2016 (1) TMI 814 - AAR - Income Tax

High Court rules settlement amount not taxable under Income-tax Act, deems it capital receipt. Section 195 not applicable.

Lead Counsel of Qualified Settlement Fund (QSF), USA and Bernstein Litowsitz Berger and Grossmann LLP, New York, NY and Grant & Eisenhofer P.A., Wilmington, DE and Baroway Topaz Kessler Meltzer and Check, LLP, Radnor, PA and Labaton Sucharow LLP, New York, NY and Kessoer Topaz Meltzer & Check, LLP, Radnor

The Delhi High Court set aside the Authority for Advance Rulings' decision that the settlement amount was chargeable under the Income-tax Act, ruling that ... Taxability of Settlement amount - TDS u/s 195 - Settlement Fund payable under the Stipulation to the Qualified Settlement Fund - whether will be regarded as sum chargeable under the provisions of the Act in the hands of the QSF? - For the purposes of deducting tax at source under Section 195 of the Act on the transfer of the Settlement Amount to the QSF, whether Satyam can take into account the chargeability of the Settlement Amount in the hands of the Authorized Claimants, as defined in paragraph 1(e) of the Stipulation? - Held that:- The settlement amount payable/paid by Satyam under the stipulation to the QSF pursuant to the judgment and final approval of the US Court cannot be regarded as sum chargeable under the provisions of the Act in the hands of QSF. The settlement amount is not chargeable to tax either as capital gains or as income from other sources. We conclude that the settlement amount in the hands of the QSF is not chargeable to tax. Therefore, we do not think it is necessary to go into other issues like whether authorized claimants were not known to Satyam and therefore deduction of tax was not appropriate or whether such income accrues or arises in India or not or is deemed to accrue or arise in India or not. Once the answer to the question no.1 is in negative, such issues are not relevant and it is also not necessary to go into the issue of stages of transfer at which tax should have been deducted from the settlement amount. It is another matter that Satyam has deducted the tax and paid to the Government account after the earlier rulings were pronounced. Issues Involved:1. Chargeability of Settlement Amount under the provisions of the Act in the hands of the Qualified Settlement Fund (QSF).2. Applicability of Section 195 of the Act for deducting tax at source on the transfer of the Settlement Amount to the QSF.3. Applicability of Section 195 of the Act when QSF distributes the Settlement Amount to the Authorized Claimants.4. Rate of income tax deduction under Section 195 if the Settlement Amount is chargeable.5. Rate of income tax deduction under Section 195 if QSF is required to deduct income tax.Issue-wise Detailed Analysis:1. Chargeability of Settlement Amount under the provisions of the Act in the hands of the QSF:The Authority for Advance Rulings (AAR) initially ruled that the settlement amount would be regarded as a sum chargeable under the provisions of the Act as required under Section 195 of the Act. However, the Delhi High Court set aside this ruling, stating that the AAR had proceeded on the wrong premise that the petitioner had accepted the receipts as revenue receipts. The High Court directed the AAR to re-examine whether the receipts were capital or revenue in nature and determine their chargeability to income tax in India. Upon re-examination, the AAR concluded that the settlement amount is a capital receipt because it was received in lieu of the surrender of the right to sue and not to compensate for any loss of income. As a capital receipt, it falls outside the scope of income chargeable to tax unless specifically brought within the ambit of income by way of specific provisions of the Income-tax Act.2. Applicability of Section 195 of the Act for deducting tax at source on the transfer of the Settlement Amount to the QSF:The AAR initially ruled that the tax should be deducted when the amount is moved from the segregated account in India to the initial escrow account in the US. However, upon re-examination, the AAR concluded that since the settlement amount is a capital receipt and not chargeable to tax, Section 195 does not apply. The Revenue argued that the machinery provisions of TDS had already been acted upon, and the taxes had been deducted and paid by Satyam. The AAR agreed that the questions related to the deduction of tax at source had lost their relevance because the taxes had already been deducted and paid.3. Applicability of Section 195 of the Act when QSF distributes the Settlement Amount to the Authorized Claimants:The AAR initially did not provide a separate ruling on this question, as it was covered by the ruling on the second question. Upon re-examination, the AAR concluded that since the settlement amount is not chargeable to tax, Section 195 does not apply when the QSF distributes the settlement amount to the authorized claimants.4. Rate of income tax deduction under Section 195 if the Settlement Amount is chargeable:The AAR initially ruled that the rate at which the tax is to be deducted is 30%. However, upon re-examination, the AAR concluded that since the settlement amount is not chargeable to tax, the question of the rate of income tax deduction does not arise.5. Rate of income tax deduction under Section 195 if QSF is required to deduct income tax:The AAR initially ruled that the rate at which the tax is to be deducted is 30%. However, upon re-examination, the AAR concluded that since the settlement amount is not chargeable to tax, the question of the rate of income tax deduction does not arise.Conclusion:The AAR ruled that the settlement amount payable/paid by Satyam under the stipulation to the QSF pursuant to the judgment and final approval of the US Court cannot be regarded as a sum chargeable under the provisions of the Act in the hands of QSF. Consequently, the questions related to the deduction of tax at source and the rate of deduction became irrelevant. The ruling was pronounced on 12th January 2015.