UPAID SYSTEMS LTD., NEW DELHI V. DCIT, CIRCLE- 3(1)(2), INTL. TAXATION, NEW DELHI

ITA 3460/DEL/2018

AI Insights

The case involves M/s. Upaid Systems Ltd., a non-resident corporate entity, which entered into a settlement agreement with Satyam Computer Services Ltd. The settlement included a compensation of US $70 million, part of which was attributed to royalty for the use of patents. The Assessing Officer rejected the valuation report provided by the assessee and determined a different value for the royalty, leading to a higher tax liability. The Tribunal found that the Assessing Officer's valuation was not supported by proper reasoning and thus accepted the assessee's valuation based on the expert's report.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 300573 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 25-12-2022
• Assessment Year: 2012-2013
• Appeal Filed On: 09-05-2018
• Other Referred Cases: Engineering Analysis Centre of Excellence Private Ltd. Vs. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Retrospective amendment; Corroborative evidences; Valuation report; Capital receipt; Revised return
• Section: 2; 43

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA No.3460/Del/2018 Assessment Year: 2012-13 M/s. UPAID SYSTEMS LTD., Mittal Chaudhry & Co., CA, S-108, LGF, Greater Kailash-1, New Delhi Vs. DCIT, Circle-3(1)(2), Intl. Taxation, New Delhi PAN :AABCU3655P (Appellant) (Respondent) ORDER PER SAKTIJIT DEY, JM: Captioned appeal by the assessee arises out of order dated 28.02.2018 of learned Commissioner of Income Tax (Appeals)-43, New Delhi, pertaining to assessment year 2012-13. 2. In the memorandum of appeal filed in Form 36, the assessee has raised the following effective grounds: Assessee by Sh. Ajay Vohra, Sr. Advocate Sh. Rohit Jain, Advocate Sh. Deepesh Jain, CA Sh. Nitin Choudhary, CA Department by Sh. Anand Kumar Kedia, CIT (DR) Sh. Sanjay Kuamr, Sr. DR Date of hearing 26.12.2022 Date of pronouncement 24.03.2023 ITA No.3460/Del/2018 AY: 2012-13 2 | P a g e 1. That on the facts and circumstances of the case and in law, both the Learned Assessing Officer and the Learned CIT(A) have erred in not accepting the value of the license fee for a limited right to use Appellant's patents granted to Satyam Computer services Limited at Rs. 3,16,68,603/- determined on the basis of a valuation report of an IP expert, one of the leading strategist in the world on IP matters in the wireless industry and mobile communication space. 2. Without prejudice to the above Ground, on the facts and in the circumstances of the case, CIT(A) erred in confirming the action of the Assessing Off icer in making an addition of Rs.156,13,84,785/- to the total income of the appellant by rejecting the valuation carried out by the third party expert valuer without any basis whatsoever, based purely on surmise and conjecture. 2.1 That on the facts and in the circumstances of the case, the CIT(A) erred in confirming the action of the Assessing Officer of ma k i n g an e s ti m a te of th e re pr o d u c ti o n c o s t a t U S D 38,598,890/ - on an adhoc and arbitrary basis by doubling the original reproduction cost of USD 19,299,445/- determined by the expert valuer. 2.2 That on the facts and in the circumstances of the case, the CIT(A) erred in upholding the action and order of the Assessing Officer in determining arbitrarily the attribution rate of 80% to the reproduction cost by enhancing the cost attribution / sharing rate to 8% and by further multiplying it for 10 future years of use for determining the value of the license fee for a limited right to use Appellant's patents granted to Satyam Computer Services Ltd., holding the same to be a valuable asset and right for the latter. It is categorically averred that the limited right to use license of Appellant's patents granted to Satyam was only a defensive right granted only for the purpose of protection against future litigation. 2.3 That the Assessing Officer and CIT(A) not having referred the issue of valuation to an expert were bound by the valuation report of an acknowledged expert, filed by the Appellant. 3. Further, vide letter dated 23.12.2021, the assessee has raised the following additional grounds: ITA No.3460/Del/2018 AY: 2012-13 3 | P a g e 1. That on the facts and circumstances of the case and in law, compensation attributable to limited license granted by the appellant to Satyam is not an income liable to tax under the provisions of the Income-tax Act, 1961 (“the Act”) 2. That on the facts and circumstances of the case, compensation attributable to limited license granted to Satyam does not fall within the purview of ‘royalty’ in terms of section 9(1)(vi) of the Act.” 4. At the outset, we proceed to deal with the admissibility or otherwise of the additional grounds raised by the assessee. As could be seen from the grounds raised, the assessee is disputing part attribution of compensation received from Satyam Computer Services Ltd. (Satyam) towards royalty in terms of section 9(1)(vi) of the Income-tax Act, 1961. 4.1 Briefly the facts are, the assessee is a non-resident corporate entity incorporated under the laws of British Virgin Island (BVI). The assessee is engaged in the business of providing and enabling electronic payment services via mobile and fixed line telecom and other telecom services network. Sometime in the year 1996, the assessee was in the process of conceiving a new framework for an advance intelligence processing platform. For this purpose, the assessee wanted to design and develop software. After developing the design, the assessee outsourced the actual development of software to Satyam Enterprise Solution ITA No.3460/Del/2018 AY: 2012-13 4 | P a g e Ltd., a subsidiary of Satyam by entering into a memorandum of understanding (MoU) on 29.05.1997. Ultimately, Satyam Enterprise Solution Ltd. merged with Satyam and Satyam took over the work of development of software project known as ‘call manager’ and ‘net manager’. After developing the software Satyam entered into an assignment agreement with the assessee in the year 1998, where under, Satyam assigned the right, title and interest in the software and Intellectual Property Rights (IPR) and copyright over the software development to the assessee in perpetuity. The assignment agreement also authorized the assessee to seek patent protection for inventions to own all patent applications and letter patent or similar legal protection for such inventions in all countries throughout the world. In terms with the assignment agreement, the assessee filed a professional patent application with the authorities in USA in respect of ‘call manager’ and ‘net manager’. Subsequently, the assessee discovered breach of patent due to certain acts and deeds of the employees of Satyam and accordingly filed a complaint against Satyam in USA. Ultimately, the dispute between the assessee and Satyam was settled through an agreement and in terms of the agreement, Satyam agreed to pay ITA No.3460/Del/2018 AY: 2012-13 5 | P a g e an amount of US $ 70 million (Rs.361,13,00,000/-) as compensation. As per the terms of the settlement, the assessee granted Satyam a perpetual world royalty free licence in respect of its patent pending and future, subject to, Satyam not having a right to assign the licence to anyone else. In the return of income filed for the impugned assessment year originally on 29.09.2012, the assessee declared total income of Rs.40,38,03,272/-, including royalty of Rs.18,83,16,253/-. Subsequently, on 29.03.2014, the assessee filed a revised return of income, declaring total income of Rs.24,71,55,622/-, including royalty income of Rs.3,16,68,603/-. 