Service Tax on Directors Services Company to Pay

With Service Tax regime migrating to negative list approach w.e.f. July 1, 2012, almost all the services except those in negative list (section 66D) and exempted services (Notification No. 25 2012-ST dated 20.06.2012) have become exigible to service tax . Thus, services rendered by company directors in the capacity of director have also become taxable w.e.f. 1.7.2012 and are now liable to Service Tax. The remuneration they get for attending board meetings shall be subjected to Service Tax. However, Central Board of Excise and Customs has recently amended the provisions of reverse charge so as to provide that Service Tax on Services rendered by the directors shall be payable by the companies under the reverse charge mechanism. The directors (generally whole time / managing / executive directors) who are under contractual employment with the company and receive salary or remuneration from the company will not be covered as they shall be considered as employees of the company. All such directors who are not in employment with the company shall be considered as providing services to the company which shall attract Service Tax. In case of whole-time directors, it is a contractual employment and is governed by the provisions of the Companies Act, 1956 which also require Governments approval in certain cases. The directors of body corporates shall also be covered for the purpose of service tax and service tax payable on services of directors of such body corporates. Body corporate includes a company. Since all the services provided by directors in their capacity of a directors shall be covered under scope of Service Tax, the gross charges payable to them by the company shall be liable to Service Tax. It may be in the form of any one or more sitting fee, commission, bonus, share in profit, benefit in form of ESOPs etc. All amounts paid as remuneration except salary to directors shall be liable to Service Tax, whether for attending board meetings or committee meetings or for any other service rendered in the capacity of a director. If an employed director gets sitting fee for attending the meeting, it may be liable to Service Tax as Department is likely to view it that way. There is need for clarification on this issue. However, the following amounts received by the directors from the company will not attract Service Tax as such amounts does not represent service provided by directors interest on loan by director to company, dividend on shares and other professional charges on account of services not rendered as a director (in professional capacity) Service Tax is payable under reverse charge by the companies who receive services from their directors who are not in employment. A director may be appointed either in an individual capacity or to represent an entity (including government) who has either invested in the company or is otherwise authorized to nominate a director. When a director receives payment in his personal capacity, the same is liable to be taxed in the hands of the director. However, where the fee is charged by the entity appointing the director and is paid to such entity, the services shall be deemed to be supplied by such an entity and not by the individual director.

In the case of Government nominees, the services shall be deemed to be provided by the Government and liable to be taxed under the exclusion sub- (iv) of clause (a) of section 66D of the Finance Act, 1994 i.e. support services by Government to business. Such services are liable to be taxed on reverse charge basis.

Re-opening of assessment for change of opinion not valid SC

The assessee had disclosed full details in the Return of Income in the matter of its dealing in stocks and shares. According to the assessee, the loss incurred was a business loss, whereas, according to the Revenue, the loss incurred was a speculative loss. Rejection of the objections of the assessee to the re-opening of the assessment by the Assessing Officer vide his Order dated 23rd June, 2006, is clearly a change of opinion. In the circumstances, we are of the view that the order re-opening the assessment was not maintainable. SUPREME COURT OF INDIA Assistant Commissioner of Income-tax v. ICICI Securities Primary Dealership Ltd. CIVIL APPEAL NO. 5960 OF 2012 AUGUST 22, 2012 ORDER Leave granted. We have heard learned counsel on both sides. The assessee had disclosed full details in the Return of Income in the matter of its dealing in stocks and shares. According to the assessee, the loss incurred was a business loss, whereas, according to the Revenue, the loss incurred was a speculative loss. Rejection of the objections of the assessee to the re-opening of the assessment by the Assessing Officer vide his Order dated 23rd June, 2006, is clearly a change of opinion. In the circumstances, we are of the view that the order re-opening the assessment was not maintainable. The civil appeal is, accordingly, dismissed. No order as to costs.

