TaxTMI 
TaxTMI 
2016 (1) TMI 793
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....he facts related to Aberdeen US and Aberdeen UK are summarized below:- (i) Twelve mutual funds, namely, (i) Aberdeen EAFE plus Sri Fund, a series of Aberdeen Delaware Business Trust, United States; (ii) Aberdeen EAFE plus Ethical Fund, a series of Aberdeen Claims Trust, United States; (iii) City of Albany Employees Pension Trust, United States; (iv) Franciscan Sister of Chicago, United States; (v) the City of New York deferred compensation plan, United States; (vi) Thrivent Partners Emerging Markets Portfolio, a serious Trivent Series Fund, Inc. United States; (vii) Aberdeen Global - Responsible World Equity Fund, Luxembourg; (viii) Aberdeen IICVC - Ethical World Fund, Scotland; (ix) Mackenzie Financial Corporation - Mackenzie Universal Sustainable Opportunities Capital Class, Canada; (x) Aberdeen Canada - Socially Responsible International Fund, Canada; (xi) Aberdeen Canada - Socially Responsible Global Fund, United States; (xii) NCB Capital Company, Bahrain; Raiffeisen Kapitalangage - Gessellsc mbg R 77 - Fonds Segment B, Austria were all holders of American Depository Shares ("ADS") (collective "ADS Holders") of Satyam Computer Services Ltd.("Satyam") (ii) Seven mutual funds....
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....with the terms of Recovery Agreement. (vi) Aberdeen US, as a trustee of the Claim Trusts, initiated a civil action against inter alia Satyam and PwC in Aberdeen Claims Admin. Inc. v. Satyam Computers Ltd, 2:09-CV-5453-NS ("Aberdeen Civil Action"), filed in United States District Court of the Eastern District of Pennsylvania ("Pennsylvania Court"), seeking unliquidated damages caused on account of inter alia Satyam's and PwC's wrongdoing. Aberdeen US estimated that the total of Aberdeen Investor's losses for which recovery was sought would exceed US $68 Million. (vii) On November 17, 2009 the Aberdeen Civil Action was transferred to the United States District Court for the Southern District of New York ("New York Court") for pre-trial consolidation and coordination with In re Satyam Computers Services, Securities Litigation in the New York Court ("US Class Action Litigation"), a class action initiated by other investors of Satyam before the court in New York, asserting claims under Section 10 (b) and 20 (a) of the Securities Exchange Act of 1934 (the US Exchange Act) and Rule 10b-5 promulgated there under. (viii) Subsequently, the Aberdeen Civil Action was consolidated with th....
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....ecovered less than US$ 6,000,000 from the Class Action Settlement, Satyam remains obligated to pay the Aberdeen US, net of any transfer taxes, the difference between the Aggregate Aberdeen ADS Recovery and US$ 6,00,000, provided however such payment is capped at US$ 1,500,000 ('"Supplemental Consideration"). The Equity Holders were excluded from the Settlement Class with respect to the claims that were assigned to Aberdeen US. Satyam transferred a sum of Primary Settlement Account to an Escrow Account, maintained with Citibank N.A at New York ("Escrow"). It was agreed between the parties these Escrowed Funds remained the property of Satyam. Aberdeen US agreed to file the present application to seek an advance ruling regarding taxability of the Primary Settlement Amount and if occasioned, the Supplemental Consideration ("Satyam Settlement Account"). (xii) Under the terms of the Aberdeen US-PwC Settlement Agreement: (a) PwC entered into the Settlement to, without limitation, eliminate burden, expenses, uncertainty and distraction of further litigation with its attendant risk of monetary damages. (b) PwC agreed to pay a total principal settlement amount of US$ 2,000,000 to A....
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....nvestors disposed of Satyam Common Stock and ADRs. January 9, 2009 Further disposal of Satyam Common Stock and ADRs by Aberdeen Investors. September 1, 2009 Aberdeen Claims Trust and Aberdeen Claims Trust II ("Claim Trusts") were formed under laws of Pennsylvania, having the Applicant as trustee of both Claim Trusts to investigate and prosecute the claims of various Aberdeen Investors against Satyam November 17, 2009 The Applicant , as trustee of the Claim Trusts initiated legal action against Satyam in Aberdeen Claims Administration Inc. vs Satyam Computer Services Limited et al., No.09-cv-5453, in the United States District Court for the Eastern District of Pennsylvania ("Aberdeen Complaint") Thereafter, the Aberdeen Complaint was transferred for consolidation (for pre-trial purposes) with the class action, in a multi-district litigation created in the United States District Court for the Southern District of New York ("New York Court") to consolidate pending lawsuits filed against Satyam, in Satyam Computer Services Limited Securities Litigation, No.09-md-2027 ("Class Action"). February 16, 2011 Satyam executed and entered into an Agreement of Settlement ("Class Actio....