4.2 In the meanwhile, to determine taxability of the compensation received from Satyam, the assessee moved an application before Authority for Advance Ruling (AAR). Before the AAR, the assessee pleaded that the compensation received from Satyam, being of capital nature, is not taxable in India. While pronouncing its ruling, the AAR held that a part of consideration paid under the settlement agreement attributable to grant of perpetual world royalty free non-assignable licence on patent to Satyam is in the nature of royalty. However, the AAR ITA No.3460/Del/2018 AY: 2012-13 6 | P a g e directed the Assessing Officer to quantify the amount of royalty out of the compensation received. In course of assessment proceeding, the Assessing Officer noticing that there is huge difference in royalty income offered by the assessee in the original return of income and revised return of income called upon the assessee to furnish the necessary details and also to explain why the quantum of royalty was reduced substantially in the revised return of income. In response to the query raised, the assessee furnished its submissions supported by a valuation report obtained from an expert to justify the royalty income offered in the revised return of income. The Assessing Officer, however, was not convinced with the submission of the assessee. Pointing out various defects and deficiencies in the valuation report, the Assessing Officer rejected it and proceeded to determine the value of royalty on his own by estimating at Rs.159,30,53,388/- and added back to the amount to the income of the assessee. Though, the assessee contested the addition before learned Commissioner (Appeals) on various grounds, however, the addition was sustained. ITA No.3460/Del/2018 AY: 2012-13 7 | P a g e 4.3 Before us, Sh. Ajay Vohra, learned Senior Counsel appearing for the assessee submitted that whether a part of the compensation received is to be treated as royalty under section 9(1)(vi) of the Act is still a live issue for adjudication before the Tribunal as the AAR has directed the Assessing Officer to examine the taxability under section 9(1)(vi) of the Act. Conceding to the fact that the assessee has not challenged the decision of AAR before any higher court, he, nevertheless, submitted that since, the AAR has not determined the issue, the assessee can raise the issue of taxability of even a part of the compensation received as royalty. He submitted, as per the terms of the settlement agreement, the copyright, propriety in the patent still remains with the assessee and same has not been parted away while granting non-exclusive, non-assignable perpetual licence to use in favour of the Satyam. Thus, he submitted, the receipt will not fall within the ambit of royalty under Explanation 2 to section 9(1)(vi) of the Act. Further, he submitted, Explanation 4 to section 9(1)(vi) of the Act, which provides that transfer of all or any rights in respect of any right, property or information includes transfer of all or any right for use or right to use a computer software including grant of a ITA No.3460/Del/2018 AY: 2012-13 8 | P a g e licence was inserted to the Statute by Finance Act, 2012 with retrospective effect from 01.06.1976. He submitted, though, the amendment was brought to the statute with retrospective effect, however, it will not apply to the impugned assessment year as the amendment is not clarificatory in nature. Therefore, he submitted, the amount received towards compensation cannot be treated as royalty under section 9(1)(vi). In support, he relied upon the judgment of Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Private Ltd. Vs. CIT, (2021) 432 ITR 471. He submitted, merely because, in the return of income the assessee has offered a part of the compensation as royalty income, the Revenue does not get a right to tax the income, in case, it does not fall under the definition of royalty. Thus, he submitted, the assessee can raise the issue for the first time before the Tribunal. 4.4 Vehemently opposing admissibility of the additional ground, learned Departmental Representative submitted that AAR in its ruling has categorical held that part of the compensation received from Satyam is towards transfer of right to use a licence/patent/copyright, hence, it will be royalty under the Act. ITA No.3460/Del/2018 AY: 2012-13 9 | P a g e He submitted, the decision of AAR is binding both on the assessee and the Revenue in terms of section 245S(1) of the Act. Therefore, he submitted, the assessee cannot be permitted to raise the additional ground at this stage for the first time. He submitted, the conduct of the assessee in offering a part of the compensation received as royalty income in the return of income and not raising any issue regarding taxability of such income as royalty, either before the Assessing Officer or before the first appellate authority clearly establishes the fact that as per the understanding of the AAR ruling by the assessee a part of the compensation is taxable as royalty. Thus, he submitted, the additional ground should not be entertained. 4.5 We have considered rival submissions and perused the materials on record. Undisputedly, by virtue of settlement agreement entered with Satyam, the assessee had received US$ 70 Million and Satyam was granted royalty free, non-transferable and non-exclusive licence in respect of software developed and subject patent. It is a fact on record, to get clarity on the taxability of the compensation received from Satyam in India, the assessee approached AAR for a ruling. Before the AAR, assessee ITA No.3460/Del/2018 AY: 2012-13 10 | P a g e pleaded that the entire compensation received US $ 70 Million as capital receipt. After considering, the submission of the assessee, the AAR while accepting that part of the compensation is capital receipt, but does not give rise to capital gain to be taxed in India, however, observed that the compensation also includes the consideration paid by Satyam to the assessee for enabling it to use the particular patent and all subsequent patents. Thus, the AAR held that this right to use the licence/patent is a valuable right acquired by Satyam. Further, referring to the settlement agreement, the AAR held that the right in perpetuity over the licence/patent given to Satyam was a right acquired by the assessee over the software/literary work. Therefore, it cannot be said that the recitals on the settlement agreement that the assignment of right is without consideration can only be viewed as an attempt to avoid payment of tax. Proceeding further, AAR held that a part of the compensation received of US $ 70 million is in the nature of royalty paid by Satyam for obtaining the right to use the patented software for all times to come. The crucial observations of the AAR in this regard are as under: “25. The amount quantified as compensation takes within its fold the consideration paid by Satyam to the applicant for ITA No.3460/Del/2018 AY: 2012-13 11 | P a g e 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. 26. The settlement Agreement dated 18.07.2009 recits that the 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 found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs'. Adopting this approach, we find that at least a portion of the compensation paid by Satyam to the applicant, must be ascribed to or earmarked as consideration for licensing of the right to use the patent and the software comprised therein. This consideration paid for granting of a license in respect of a patent or obtaining the right to use the patent or a process protected by copyright, is royalty as defined in the Income-tax Act. We are therefore satisfied that a part of the $ 70 million paid as compensation by Satyam takes in ITA No.3460/Del/2018 AY: 2012-13 12 | P a g e 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 prejudice to his contention that no part of $ 70 million was taxable, which contention we have rejected.” 