over the support period. Dividend income is recognized when the right to receive dividend is established as at the reporting date. Interest income is recognized on a time proportion basis taking into account the amount outstanding and the rate applicable. The Company recognizes legal award revenue when the litigation reaches finality, and the Company has assurance of collecting those awards or the Company has collected litigation awards from the other litigating party or parties. The Company collects service tax and value added taxes (VAT) on behalf of the government and, therefore, it is not an economic benefit flowing to the Company. Hence, it is excluded from revenue.” ITA No.2546/Bang/2019 Page 18 of 31 22. The revenue received by the assessee from licensing the IPR to Spreadtrum was at all times earlier offered to tax by the assessee as licence fee / royalty and declared as business revenue. The sum received under the Arbitration award was also offered to tax as business income. It is only the sum received under the Settlement Agreement that was claimed as not taxable. It is therefore clear that the independently owned IPR and Foreground Information which partakes the character of stock-in-trade for companies like that of the assessee was not a capital asset within the meaning of section 2(14) of the Act and therefore the sum received by the assessee cannot fall within the ambit of the head of “Income from Capital Gain”. The assessee did not receive the sum in question for giving up any source of income as the assessee was free to exploit independently owned IPR as well as Foreground information and therefore the argument that the sum received is capial receipt for losing a source of income and therefore not chargeable to tax, is devoid of any merits. In view of the above conclusion, we have not discussed the cases cited by the learned Counsel for assessee on the basis that the assessee transferred capital asset and that capital gain cannot be brought to tax due to the fact that it was not possible to compute capital gain and thefore the machinery provisions fail and therefore the charge itself fails. 23. Consequently, the relevant grounds of appeal 2 to 3 of the assessee are dismissed. 24. Ground Nos.4 and 5 can be decided together as they arise under identical facts and circumstances. We have already seen that assessee received a sum of Rs.2,98,96,35,130/- from Spreadtrum under a Settlement Agreement. According to the assessee, it wanted to share the windfall it received on settlement agreement with spreadtrum with its stakeholders and employees and therefore made a ITA No.2546/Bang/2019 Page 19 of 31 provision of Rs.28,84,38,000/- and claimed the said sum as deduction in computing income from business. The details of the sum of Rs.28,84,38,000/- and the basis of the assessee’s claim that the liability was ascertained liability was as follows: Designation Amount in INR Lakhs Chairman and Managing Director 5,22.92 Whole Time Director and CFO 2,61.46 Other Employees 21,00.00 Total 28,84.38 25. As far as the sum of Rs.7,84,38,000/- which was shown as payable to Chariman and Managing Director and WTD and CFO in the chart above, is concerned, as per the Accounting Standards, if any item in the financial statements is exceptional by nature, then the same has to be shown separately as exceptional item. The sum of Rs.7,84,38,000 was disbursed in the subsequent AY as Managerial Remuneration to the Chariman & MD and Whole Time Directors. as provided in the above table. 26. As far as the remaining sum of Rs.21 crores is concerned, a sum of Rs. 75 Lakhs was paid out to employees/directors and the balance Rs.2025 Lakhs was reversed in AY 2017-18, as the same was no longer required to be paid. The Resolution of the Nomination and Remuneration Committee and Audit Committee effecting the reversal was also filed before the AO. Designation Amount in INR Lakhs Independent Director 40.00 Vice President & Head — Communication and Consumer Business 25.00 Senior Architect — Software and Satellite Communications 10.00 Total 75.00 ITA No.2546/Bang/2019 Page 20 of 31 Resolution passed by the Members of the Nomination and Remuneration Committee (NRC) of the Board of Sasken Technologies Limited on 27th March, 2017 was as follows: “RESOLVED THAT pursuant to the provisions of Section 178 and other applicable provisions, if any, of the Companies Act, 2013 and Rules made thereunder, decision of the Nomination Et Remuneration Committee be and is hereby accorded that the balance exceptional provision of Rs.2,025 lakhs is no longer required in the books and recommends to the Audit Committee of the Board to consider reversing the said provision.” 27. In so far as the sum of Rs.21 Crores shown as payable to other employees is concerned, the AO and CIT(A) held that the liability was contingent and hence cannot be allowed as a deduction. The assessee has challenged the same in ground No.4. 