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....axable income, applicable tax rate, applicable rate of deduction of tax at source thereon and at what stage (i.e. on remittance to Escrow Account or on remittance from Escrow Account to Aberdeen US) is such tax required to be deducted? Q.3 Without prejudice to the arguments advanced in the Application, whether the Settlement Amount (if held to be taxable in India) shall attract Indian taxes under the Income Tax Act, 1961 at the time of deposit of the Settlement Amount by Satyam Amount by Satyam in the Escrow Account? Questions for Ruling in Application No.1370 Q.1 Whether , on fact and circumstances of the case, the consideration to be received by Aberdeen US, as trustee for the Claim Trusts from PwC in accordance with the terms of the Settlement Agreement entered between the Applicant and PwC on July 18, 2012 is not taxable under the provisions of the Income tax Act, 961? Q.2 If answer to question number 1 is in the affirmative, what would be the basis and method of determination of taxable income, applicable tax rate, and applicable rate of deduction of tax at source thereon? Questions for Ruling in Application No.1433 Q.1 Whether, on the facts and circumstances ....
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.... 5 of the ITA. This is on the basis that the Impugned Settlement Amounts are not connected with the Applicant's business in India but for release of claims of Aberdeen Investors against Satyam/PwC under the Aberdeen Civil Action initiated in United States, and to end reputational harm caused to Satyam/PwC in United States. Therefore, the Impugned Settlement Amounts have no territorial nexus with India. The applicant has relied on the decision of the Privy Council in Commissioner of Income-tax, Bengal vs Shaw Wallace & Company (ILR 59 Cal 1343 At P. 1352). (d) The Impugned Settlement Amounts are capital receipt in the books of Aberdeen US which does not fall for consideration under section 45 of the ITA for the following reasons: a The Impugned Settlement Amounts are received on account of destruction of capital assets (i.e. the right to sue Satyam/PwC) and do not fall for consideration under Section 45 of the ITA. b. Even if the Impugned Settlement Amounts fall for consideration under Section 45 of the ITA no Capital Gains arise owing to failure of computation mechanism under Section 48 of the ITA and Section 48 of the ITA and Section 55 (3) of the ITA. c. Without prejudice....
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....ssets. The later provision contemplates that the asset will continue to exist, even if the rights in such asset are extinguished. The applicants have relied on the verdict of the Apex Court in CIT vs Mrs Grace Collis and others (AIR 2001 SC 1133). However, the impact of this verdict will be discussed later in subsequent paragraphs as the applicants have not quoted the relevant portion. (g) The cost of acquisition and cost of improvement of a right to sue cannot be computed. In such a situation the mechanism for computation of Capital Gains under Section 48 of the ITA would fail in the present situation. The applicants have relied on the decision of the Supreme Court in CIT vs B.C. Srinivasa Setty (128 ITR 294) (h) Satyam equity shares and ADS held by the Aberdeen Investors were in the nature of capital assets. At the time of investments in Satyam equity shares, Aberdeen Investors were registered as Foreign Institutional Investors ("FIIs") and/or sub-account of FIIs under the erstwhile SEBI (Foreign Institutional Investor) Regulations, 1995 ("FII Regulations") with the Securities Exchange Board of India (SEBI). The investments made by FII entities/sub accounts are in the nature ....
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....iness activities of dealing in securities. (c) The recipients of the settlement amounts are the Aberdeen funds (and not participating investors) who are in the business of purchase and sale of securities. (d) The Mutual Funds (like Aberdeen Funds) invest their funds after a careful research of the market. The investment decisions are not taken based on the expected dividends from and the expected appreciation in the value of a particular security. Rather, these decisions are taken on the potential upside in the market price of a share/security. Unlike an investor, Mutual Funds change their portfolios frequently and sometimes prefer even booking losses. Whenever their research tells them that a particular security has reached its optimum price and the risk of losing was more than a chance gaining, they exit the security. These are characteristics of a trader and not of an investor. For example, the FIIs take decisions to move out a market on local as well as international factors. The buying and selling of shares is done very regularly and frequently except in case of some securities where the analyst is not able to suggest a decision to exit. The FIIs are in the business of tra....
