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It was stated by HCL that Tolerant may give its reaction to the above, so that HCL can plan its manufacturing and also come up with a schedule for Clearance of the final payment".

5. After this letter, it appears that the disputes were referred to arbitration as per the arbitration clause in the agreement on 8-8-1990. Pursuant to the award, which was signed by Tolerant (which had become Viritas by that time) on 1-11-1990 and by HCL on 15-11-1990. According to the award, which is styled as "general release and settlement agreement" HCL was to pay Tolerant a sum of US $ 17,500 on receipt of which Tolerant would deliver to counsel for HCL one complete copy of the "fully commented source code from which the software was compiled in machine readable form on magnetic tape media in ASCII format, and on paper, along with any documentation as is reasonably necessary to understand and compile such source code". On delivery, counsel for HCL would deliver to counsel for Tolerant the amount of US $ 17,500. When intimation is received about the clearance of the L/C under which the sum was paid, counsel for HCL may release the source code to HCL. HCL was to pay royalty for the use of the source code, which was a fixed royalty of US $ 400 for each SBB (system building block) manufactured or sold by HCL. These are the two important terms of the arbitration award; the other terms are not relevant for the present appeal.

11. The question for consideration is whether the disputes between HCL, the assessee herein, and Tolerant (now Veritas) were such that they postponed the accrual of income in favour of the later till they were finally settled by arbitration. In the case of CITv. swadeshi Cotton & Flour Mills P Ltd (1964) 53 ITR 134 (SC), the Supreme Court held that income under a contract which gave rise to disputes between the parties thereto, can be said to have accrued only when the disputes were finally settled. In contrast, in the case of a statutory liability, the position is different. In that case the liability arises the moment the conditions necessary for attracting the statute have been fulfilled and the fact that the person subject to the statute disputes the liability does not postpone the same. It is on this principle that excise and customs duty liabilities can be deducted for purposes of assessment to income-tax the moment goods are manufactured or imported and the fact that a person manufacturing or importing the goods disputes the liability does not detract from the efficacy of the liability. Herein we are not concerned with a statutory liability. We are concerned with a contractual liability, the contract being the agreement styled "Manufacturing and software licensing agreement". Under the agreement, certain technology is to be provided by Tolerant to the assessee, which is engaged in the manufacture of computers in India. The agreement has been approved by the Government of India. A payment schedule for remitting the US $ 500,000 has also been prescribed. The amount has to be remitted in instalments, which we have already noted, at different stages of fulfilment of the obligations under the agreement by Tolerant. Disputes arose between the parties with HCL claiming that the technology supplied by Tolerant was out-dated and placed handicaps on it in competing with other manufacturers of computers. In particular, HCL claimed that Tolerant did not comply with the formalities relating to "Deposit Agreement" in accordance with clause 8.3.1.1 of the licensing agreement. The "deposit agreement" was to be executed concurrently with the licensing agreement and the "deposit materials" had to be placed under escrow by Tolerant. According to clause 1 of the deposit agreement, the "deposit materials" shall consist solely of one complete copy of the fully commented source code from which the software was complied, in machine-readable form on disk of magnetic tape media in ASC 11 format, and such documentation as is necessary to understand and compile such source code." Tolerant was under an obligation to deposit the deposit materials under escrow in a sealed package within 30 days after the execution of the deposit agreement (clause 2 of the deposit agreement). HCL, through its employees, had the right to inspect the deposit material "for the purpose of determining their completeness prior to their delivery to the Deposit Agent and an HCL employee will have the option to accompany Tolerant's delivery of the Deposit Materials to the Deposit Agent". Under clause 2.1 of the deposit agreement it was Tolerant's obligation to deliver even the updates to the deposit materials until they are released to HCL. The deposit agreement made detailed provisions relating to the receipt of the deposit materials by the deposit agent, storage inspection, maintenance of records, events causing release of the materials, obligations of the deposit agent, delivery site, time and mode of delivery to HCL, discharge of the deposit agent, compensation payable to the agent, indemnity and so on and so forth. The fact that the deposit agreement had to be executed concurrently with the licensing agreement and the further fact that the former was attached to the licensing agreement as Exhibit "G" are pointers to the importance thereof. Though it is a technical subject, it is not difficult to appreciate orinfer that the fully commented source code, which is the deposit material subject to the elaborate terms and conditions prescribed