Compensation or damages for fraud taxable as income from other sources

AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI

IC, In re

JUSTICE P.K. BALASUBRAMANYAN, CHAIRMAN

A.A.R. NOs. 1045, 1060, 1078, 1087 & 1088 OF 2011

AUGUST 27, 2012

RULING

1. AAR No. 1045 of 2011 is filed under section 245Q of the Income-tax Act by an Indian company, for convenience referred to hereafter as IC, seeking advance rulings on the questions formulated in that application arising out of a class action filed in the United States of America represented by the applicant in AAR No. 1060 of 2011 referred to as Lead counsel hereafter, IC, the payer and Lead counsel the payee essentially want a ruling on the question whether the amount that passes from IC to Lead counsel is chargeable to tax in India.

2. Based on the same cause of action, compensation was also claimed against the auditors of IC. Money is to pass from the Auditors to Lead counsel. Lead counsel and the auditors want a ruling on whether the money that thus passes is chargeable to tax in India. Lead counsel has filed AAR No. 1078 of 2011 in that behalf. The Indian arm of the auditor, hereafter referred to for convenience, 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 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 in countries other than USA and India.

5. The class action was referred to mediation or conciliation. The services of a Retired District Judge were obtained. The parties arrived at a negotiated settlement of the disputes subject to the approval of the court where the class action was pending. Under the proposed settlement IC agreed to pay $ 125 million to the Qualified Settlement Fund (QSF) to be administered by Lead counsel for distributing the compensation to those qualified to participate in the class action. A and B together agreed to pay $ 25 million to the QSF. Of the $ 25.5 million, ‘ A’ the Indian resident was to pay $ 15.5. million and B, the non-resident, $ 10 million.

6. Pursuant to the settlement, subject to the approval of court, IC deposited an amount of US $ 125 million on 25.2.2011 in a segregated account in the local branch of CitiBank N.A. in India. Companies ‘A’ and B similarly deposited $ 25.5 million in their account. On 21.3.2011, the US court passed a preliminary order approving the settlement, on being satisfied that the pre-requisites of a class action settlement are fulfilled. On 29.3.2011, the Reserve Bank of India gave approval for the transfer of the settlement amount deposited by IC into an initial escrow account in USA. On the basis of it, the amount of $ 125 million was transferred from the segregated account to the Initial Escrow account in the New York Branch of CitiBank N.A. The amount deposited by ‘A’ moved similarly and the deposit by ‘B’ was in the Initial Escrow account in New York.

7. On 13.9.2011, 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 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 residents were excluded from the purview of the rulings.

11. In AAR No. 1060 of 2011, the following questions were formulated subject to the same exclusion :

 1.  Whether, on the facts and circumstances of the case, the Settlement Amount payable by IC under the Stipulation to the Qualified Settlement Fund 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.  For the purposes of deducting tax at source under section 195 of the Act on the transfer of the Settlement Amount to the QSF, whether IC can take into account the chargeability of the Settlement Amount in the hands of the authorized claimants, as defined in paragraph 1(e) 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 Amount 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 IC is required to deduct income tax 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?

12. In AAR No. 1078 of 2011 filed by Lead Counsel regarding the payments by ‘A’ and ‘B’, the following questions were formulated 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 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 the Stipulation?

 3.  If the answer to the question no. 1 or question no. 2 is in the affirmative and applicant has to deduct tax at source under section 195 of the Income-tax Act, 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? :

14. In AAR No. 1088 of 2011 filed by ‘B’ the following questions were formulated subject to the same qualification regarding residents :

 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 the Stipulation?

 3.  If the answer to the question no. 1 or question no. 2 is in the affirmative and applicant has to deduct tax at source under section 195 of the Income-tax Act, 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 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 amounts are chargeable to tax in India and tax has to be withheld under section 195 of the Act by the payers.

19. As emphasized by counsel, there are three stages in this transaction of IC, First, when IC deposits the amount in the segregated account in India in its own name, second when it goes from the segregated account to the initial escrow account in New York and third, when it moves from the initial escrow account to the final escrow account. At what stage, if, at all, it will become chargeable to tax is one of the aspects arising for ruling.

20. In the case of A the same pattern as IC was followed. In the case of B, the amount was directly deposited in an Initial escrow account in New York. It had to move from it to the final escrow account.

21. But, before that, the question to be decided is whether it is income at all in the hands of QSF liable to be taxed in India. If it is found that it is not income chargeable to tax in India, then the question, when title passes would become academic.

22. As pointed out by Counsel for IC, A and B, the Revenue seems to have a confused stand on the nature of the deposit. Whereas in the applications relating to deposit by IC, the Revenue adopts the stand that it is revenue income, in the applications relating to the deposit by A and B the stand adopted is that it is a capital receipt. Probably the situs of the initial deposit of the amount 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 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 approval of the court and it is accepted. It is a contract with the imprimatur of the court. Here, when the settlement was arrived at, it remained a mere contract for payment of damages and on the initial approval followed by the final approval, the rule of court. So, nothing turns on the procedure followed in the American court for making the settlement an enforceable one on behalf of a class of claimants.