28. As far as the remaining sum of Rs.7,84,38,000/- payable to Chairman and MD and wholetime Director and CFO is concerned, the AO examined the claim for deduction under section 36(1)(ii) of the Act which provides that any sum paid to employee as bonus or commission for services rendered would not be allowed as a deduction where sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission. The sum could not be disallowed as continent because the payees were identified and paid in the subsequent Assessment Year to the MD and WTD. The AO invoked the provisions of section 36(1)(ii) of the Act and concluded that the MD and WTD were getting regular pay and the additional pay were not for any services rendered. It is an ex-gratia payment received because of their control over the company. The amount paid was nothing but distribution of profits and therefore cannot be allowed as a deduction. The order ITA No.2546/Bang/2019 Page 21 of 31 of the AO was confirmed by the CIT(A) and hence ground No.5 by the assessee before the Tribunal. 29. As far as ground No.4 is concerned, the contention of the learned Counsel for the assessee is that the liability of the assessee is certain and not contingent and, in this regard, reference was made to a decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers Vs. CIT 245 ITR 248 (SC). We are of the view that the liability in question was not certain and was contingent. No basis for the claim being certan has been given by the assessee, especially when the payment itself is voluntary and in the nature of an incentive. The fact that part of the sum claimed as deduction was revised in the subsequent year also lends credence to the conclusion of the AO that the liability was contingent in nature. Hence, the ground of appeal of the assessee is held to be without any merit. However, we direct that the sum reversed in subsequent year and offered to tax shall not be taxed so as to avoid double taxation of the same income. The AO is directed to allow relief in the subsequent Assessment Year. We hold and direct accordingly. 30. As far as ground No.5 is concerned, the contention of the learned Counsel for the assessee was that the additional payment made to the Chairman & MD and WTD & CFO were for services rendered. The same practice was followed by the Assessee for the earlier years. The AO agreed with the position adopted by the Assessee and no disallowance was made with respect to the same in the earlier years. The Managerial Remuneration payable to the executives/Directors was approved by shareholder of the company for the services rendered by them and monitored by NRC. The Managerial Remuneration is within the limits prescribed under Companies Act, 2013 and approved by NRC. The Managerial Remuneration has been considered as salary and TDS u/s 192 has been deducted accordingly. ITA No.2546/Bang/2019 Page 22 of 31 Managerial Remuneration has not been paid in the shareholding ratio of the executives. For a limited company, the Nomination and Renumeration Committee (`NRC'), determines the compensation payable to executive directors within the overall limits as provided by the Companies Act, 2013. This committee consists of a majority of independent directors. It was pointed out that CBDT Circular No. 6P dated 6th July 1968 [Page 1617-1645 of CLC-II], states that once the remuneration is approved by the company law administration, no disallowance could be made under the Act for the same. Bonus paid to shareholders in their managerial capacity cannot be questioned merely on the basis of speculation by the revenue that such payment was to avoid tax. Arihantam Infraprojects (P.) Ltd v JCIT [2015] 64 taxmann.com 404 (Pune-Trib.), AMD Metplast (P.) Ltd. v DCIT [2012] 341 ITR 563 (Delhi), Chryscapital Investment Advisors (India) (P) Ltd. v. DCIT [2015] 56 taxmann.com 417 (Delhi). Even otherwise, the adequacy of services is not a relevant consideration. It is not necessary that payment should be made commensurate to the rendering of services. The only requirement is that services have to be rendered by the directors. Reliance placed by the AO on the decision Dalal Broacha SB decision. The same is distinguishable on facts. The learned DR relied on the order of the AO/CIT(A). 