4.6 From the aforesaid observations of AAR, it is very much clear that in no uncertain terms AAR has given a ruling that part of US $ 70 million paid as compensation should be attributable to royalty as defined in the Act. What the AAR has directed the Assessing Officer to do is to examine the quantification part as to how much out of the compensation received can be attributed towards royalty. The observations of AAR to the effect that “in the absence of adequate material available before us, we think that will be appropriate to accept this suggestion made by the counsel for the applicant” in Paragraph 27 of the order cannot be read in isolation but has to be read in the context of the entire observation made by AAR. It is further relevant to observe, while ITA No.3460/Del/2018 AY: 2012-13 13 | P a g e concluding on the issue, the AAR has made it clear that the contention of the assessee that no part of IS $ 70 million was taxable was rejected by AAR. Thus, from the aforesaid observations of the AAR, it can be safely concluded that a clear ruling was given regarding taxability of a part of compensation received as royalty under the provisions of the Act. Admittedly, the aforesaid ruling of AAR has attained finality and in terms of section 245S(1), it is binding, both on the assessee and the Revenue. Being conscious of the aforesaid factual and legal position, the assessee filed its return of income for the impugned assessment year offering a part of the compensation received as royalty income. Even, in the revised return of income, the assessee again offered royalty income at a substantially reduced figure. Neither in course of assessment proceedings, nor before learned Commissioner (Appeals), the assessee took a stand that no part of the compensation received is taxable as royalty. Thus, the aforesaid conduct of the assessee clearly indicates that according to its own understanding of the ruling of AAR, a part of compensation received is taxable as royalty under the Act. Keeping the aforesaid facts in view, we hold that at this stage, the assessee, through the additional grounds, cannot rake up the ITA No.3460/Del/2018 AY: 2012-13 14 | P a g e issue again that no part of the compensation can be treated as royalty under section 9(1)(vi) of the Act. Accordingly, we decline to admit the additional grounds raised by the assessee. The additional grounds are dismissed. 5. Insofar as, the main grounds are concerned, they relate to the addition made on account of royalty over and above the amount offered by the assessee in the revised return of income. As discussed earlier, in the revised return of income the assessee had offered royalty income of Rs.3,16,68,603/- as against Rs.18,83,16,253/- offered in the original return of income. While explaining the reason for revising the royalty income offered to tax, the assessee submitted that while offering the royalty income in the original return of income, the assessee did not have the benefit of exact value of the royalty determined by an expert. Subsequently, based on valuation report of an expert the assessee filed the revised return of income reducing the royalty income. The Assessing Officer was not convinced with the submissions of the assessee. After rejecting the valuation done by expert the Assessing Officer proceeded to determine the value of the royalty himself and made the disputed addition. The ITA No.3460/Del/2018 AY: 2012-13 15 | P a g e addition so made was confirmed by learned Commissioner (Appeals). 5.1 Before us, learned counsel appearing for the assessee submitted that the royalty income offered by the assessee in revised return of income is based on valuation report of a world renowned expert, Mr. Chetan Sharma. He submitted, while determining the value of royalty, the expert has considered various factors, including the nature of compensation, reproduction cost etc. He submitted, the valuation by the expert is based on internationally accepted methodology. He submitted, the expert valuer has adopted cost method for valuation over income and market approach method, backed by proper reasoning. He submitted, while applying cost method, the valuer has also considered the historical cost taking note of development cost, personnel cost, legal cost etc. Whereas, he submitted, the Assessing Officer after rejecting the valuation report without any valid reason has adopted a purely ad-hoc approach and determined the value on estimate basis. He submitted, the credentials of the valuer cannot be doubted as he is one of the leading strategist on IP matters in the wireless ITA No.3460/Del/2018 AY: 2012-13 16 | P a g e industry and has advised clients with biggest portfolios in the world and worked with players across the wireless value chain. He submitted, he has been retained as an expert witness and advisor for some of the most prominent legal matters before International Trade Commission (ITC). He submitted, rejecting the valuation report of such an expert, the Assessing Officer not being an expert, could not have proceeded to determine the value of royalty on a purely estimate basis. Thus, he submitted, the royalty income offered by the assessee in terms with the valuation report should be accepted and the value of royalty determined by the Assessing Officer should be rejected. In support of his submission, learned counsel relied upon the following decisions: 1. G.L. Sultania and Anr. Vs. SEBI (AIR 2007 SC 2172) 2. CIT Vs. Bharti Cellular Ltd., 330 ITR 239 (SC) 3. Hindustan Lever Employees’ Union Vs. Hindustan Level Ltd., 1995 AIR (SC) 470 4. Shreyans Industries Ltd. Vs. JCIT, 277 ITR 443 (P & H HC) 5. Cinestaan Entertainment (P.) Ltd. Vs. ITO, 170 ITD 809 (Delhi Trib.) 6. PCIT Vs. Cinestaan Entertainment Pvt. Ltd., ITA No.1007/2019 (Delhi HC) ITA No.3460/Del/2018 AY: 2012-13 17 | P a g e 7. Urmin Marketing Pvt. Ltd. Vs. DCIT, [2020] 122 taxmann.com 40 (Ahd.) 8. Pramila M Desai, HUF Vs. DCIT, ITA No.04/Ahd./2012 (Ahd. Trib.) affirmed by Gujarat High Court in [2014] 221 Taxman 158 9. CIT Vs. Manjulaben M. Unadkat, 229 Taxman 531 (Gujarat) 10. Shri Rajendra H. Seth Vs. ACIT, ITA No1495/Ahd/2007 (Ahd. Trib.) 11. Sosamma Paulose Vs. JCIT, 79 TTJ 573 (Coch.) 12. Rameshwaram Strong Glass (P.) Ltd. Vs. ITO, [2018] 172 ITD 571 (Jaipur) 5.2 Per contra, learned CIT(DR) strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals). He submitted, the expert from whom the assessee has obtained the valuation report may be having some knowledge of telecom sector but that does not make him world renowned. He submitted, royalty is nothing but capture of cost of developing software and the profit margin of IPR owner. He submitted, if the IPR is to be shared in a geography, the value of royalty will be equal to the cost of software multiplied by the share of the IPR which is being transferred to that particular geography. He submitted, under the cost method of valuation of IPR, two components need to be examined, i.e., the reproductive cost of the IPR and how much of the total IPR cost is attributable to the ITA No.3460/Del/2018 AY: 2012-13 18 | P a g e licensee (Satyam). He submitted, reproduction cost of the IPR has been worked out by the valuer at US $19.29 million, whereas, the historical cost has been taken by him at US $15.43 million. He submitted, the Assessing Officer in a very detailed and exhaustive manner pointed out the deficiencies in the value determined by the valuer. In this context, he drew our attention to the relevant observations of the Assessing Officer. He submitted, though, the assessee has rebutted some of the contentions of the Assessing Officer, however, most of the contentions of the Assessing Officer are still valid, as, the assessee has been unable to rebut them. In this regard, he specifically referred to the observations of the Assessing Officer with regard to software designing cost, stamp duty cost, ESOP cost, productivity improvement rate and wrong application of US Treasury rates, which are much lower compared to Indian tax rates. Thus, he submitted, the rejection of the valuation report of the expert is based on proper reasoning. He submitted, while allocating a part of cost of the software to Satyam for acquiring the right in the IPR, the Valuer has assigned a range of 3 to 5% under the historical cost/reproduction cost method, which is not correct, as, the Valuer has wrongly held that Satyam cannot commercially exploit the licences. Whereas, ITA No.3460/Del/2018 AY: 2012-13 19 | P a g e Satyam, in reality, has right to use the software as a component in developing derivative software or products which can be sub- licensed or rented. He submitted, the license also protects vast use of software by Satyam for its clients. He submitted, in the original return of income, the assessee itself has taken 25% of the cost as royalty, chargeable from Satyam. Thus, he submitted, assessee’s conduct itself shows that the value determined by the expert is not correct. 