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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 ..... rose out of the misrepresentation of IC, by the alleged manipulating of the financial statements of IC with the alleged connivance of A and B, followed by the confession of the Managing Director of IC about the inaccuracy of the financial statements. All these took place in India. The suit could be filed in India - On a settlement of the class action, the sums were agreed to be paid and 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 - Once it is found chargeable to tax in India, IC will have the obligation to withhold tax on the amount under section 195 on the transfer of the fund from the segregated account in India to the initial escrow account in the U.S. When a settlement is arrived at subject to the approval of Court and steps are taken thereunder, then the approval of court will be approval of each step taken as part of the settlement. That would mean that IC would lose its title to the fund from the date of deposit once the court approved the settlement subject to the terms of the settlement, like the stipulation regarding interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Action Complaint for alleged violation by IC, A and B of sections 10(b) and 20(a) of the Securities Exchange Act of US, The Class action was filed on behalf of those who purchased or otherwise acquired IC ADSs on New York Stock Exchange, were investors residing in US who purchased or otherwise acquired shares of IC on the BSE or NSE between 4th January and 6th January 2009 (described the Class period), exercised options to purchase IC ADSs pursuant to IC Employees ADSs Plan during that class period and were US residents who exercised options to purchase IC ordinary shares pursuant to IC Employees Ordinary Share Option Plans during the Class period. It was clarified that only 0.0135% of the class represented by Lead Counsel were persons having an Indian address, 94.378% were having addresses, in the US and 5.608% are having addresses i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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 the affirmative, without restricting the generality of the question no. 2 above, assuming but not admitting, whether the applicant is required to deduct income tax under section 195 of the Act at the time of (a) deposit of the Settlement Amount into the Initial Escrow Account to the final Escrow Account (the Qualified Settlement Fund), as per the Stipulation pursuant to the judgment and final approval of the US Court? 4. Where the answer to the question no. 1 is in the affirmative and the applicant is required to deduct income tax under section 195 of the Act, at what rate shall income tax is deducted? 10. It was clarified that regarding those of the claimants who were residents of India as on the date of the application, the rulings to be rendered will not be binding on them or on the authorities under the Act. In other words, the resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income tax be deducted? 5. If the answer to the question no. 3 is in the affirmative and the QSF is required to deduct income tax under section 195 of the Act, at what rate shall income tax be deducted? 13. In AAR No. 1087 of 2011 filed by 'A' the following questions were formulated subject to the same qualification : 1. Whether the Settlement Funds when paid or transferred from the initial Escrow Account to the Final Escrow Account (Qualified Settlement Fund (QSF) pursuant to the judgment and final approval of the U.S. Court would be 'chargeable to tax' in terms of section 195 of the Income-tax Act, 1961? 2. Whether for the purpose of deducting tax at source under section 195 of the Income-tax Act, 1961 on the transfer of the Settlement Amount to the QSF, the applicant can take into account the chargeability of the Settlement Amount in the hands of the authorized claimants, as defined in paragraph 1(e) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scrow 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 fees incurred and meeting the tax liability, if any. 17. The segregated account stood in the name of IC. The interest earned on the deposit belonged to IC and the principal deposited stood transferred to the initial escrow account at the conversion rate prevailing on the date of transfer of the fund. The interest was to the benefit of IC and the title to it did not pass to QSF. The benefit or detriment of the variation in exchange rate was to be that of IC Before the fund actually got transferred to QSF, rulings had to be obtained from this Authority on chargeability to tax in India and that led to these applications. This was necessary to ascertain the actual amount available for distribution to the class action plaintiffs - qualified claimants. 18. The stand of the Lead counsel on behalf of QSF is that the amounts paid by IC, 'A' and 'B' by way of settlement is not chargeable to tax in India at all. IC, A and B support this position. The Revenue takes up the position that the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 origin in tort. The prayer was for recovery of damages for that tort. The class action complaint also avers that the action 'seeks to recover damages caused by the defendants 'mis-conduct'- It further says that the complaint asserts a claim under the Securities Exchange Act and the Securities Act. 25. The suit having been filed for damages, any settlement arrived at therein without specifically admittedly or not admitting liability for payment of compensation, cannot be considered to be compensation for forbearance to sue. The amount agreed to be paid can only be understood as damages agreed to be paid by way of settlement without going to trial and without admitting guilt or liability. I have, therefore, no hesitation in finding that the sums of $ 125 million and $ 25.5 million agreed to be paid to Lead plaintiffs would be in the nature of damages or compensation. 26. A compromise is only a contract. It becomes a decree or order of court when it receives the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, 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 court giving approval to the settlement is by ignoring the cause of action that gave rise to the action. If the income is relatable to the cause of action leading to the claim, it can only be held that the action and settlement in US was only a mode of securing that compensation arising out of a cause of action that has roots in India. 30. It is argued that the income does not accrue to the QSF in India since on depositing it in the segregated account in India, QSF does not get title to it. Since IC has title to the funds even after depositing the amounts in the segregated account, the amount does not get credited to the QSF account. The title to the fund also does not pass. What I find on a consideration of the scheme adopted, is that the fund that leaves IC reaches the QSF on the orders of Court. The adopting of the three stage procedure does not alter the fact that once the fund goes from the segregated account in India, IC loses its control over it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Plaintiffs on receiving the funds would be holding it for the qualified claimants in the class action. 34. By the settlement arrived at by the parties and the deposit of the fund in the segregated account, subject to breach of the settlement by IC or non-approval by Court, the title to the fund is lost to IC. Even if that be not the position, the title would be lost when the funds are transferred to the initial escrow account. Once it went to that account, only a disapproval of the settlement by court can revive the right of IC over the fund. Here, preliminary approval by court of the settlement was followed by the transfer into the initial escrow account after getting the permission of the Reserve Bank of India for such transfer. Since the settlement was finally approved by US court the title to the funds vested with QSF with effect from the date of it being credited to the initial escrow account, if not from the date of deposit in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 India, IC will have the obligation to withhold tax on the amount under section 195 of the Act. I have found that the title to the fund passed from IC to the QSF or Lead Counsel when the fund moved from the segregated account in India to the initial escrow account in the US. For that transfer the permission of the Reserve Bank of India was also needed and IC could not thereafter deal with the amount and what it earned unless the court refused to accept the settlement. That contingency did not happen. So, I am satisfied that it would be appropriate to hold that the obligation of IC to withhold tax under section 195 would arise on the transfer of the fund from the segregated account in India to the initial escrow account in the U.S. 38. Some procedural aspects regarding withholding and deposit of tax was relied on by Senior Counsel for IC in support of the contention that no withholding of tax by IC was called for. With great res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 amount will be regarded as sum chargeable under the provisions of the Act as required under section 195 of the Act. On question no. 2, I rule that the time to deduct the tax is when the amount is moved from the segregated account in India to the initial escrow account in the US. In view of the ruling on question no. 2, no separate ruling on question no. 3 is called for. On question no. 4 I rule that the rate at which the tax is to be deducted is at 30%. In AAR No. 1078 of 2011, I rule on question no. 1 that the amount payable to the Settlement fund by A and B will be regarded as sum chargeable under the provisions of the Act in the hands of QSF. On question no. 2, I rule that for the purpose of deduction under 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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