S.5(2) : Scope of total income – Compensation – Fraud - Taxability of Compensation for misrepresentation, fraud compensation on settlement of suits for misstatements, cause of action in India is taxable in India as IFOS and liable to withholding tax. (S. 56, 195)
Shares of an Indian company were listed on BSE and NSE while its American Depository Receipt (ADS) were listed on New York Stock Exchange. Price of its shares fell suddenly as a result of admission by its former Chairman from India that its accounts as on 30.09.2008 contained misstatements. A number of suits were filed against the company and its auditors in US claiming damages. The suits were based on tort, misrepresentation, deceit, fraud. The suits were consolidated and Lead plaintiffs through the lead counsel filed consolidated Class Action Complaint. The parties arrived at a negotiated settlement of disputes subject to approval of court. Company agreed to pay $125 million and auditors agreed to pay $25 million to Qualified Settlement Fund (QSF) to be administered by Lead Counsel for distribution amongst those qualified to participate in class action. The amounts were transferred by company and auditors to QSF after taking RBI approval. US Court passed final judgment confirming the settlement as fair, reasonable and adequate.
Issue that came up before AAR was whether the compensation was taxable in India and liable to withholding tax under section 195 of the Act.
The Authority observed that right of action is different from cause of action. Even though the plaintiffs had a right of action in US, their cause of action arose or accrued in India by reason of the alleged misrepresentation, tort, etc. practiced by the company and its auditors in India. Therefore it ruled that compensation accrued or arose in India within the meaning of section 5(2). It further ruled that the compensation was neither capital receipt nor capital gains but a revenue receipt and that the compensation or damages are taxable as income from other sources under section 56(1).
Satyam/PwC - A.A.R. No.1045,1060,1078,1087 & 1088 dt. 27/08/2012 (AAR)
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