5.3 As regards attribution of 80% of estimated reproduction cost to Satyam, learned Departmental Representative relied upon the observations of the Assessing Officer. Further, he submitted, the decisions relied upon by assessee’s counsel are case and fact specific, hence, would not apply. Without prejudice, learned Departmental Representative submitted, the valuation exercise may be referred back to the Assessing Officer with a direction to get the value of royalty determined by a second valuer. 6. We have considered rival submissions in the light of decisions relied upon and perused the materials on record. It is a fact on record that to support the value of royalty offered as income in the revised return of income, the assessee had furnished a valuation report from an expert. To appraise the ITA No.3460/Del/2018 AY: 2012-13 20 | P a g e bench about the credentials of the expert, the assessee has taken us through the valuation report and the information available in public domain, which are as under: (a) Mr. Chetan Sharma is one of the leading strategists on JP matters in the wireless industry and has advised clients with biggest patent portfolios in the world and worked with players across the wireless value chain. (b) Mr. Chetan Sharma has been retained as an expert witness and advisor for some of the most prominent legal matters in front of the International Trade Commission (ITC) such as Qualcomm vs. Broadcom and Ericsson vs. Samsung. (c) Mr. Chetan Sharma is a chief curator of the popular Mobile Breakfast Event Series and the Mobile Future Forward Executive Summits. (d) Mr. Chetan Sharma is advisor to CEOs and CTOs of some of the leading wireless technology companies on product strategy and IP development. Mr. Chetan Sharma also advises some of the largest financial institutions on wireless technology and companies in the sector. (e) Mr. Chetan Sharma is regularly invited by various US government agencies to speak on wireless data and security related matters. (f) Mr. Chetan Sharma has served as an advisor to senior executive management of several Fortune 100 Companies in the wireless space and is probably the only industry strategist who has advised each of the top 6 global mobile data operators. (g) Mr. Chetan Sharma is the author or co-author of a dozen bestselling books on wireless including Mobile Advertising and Wireless Broad Band: Conflict and Convergence. (h) Mr. Chetan Sharma is also the editor of Mobile Future Forward Book Series. His books have been adopted in several corporate training programs and university courses at NYU, Stanford and Tokyo University. (i) Mr, Chetan Sharma is interviewed frequently by leading international media publications such as Time Magazine, Wall Street Journal, Business Week, Mobile Communications International, BBC and TechCrunch and appeared on NPR, WBBN and CNBC as a wireless data technology expert. (j) Mr. Chetan Sharma is an advisor to CEOs of some of the leading wireless technology companies on product strategy and intellectual property (IP) development and serves on the advisory board of several companies. ITA No.3460/Del/2018 AY: 2012-13 21 | P a g e (k) Mr. Chetan Sharma is a senior member of IEEE, IEEE Communications Society and IEEE Computers Society. He has Master of Science from Kansas State University and Bachelor of Science degree from Indian Institute of Technology, Rourkee. 7. Undisputedly, in the valuation report, the expert has determined the value of royalty by adopting a particular methodology. It is a fact on record that while delivering its ruling on application filed by the assessee, the AAR has negated the stand taken by the Department that the entire compensation of US $ 70 million received by the assessee is in the nature of capital gain, hence, taxable in India. 8. On the contrary, the AAR has accepted assessee’s claim that major part of the compensation received, though, in the nature of capital receipt but is not capital gain, hence, not taxable in India. However, the AAR has observed that a part of the compensation received has to be attributed towards royalty for assignment of right to use the patent in perpetuity. However, the AAR has made it clear that the value of such royalty has to be determined through a proper exercise. The assessee, on its part, has furnished a valuation report from an expert to support the value of royalty offered as income. Whereas, the Assessing Officer himself has taken up the task of determining the value of royalty ITA No.3460/Del/2018 AY: 2012-13 22 | P a g e by rejecting the valuation report of the expert. While doing so, the Assessing Officer has proceeded on a purely ad-hoc basis by estimating the reproduction cost to double the amount of reproduction cost taken by the expert valuer. On what basis such a quantum jump in the reproduction cost was arrived at has not been reasoned out by the Assessing Officer. He has also rejected the range of 3 to 5% per annum adopted by the expert valuer towards value of royalty and has applied the rate of 8% per annum on the estimated reproduction cost. The Assessing Officer has also made general observations regarding deficiency in the Valuation Report furnished by the assessee. In this regard, specific rebuttal by the assessee on various observations of the Assessing Officer on the Valuation Report are as under: Sl. No. Valuation method by expert valuer Comments of the assessing officer (Para no. of AO) Rebuttal/ Remarks/ Submissions 1. Expert valuer has given a range of value — US $5,78,983 to US $9,64,972. The assessee has adopted a value of US $6,13,810 In para 9.2 and 9.4 (i) [page 21], the assessing officer observed that: - there is no basis in adopting $6,13,810 which is 6% higher than lower side of range by expert valuer; - the valuation is liable to be rejected since it does not provide exact number but range of value. The expert has adopted a very scientific approach of first determining the cost of production and then, determined the fair value to Satyam. The expert provided a range to obviate risk of any estimation, uncertainty that may be inherent in the exercise of valuation. The concept of estimation/uncertainty is very well recognized and elucidated in commercial law and finds special reference in Accounting Polices in Accounting GAAPs throughout the world. The Act itself recognizes the concept of range in the context of valuation of international transactions under transfer pricing norms. It is submitted that the expert cannot be expected to second guess e with precise accuracy and certainty, the exact amount ITA No.3460/Del/2018 AY: 2012-13 23 | P a g e Satyam would agree to share in the cost of development of the IP. Being so, no adverse inference can be drawn from the fact that a precise range of valuation has been given by the expert valuer. As regards the amount offered by the appellant, the same undisputedly falls within the range determined by the valuer; it is higher than the base value suggested by the valuer. 