Royalty — Compensation paid by a Resident company (Satyam) to non-resident (Upaid Systems Limited) pursuant to a settlement arising out of a dispute relating to breach of contract relating to grant of a license in respect of a patent or obtaining the right to use the patent or a process protected by copyright, is taxable as royalty and the compensation paid other than the portion attributable to royalty will not be taxable in India and can be treated as capital receipt — as held by AAR in Upaid Systems Limited, In Re.
An attempt to avoid ascribing of a consideration for the grant of a perpetual licence 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.
The amount deposited in the Escrow account by Satyam has earned interest, thus the interest portion is taxable in India as income arising in India.
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