Bernstein Litowitz Berger And ... vs Union Of India And Ors
2014 Latest Caselaw 4598 Del

             THE HIGH COURT OF DELHI AT NEW DELHI

%                                            Judgment delivered on: 18.09.2014

+       W.P.(C) 6167/2012

BERNSTEIN LITOWITZ BERGER AND GROSSMANN
LLP AND ORS                        ..... Petitioners

                                    versus


UNION OF INDIA AND ORS                                          ..... Respondents

+       W.P.(C) 7774/2012

BERNSTEIN LITOWITZ BERGER AND GROSSMANN
LLP AND ORS                        ..... Petitioners

                                    versus


UNION OF INDIA AND ORS                                          ..... Respondents


Advocates who appeared in this case:
For the Petitioner        : Mr M.S. Syali, Senior Advocate with Ms Husnal Syali,
                            Mr Mayank Nagi, Ms Reeta Mishra, Mr Harkunal Singh
                            and Mr Tarun Singh

For the Respondents : Mr Abhay Prakash Sahay

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE SIDDHARTH MRIDUL

                                        JUDGMENT

BADAR DURREZ AHMED, J (ORAL)

1. These writ petitions impugn the Ruling dated 27.08.2012 made by the

Authority for Advance Rulings under the Income-tax Act, 1961.

2. A few basic facts are necessary for disposal of these writ petitions.

Certain shareholders of American Depository Shares have filed suits against

Satyam Computer Services Limited (Indian Company) as well as against

Pricewaterhouse Coopers, Bangalore and Pricewaterhouse Coopers LLP, USA

claiming damages on account of the alleged admitted fraud in the

representations to the Authority governing the stock exchange under the

Securities Exchange Act, 1934 and the Securities Act of 1933 (both USA

Acts). Those suits were consolidated as a class action suit and the petitioners

herein were nominated as lead counsel.

3. In those suits a settlement was arrived at whereby the Indian company

was required to pay damages to the extent of USD 125 million and

Pricewaterhouse Coopers (Bangalore) and the Pricewaterhouse Coopers LLP

(USA) were required to pay a total amount of USD 25.5 million. For this

purpose, a Qualified Settlement Fund was to be created. The settlement was

also subject to the approval of the court in New York. Before the final

approval of the court in New York, the funds equivalent to USD 125 million

were transferred by the Indian company to a Segregated Account in India (with

Citi Bank). Similarly, the Indian component of Pricewaterhouse Coopers also

deposited the equivalent of USD 15.5 million in the said Segregated Account.

The lead counsel thereafter took a preliminary approval from the court at New

York and the funds deposited in the Segregated Account in India were

transferred to the Initial Escrow Account in the New York Branch of Citi Bank

NA. On 13.09.2011 the court at New York finally granted approval and

confirmed the settlement which had been arrived at between the Indian

company, Pricewaterhouse Coopers and the holders of the American

Depository Shares. Thereafter, the money lying in the Initial Escrow Account

in New York was transferred to the Qualified Settlement Fund which was to be

operated by the lead counsel for the purposes of disbursement to the various

parties in favour of whom the settlement was arrived at.

4. We may point that shortly after the settlement was arrived at, as a

condition of the settlement, an advance Ruling was invited from the Authority

for Advance Rulings with regard to the taxes to be withheld in respect of the

transfer of funds from India to US.

5. While the matter was pending before the Authority for Advance

Rulings, the entire funds available in the Segregated Account were transferred

to the Initial Escrow Account in New York. However, thereafter the Authority

for Advance Rulings, by virtue of its Ruling dated 27.08.2012, determined that

the said amount was taxable in India and therefore tax ought to have been

deducted at source prior to the payment to the beneficiaries. Consequently,

30% of the funds which had been transferred from the Segregated Account to

the Initial Escrow Account were returned to India and they continue to be

deposited with the Revenue Authorities. It is thereafter that the remaining

funds were transferred to the Qualified Settlement Fund.

6. 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 inasmuch as from the impugned Ruling itself it would be

evident that the stand of the petitioner was that they were not revenue receipts

but capital receipts not chargeable to tax. It was the further case of the

petitioner that the settlement amounts would only go towards reducing the cost

of acquisition of the American Depository Shares.

7. We are of the view that the Authority for Advance Rulings has rendered

its ruling based upon the wrong premise that the petitioner had accepted the

receipts to be in the nature of revenue receipts. Thus, the Ruling cannot stand.

Consequently, we set aside the Ruling dated 27.08.2012 and remit the matter to

the Authority for Advance Rulings 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. The Authority for Advance Rulings has to

examine this aspect in the context of Section 195 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.

8. 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.

BADAR DURREZ AHMED, J

SIDDHARTH MRIDUL, J SEPTEMBER 18, 2014 SU