2. Nature of compensation duly analyzed by AAR and by the expert valuer In para 9.4 (ii) [page 21], the assessing officer observed that: - Damages were awarded, inter alia, for failure of Satyam to process and convey good title to the right to the appellant. Accordingly, the appellant was not able to freely transfer and assign the right to others . The observation of the assessing officer that the appellant is not able to freely transfer and assign the rights to others is factually incorrect. In terms of the clause 5 of the Settlement Agreement (pages 134 to 149 @ page 136-137 of the paperbook], the intellectual property rights shall be retained by the appellant on as is basis. Thus, the appellant is the owner of the rights in the patents and is entitled to freely transfer or commercially exploit the same right. Further, the said fact has also been noticed by the AAR. As regards the comment of the assessing officer on the component to the compensation, it would be noticed that the AAR has, after analyzing the nature of damages received having various components, held the same to be capital receipt not liable to tax, except to the portion attributable to royalty free license granted to Satyam. Being so, the observations/comment of the assessing officer qua nature of compensation in contradiction to binding findings of the AAR are not sustainable and are irrelevant. 3. Valuation is based internationally accepted methodologies and is issued after considering all the facts. In para 9.4 (iii) [page 21-22], the assessing officer, inter alia, observed that the valuation report it is not a good indicator of value for following reasons: - The appellant may not be able to recover the cost in normal way so one cannot conclude that Satyam would have paid only 3-5% of the total cost as It is reiterated that the appellant is the owner of the rights in the patents and is entitled to freely transfer or commercially exploit the same right. Further, it is categorically and unequivocally emphasized that no valuable right has been conferred on Satyam vide the Settlement Agreement, wherein royalty free license of patents was granted to them. Pertinently, such royalty free license was undisputedly not assignable or transferable and non-exclusive (refer clause 8 of the Settlement Agreement). The said perpetual right in patent was given simply as a mutual release and was a covenant not to sue each other. ft was given simply as protection from litigation as opposed to any commercial benefit accruing to Satyam (refer clause 7- ITA No.3460/Del/2018 AY: 2012-13 24 | P a g e license fee. - Entire cost of developing software or it's reproduction cost should have been considered for valuation of software license rather than 3-5% as considered in the report submitted. - License is granted to Satyam and all its affiliates which are located at different locations i.e., 16 countries, which factor is not considered while concluding valuation - Satyam has been granted the license to use the software without any time limits thus it can use the software for its use till perpetuity without incurring any cost. 8 of the Settlement Agreement). . The expert valuer Shri Chetan Sharma in his report had also opined that Satyam had no way to generate revenue from the appellant's exclusive right in the patents; the license granted by appellant to Satyam was intended solely to protect each other from future litigation between the parties and not as a generator of revenue. Satyam is not in a position to exploit the license commercially. Thus, the expert valuer concluded that the commercial value of the license rights to Satyam is de-minimus (of minimum value). . Most importantly, the factum that the aforesaid right in patents granted to Satyam was not of any commercial value to Satyam is also evident from the fact that the said damages/ compensation paid by Satyam has been written off as expenditure in the profit and loss account by Mahindra Satyam Ltd. in profit and loss account for year ending 31.03.2012; the license has not been recognized as an intangible asset by the said company. By not creating any such asset in its books and by not amortizing the same, Mahindra Satyam Ltd. has confirmed that the said license did not have any economic value to Satyam and was only a defensive right meant to be used in the event of litigation and not an income generating asset. In this regard, relevant of audited financial statements of Mahindra Satyam Ltd. for FY 2011-12 is placed at pages 308 to 313 @ 311 of paperbook (refer Note 27 of the annual report). Further, the basis of adopting 3-5% cost sharing on part of Satyam has been explained in detail by the expert valuer in the valuation report. Summarily, Satyam's sharing of cost can only be a very small percentage of appellant cost as appellant is the owner and licensor of the software & patents whereas Satyam is only a licensee with no further rights of assignment or sub-license; Satyam's rights are severely truncated and ringfences and is thus of de-minimus value. The issue is d i s c u s s e d i n d e t a i l i n f r a . . 4. Theexpert valuer has In para 9.4 (iv) [page The allegation made by the assessing officer is ITA No.3460/Del/2018 AY: 2012-13 25 | P a g e adoptionCost Method for valuation of patent/right granted to Satyam over Income and Market approach method. 22-23], the assessing officer, inter alia, observed that the expert valuer has not given verifiable basis for adoption of cost-based approach as most appropriate on the facts of the case. bald and baseless. The expert valuer has given detailed reasons to select the Cost Method as the most appropriate method for 'Valuation of a License Fee for a Limited Right to Use Upaid's Patents'. The valuer has discussed in detail the 'CHOICE OF THE MOST APPROPRIATE METHOD' in his report (Please refer internal pages 8 to 16 of the valuation report or pages 25-72 @ 32 to 40 of paperbook). Further, it is interesting to note that the assessing officer has himself principally accepted the said method in computing the value of royalty and has merely changed the quantum of parameters (cost of attribution percentage) to arrive at a different value. 5. Cost Method has been adopted for valuation of right granted to Satyam In para 9.4 (v) and (vi) [page 22], the assessing officer has primarily observed: - that the data used in the valuation report either contains a lot of assumptions or is based on the unverified information fed by the owner of the software. - that the valuer has not Considered costs of idea generation. The allegations made are completely baseless. The information given by management to the valuer is fully verified on the basis of documents and information available with the appellant and the underlying assumptions have been clearly documented and based on cogent material and references mentioned in report. For ease of reference, enclosed is basis for cost numbers used by the expert valuer: Particulars Amount USD Basis of calculation/val uation Historical Cost Of Development 12,684,982 Based on the invoices of Satyam. Detail of all invoices along with copies of material invoices at pages 314 to 322 of supplementary paperbook. Productivity Factor for determination of reproduction cost In relation to Productivityfactor, expert valuer considered Six Sigma methodologies and various advanced ITA No.3460/Del/2018 AY: 2012-13 26 | P a g e statistical and non-statistical tools. Increase/ decrease in Development costfor determination of reproduction cost In relation to increase/decrease in software development cost, the expert valuer relied upon the analysis published on the website of livemint.com. The reference of website is given in the valuation report. Historical cost — PersonnelCost of Development 293,291 Based on management representation. Historical cost — Personnel Cost for Patent Invention 1,088,506 This comprises of cost of the Chairman & CEO — Mr. Simon Joyce and Advisor — Mr. Patrick Nunally for the period 1998 to 2007. The detail of invoices of Mr.Patrick Nunally alongwith copies