APPENDIX HIGH COURT OF BOMBAY ICICI Securities Ltd. v. Assistant Commissioner of Income-tax 3(2), Mumbai H.L. GOKHALE AND J.P. DEVADHAR, JJ. WRIT PETITION NO. 1919 OF 2006 AUGUST 22, 2006 ORDER P.C. : 1. Heard Mr. Mistry for the Petitioner and Mr. Kotangale for the Respondents. The Respondents have filed their reply and the rejoinder has also been filed by the Petitioner. 2. Rule. Rule is made returnable forthwith. 3. We have noted the submissions of both the parties. The Petitioner is a public limited company engaged in the business of carrying on various non-banking financial activities. The present petition is concerning the assessment year 1999-2000. The assessment of the Petitioner for that year had been finalised under section 143 of the Income Tax Act. An order in that behalf was passed earlier on 28th March, 2002 determining the income of the Petitioner as Rs. 27.72 crores. Thereafter the 1st Respondent sought to reopen the assessment and the reasons for reopening the assessment recorded vide his letter dated 27th March, 2006 disclose that it is essentially after having another look at the annual accounts which had been furnished earlier. The officer records that now it is noticed that during that year the assessee company had incurred a loss in trading in share. The officer thereafter discusses the various entries appearing in the opening and closing stocks and purchases and sales of those stocks. Thereafter the officer has concluded that there is a loss of Rs. 19.86 crores and that the loss was speculative one. He has therefore come to a conclusion that the income chargeable to tax to the extent of Rs. 19.86 crores has escaped the assessment and that is how he has passed the order under section 147 of the Income Tax Act although almost 4 years have gone after the assessment of the concerned year. 4. Mr. Mistry, learned counsel for the Petitioner, points out that the reasons given by the 1st Respondent in his order dated 27th March, 2006 are clearly based on the documents, which the Petitioner had already furnished, containing the accounts tendered by the Petitioner. There is

nothing new that has come to the notice of the revenue at this point of time. It is only a different analysis which is now being done and the conclusion is being drawn that its income to the extent of Rs. 19.86 crores has escaped the assessment. In his submission, this is impermissible under the powers that are available to the revenue under section 147 of the Income Tax Act. It can only be where there is a failure on the part of the assessee to make a true return which is what provided in proviso to section 147 and wherein such a reopening would be permissible after the expiry of four years. In the instant case, nothing of the kind has happened. 5. Mr. Kotangale, learned counsel for the Respondents, has drawn our attention to a judgment of the Apex Court in the case of Sri Krishna (P.) Ltd. v. Income Tax Officer 221 I.T.R. 538. In this case, what is held by the Apex Court is that where certain loan transactions were relied upon and which were subsequently discovered to be false, reassessment proceedings were validly initiated. What is however material to note is that in that particular case the Court has given a clear finding that the assessee had created and recorded bogus entries of loan and, therefore, the Court held that the assessee could not say that it had truly and fully disclosed all material facts necessary for the assessment for the concerned year. 6. The second judgment relied upon by Mr. Kotangale is in the case of Phool Chand Bajrang Lal v. Income Tax Officer 203 I.T.R. 456. In this case, the reopening was permitted in view of subsequent information which was found to be definite, specific and reliable. This subsequent information included the confession of the Managing Director that the company had not advanced any loan to any person during the period covered and for which certain cash loans were supposed to have been advanced. It was in the facts of this particular development that the Apex Court held that the reopening was justified. 7. In the facts of the present case, there is nothing new which has come to the notice of the revenue. The accounts had been furnished by the Petitioner when called upon. Thereafter the assessment was completed under section 143(3) of the Income Tax Act. Now, on a mere relook, the officer has come to the conclusion that the income has escaped assessment and he is of course justified in his analysis. In our view, this is not something which is permissible under the proviso to section 147 of the Income Tax Act which speaks about a failure on the part of the assessee to make a proper return. In the present case, no such case is made out on the record. 8. In the circumstances, we allow this petition in terms of prayer (a) and quash and set aside the notice dated 27th March, 2006 directing reopening of the assessment for the year 1999-2000. 9. Rule is made absolute as above with no order as to costs.

