TaxTMI 
TaxTMI 
2016 (1) TMI 814
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....er:- (1) Whether, on the facts and circumstances of the case, the Settlement Amount payable by Satyam under the Stipulation to the Qualified Settlement Fund pursuant to the Judgment and Final approval of the US Court will be regarded as sum chargeable under the provisions of the Act in the hands of the QSF? (2) 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? (3) Whether on the facts and circumstances of the case, Section 195 of the Act will also apply to the QSF when it distributes the Settlement Amount to the Authorized Claimants pursuant to the judgment and final approval of the US Court? (4) If the answer to Question No.1 or Question No.2 is in the affirmative and Satyam is required to deduct income tax under section 195 of the Act, at what rate shall income tax be deducted? (5) If the answer to the Question No.3 is in the affirmative and QSF is required to deduct income-tax under section 195 of the Act, at what rate sha....
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....e hands of the authorized claimants. Question No.3 raised has to be raised before the tax authorities in US. Once the tax is deducted on the fund as a whole, in the present context, the obligation of QSF will come to an end. The other aspect is not for consideration now. On question No.4, I rule that the deduction of tax will be at the rate of 30%. 5. In the order dated 18th September, 2014, Hon'ble Delhi High Court observed as under:- The primary question which was there before the Authority for Advance Rulings was whether the amount of the settlement funds which had been transferred from India to USA were chargeable to tax in India. In order to answer this question a primary issue that arose was whether the receipts in the hands of the beneficiaries were in the nature of capital receipts or revenue receipts. The Authority for Advance Rulings had proceeded on the basis that they were revenue receipts and it had so observed on the basis of an alleged submission to this effect made on behalf of the petitioner. That is not the correct position in as much as from the impugned Ruling itself it would be evident that the stand of the petitioner was that they were not revenue receipts....
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....man of Satyam filed a letter to the Board of Directors admitting that the company's balance-sheet was inflated on account of false inflated receipts, incomes and profits over several years. As a result of public disclosure of this fraud the prices of Satyam ADS fell on NYSE from USD 9.35 on 7.1.2009 to USD 1.14 on 9.1.2009. Several US investors of Satyam filed suits against Satyam in various jurisdictions in United States claiming damages. All these suits were consolidated on 9.4.2009 by the United States judicial panel on multi district litigation into one proceeding in the United States Court for the Southern District of New York. On 12.5.2009 the United States Court appointed Lead Plaintiffs in the action and approved their selection of the applicant as the Lead Counsel. On 17.7.2009 a consolidated class action complaint was filed on behalf of the Lead Plaintiffs. 8. The claims in the Complaint were filed on behalf of a Class of investors comprising of (i) persons and entities who purchased or otherwise acquired Satyam ADSs traded on the NYSE, and (ii) persons and entities residing in the United States that purchased or otherwise acquired Satyam ordinary shares traded on the NS....
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....hat have resulted from an event or a related series of events that has occurred and that has given rise to at least one claim asserting liability arising out of a tort, breach of contract, or violation of law. As per United States Tax Regulations, QSF is a separate United States person and a tax resident of a United States subject to entity level tax. 11. All funds held in the Initial Escrow Account or the Final Escrow Account, as the case may be, shall be deemed to be in the custody of the US court and shall remain subject to the jurisdiction of the US Court until such time as the funds shall be distributed pursuant to the Stipulation and/or Orders of the US Court, or returned to Satyam upon the termination of the Settlement Agreement pursuant to its terms. Before proceeding ahead we may list the chronology of main events in the case of Satyam (AAR No.1060) as under:- 17.02.2011 Satyam filed application before the AAR seeking advance ruling 25.02.2011 Satyam opened account with Citibank, Secundrabad (the Segregated Account) and deposited INR 5,671,250,000.00 as the Settlement Amount in it. 21.03.2011 US Court passed order granting Preliminary Approval to the Settlement Agr....
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.... QSF till a competent Court decides on the legal claims to such amount. The applicants have argued that such amount is a capital receipt in the hands of QSF and not its income and even though QSF is a separate taxable entity, settlement amount is not its income either in United States or in India. It has been further submitted that at the time when the Settlement Amount was transferred to the QSF, the identities of the eventual authorized claimants were not known and there was no payment or credit to the account of any person liable to be assessed to tax. The applicants have relied upon the judgment of Hon'ble Supreme Court in the case of GE India Technology Centre Private Limited vs. CIT 2010 327 ITR 456 (SC) and UCO Bank vs. Union of India 2014 369 ITR 335 (Delhi). 13. The applicants have mentioned that after the ruling dated 27th August, 2012 Satyam was directed by the Income Tax Department to deduct tax on the settlement amount but at that time the identities and shares of amount of eventual claimants were not known and in such a situation there would be no liability of TDS under Section 195 because the amount payable to the non-resident had not became due. The applicant has p....
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....Act, directly or indirectly- * through or from any business connection in India, or * through or from any property in India, or * through or from any asset or source of income in India, or * through the transfer of a capital asset situate in India. According to the applicants the Settlement Amount does not fall in any of the above categories qua the QSF or the Authorized Claimants, is clearly not arising to them from any 'business connection in India' or from any 'property' in India and they have not transferred any 'capital asset' in India. 17. The applicants have further argued that a mere right to sue is not a capital asset from which capital gains can arise. A mere right to sue is neither an actionable gain nor 'property of any kind' and, therefore, is not a capital asset within the meaning of Section 2(14) of the Income-tax Act. Reliance has been placed on the judgment in Union of India vs. Raman Iron Foundry, AIR 1974 SC 1265. It has been further stated that a mere right to sue cannot be transferred and it has no cost of acquisition. 18. The applicants have further stated that the Settlement Amount cannot be taxed as 'income from any other source' as the Settlement ....
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.... deducting and paying tax if the Authority so ruled. Satyam has already deducted the necessary tax and paid to the Government account in accordance with the terms of settlement. According to the Revenue questions 2, 3, 4 and 5 of the applicant relate to deduction of tax under section 195 by the payer and these questions have lost their relevance because the taxes have been deducted and paid by Satyam. Therefore, these questions are no longer open to adjudication. According to the Department of Revenue there is no provision in the Income-tax Act whereby the payer-deductor having not disputed the ruling and having acted upon it can still be entitled to receive back the amount so deducted and paid. The refund of taxes deducted at source can be given only to the payer, i.e. QSF. The Department has further mentioned that the only valid question for consideration by this Authority is question No.1 which is whether the amount paid by Satyam to the QSF can be regarded as sum chargeable to tax under the provisions of the Act in the hands of QSF. 20. As regards the issues raised by the applicant's counsel, the Department has given a point wise reply, the gist of which is as under:- a. The....
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....ould have earned from the asset (if the fraud had not taken place). g. The Department has further submitted that contention of the applicants that the receipts are not for the lost income but are compensation for the inflated price they paid as the cost of acquisition on the basis of Annual Reports disseminate and published by Satyam is misconceived for the following reasons: i. Share prices are not necessarily dependent on the financial results or the net worth of the company. Even after poor financial results, some statement of the company regarding an upcoming project or some policy announcement of the respective governments regarding incentives in future, merger or acquisitions or the overall market sentiments may still keep the prices high or vice versa. ii. Compensation was not for the cost of acquisition, the compensation was worked out only for shares/ADs sold at a loss between 15.09.2008 and 06.04.09 or those not sold as on 06.04.2009. No compensation is agreed to be given to the shares/ADs sold prior to 14.09.2008 irrespective of their cost of acquisition. iii. Compensation was determined with reference to the fall of prices at the point of sale. The amount of com....
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....en by the applicant that the income deemed to arise in India under section 9 is within the ambit of Article 23 is wholly erroneous. The word "arising" is not defined in the Income Tax Act as well. However, section 9 extends the scope of taxable income by deeming certain income which otherwise do not arise in India as arising in India. A legal fiction created under section 9 to enlarge the scope of accrual/arising of income cannot be nullified by putting a restricted meaning to the word "arising" used in the treaty. A deemed arising of income is nonetheless arising of income under the law, Article 23 of the DTAA does not make any difference between arising and deemed arising. The difference contained in the domestic law cannot be imported in the treaty nor can the DTAA be read with IT Act in hand. l. As regards the account being Custodia Legis it was stated that amount to be transferred from the Initial Escrow Account was not on taxes, if any, payable in India as per the terms of the agreement. The amount needed the custody of the US Court, if at all to be so, would be only that part of the money which is available for distribution and not the amount of statutory taxes which were ....
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.... Lead Plaintiffs commenced negotiations regarding claims against PWC entities. Subsequently the PWC entities also entered into the settlement agreement to eliminate the burden, expense, uncertainty and distraction of further litigation and agreed to pay US dollars 25.5 millions as a consideration for their release in terms of the stipulations. As per the scheme of payments when the amount was kept in segregated account in Indian currency in India, Satyam/PWC remained owner of such account. When the amount was transferred to Initial Escrow Account in US, the amount still remained the property of Satyam and it was only when the amount was transferred to Final Escrow Account, the amount did not remain the property of the Satyam. As per paragraph 14 of the Settlement agreement all funds in the Initial Escrow Account or Final Escrow Account shall be deemed to be in the custody of the US Court and shall remain subject to the jurisdiction of the US Court until these are disposed of under orders of the US Court. It is only upon transfer into the Final Escrow Account that the settlement funds became Qualified Settlement Fund (QSF). Under US Treasury Regulations, a QSF is a fund, account or ....