of material invoices placed pages 323to 334 supplementary paperbook Historical Legal cost 1,365,480 Based on the invoices lf Law firm M/s. Staas & Halsey LLP Washington D.C. engaged by the appellant company in relation to registration etc. of patent. Detail of all invoices alongwith copies of material ITA No.3460/Del/2018 AY: 2012-13 27 | P a g e invoices are placed at pages 335 to 382 of supplementary paperbook Opportunity Cost 6,334,891 In accordance with valuation principles and on the basis of various studies e.g., Traditional IntangibleAssets Techniques,Weston Anson,The Intangible Assets Handbook - etc. — references given in Valuation report. Further, the internal costs incurred by the apofficer, has not been fully considered for valuation are- (i) Costs incurred in Idea Generation; and (ii) Relationship Management and Learning Curve costs. As regards Idea generation, the idea for the technology for Telephony Platform and Method for providing Enhanced Communication Services was conceived by Mr. Simon James Joyce, the Chairman & CEO of Upaid Systems, Limited. Mr. Joyce has been named as Chief Inventor of Upaid's Patents in both filing as well as the grant of patents. In relation to the relationship management with Satyam, it was managed by: (i) Chairman & CEO, (ii) Senior Vice President Technology, (iii) Chief Platform Architect, (iv) Product Development Manager. Pertinently, the cost for the above have been considered and incorporated in the valuation report. Further, upon execution of the Agreement with Satyam, it was clearly mentioned and stipulated that Satyam will provide research and ITA No.3460/Del/2018 AY: 2012-13 28 | P a g e development services for software and system integration projects related to software products. 6. While applying the Cost Method, the Historical cost considered by the expert valuer are as under: In para 9.5 [page 24 onwards], the assessing officer has alleged following infirmities in respect of some of the variables adopted by the valuer: Each aspect dealt separately below: 7. -Development Costs: $12,684,982 - Personnel Costs Development: $293,291 - Personnel Cost Patents: $1,088,506 - Legal Costs: - $1,365,480 1. Development cost: No detailed break-up with reference to invoice has been given and therefore, the Veracity ofamount USD 12,684,982 is not proved - No basis for adopting productivity level @ 3% - Billing rates of Infosys and Wipro @ USD 21 per hour in 2009 is difficult to accept as cost of USD 23.5 per hour was paid in 1998-2000 The year-wise break- up of the aggregate amount of $12,684,982 is given in the valuation report (refer internal page 19 of the report or page 43 of paperbook). Further, the invoice wise detail and copies of material invoices was placed before the CIT(A)- refer pages 314 to 322 of supplementary paperbook; The assessing officer never asked invoices of Satyam during the assessment proceedings. Detailed research and analysis was carried out by the expert valuer across similar industries and he found that productivity have been enhanced in the range of 3% to 5% per annum through path breaking and innovative changes in technology and manpower planning. The expert valuer thought it fit to err on the side of caution and take the lower range of productivity level at 3% per annum (refer ITA No.3460/Del/2018 AY: 2012-13 29 | P a g e internal page 20-23 of valuation report at pages 44-47 of paperbook). In so far, the billing rate of USD 21 per hour in 2009 is concerned, the expert valuer has provided his reliable source in his report clearly outlining where he has obtained his research from (refer internal page 23-24 of valuation report at pages 47-48 of paperbook). 8. 2A. Personal Cost Development: - It was doubted as to why the salary of Chairman & CEO has been taken only for the period 1997-99 and not thereafter; why salary of Sr. VP— Technology has been, taken only for 2 years and not prior to 1999-00 and after 2000-01; why salary of Chief Platform Architect has not been considered prior to 2000-01; and why salary of Product Development Manager has not been prior to 2001- 02 - The reproduction cost cannot be computed merely adjusting historical cost to inf lat io n e specially considering that the salaries in IT industries were at boom till 2009 The IP Expert Valuer has exercised abundant care and diligence to include all costs pertinent and germane to the Valuation of License Fee for a Limited Right to use Upaid's Patents. It is respectfully submitted that - Costs of Chairman & CEO have been taken till 1997 to 1999 as it was only then was he actively involved in interacting with Satyam on the Development Contract. Thereafter, other people were employed by the appellant to perform this function and the Chairman & CEO shifted his time and energy on other functions of the organization such as on overall strategy and management, fund raising and on patent portfolio. _ The salary of VP-Technology was not taken prior to 1999-2000 .as he was engaged for the first time during 1999-00 - The Salary of Chief Platform Architect was not considered prior to 2000-01as this position was created for the first time in that year. - The Product Development Manager was appointed for the first time in 2001-02 and thus his cost was captured for the first time in 2001- 02. - The standard methodology under reproduction cost is to adopt a rationale and consistent basis which is designed to eliminate extreme tendencies and limits. The selection of consumer price index and cost inflation index tends to find a regular median which is free from wide fluctuations and subjective assumptions. In any case actual cost have been taken and adjusted for inflation, which is an internatonaly accepted method. 9. 2B. Personal Cost Patents The Chairman & CEO was involved in the broad strategy and vision of the Upaid's IP Patent Portfolio. His costs have been considered in the ITA No.3460/Del/2018 AY: 2012-13 30 | P a g e - The reports states that salary of Chairman & CEO prior to 2001 is considered on best estimate basis. Thus, it shows that prior to 2001, even the Upaid is not clear of the extent of salary which deserves to be captured on this account. The component of 25% in the case of Chairman & CEO and 50% no rational basis. entire period of 19982007. He was also involved in other CEO functions including fund raising, general administration, marketing and high-level decision making. As per management estimates a general assumption of 25% of his total time and cost has been made to Patent Costs. In so far as appellant's advisor was concerned, he was engaged for the first time in 2002 and therefore there were no cost prior to 2002. 50% of time is not considered in reproduction costs as the same was for patent litigation and enforcement strategy which is not pertaining to development of software. In relation to advisor — Mr. Patrick Nunally, details of his invoices as considered by the expert valuer is placed at pages 323 to 334 of supplementary paperbook. 10. 