31. We have carefully considered the submissions. The provisions of section 36(1)(ii) provide the following conditions to be fulfilled when a payment of Bonus and Commission is made to an employee before it can be claimed as deduction in computing income from business viz., (i) the payment must be on account of bonus; (ii) paid to an employee; (iii) for services rendered; (iv) is not in lieu of payment of dividend. The case of the Revenue is that the payment in question was not for any services rendered and was motivated by the fact that the MD and WTD were in a position to control the affairs of the company and instead of paying as profits or as ITA No.2546/Bang/2019 Page 23 of 31 dividend, the same will not go to reduce taxable profit and can be only as an appropriation of taxable profit. In the case of payment of dividend, the assessee will also have to pay Dividend Distribution Tax (DDT). The above being the purpose behind the provisions of section 36(1)(iiv) of the Act, let us examine the facts in the present case. 32. In the present case, the provision of Rs 784.38 lakhs has been made for payment to two whole-time Directors. The shareholders of the company, in the Annual General Meeting of the Company held on Sep 14, 2015 have, inter alia, approved payment of Variable Pay ("VPP") as determined by the Nomination and Remuneration Committee ("NRC”) of the Board of Directors. The NRC in its meeting on July 19, 2015 has approved the VPP of 3% and 1.5% of the Net Profits of the group for CEO and CFO respectively, subject to the limits laid down in the Companies Act. It may be noted that this method of calculating the VPP has been in vogue for the earlier ears resolutions also and not limited to this year. In this connection it is also pertinent to note that these have been fixed much before the agreement between both the parties for Assignment of rights to the independently owned IPR was finalised in March 2016. It is a practice in the corporate world to remunerate the wholetime Directors a percentage of the profits and that has been applied here also. All the stakeholders gain if there is an increase in profits and the whole-time Directors are remunerated for that. At the risk of repetition, it is stated that this has been approved by the shareholders who are the ultimate authority in approving the Directors remuneration as per the Companies Act and overseen by the NRC. Subsequently, in the meeting held by the Nomination and Remuneration Committee on 22.4.2016. VPP was determined based on net profits of the Group, which was within the overall limits laid down under the Companies Act, 2013 and the audited accounts of the company. The provision for managerial remuneration of ITA No.2546/Bang/2019 Page 24 of 31 Rs. 784.38 lakhs is not a sham transaction. The word "sham' means 'a thing that is not what it is purported to be. Provision for managerial remuneration of Rs. 784.38 lakhs was made in accordance with the mandate of Accounting Standards. Companies Act, etc. The same was also approved by the shareholders in the AGM. It was approved by the statutory auditors as well. It was within the overall limits under the Companies Act, 2013. It was also actually paid and thus, it cannot be treated as a sham transaction at all. 33. Similarly, the provision for managerial remuneration cannot be re- characterised as a dividend as it was not a distribution of profit. Merely for the reason that the said provision was made with a view to compensate the whole-time Directors based on profit it cannot be treated as distribution of profit. If that were to be the position, then, incentive bonus, profit bonus, statutory bonus paid to employees with a view to share the profits of the company also will be treated as distribution of profits. Companies Act, 2013 itself permits payment of managerial remuneration as a percentage of net profits of a company. Thus. the provision for managerial remuneration amounting to Rs. 784.38 lakhs cannot he treated as distribution of profit at all. In addition, the assessee being a company, whose shares are listed in the BSE and NSE, cannot selectively distribute dividend to selected shareholders who hold the same class of shares. Such distribution, if ever done, will be in violation of the Companies Act. 34. The decision rendered in the case of Dalal Broacha Stock Trading (2011) 140 TTJ 280 (Mum-SB) is distinguishable on facts. In the caselaw the said assessee in the case law was a private limited company whereas the Assessee in the present appeal is a listed company. Accordingly, the said assessee in the case law is allowed to provide for remuneration in a manner agreed within themselves however Sasken ITA No.2546/Bang/2019 Page 25 of 31 is a listed company and is mandated to follow rules and procedures for approval of remuneration of the managerial group by constitution of a NRC.In the caselaw, the director had not provided any services to be eligible for the commission whereas in the case of Sasken, the annual report duly acknowledges the fact that on the conclusion of the Settlement Agreement between Sasken and Spreadtrum the additional remuneration was awarded to the managerial group and a select number of employees. The AO has failed to highlight that the decision of the Special bench states that as regards the rendering of services by the employees for payment of bonus/commission, the only requirement of section 36(1)(ii ) is that some services should have been rendered. Adequacy of services is not a relevant consideration. It is not necessary that