Compensation or damages for fraud taxable as income from other sources

The assessee sold his 2/5th share in the land situate at 14A Burdwan Road, Kolkata, along with the two other co-owners, being group companies, i.e., Bagari Investments Pvt. Ltd. and Bagari Synthetics Pvt. Ltd., to fifteen (15) different buyers, per separate conveyance deeds, i.e., qua each conveyance. The respective agreements to sales were in all cases executed on 15-10-1996. While five (5) conveyance deeds were executed on 15-01-1998, and registered after paying stamp duty on 22-02-1999, the balance ten (10) were executed on 26-05-2006; the corresponding date of registration being 27-11-2007, when the stamp duty was finally assessed. The bulk of the sale consideration stood received, as well as possession made over, in almost all cases by January, 1998, whereat the five (5) deeds were executed. The assessee, however, returned long term capital gains (LTCG for short) arising on the said transfers for the current assessment year, i.e., A.Y. 2006-07, at Rs. 97,14,463/-. The AO, however, assessed it at Rs.1,73,32,543/- by deeming the sale consideration at Rs. 214.18 lakhs i.e., as against the actual sale consideration (i.e., in respect of the assessees 2/5th share) of Rs.138 lakhs, or increasing it by Rs. 76,18,080/-. It is this enhancement of sale consideration, for the purpose of assessment of LTCG, by invoking the provision of section 50C of the Act, that is the subject matter of dispute between the assessee and the Revenue, with the assessee having been granted relief by the first appellate authority, so that the Revenue is in appeal before us. The Revenues case is that the provision of sec. 50C having come on the statute book with effect from 1-4-2003, and the capital asset which is the subject-matter of transfer, being land, the same would apply, and thus stands rightly invoked by the AO. The assessees case, and on the basis of which it found favour with the first appellate authority, is that the transfer in the first five (5) cases stood effected much prior the relevant year, i.e., on 15-01-1998, so that it could not be subject to the rigor of section 50C. In fact, there is no dispute between the sale value adopted by the assessee and that assessed by the Stamp Valuation Authority (SVA for short) in these cases. For the balance 10 (ten), the assessment by the SVA took place only on 27-11-2007, i.e., subsequent to the date of transfer. The words or assessable in s. 50C(1) stand inserted in the section only by Finance (No.2) Act 2009, with effect from 1-10-2009. The amendment is prospective and, as such, would have no application for the current year. That is, prior to 01-10-2009, it is only where the transfer under reference is subject to assessment by the SVA in the same year, i.e., the year of transfer, that the legal fiction per section 50C would come into play. Reliance is placed on the decisions in the case of ITO v. Mangal Shree Estate Ltd. (ITA No.88/Jp/2011 dated 05-08-2011) and Smt. Rajshree Bihani v. ITO [2011] 48 SOT 594 (Kol) In the facts of the present case, without doubt, the assessee has returned capital gains for the current year, and admits it to be the year of the transfer of the relevant land, and which, as clarified at the outset, is not the subject matter of dispute or determination. The capital gains being assessable for the current year, the provision of sec. 50C would apply. The assessee could not possibly take a stand that while capital gains would stand to be charged u/s. 45 for the current year, sec. 50C would not apply; the assessment year under reference being subsequent to AY 2002-03 (also refer para 4.3, 4.5). The said decision is thus, again, distinguishable, and would be of no assistance to the assessee. We decide accordingly. IN THE ITAT KOLKATA BENCH A

