TaxTMI 
TaxTMI 
2016 (1) TMI 793
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....ommon order is being passed. Facts 2. The 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 Comput....
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....berdeen Investors, after payment of certain litigation costs, all in accordance 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 $68 Million. (vii) On November 17, 2009 the Aberdeen Civil Action was transferred to the United States District Court for the Southern District of New York ("New York Court") for pre-trial consolidation and coordination with In re Satyam Computers Services, Securities Litigation in the New York Court ("US Class Action Litigation"), a class action initiated by other investors of Satyam before the court in New York, asserting claims under Section 10 (b) and 20 (a) of the Securities Exchange Act of 1934 (the US Exchange Act) and Rule 10b-5 prom....
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....i) The ADS Holders were deemed members of the Settlement Class and were bound by the terms of the Class Action Settlement. However in the event ADS holders recovered less than US$ 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, e....
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.... Ramalinga Raju, the then Chief Executive Officer of Satyam submitted his resignation letter to Satyam's board wherein he accepted that Satyam's financial results were manipulated over a period of years. January 7, 2009 The Aberdeen Investors 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 Ne....
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....sts from Satyam in accordance with the terms of the Settlement Agreement entered into between Aberdeen US and Satyam on July 27, 2012 is taxable under the provisions of the Income-tax Act, 1961? 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, 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 ....
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....am and hence the territorial nexus principle is not fulfilled in that respect. This can be established by the fact that the Aberdeen Investors had sold the shares prior to initiation of the action and the suit was linked to allegation of fraud/negligence. Therefore, the Impugned Settlement Amounts cannot be brought to tax under Section 9 read with Section 4 and Section 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....
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....nge or relinquishment of the asset; or (ii) the extinguishment of any rights therein". The legislature in its wisdom has specifically distinguished sale, exchange and relinquishment of the asset from extinguishment of rights in a capital asset. Thus while in the former, the provision speaks of sale, exchange and relinquishment of the asset itself, the later explicitly speaks of extinguishment of any rights in the capital assets. 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 hel....
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....e Aberdeen Funds which are the recipients of the respective amounts of compensation from Satyam (the applicant being only a pass-through entity) are in the business of trading in securities and thereby earning profits. The mode of sharing of profit between the fund and the participants depends on the scheme of the fund and would not be a relevant factor to decide the nature of the activity. (b) The loss was incurred by the Aberdeen Funds in the course of their business 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 pa....
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.... 2011. (h) The amount of the compensation was received in the course of business of the Aberdeen Funds. Hence, it would constitute a business receipt and would be part of their business profits. (i) No asset was destroyed in this case. Any fall in price of share cannot be regarded as destruction of asset. In fact, in the case of business of a mutual fund, rise and fall in prices of securities, be it for one reason or the other, is a normal business incidence and neither the rise in price creates an asset 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 ....
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....ount till it is finally disbursed. 30. Now we may also consider whether the settlement amount can be treated as capital gains in the hands of QSF. Section 2(24) of the Act specifically includes "(vi) any capital gains chargeable under section 45" within the ambit of income. Thus a capital receipts would be chargeable to tax only if it falls under section 45 of the Act (as capital gains) though capital receipt as such is not taxable. This principle was described by the Income Tax Appellate Tribunal (Mumbai) in Dhruv N. Shah v. Commissioner of Income Tax 88 ITD [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 ....
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....al is not transferable." ------------------------------------------------------------------------------------- "Chagla C.J. had an occasion to consider this aspect of the law in Iron & Hardware Co. v. Shamlal & Bros., AIR 1954 Bom 423. The learned Chief justice observed as under (at p. 425): "It is well settled that when there is a breach of contract, the only right that accrues to the person who complains of the breach is the right to file a suit for recovering damages. The breach of contract does not give rise to any debt and, therefore, it has been held that a right to recover 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 ....
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....s independent of transfer. This question had come up before the Apex Court in the case of CIT vs Mrs Grace Collis and other 2001 248 ITR 323 wherein it was held as under: "We have given careful thought to the definition of transfer in Section 2(47) and to the decision of this court in Vanias case. In our view, the definition clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. We do not approve, respectfully, of the limitation of the expression extinguishment of any rights therein to such extinguishment on account of transfers or to the view 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 ....
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....lement agreement in the case of Aberdeen US and Aberdeen UK is same and we take the same view in this case also that the nature of settlement amount is of capital receipt and it cannot be categorized as income. Further this amount has been received against surrender of right to sue which cannot be considered for the purpose of capital gains under section 45 of the Income-tax Act. 11 The Revenue has raised certain additional points in this case which are required to be addressed. In this case the Revenue has taken a different stand to establish that the settlement amount received is income of the applicant. According to the Revenue the settlement amount received by the applicants 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 t....
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....se (a sub-section (1) includes business income also, and it is argued that there is no reason why sections 28 to 44C of the Act, the provisions relating to computation of 'profits and gains of business', should be excluded. We are not persuaded to accede to the contention of the learned counsel. We have pointed out above that income in respect of securities, referred to in clause (a)of sub-section (1) of section 115AD, refers to income in the nature of dividends, interest income of debenture and the like. For the purpose of realizing such income, an investor/a FII would naturally engage staff and incur expenditure by way of salaries of the staff etc. incur expenditure in obtaining loan, 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 purpo....