3. Legal Cost: - Historical Cost Method: Professional fee paid by Upaid for the year 2000 to 2007 has been taken in report without elaborating the person to whom it was paid and if the amount captures the full value. The amount captured is understated for the reason that the material on record suggests that litigation with Satyam continued even after 2007 and the initial settlement agreement was arrived on 18.07.2009. - Reproduction cost: same as 2A above These amounts were paid to a law firm, M/s Staas & Halsey LLP in Washington D.0 who were patent attorneys responsible for patent registrations and filings. Detail of invoices filed before lower authority is at pages 335 to 382 supplementary paperbook. The reason for considering costs only till 2007 was because the last patent US7308087 was filed on 11.12.2007 (refer internal page 6 of valuation report page 30 of paperbook). As regards litigation and settlement cost, it may be noted that the same bears connection and correlation with registration and 'development of patents/ software license granted to Satyam and thus cannot be attributed to value of the license. Substantial legal expense were incurred by the appellant in respect of suits against Satyam, Verizon and Qualcomm etc. The payments were made to various attorney's/ law firms such as Foley & Lardner LLP, Patton Boggs LLP, and Freshfields Bruckhaus Deringer LLP for such litigation which cannot be attributed to development, of software. • The summary of major legal expenses are as under: ITA No.3460/Del/2018 AY: 2012-13 31 | P a g e 4. Opportunity Cost: - The rate applied should have been with reference to Indian perspective where the software was developed rather than the US Treasury Bond Rates. It needs no elaboration that the Bond yields in India are historically higher than that the USA Name of Law Firm Perio d Cost not related to Patent develop ment (USD) Cost related to patent developm ent (USD) Stass & Halsey LLP 2000 to 2007 - 1,365,480 Foley & Larder LLP 2005 to 2006 3.44 million Patton Boggs LLP 2007 to 2009 7.55 million Freshfields Bruckhaus Deringer LLP 2007 to 2008 3.07 million Total 14.06 million 1,365,480 The agreements between the appellant and Satyam were never subject to Indian law; initial IDC Agreement entered was per laws of Washington D.C. USA; final settlement agreement (18.07.2009) and supplementary settlement agreement (06.01.2012) were also entered into as per the laws of New York, USA. Upaid was the entity that made payments to Satyam for development of software. Has this not been done, it would have possibly deployed the funds in US Treasury Bonds being a foreign company. Being so, it is abundantly clear that the opportunity cost has to be seen from opportunities that are available for a foreign company in foreign markets. 11. 5, Final Cost: - Cost sharing ratio has been taken between 3% to 5% of the reproduction costc o m p u t e d a t U S D 19,299,445. To come to this figure of 3% to 5%, no comparable cases have been given The value derived by Satyam was the right granted was de-minimus (minimal value) because of the following factors: -The limited right to use appellant patent is not a valuable right for Satyam. - Right granted to Satyam was not assignable or transferable. -Satyam could not have commercially exploit the licenses given to it. Should ITA No.3460/Del/2018 AY: 2012-13 32 | P a g e and therefore, the figure adopted in the report is unsupported by factual cases. they choose to do so, their ultimate client would be infringing the appellant's patents. -No revenue could be generated by Satyam from the right granted to it by the appellant. -Satyam' s rights of the license granted is severely truncated and ring fenced; appellant was the owner of the patent and had substantially superior rights to that of Satyam. -The license was granted to Satyam merely as a protection right again future litigation and not as a generator of revenue (which is the primary basis of deriving the value). - In fact, Satyam did not recognize the license granted as income generating asset; rather it expensed off the amount paid to the appellant thus proving that the license granted by the appellant to Satyam was of no economic value to the latter. Mahindra Satyam Ltd. would have, in terms of mandatory Accounting Standard 26, would have capitalized the license had there been an expectation of flow of any economic benefit from the license received from the appellant. It is, in view of the aforesaid, a rate of 3% to 5% has been applied to attribute cost to the right Satyam. In fact, benchmark for 5% to 6% is also available in the reports of KPMG. and Tim Hebersden @ pages 187-238 of paperbook. The rate of 3% to 5% adopted by the world- renowned expert is sufficient and reasonable considering the peculiar facts and has been justified by the expert valuer in detail. 12. Reproduction \cost is computed $19,299,445 by the expert valuer as under: - Development Cost: $9,769,036 In para 9.6 [page 29], the assessing officer has doubled the reproduction cost $38,598,890 observing that there could be several other expenditures which have not been captured by the As explained in detail supra, the expert valuer has duly considered all the expenses relevant for the purposes of development of the software and patenting of the same. Further, the allegations made by the aforesaid with respect of items of cost and its attribution are completely baseless as has been dealt supra. Further, the ad-hoc exercise of the assessing officer in doubling the expenditure taken by the expert valuer is grossly perverse and not based on ITA No.3460/Del/2018 AY: 2012-13 33 | P a g e - Personnel Cost- Development: $422,068 - Personnel Cost- Patents: $1,220,719 - Legal Costs: $1,552,731 - Opportunity Costs: $6,334,891 valuer and are relevant for purposes of development of software, its patenting and related litigation and thus the valuation suffers from inconsistencies and inaccuracies. any logical or rational basis. It is reiterated that one must not doubt the report of the technical expert on the subject, that too one of the best in the world, on basis of mere conjectures and surmises. Being so, the same deserved to be reversed at all threshold. 13. Cost attribution rate taken at 3% to 5% by the expert valuer In para 9.7 [page 29- 30], the assessing officer, inter alia, observed as under: - The appellant has permitted Satyam to utilize the IP; Satyam has made onetime payment to the assessee whereas Satyam will be using the software / patents for perpetuity without any payment in future. - Accordingly, the rate of 8% per annum will have to be aggregated for future years of use. Considering that the said software / patent will be used without any limit, it would be fair and reasonable to multiply it by at least ten. This multiple of ten will take care of onetime lump sum payment for say about fifteen years and will also account for the discounting for down payment by Satyam to the assessee. Thus, the rate applied would be 80% of the estimated It is submitted that the contention of the assessing officer is absurd on the face itself as the assessing officer has attributed 20% of the value of the license to the owner of the IP, i.e., the appellant and 80% to the licensee whose rights are severely truncated. The reasoning adopted by the assessing officer is that the license granted by the appellant to Satyam is a very valuable right for Satyam which the latter can use in perpetuity and forever. This fundamental premise is completely flawed for the reasons explained above summarized hereunder: -The right cannot be transferred or assigned by Satyam; -It cannot be commercially exploited or lead to generation of revenue as opined by the valuer; Satyam's admission that the license granted by appellant had no enduring economic benefit to it is evident - from the treatment in their annual report where the amount paid has been expensed off, instead of recognition of asset in terms of Accounting Standard 26 had there been an expectation of flow of any economic benefit from the license received by Satyam. In view of the aforesaid, the aforesaid attribution made by the assessing officer is completely baseless and alien to any logical basis. Further, the rate of 8% adopted by the assessing officer has no justifiable basis and shall be disregarded. The license granted as de-minimus value which can be computed by attributing maximum of 3%-5% of reproduction cost, as opined by the expert valuer. ITA No.3460/Del/2018 AY: 2012-13 34 | P a g e reproduction cost of USD 38,598,890. Further, the assessing officer has arbitrarily and on an ad hoc basis, erroneously assumed that the license granted by the assessee to Satyam has a future useful life and thus multiplication factor of 10 years from the date of grant of license must be applied. As submitted above, it is absolutely erroneous to assume that the license granted to Satyam was in the nature of an intangible asset having an economic life in the absence of any evidence to the contrary. Even otherwise, even if one is to assume for the sake of argument (and without conceding) that the license led to creation of an intangible asset, the useful life of the asset would begin from the date of the grant of patent and not from the date of signing of the license agreement/ settlement agreement. The useful life of a technology has nothing to do with the date of execution of the license . agreement but runs from the date it comes into existence. In this case, the mother patent, i.e. Patent No. US6320947 was granted on November 20, 2001 (as against the date of settlement of being 18.07.2009. Accordingly, it follows that eight (8) years had elapsed on the date of settlement and that the unexpired life of the patent (even as per assessing officer's erroneous logic) was only two (2) years. Thus, application of multiplication factor of 10 is completely baseless. 