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....t nor the fall in price destroys an asset. (j) The amount paid by Satyam is not for relinquishment or extinguishment of the right to sue but as a compensation for the loss of potential income suffered by Aberdeen Funds in the course of their business operations. (k) The Revenue has relied on the judgment of Allahabad High Court in CIT vs Smt Shanti Meattle 1973 90 ITR 385 and decision in the case of CIT vs GR Karthikeyan 201 ITR 866 (SC). Inferences 9. We have carefully considered the submissions and counter submissions of applicants and Revenue respectively. Similar question was involved in application No. 1060 & 1070 of 2010 wherein we had analyzed various arguments relating to taxability of Settlement amount received from Satyam and PwC in similar circumstances, i.e., receipt of settlement amount as a result of settlement agreement and approval by the US Court after the complaints were filed in respect of fraud committed by Satyam/PwC. In that case we have held as under:- "28. The term income has been defined in section 2(24) of the Act. The Privy Council in CIT vs Shaw Wallace & Co (ILR 59 Cal 1343) defined income as under:- "Income, their Lordships think, in the In....
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.... [2004] 118 as follows: "Further, all receipts are not taxable under the Income Tax Act. Section 2(24) defines "income". It is no doubt that this is an inclusive definition. However, a capital receipt is not income under section 2(24) unless it is chargeable to tax as capital gain under section 45. It is for that reason that under section 2(24) (vi), the Legislature has expressly stated, inter alia, that income shall include capital gain chargeable under section 45. Under section 2(24) (vi), the Legislature has not included all capital gains as income. It is only capital gain chargeable under section 45 which has been treated as income under section 2(24). Further under section 2(24)(vi), the Legislature has not stopped with the words "any capital gains". On the contrary it is obviously stated that only capital gains which are taxable under section 45 could be treated as "income". In other words, capital gains not chargeable to tax under section 45 fall outside the definition of "income" in section 2(24). Therefore, the words "chargeable under section 45" are very important. So, whenever an amount which is otherwise a capital receipt is to be charged under section 2(24), and whe....
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....ver damages is not assignable because it is not a chose-in-action. An actionable claim can be assigned but in order that there should be an actionable claim, there must be a debt in the sense of an existing obligation. But inasmuch as a breach of contract does not result in any existing obligation on the part of the person who commits the breach, the right to recover damages is not an actionable claim and cannot be assigned. ------------------------------------------------------------------------------------- In my opinion, it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party. As already stated, the only right which he has is the right to go to court of law and recover damages. Now, damages are the compensation which a court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation ....
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.... that the expression extinguishment of any rights therein cannot be extended to mean the extinguishment of rights independent of or otherwise than on account of transfer. To so read the expression is to render it ineffective and its use meaningless. As we read it, therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer." In view of above, the right to sue can be considered for the purpose of capital gains. This has been further clarified by explanation 2 of Section 2(47) inserted by Finance Act, 2012 but effective from 1.4.1962. This explanation reads as under:- "Explanation 2 - For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of right has been characterized as being effected or dependent upon or....
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....nts is a part of their business receipt because these applicants are representing mutual funds which invest their funds after careful research of the market on the basis of expectation of potential upside in the market price of share and unlike an investment, mutual funds book their profits frequently and sometimes prefer even booking loses. According to the Revenue these are characteristics of a trader and not of an investor. As regards the treatment of income of such mutual funds as FIIs as capital gains the revenue has submitted that the Government has done so in order to attract investors but that does not alter the basic character of the activities of FII and it only changes the manner of taxability. The Revenue has relied on the principle of surrogatum saying that the settlement amount has been received for the future profits surrendered. The issues raised as above by the Revenue have to be examined first against the factual position in this case and then in the light of legal position. There is no doubt that according to the surrogatum principle the character of receipt of an award of damages or of an amount received in settlement of a claim as capital or revenue depends on ....
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...., pay interest thereon, or incur expenditure of like nature. In our view it is against such deductions that the Parliament guarded against by providing in clause (a) of sub-section(2) of section 115AD of the Act stating that no deduction shall be allowed in computing income in respect of securities referred to in clause(a) of sub-section (1). If we read section 115AD in conjunction with the regulations 12(3) of SEBI Regulations whereunder a sub-account of FII is registered as FII for the limited purpose of deriving the benefit under section 115AD, it becomes clear that this is for the purpose of deriving the benefit of reduced rates of tax. 23. The circumstances and the framework of the plethora of legislative provisions unmistakably point out that a FII is not registered for carrying on trade in securities; it can only invest in securities for the purpose of earning income by way of dividends and interest and realizing capital gains on their transfer." Therefore, the settled legal position is that FIIs are not engaged in trading business. The facts of the present three cases also show that the shares were purchased as investors and not as traders. In their books of accounts a....