payment should be made commensurate to the rendering of services or there should be some extra services rendered for payment on account of bonus or commission. The AO has stated that a law firm was appointed in the US for the arguing the arbitration proceedings and that the services of the CEO or CFO in the arbitration or settlement negotiation was only supervisory in nature. Therefore, the AO has himself conceded that the CEO or CFO has rendered services towards the arbitration proceedings, however remote. Whereas the CEO and CFO cannot take a hands-off approach and had played a significant role in strategizing and providing inputs to the lawyers. The lawyers themselves cannot guide the legal matters Hence, applying the ratio in the case of Dalal Broacha Stock Trading (supra), the expense is to be allowed under section 36(1)(ii). 35. For the reasons given above, we allow ground No.5 raised by the assessee. 36. The next issue that requires adjudication is Ground No.6 in which the assessee has challenged the action of the Revenue authorities in disallowing ITA No.2546/Bang/2019 Page 26 of 31 deduction of a sum of Rs.18 lakhs paid to BSE Ltd., while computing income from business. The sum was paid to BSE Ltd., to give effect to a scheme of amalgamation of Sasken Network Engineering Ltd., with the assessee. The AO and CIT(A) held that the expenditure is capital expenditure and disallowed the claim of the assessee for deduction. The assessee contends that the expenditure is revenue in nature and in the alternative submitted that the assesee should be allowed deduction under section 35DD of the Act which allows expenditure on amalgamation at 1/5 th of the expenditure over a period of 5 Assessment Years. After considering rival submissions, we are of the view that without going into the question whether the expenditure is capital or revenue in nature, it would be just and appropriate to direct the AO to allow 1/5 th of expenditure under section 35DD of the Act. Thus, ground No.6 is partly allowed. 37. The next issue raised in ground No.7 by the assessee is with regard to disallowance of profession fees paid to M/s. Mckinsey and Co., USA, amounting to Rs.3,50,07,500/-. The assessee claimed that it engaged the consultant for formulating business strategy for future growth. The AO and CIT(A) held that strategy for future business growth cannot be regarded as revenue expenditure and disallowed the claim for deduction. 38. We have heard the rival submissions. Consultancy services were procured from a consultant regarding the growth opportunities available in the embedded and digital space. The Study was to help Sasken evaluate whether the market size where we operate is large enough and whether it was a growing market. This exercise was undertaken since the company had been de growing for the last 5 years. The scope and deliverables of services were as follows: -Identification of opportunities. ITA No.2546/Bang/2019 Page 27 of 31 -Market Strategy. -Talent Management. a)The report in the present case provided Assessee with expertise regarding identification of opportunities, market strategy, talent management, identifying and executing key deliverables. The report was on how to fine tune to business operations of Sasken. Going by the aforesaid mentioned principles, neither did the expense provide any enduring benefit nor did it facilitate the acquisition of an asset. Therefore, the same cannot be construed as an expenditure incurred in the capital field. b)It is well-settled that it is not only permissible, but it is also necessary for any business to update its own knowledge and adopt better ways of organising its business, if it is so to survive in the market. The expenditure so incurred for such purpose cannot be regarded as capital expenditure and it is only a revenue expenditure. [CIT v. Carborandum Universal Ltd [2009] 177 Taxman 347 (Madras), c)In the following decision it was held that study undertaken in relation to an existing business is revenue in nature. [CIT v. Manganese Ore India Ltd [2016] 67 Taxmann.com 268 (Bombay), ITO v. Dodsal Mfg P Ltd [1984] 19 Taxman 27 (Ahmedabad), CIT v. Priya Village Roadshows Ltd [2009] 185 Taxman 44 (Delhi). ITA No.2546/Bang/2019 Page 28 of 31 39. In the light of the above discussion, we are of the view that the plea of the assessee to allow deduction deserves to be accepted. Ground No.7 is accordingly allowed. 