14. On bottom of page 30 of the assessment order, the assessing officer has mentioned that the claim of the assessee in the revised return Sharma is unsubstantiated since the valuation report Mr.Chetan Sharma is of November 2014 while revised turn was filed in March 2014. The doubts raised by the assessing officer is completely baseless. The valuation was conducted by the expert valuer in March 2014 as has been confirmed by the valuer himself in certificate placed at page 259 of paperbook. The: valuer had mentioned that he was engaged by the appellant in December 2013 for valuation, which was completed around 25 th March 2014 which was communicated to the management on the same date as it was needed to filed tax return in India. The signed report was, on request, sent in. November 2014. Being so, there cannot be any basis to doubt the action of the assessee in relying on the valuation report for filing the revised return. Be that as it may, even if the report is stated to be ITA No.3460/Del/2018 AY: 2012-13 35 | P a g e post facto, no adverse inference could be drawn on the valuation determined by the expert valuer on sound and logical basis. 15. Expert valuer has given a range of value — US $ 5, 7 8 , 9 8 3 t o U S $9,64,972. The assessee has adopted a value of US $6,13,810 Assessing officer has, After applying, 80% to reproduction cost of USD 38,598,890 worked value of license granted at $30,879,112 (-30 million) As explained above, the reproduction cost doubled by the assessing officer on adhoc basis; and rate of 80% applied is ex-facia and patently erroneous. It is further submitted that as per the aforesaid attribution done by the assessing officer, around 44% of the total compensation ($70 million) received has been attributed towards limited license granted to Satyam. In this regard, it would be noticed that the AAR categorically analyzed ,the nature of compensation, which is on account of: (i) Declaration of authenticity of the signatures furnished by Satyam and a declaration of the legal status of all its patents. (ii) Actual damages arising from fraud and/or negligent misrepresentation involved in having to give up its claim for patent violation against Qualcomm and Verizon. (iii) Damages on account of losses suffered for alleged breach of the Assignment Agreement by Satyam. (iv) Damages for the alleged defect in title to the Patents conveyed by Satyam to Upaid (v) Actual damages under concerned Federal statute. (vi) Statutory damages under concerned Federal statute. (vii) Claim for punitive and exemplary damages for alleged forgery. (viii) Cost of all legal proceedings borne by Upaid on account of litigation and legal proceedings against Verizon & Qualcomm. (ix) Grant to Satyam a royalty free, non- ITA No.3460/Del/2018 AY: 2012-13 36 | P a g e assignable, non-exclusive, non- transferable license to all patents of Upaid. Item no. (i) to (viii) were held by the AAR to be capital receipts, not deemed to accrue or arise in India and hence non-taxable. It was only item no. (ix) was adjudicated to be in the nature of royalty where attribution was required to determined. The assessee's consistent position has been that the aforementioned item no. (ix) represents a de minimis commercial value of license rights to Satyam as it is primarily meant as a protection against litigation and not as a generator of revenue. Thus, attributing major component of around 44% of total compensation received towards license fee granted to Satyam is ex-facia erroneous and even contradictory to the AAR order. 9. We find substantial merit in the aforesaid submissions of the assessee. It is quite evident, while the assessee has supported the value of royalty through a Valuation Report of an expert, having domain knowledge on the subject, the Assessing Officer has determined the value of royalty on purely ad-hoc/estimation basis not backed by proper reasoning. In any case of the matter, neither the Assessing Officer, nor learned first appellate authority is competent to assume the role of an expert valuer. In case, the Assessing Officer was not satisfied or convinced with the Valuation Report of the expert valuer, proper course for him would have been to seek opinion of a second valuer on the ITA No.3460/Del/2018 AY: 2012-13 37 | P a g e Valuation Report furnished by the assessee. Instead of doing that, the Assessing Officer has taken it upon himself to undertake the exercise on valuation of the royalty. This, in our view, is totally erroneous and against settled legal principles. The Assessing Officer cannot reject the Valuation Report done by an expert in the field, when he has no such expertise. The decisions relied upon by learned counsel appearing for the assessee clearly support this view. It is evident, after rejecting the Valuation Report of the expert on flimsy grounds, the Assessing Officer eventually has proceeded to value the royalty on purely estimate basis without bringing on record any cogent material to support such estimate. There is no valid reason, why he estimated the reproduction cost to twice the amount determined by the expert valuer. Further, the data relied upon by the Assessing Officer to estimate the value of royalty at 8% per annum on the reproduction cost is not based on any authentically sourced information. These facts are well brought out in assessee’s rebuttal to Assessing Officer’s observations. 10. As regards the submissions of learned Departmental Representative that in the original return the assessee has attributed 25% of the compensation towards royalty, we must ITA No.3460/Del/2018 AY: 2012-13 38 | P a g e observe, the assessee has subsequently explained that at the time of original return of income, the assessee did not have the benefit of the Valuation Report of the expert, which was available to him subsequently. Hence, filing of revised return of income was necessitated. In absence of contrary material brought on record by the Revenue to finalize the aforesaid claim of the assessee, we are inclined to accept assessee’s contention. Thus, in the ultimate analysis, we hold that since, the Assessing Officer has rejected the Valuation Report of the expert on flimsy grounds and has proceeded to make the addition by determining the value of royalty on purely estimate basis, without being backed by any supporting evidence, we are inclined to reject such valuation of the Assessing Officer. Accordingly, we delete the addition made by the Assessing Officer on account of royalty. In other words, the royalty income offered by the assessee in the revised return of income should be accepted. Grounds are allowed. 11. In the result, the appeal is partly allowed. Order pronounced in the open court on 24 th March, 2023 Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 24 th March, 2023. RK/- ITA No.3460/Del/2018 AY: 2012-13 39 | P a g e Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi