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TMI Blog2016 (1) TMI 814X X X X Extracts X X X X X X X X Extracts X X X X ..... hargeable 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 answer to the question no.1 is in negative, such issues are not relevant and it is also not necessary to go into the issue of stages of transfer at which tax should have been deducted from the settlement amount. It is another matter that Satyam has deducted the tax and paid to the Government account after the earlier rulings were pronounced. - A.A.R. No 1060 & 1078 of 2010 - - - Dated:- 12-1-2016 - V.S. Sirpurkar (Chairman) A.K. Tewary, Member (Revenue) For The' Applicant : Mr.S.S.Khan For The Department : Mr. G.C.Srivastava, Special Counsel, Mr. CH.Rajeswara Reddy, DCITIT, Hyderabad RULING (by A.K Tewary) The rulings were pronounced by a common order incx AAR Nos. 1045, 1060, 1078, 1087 1088 of 2011. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case, section 195 of the Act will also apply to the QSF when it distributes the Settlement Fund 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 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 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? 4. The rulings pronounced by this Authority in the order dated 27th August, 2012 were as under: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Advance Rulings has to examine this aspect in the context of Section195 of the Income-tax Act, 1961 and for that purpose it has to consider whether these receipts, if they are to be regarded as income, could be construed as income at the point of time at which the tax was to be deducted at source. These issues need to be examined by the Authority for Advance Rulings apart from the other issues that may arise including the question of any income having arisen in India, having been received in India or deemed to have accrued in India. With these observations, the impugned advance Ruling dated 27.08.2012 is set aside and the matter is remitted to the Authority for Advance Rulings to consider the matter afresh in the light of our observations and with the hope and expectation that the Ruling would be given at an early date. The writ petitions are allowed to the aforesaid extent. No costs. 6. The facts in both applications are similar and arguments adduced by the applicants counsel are also same. Therefore, it will be sufficient to set out the facts in one case, i.e. Satyam Computer Services, and pronounce the rulings which will apply in the case of PWC also. 7. Satyam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ages for which Satyam and the other defendants were liable. On 16.02.2011 a Settlement Agreement was reached between Lead Plaintiffs and Satyam, whereby in lieu of Satyam paying USD 125 million the Lead Plaintiffs and the Class Members, agreed to release and waive their claims against Satyam subject to the judgment of the US court. The Settlement Agreement provided that the obligations incurred pursuant to it are in full and final disposition of the Complaint with respect to Satyam, subject to approval of US Court and final operation of its judgment. 10. The scheme of payment of the settlement amount as per settlement agreement was as under:- a. Satyam will open a bank account in India, called Segregated Account, and deposit USD 125 million into it in Indian currency. b. After preliminary approval of the Settlement Agreement from the United States Court is obtained, Satyam will, with the approval of the Reserve Bank of India (RBI), transfer the amount from Segregated Account to a bank account to be opened by Satyam in United States called Initial Escrow Account . The settlement amount in this account remained the property of Satyam and under the custody of the United Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable and adequate. The Court retained continuing jurisdiction over implementation of the Settlement and disposition of the Settlement Amount. 16.03.2012 Satyam terminated its ADS Scheme by notice to NYSE. 29.03.2012 Security Exchange Commission (SEC) de-registered the ADS program. 27.08.2012 AAR ruled that TDS needs to be deducted @ 30% on transfer of Settlement Amount from Segregated bank account to the Initial Escrow Account. 10.09.2012 Satyam transferred an amount equal to 30% of Settlement Amount from Initial Escrow Account in Citi Bank New York back to India and deposited TDS of ₹ 171 crore in compliance with the Ruling of AAR together with interest of ₹ 30.90 crore under section 201 of the Act. 26.10.2012 Satyam transferred the balance of Settlement Amount from the Initial Escrow Account in US to the Final Escrow Account opened by Lead Counsel in US. 23.08.2013 Claims Administrator and Lead Counsel submitted Memorandum to US court for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The issue of TDS certificates to the person from whose income-tax is deducted within a specified timeframe under Rule 3I IT Rulings, 1962 is a statutory duty. The fact that the TDS certificates have not been issued by the Satyam so far confirms that machinery provisions of TDS have failed. 15. According to the applicants the Settlement Amount is capital receipt. Complaint filed by Lead Plaintiffs shows that the wrongs alleged in the complaint related to filing of false and fraudulent statements by Satyam as a result of which the Plaintiffs were defrauded into payment of inflated prices on purchase of Satyam securities. Therefore, they exercised their right to sue Satyam/PWC in US for damages under US Laws for injury caused to them in US. The applicants have argued that the settlement amount is a compensation received by Plaintiffs in lieu of their agreeing not to pursue the class action complaint and it is a capital receipt in the hands of both QSF and the authorized claimants. The applicants have further submitted that this amount is not for making good any lost income as the class action did not allege any loss of income due to normal price fluctuations in stock exchanges. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, there was no income that could be taxed under the head Other Sources . The applicants have further mentioned that even if the Settlement Amount is held to be taxable in India as income from Other Sources, statutory deductions prescribed in Section 57 of the Act e.g. attorney fees, administrative costs etc. as provided in Paragraphs 1(dd), 17 to 24 and 26 of the Settlement have to be allowed. Therefore, attorney s fees (up to 17%), litigation expenses (up to USD 12.5 million) and litigation fund (for pursuing cases against non-settling defendants) have to be deducted. Further, QSF and the Plaintiffs are both tax residents of US. If the Settlement Amount is held to be income from Other Sources then Article 23 of the India-US DTAC gets attracted under which any income of US residents from other sources can be taxed only in the US and not in India. Article 23 is reproduced below: Article 23 Other income 1. Subject to the provisions of Paragraph 2, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing Articles of this Convention shall be taxable only in that Contracting State. According to appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case as these exist at present. b. According to the Department issue of certificate of TDS to the payee is a matter between the payer and the payee and the Revenue, under the law, has no role to play. c. The Department has pointed out that the amount was paid by Satyam to QSF, which is a legal entity under the US Law and would also be an assessable entity under the Indian Law as an artificial jurisdictional person or as an association of persons deriving its existence from the laws of the United States and, therefore, it is incorrect to suggest that TDS machinery has failed in this case. In fact, the machinery has already worked. It is open to Satyam to issue certificate of tax deduction to the payees who are taxable entities in their own rights and also in their representative capacity representing a class of Members. d. The Department has further submitted that Indian tax laws also stipulate the initiation of proceedings and making of assessments of persons in respect of income of other persons in respect of which they are assessable as Representative Assessees. The definition of assessee in section 2(7) includes representative assesses. The provisions contained i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e characterized as capital gains since it is paid as compensation for the loss of income to the payees arising as a result of fraud and manipulations of accounts done by Satyam. It is not paid in consideration for transfer of any capital asset (which by its very definition in section 2(14) would include property of any kind extending the scope to all rights and entitlements). Hence the income not being exempt in section 10 (Chapter III) and not falling under any other head would need to be characterized as Other Income chargeable to tax under section 56(1) of the Act. i. Without prejudice and as an alternate submission, the Department has contended that if it is held that the receipts are capital in nature, the income would be characterized as capital gains and would be liable to tax by virtue of section 45 of the Act. j. According to the Department the income accrued/arose in India. The judgment of the US Court was only one of the different options available to enforce the rights which existed in India, as the company was located in India and the fraud happened in India. The efficacy of the option and its final choice would not alter the place of accrual. The proximate cau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for our consideration: i. Whether questions no. 2, 3, 4 and 5 are required to be adjudicated after the ruling dated 27.08.2012 was accepted by Satyam / PWC and accordingly tax was deducted by them from settlement amount kept in Initial Escrow Account in New York and paid to Government account? ii. Whether settlement amount transferred to QSF is capital or revenue receipt? iii. Whether settlement amount is against surrender of right to sue as claimed by applicants or it represents loss of potential income without loss of capital asset as claimed by revenue? iv. Whether settlement amount can be characterized as capital gains or income from other sources ? At this juncture it would be appropriate to recapitulate the facts to see how the settlement agreement was arrived at. On 7.1.2009 Chairman of Satyam admitted that the balance sheet of Satyam was inflated on account of false, inflated receipts, incomes and profits over several years. Satyam also submitted statement before SEC that PWC audit reports and opinions in relation to Satyam s financial statement from the quarter ended June 30, 2000 until quarter ended September 30, 2008 should no longer be relied upon. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw, subject to continuing jurisdiction of US Court. QSF is a separate taxable entity under US Tax Law. However, the amount transferred to QSF to resolve or satisfy a disputed law is excluded from its gross income for US tax purposes. 22. In this case the rulings were pronounced on 27.8.2012 holding that the settlement amount will be regarded as sum chargeable to tax as required under section 195 of the Act and the deduction of the tax will be made by the payer when the amount is moved from the segregated account in India to the initial Escrow Account in the US. Satyam had already transferred USD 125 million from the segregated account in India to Initial Escrow Account in New York on 27.04.2011. After the ruling payer i.e. Satyam, deducted the tax @ 30% from amount lying in Initial Escrow Account and paid to the Government Account. The balance of the amount was transferred to the Final Escrow Account opened by Lead Counsel in USA and it became Qualified Settlement Fund (QFS). 23. The question Nos. 2, 3, 4 5 relate to deduction of tax at source on the transfer of the settlement amount to the QSF and on further distribution of this amount by QSF to the authorized claimants. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... high premium for ADS which were traded on NYSE and not in India. Thus, these torts were committed by Satyam and PWC in USA and for this reason SEC had the jurisdiction to levy penalty. The relief claimed by the plaintiffs under US Securities Act and US Exchange Act sought compensatory damages, compelling the defendants (Satyam and others) to disgorge illegally gained proceed and restitution of investor s money defrauded by them. It is clear that the plaintiffs have exercised their right to sue Satyam/PWC in US for damages under US laws for injury caused to them in US. The settlement agreement clarifies that Satyam entered into the settlement without any admission of any wrong doings on its part and to enhance its credibility and business opportunities in the US. On the other hand, the plaintiffs entered into the settlement recognizing the inherent risks associated in prosecuting a complex action of this nature through trials and appeals etc. The final judgment of the US Court dated 13.09.2011 is a decree issued by the Court under US Federal Rules of Civil Procedure. The Court directed that lead plaintiffs and Members of class shall be deemed to have fully and finally released and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or revenue receipt is applied to the facts in this case, it is clear that the nature of settlement amount in the hands of QSF is capital only because this has been received not to compensate the loss suffered but in lieu of surrender of right to sue. 27. The Revenue has argued that the nature of income has to be examined from the perspective of payees of such income and according to them the claim of the recipient is against the lost income . It is not possible to accept the stand of revenue that the settlement amount is a claim against the lost income on the ground that the compensation payable by Satyam was related to the income which the investors would have earned from the assets if the fraud had not taken place. It is also not possible to accept that the settlement amount represents higher realization value of shares and, therefore, would be revenue because the surrender of right to sue can never qualify as income. On the one hand the Revenue is saying that the compensation was worked out only for shares/ADS sold at a loss between 15.9.2008 and 16.4.2009 or those not sold as on 6.9.2009 and on the other hand it is arguing that this represents income which investors w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because they have agreed not to pursue the complaint. QSF is only custodian of this amount 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o sue, whether arising out of tortuous act or ex- contractual 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. ------------------------------------------------------------------------------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the extinguishment of rights is 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. According to Revenue all kinds of income, which are not exempt and which are not chargeable under other heads (profit, salary, business and capital gains) would be taxable as other income and the amount paid by Satyam not being exempt in section 10 of the Act (Chapter III) and not falling under any other head would need to be categorized as other income chargeable to tax u/s 56(1) of the Act. There is no force in this argument. Section 56(1) primarily brings to charge income of every kind. Income is defined in section 2(14) of the Act and we have concluded, after elaborate discussions, that the settlement amount cannot be brought within the purview of income under the Income-tax Act. Further, section 56(1) contemplates only such source which does not specifically fall under any one of other four heads of income i.e. Salaries, Income from house property, profit or gains of business or profession, or capital gains. To come within the ambit of this section the following conditions have to be fulfilled: a) There has to be an income (under section 2(24) read with section 4 and 5 of the Act). b) That income should not be exempt under section 10 to 13A of the Act. c) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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