27. If it is damages or compensation, then the question arises, damages or compensation for what. Here, it is compensation for the loss suffered by the class plaintiffs because of the alleged fraud perpetrated by the defendants in the suit, IC, A and B. The question then is, where did the cause of action arise. A cause of action is a bundle of facts giving rise to an action The right to sue arose 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. The claimants in the United States could also invoke the Securities Exchange Act and the Securities Act of U.S., but based on this cause of action. They acquired a right to sue in U.S. because of a statute providing a remedy. So, they sued in U.S. They exercised a right of action. A right of action is 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 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 and its right to it is solely dependant on the court not approving the settlement. On the approval of the court, the title to the fund vests in QSF with effect at least from the date it gets transferred to the initial escrow account, if not on the deposit in the segregated account itself. I have already noticed that IC would lose its right to the fund once it goes into the segregated account on the terms of the settlement unless there is a breach of the settlement itself. Here, the transfer from the segregated account in India to the initial escrow account in US itself was based on an interim or preliminary approval by court of the settlement. That approval was subsequently confirmed by the final approval. I, therefore, hold that the title to the fund passed to QSF in any event, when it got transferred from the segregate document to the initial escrow account.

31. The question then is what is the nature of the income. It has been argued on behalf of the applicants that the settlement amount is a not a capital asset. Though the Revenue, in the applications by A and B raised the plea that it is a capital asset, the main argument on behalf of the Revenue before me was that it was a revenue receipt. Considering the nature of the payment, I am inclined to accept the argument of learned counsel for the applicants that the settlement amount is not a capital receipt. It can be treated only as a revenue receipt.

32. What 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 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 segregated account itself. 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 earned in the segregated account and the right to withdraw the taxes that may be found payable in India from the initial escrow account.

35. I, therefore, come to the conclusion that the amount deposited by IC as part of the settlement of the class action dispute with Lead counsel is income from other sources in the hands of Lead counsel or the QSF and that income arises in India.

36. The QSF or Lead counsel being a resident of US is entitled to claim the benefit of the India-US Double Taxation Avoidance Convention (DTAC). It is argued by Counsel that if the income is regarded as income from other sources, under Article 23 of the DTAC, the income not having arisen in India, it can be taxed only in the United States. He relied on paragraph 1 of Article 23 read with paragraph 2 thereof. The Revenue on the other hand argued that the income arises in India and the same can be taxed in India in view of paragraph 3 of Article 23 of the DTAC. I have found that the income arises in India or the source from which it arises is 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 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 respect to Counsel, once it is found that IC has to withhold the tax, the obligation of IC does not get destroyed by the aspects pointed out by him. After all, Lead counsel or the QSF represents the qualified claimants, the ultimate beneficiaries and even according to the order of approval of the settlement by Court, Lead Counsel have to deduct the expenses incurred including counsel fee payable and the taxes due on the fund. The withholding tax has therefore to be deducted from the fund before it is distributed. The rules and forms referred to by Counsel are adequate to meet the situation. The fund would get the credit for the tax paid and the obligation will be to distribute the balance only. IC will have to withhold the tax as enjoined by the Act.

39. Regarding the rate of tax to be withheld, the Revenue submitted that it is at 30% of the amount. This is not contradicted.

40. Now coming to the transaction relating to A and B, it is clear that the position regarding A, a resident in India is identical. Here also, the sum of $ 15.5 million was first deposited in a segregated account in the name of A in HDFC Bank in India. It followed the same route as the deposit of IC. The position obtaining is, therefore, the same.

41. ‘B’ is a non-resident. The application by Lead Counsel, AAR No. 1078 of 2011 asserts that the sum of $ 10 million was directly transferred into the initial escrow account by some or all remaining B entitles who are not based 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 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 the tax authorities in US. Once the tax is deducted on the fund as a whole, in the present context, the obligation of QSF will come to an end. The other aspect is not for consideration now. On question no. 4, I rule that the deduction of tax will be at the rate of 30%.

In AAR No. 1087 of 2011, I rule on question no. 1 that the amount would be chargeable to tax in terms of Section 195 of the Act at the point of time as specified in the rulings in the other applications. On question no. 2, the ruling given in AAR No. 11078 of 2011 will be the ruling here also. On question no. 3, I rule that the deduction will be at 30%.

Question no. 4 cannot be ruled on since no specific arguments were raised on it. I leave it open .

In AAR No. 1088 of 2011, the four questions raised are identical to the four questions raised in AAR No. 1077 of 2011. The rulings are also the same and as set out above while ruling in AAR No. 1077 of 2011.

43. Accordingly, the ruling is pronounced.