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TMI Blog2012 (8) TMI 780X X X X Extracts X X X X X X X X Extracts X X X X ..... ience, as 'A' has filed AAR No. 1087 of 2011 and the foreign arm of the auditor hereafter referred to as 'B', has filed AAR No. 1088 of 2011 seeking rulings on the transaction among them. 3. The shares of IC are listed in the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India. Its American Depository Shares (ADS) were listed in the New York Stock Exchange (NYS). The price of the shares of IC fell suddenly in the market as a result of an admission by its former Chairman from India that the accounts prepared as on 30.9.2008 contained some misstatements. This caused the fall in prices of its shares. 4. Between January and April, 2009 a number of suits were filed against IC and A and B in various jurisdictions in the United States claiming damages. The suits were based on tort, misrepresentation, deceit, fraud and so on. In terms of the procedural laws of the United States, the suits were directed to be consolidated. The suits were consolidated and Lead plaintiffs and Lead counsel were appointed to pilot the class action on behalf of the eligible claimants for damages. Pursuant to that, the Lead plaintiffs through the Lead counsel filed a consolidated Class Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.9.2011, the US court passed a final judgment and order confirming the settlement arrived at, finding it to be fair, reasonable and adequate. The QSF came under the control of Lead Counsel subject to the jurisdiction and control of the US court. 8. The applications before this Authority were filed even prior to the final order of approval, but after the initial order of approval. This Authority allowed the applications under section 245R(2) of the Act to render rulings on the questions formulated in these applications. 9. In AAR No. 1045 of 2011 filed by IC, the following questions were formulated for rulings while allowing the application under section 245R(2) of the Act : 1. Whether, on the facts and circumstances of the case, the Settlement Amount payable under the Stipulation pursuant to the judgment and Final approval of the US Court will be regarded as sum chargeable under the provisions of the Act as referred under section 195 thereof? 2. Where the answer to question no. 1 is in the affirmative, at what time shall be applicant be required to deduct income tax under section 195 of the Act? 3. Where the answer to question no. 1 is in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmulated subject to the same qualification : 1. Whether, on the facts and circumstances of the case, any portion of the Settlement Fund payable by the A & B Entities under the Stipulation to the QSF 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. Whether, on the facts and circumstances of the case, for the purposes of deducting tax at source under section 195 of the Act on the transfer of the Settlement Fund Initial Escrow Account to the QSF, can the A & B entities take into account the chargeability of the Settlement Fund in the hands of the Authorised Claimants, as defined in paragraph 1(d) 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 Fund to the Authorised claimants pursuant to the judgment and final approval of the US Court? 4. If the answer to question no. 1 or question 2 is in the affirmative and income tax is required to be deducted from the Settlement Fund under section 195 of the Act, at what rate shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1961, at what rate shall the tax be deducted? 4. Whether a ruling of the Authority would be sufficient authorization to the applicant to credit the said amount in its books of account and/or make the payment without undertaking any further process under the Income-tax Act, 1961? 15. This Authority reserved for consideration the question whether any scheme has been devised for avoidance of tax in India. Nothing significant was brought out or argued in that behalf. So, that aspect need not detain us in these Rulings. 16. Under the terms of the settlement subsequently approved by the Court, IC had first to deposit the amounts agreed to, in a segregated account in India. 'A' had to do likewise and 'B' had to deposit it in an initial escrow account in New York, Thereafter, the amount deposited by IC had to be transferred to an Initial Escrow account in New York, After the approval of the settlement, the amount had to be transferred from the initial escrow account to the final escrow account to be treated as Qualified Settlement Fund (QSF). Thereafter, it had to be distributed to the qualified claimants in the class action, after deducting the expenses including legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount by B led to this varying stands. 23. According to learned counsel for the applicants, the settlement amount received by QSF is not income arising in India. Nor can it be deemed to arise in India. It was an amount offered by IC and A to Lead counsel or QSF in lieu of the various claimants giving up their right to sue for damages. 