in the deposit agreement, is of vital importance for the successful implementation of the licensing agreement, so far as HCL is concerned. We are inclined to agree with the submission of the learned counsel for the assessee that the execution of the deposit agreement concurrently with the licensing agreement and the delivery of the fully commented source code to the deposit agent were of the essence of the licensing agreement, the non-fulfilment of which would render the very licensing agreement useless to the assessee. Therefore, when Tolerant did not fulfil its obligations vis-a-vis the deposit agreement, the assessee (HCL) raised a dispute and withheld the final payment. The argument of the revenue that the earlier two payments, which are the subject-matter of the appeal, were made only because Tolerant had fulfilled its obligations with regard to the basic source materials and that the assessee withheld the final payment only because Tolerant had failed to supply the updates does not appear to have any factual basis. The schedule of payments is not related to the accrual of income, in the sense that it can be said that the income to the extent of US $ 1,66,667 accrued on 29-6-1988 and income to the extent of US $ 1,66,667 accrued on 18-111988, when such payments were remitted. These dates and the events are only landmarks, on the happening of which the remittances had to be made and have no bearing on the question of accrual of income. The timeframe stipulated in the licensing agreement for remitting the license fees is a convenient arrangement between the parties merely linked with the performance of certain obligations. In fact it would appear that the timeframe was modified by the Government of India while approving the agreement. It is somewhat difficult to imagine that a third party to the agreement, such as the Government of India, would have a say in the matter of when and how much income accrued to the foreign company. For instance, the last instalment of the licensing fee had to be remitted, as per the modification made by the Government of India while granting approval, on the commencement of commercial production or four years after the agreement is filed with the RBI. Once commercial production has been commenced, the liability to remit the amount will arise and irrespective of the fact that the amount was not actually remitted, the income would accrue to the non-resident company as it would get a right to the amount. The actual remittance of the licensing fee, therefore, has nothing to do with the question of accrual of income. The question can be determined only by finding out at what point of time Tolerant would get the right to receive the income, as against the remittance. The answer to this question would depend upon the nature of the agreement and the rights and obligations of the parties thereto. A perusal of the various terms and conditions of the licensing agreement shows that the deposit agreement has a crucial role to play in facilitating the successful manufacture and marketing of the computers by HCL in India. Unless the fully commented source code is delivered to the deposit agent, for being transmitted to HCL on the fulfilment of certain conditions it cannot be said that Tolerant had fulfilled all its obligations under the licensing agreement so that it can be said to have obtained a right to the income (contrasted with remittance). It is not in dispute that Tolerant defaulted in this, which created difficulties for HCL in successfully manufacturing and selling the computers in India. So it withheld the final payment. Disputes arose between the parties which were referred to arbitration as envisaged by the licensing agreement itself. They were resolved by the arbitration committee and HCL was asked to pay US $ 17,500 for obtaining the fully commented source code and a further sum of US $ 400 as royalty for use thereof. The disputes were referred to arbitration on 8-8-1990 and the award was given in October 1990 and signed by both the parties later in that year. In our opinion, Tolerant gets a right to receive the income only when the disputes were resolved by the arbitration award and not before. Only on performance of the conditions prescribed in the deposit agreement do the obligations of the parties under the licensing agreement get fulfilled and only then does the non-resident company get a right to the income under the licensing agreement. The amounts remitted till then are merely in the nature of monies applied in connection with the working of the licensing agreement. We do not think that any intention on the part of the parties to the licensing agreement was expressed or could be inferred to the effect that the agreement could be broken up into three different stags depending upon the time-frame stipulated for remitting the monies payable by HCL. It was a single licensing agreement, subject to various conditions including, most crucially, the concurrent exe cution of the deposit agreement and the performance of the obligations thereunder and when there is a default in performing the obligations under the deposit agreement it cannot be said that Tolerant had any right to claim any income under the licensing agreement. The monies received by it till the arbitration award was given and the subsequent performance of the obligations under the deposit agreement relating to the delivery of the fully commented source code remained mere receipts, which could not be rightfully appropriated by it as its income.