40. As far as ground No.8 raised by the assessee is concerned, the same relates to non-grant of credit for Foreign Taxes (FTC). The assessee has 3 business segments. Non-SEZ (in which no deduction under section 10AA of the Act had been claimed by the assessee because of losses in this unit) and two SEZ units on which deduction under section 10AA of the Act had been claimed by the assessee. The credit for Foreign Taxes paid were in relation to foreign branches and overseas customers of the non-SEZ units for which no deduction under section 10AA of the Act was claimed by the assessee. The AO denied benefit of FTC for the reason that since the non-SEZ unit was incurring loss, no tax was payable in India. The CIT(A) confirmed the order of the AO. 41. At the time of hearing, it was agreed that the issue with regard to claiming FTC is no longer res-integra and has been settled by the Hon’ble Karnataka High Court in the case of Wipro Ltd., 382 ITR 179 (Karn.). “The Hon'ble Karnataka High Court has given following reason for allowing Foreign Tax credit in the case of Wipro Ltd (supra):- "56. Therefore, it follows that the income under Section 10A is chargeable to tax under Section 4 and is includible in the total income under Section 5, but no tax is charged because of the exemption given under Section 10A only for a period of 10 years. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax. The said exemption granted under the statute has the effect of suspending the collection of income tax for a period of 10 years. It does not make the said income not leviable to income tax. The said exemption granted ITA No.2546/Bang/2019 Page 29 of 31 under the statute stands revoked after a period of 10 years. Therefore, the case falls under Section 90(1)(a)(ii)." On a careful perusal of the decision rendered by Hon'ble Karnataka High Court, we are of the view that, what is required to be seen is whether the income u/s 10AA is chargeable to tax u/s 4 and is includible in the total income u/s 5. The fact that the assessee is not paying tax due to exemption or deduction granted under the Act is not relevant. Accordingly, we set aside the order of Ld CIT(A) in so far as it is contrary to the decision rendered by Hon'ble Karnataka High Court in the case of Wipro Ltd (supra). 42. The fact that the Assessee suffered loss in Non-SEZ unit and therefore the claim for FTC cannot be allowed cannot be accepted as taxability is not the criteria to deny FTC. Thus ground No.8 is allowed. 43. As far as ground No.9 is concerned, the same reads as follows: 9 Ground relating to MAT credit 9.1 The learned AO has erred in reducing MAT credit by an amount of Rs. 12,34,134 and the learned CIT(A) has erred in confirming the same. The same is bad in law and liable to be deleted. 9.2 The learned AO has failed to appreciate the rule 128 of the Income Tax Rules, 1962 was introduced w.e.f AY 2017-18 and the same applies prospectively. 9.3 The learned AO had erred in reducing MAT credit by application of Rule 128 to AY 2011-12 wherein no rules governing FTC credit were applicable. 9.4 The learned AO has erred in upholding that an addition can be made in the absence of a specific mandate provided by any law or rule. 44. The parties prayed that a direction to the AO to give MAT credit as per the earlier years’ orders for Assessment Year 2013-14 as per the final orders passed therein would be sufficient. In this regard, it is seen that due to an order under section 154 dated 04.10.2018 for Assessment Year 2013-14 wherein MAT credit was reduced by Rs.37.23 lakhs, the MAT credit for Assessment Year amounting to ITA No.2546/Bang/2019 Page 30 of 31 Rs.12.34 lakhs were disallowed. The final order in Assessment Year 2013-14 on the issue will have consequential effect and the AO is directed to give consequential relief. 45. Ground No.6 raised by the assessee reads as follows: 6. Grounds relating to disallov$ ance of processing fees paid to BSE Ltd amounting to Rs. 18 lakhs 6.1 The learned AO has erred in disallowing the processing fees paid to BSE Ltd towards amalgamation of Sasken Network Engineering Ltd with the assessee company, amounting to Rs. 18,00,000 as capital expenditure and the learned CIT(A) has erred in confirming the same. 6.2 The findings of the learned AO and CIT(A) are contrary to facts, bad in law and liable to be quashed. 6.3 Without prejudice, the learned AO and CIT(A) have erred in not considering the said expenditure as deductible under section 35DD over a period of 5 years. 6.4 On facts and circumstances of the case and law applicable, processing fees paid to BSE Ltd amounting to Rs. 18 lakhs should be allowed as deduction. 46. We are of the view that it would be just and appropriate to direct the AO to consider the claim of the assessee in the light of CBDT Circular No.37/2016 dated 02.11.2016 on the approach to be adopted on such claims. The AO will afford opportunity of being heard to the assessee before deciding on the issue. 47. Ground No.11 with regard to charging of interest under section 234B and 234C are purely consequential and the AO is directed to give consequential relief. ITA No.2546/Bang/2019 Page 31 of 31 48. In the result, appeal of the assessee is partly allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (B. R. BASKARAN) (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 16.03.2022. /NS/* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.