TaxTMI 
TaxTMI 
2016 (1) TMI 814
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....aised for the ruling for AAR 1060 are as under:- (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 r....
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....er section 195, the entities A and B are not entitled to take into account the chargeability of the settlement fund in the 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 muc....
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....ere listed on the New York Stock Exchange (NYSE). In May, 2005 it issued another 130.41 lakhs ADS and listed on NYSE. On 7.1.2009 the then Chairman 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 ....
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....ted States Treasury Regulations QSF is a fund, account or trust established pursuant to a United States Court order to resolve or satisfy contested or uncontested claims that 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, Secundr....
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....on 195 was not attracted at this stage also. After transfer of amount to the Final Escrow Account the legal title over the settlement amount gets transferred to QSF. However, QSF is a passthrough entity and the settlement amount remains with 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 tha....
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....urt passing the final judgment and, therefore, such right accrued in the US and not in India. They have further submitted that section 5(2) (b) becomes applicable only when income is 'deemed to accrue or arise in India' under Section 9(1)(i) of the 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. ....
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.... TDS deducted in India. Revenue's arguments 19. The Revenue has argued that the ruling given by the Authority on 27.8.2012 was accepted by Satyam and acted upon by the concerned parties. It was not a unilateral act of Satyam but other applicants have also agreed to the procedure of 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 i....
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....this case) of the claimants. The shares had already been sold by the investors on their own. The damages were determined / settled long after the sale of the asset (shares or ADs). Hence, the compensation payable by Satyam was in no way related to the loss of income generating asset (shares) but to the income which the investors would 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 ....
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....is in India and the primary source of income is the shares in Indian Company which has their situs in India. The ADs issued to the US Investors are nothing but derivatives, representing certain number of Shares in the Indian company. These cannot have their situs other than in India. k. As regards Article 23 of DTAA it has been stated by the Department that the narrow view taken 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. ....
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....onduct of Satyam and its auditors, the plaintiffs suffered damages for which Satyam and other defendants were liable. On 16.2.2011 a settlement agreement was arrived at between Lead Plaintiffs and Satyam whereby in lieu of Satyam paying US dollar 125 million, the Lead Plaintiffs and the class members agreed to release and waive their claims against Satyam. Following the announcement of the Satyam settlement, PWC entities and 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 Settlemen....
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....f TDS certificate are not relevant and has no bearing on the main issue, i.e. whether the settlement amount payable by Satyam to the QSF can be regarded as sum chargeable in the hands of QSF under the provisions of the Act. While setting aside the earlier ruling, the Hon'ble High Court has also asked this authority to examine the position, first of all, in the light of whether the receipts were in the nature of capital receipts 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 settlemen....
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....T vs Barium Chemicals 1987 31 Taxman 471 AP The issue relating to distinction between capital and revenue receipts has engaged the attention of courts in a large number of cases. However, in order to decide whether or not a payment is capital or revenue receipt, it is necessary to look into its true nature and substance. In the case of CIT vs Barium Chemicals a general principle was enunciated that if the payment is received in the ordinary course of the business 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 stru....
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....ned income as under:- "Income, their Lordships think, in the Indian Income-tax Act, connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall." The settlement amount received as per the Court Order is not 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 activi....
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....herwise a capital receipt is to be charged under section 2(24), and when specifically so provides for not charging to capital gain for any reason under section 45, the same cannot be brought to tax as income by applying the general connotation under section 2(24)......" 31. In this case it is to be considered whether right to sue is property and a capital asset as defined u/s 2(14) of the Act and whether it is chargeable to tax. Section 2(14) defines Capital Asset to mean "property of any 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 set....
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....ompensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the court. Therefore, no pecuniary liability arises till the court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the court is doing is ascertaining a pecuniary liability which already existed. The court in the first place must decide that the defendant is liable and then it proceeds 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 sect....
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....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 flowing from the transfer of a share or shares of a company registered or incorporated outside India." So right to sue may be considered for the purpose of capital gains within the terms of section 45 of the IT Act which is a charging section. However, the charging section and the computation provisions under section 48 must go together. The Apex Court in the case of CIT vs BC Srinivasa Setty1981 128 ITR 294 had 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 ....
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....sferred to Final Escrow Account. Before this and up to the stage of Initial Escrow Account the amount remains the property of Satyam. After it becomes QSF the amount remains under the jurisdiction of the US court and the amount is to be utilized only for the purpose of distribution to the authorized claimants. QSF has no ownership over the amount. In the circumstances the issue of QSF being a separate legal entity as per US law or being assessable as representative assessee in India becomes irrelevant. The QSF is merely acting as a custodian of the amount to be distributed to authorized 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 settleme....