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....or revenue receipts and thereafter to determine as to whether those receipts were chargeable to income-tax in India. 24. Section 195 puts responsibility on the payer making payment to a non-resident to deduct taxes on any interest or any other sum chargeable under the provisions of this Act. This means that the payer should deduct taxes at the time of its credit or payment to the non-resident only if the amount involved is chargeable to tax in India. The Hon'ble Supreme Court in GE India Technology Centre Private Limited vs. CIT 2010 327 ITR 456 has held that the law for deduction u/s 195 arises only when the sum paid is chargeable to tax in India but not otherwise. Even in light of this the only relevant question to be considered is whether the settlement amount can be treated as sum chargeable to tax because other events like deduction of tax at source and rate thereof have already taken place. 25. Coming back to the nature of settlement amount, we notice that the complaint filed by Lead Plaintiffs before the US Court was in respect of the fraud committed by Satyam by filing various false annual reports and quarterly reports before US authorities for 2004 and 2005 along with a ....
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....ss for loss of stock in trade it is revenue receipt and if, on the other hand, the receipt is towards compensation for extinction or sterilization partly or fully of profit earning source (capital assets) such receipt not being in the ordinary course of the business, it must be construed as capital receipt. In the case of Kettlewell Bullen and Company , the Apex Court analyzed a large number of cases and concluded as under:- "On analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of assessee's income, the payment made....
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....ot a periodical monetary return. As it is against surrender of 'right to sue', it is not linked with income generating apparatus, i.e. shares of Satyam. It can also not be said that it relates to any sort of business activity carried on by the QSF. In the circumstances the settlement amount has to be characterized as capital receipt. Once the character of receipt is capital in nature, it goes outside the scope of income chargeable to tax unless it is specifically brought within the ambit of income by way of specific provisions of the Income-tax Act. 29. We also notice that the most important point here is that we have to consider the nature of receipt in the hands of QSF which is not doing any activity to earn such receipt which may qualify as income. QSF is not in the business of suing and seeking settlement amount. Surrender of 'right to sue' has also been made by investors and not by QSF. Under no circumstances the theory of loss of future income would apply to QSF as neither is it owner of ADS nor it is doing any business relating to ADS. We are required to give ruling whether settlement amount in the hands of QSF is chargeable to tax. We are not considering whether investors ....
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.... kind held by an assessee, whether or not connected with his business or profession". Section 6 of the Transfer of Property Act states that "property of any kind may be transferred, except as otherwise provided by this Act or by any other law for the time being in force." Section 6 (e) notes that "a mere right to sue cannot be transferred". Therefore, a 'right to sue' is property and thus Capital Asset as defined under section 2(14) of the Act but is not transferable. There cannot be any transfer of a right to sue under Indian law and any capital receipt arising from a right to sue cannot thus be considered capital gains under section 45. While examining the treatment of capital receipt from settlement and extinguishment of right to sue as Capital gains the Gujarat High Court in Baroda Cement and Chemicals v. CIT (158 ITR 636) held as under: "The amendment of clause (e) of section 6 by the deletion of the italicized words has brought into sharp focus the distinction between property and a mere right to sue. Before the amendment, only the right to sue for damages arising out of a tortuous act fell within the ambit of the said clause. The right to sue arising ex-contractual, theref....
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....roceeds to assess what that liability is. But till that determination, there is no liability at all upon the defendant. " Further, the Supreme Court in Union of India v. Raman Iron Foundry, AIR 1974 SC 265 held as under: "When there is a breach of contract, the party who commits the breach does not eo instanti incur any pecuniary obligation, nor does the party complaining of the breach become entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. That is not an actionable claim and this position is made amply clear by the amendment in section 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred. " The Supreme Court endorsed the views of J. Chagla "This statement in our view represents the correct legal position and has our full concurrence." If right to sue cannot be transferred and it has no cost of acquisition, the question of considering the same for the purpose of capital gains u/s 45 of the Act would not arise. Having said as above, it will have to be considered whether surrender of right to sue is covered under t....
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....ad considered this issue and held that the "Charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section." The Apex Court also held that "none of the provisions pertaining to the head 'capital gains' suggests that they include an asset in the acquisition of which no cost of acquisition can be conceived." It is clear that even if right to sue is considered as capital asset covered under the definition of transfer within the meaning of section 2(47) of the IT Act, its cost of acquisition cannot be determined. In the absence of such cost of acquisition, the computation provisions failed and capital gains cannot be calculated. Therefore, right to sue cannot be subjected to income tax under the head 'capital gains'. The Revenue also agrees that settlement amount is not paid in consideration for any capital asset and cannot be characterized as capital gains. It is only as an alternative argument that they have brought the issue of capital gains. 32. According to Revenue the settlement amount is charg....
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....rized claimants after the order of the US court is available. Such amount can be characterized Custodia Legis only and is not to be considered for tax purposes. It is for this reason that even under the US laws the amount transferred to a QSF to resolve or satisfy a disputed liability is excluded from its gross income for US tax purposes. 34. We are now in a position to answer the four issues identified by us for our consideration as mentioned earlier in paragraph 21. In view of the fact that tax on settlement amount has already been deducted, questions Nos. 2,3,4 & 5 are not relevant now. The settlement amount is capital in nature and has been approved by the US Court against surrender of 'right to sue'. 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....