24. I will first consider what is the nature of this payment by IC, A and B. According to the applicants, the amounts are amounts in respect of waiver, release and discharge of the applicants in the class action or compensation for forbearance to sue. I find it difficult to agree with this submission. This is not a case of forbearance to sue or waiver of the right to sue. Various suits had already been instituted. The court in America took note of the several suits already filed and consolidated them and permitted them to be prosecuted as a class action in terms of the procedural laws of that country. Those suits filed were for damages or compensation. The claim was based on liability in tort. The suits were no doubt consolidated into a class action for breach of the provisions of the Securities Exchange Act of that country. But, the action had its o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different from a cause of action. Even though the Lead Plaintiffs had a right of action in U.S., their cause of action arose or accrued in India by the alleged misrepresentation, deceit or fraud practiced in India by IC, A and B. Therefore, I am not in a position to agree that the cause of action was all in the U.S. In my view, the cause of action arose in India. 28. Based on a cause of action that arose in India, a class action suit was filed in US. On a settlement of the class action, the sums were agreed to be paid. The source of the compensation is the alleged tort perpetrated in India. Therefore, the right to the compensation arose in India. The source of the compensation is the alleged tort in India. The plaintiffs represented by Lead Counsel [as clarified by the order under section 245R(2) of the Act] are non-residents. In the language of section 5(2) of the Act, the income by way of compensation or damages accrued or arose in India. This is because, the entitlement to receive and the receipt is based on the alleged tortuous act committed in India. The source is India. 29. The argument that the source must be taken to be the class action filed in US and the orders of cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is the character of the receipt? it is not capital receipt as I have found. Then, the income arising cannot generate any capital gain as sought to be contended by the Revenue in the applications by A and B. In the context of the definition of income in the Act read with Section 56(1) of the Act, the income can be held to be income from other sources. In other words, the settlement amount in the hands of QSF would be income from other sources in terms of the Act. Damages received by way of settlement or otherwise, cannot but be income in the hands of the receiver. 33. Considerable arguments were raised by Senior Counsel for IC that there is no receipt of income by QSF until, by the final order of the court, the amount gets transferred and becomes available for distribution. He even contended that the income would accrue to the class plaintiffs only on the amount being distributed in the US by the Lead Plaintiffs from the QSF. As I see it, the Lead Plaintiffs represent all the qualified claimants in the class action. The lead plaintiffs are their representatives. When the title to the funds passes to the QSF or Lead Plaintiffs the title passes to the qualified claimants. The Lead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in India. Paragraph 1 of Article 23 provides that items of income of a resident of US, wherever arising, which are not expressly dealt with in the foregoing articles shall be taxable only in US. This is subject to paragraph 2. Paragraph 2 clarifies that paragraph 1 shall not apply to income other than income from certain sources specified therein. Paragraph 3 of Article 23 reads: "3. Notwithstanding the provisions of paragraph 1 and 2, items of income of a resident of a contracting State not dealt with in the foregoing articles of this Convention and arising in the other Contracting State may also be taxed in that State." Elaborate arguments were raised whether an income deemed to arise in India in terms of Section 9 of the Act, can come within the purview of this paragraph or it is confined only to the income actually arising in India. In view of my finding that the income here arises in India, this controversy need not detain me in this ruling, On my finding of its being income from other sources arising in India, paragraph 3 of Article 23 of the DTAC has application. The income is chargeable to tax in India in terms of the DTAC. 37. Once it is found chargeable to tax in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased in India. I have found the source of income for the QSF to be India. I have also held that the liability to be taxed in India exists by virtue of paragraph 3 of Article 23 of the DTAC. No separate argument was raised on the existence or non-existence of an obligation under section 195 of the Act in the case of B. Since, the whole settlement fund is found to be liable to be charged to tax in Act, the deduction will be made from the fund in terms of Section 195 of the Act on this amount also and deposited before the fund is distributed to the qualified claimants. 42. The rulings can now be summarised. In AAR No. 1045 of 2011, I rule on question no. 1 that the Settlement amount payable will be regarded as sum chargeable under the provisions of the Act as referred to under section 195 of the Act. On question no.2, I rule that the applicant is required to deduct income-tax when the settlement amount moves from the segregated account to the initial escrow account. In view of the ruling on question no. 2, no separate ruling is called for on question no.3. On question no. 4, I rule that the deduction should be at the rate of 30%. In AAR No. 1060 of 2011, I rule that the settlement ..... X X X X Extracts X X X X X X X X Extracts X X X X
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