Deputy Commissioner of Income-tax, Circle-9 v. Bagri Impex (P.) Ltd. IT Appeal NO. 498 (KOL.) OF 2012 [ASSESSMENT YEAR 2006-07] AUGUST 9, 2012 ORDER Sanjay Arora, Accountant Member This is an Appeal by the Revenue arising out of the Order by the Commissioner of Income-tax (Appeals)-XXXII, Kolkata (CIT(A) for short) dated 11-012012, allowing the assessees appeal contesting its assessment u/s. 143(3) of the Income-tax Act, 1961 (the Act hereinafter) dated 04-08-2008 for the assessment year (A.Y) 2006-07. 2. The Revenue has raised three grounds per its present appeal, reading as under:1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in accepting fresh evidence which is in violation of Rule 46A of the I.T. Rules, 1962. 2. That on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in directing the A.O to delete the addition of Rs.76,18,080/- in the sale value consideration for computing long term capital gain. 3. That on the facts and circumstances of the cases and in law, Ld. CIT(A) has erred in not considering the fact that the Assessing Officer is within his right to adopt the sale consideration as per the valuation of stamp duty authority which is higher than the value declared by the assessee. The matter was heard at length. 3. Qua the first ground, the Revenues case is that while all the fifteen (15) conveyance deeds, per which the land in question was conveyed by the assessee, were produced before the first appellate authority, only one copy was supplied to the assessing authority. Toward this, the ld. AR clarified that all the relevant material was before the Assessing Officer (AO), and there has been no wrong assumption of any fact by him in deciding the assessees case. Reference was made by him to the observation by the ld. CIT(A) to this effect in the operating part of his impugned order. Further, copy of the assesseess letter dated 16-07- 2008 to the AO was placed by him on record to exhibit that one copy each of the two deeds dated 15-01-1998 and 26-05-2006, i.e., the two dates on which the entire bunch of 15 deeds were executed, were filed as specimen copies before the AO; the other deeds being identical in all other respects. Had the AO wanted, he averred, the assessee could have supplied the copies of all the other deeds as well. The ld. DR, after seeking an adjournment for making verification, confirmed the said letter (dated 16/7/2008) as forming part of the assessment

record. He also could not demonstrate any wrong assumption of fact/s by the AO. Under the circumstances, we find no merit in which Revenues case qua its Ground No.1, so that the same is dismissed. 4. That leaves us with the issue on merits, which stand projected by the Revenue per its Ground Nos. 2 and 3 (supra). 4.1 At this stage, it would be relevant to delineate the background facts of the case. The assessee sold his 2/5th share in the land situate at 14A Burdwan Road, Kolkata, along with the two other coowners, being group companies, i.e., Bagari Investments Pvt. Ltd. and Bagari Synthetics Pvt. Ltd., to fifteen (15) different buyers, per separate conveyance deeds, i.e., qua each conveyance. The respective agreements to sales were in all cases executed on 15-10-1996. While five (5) conveyance deeds were executed on 15-01-1998, and registered after paying stamp duty on 2202-1999, the balance ten (10) were executed on 26-05-2006; the corresponding date of registration being 27-11-2007, when the stamp duty was finally assessed. The bulk of the sale consideration stood received, as well as possession made over, in almost all cases by January, 1998, whereat the five (5) deeds were executed. The assessee, however, returned long term capital gains (LTCG for short) arising on the said transfers for the current assessment year, i.e., A.Y. 2006-07, at Rs. 97,14,463/-. The AO, however, assessed it at Rs.1,73,32,543/- by deeming the sale consideration at Rs. 214.18 lakhs i.e., as against the actual sale consideration (i.e., in respect of the assessees 2/5th share) of Rs.138 lakhs, or increasing it by Rs. 76,18,080/-. It is this enhancement of sale consideration, for the purpose of assessment of LTCG, by invoking the provision of section 50C of the Act, that is the subject matter of dispute between the assessee and the Revenue, with the assessee having been granted relief by the first appellate authority, so that the Revenue is in appeal before us. 4.2 The Revenues case is that the provision of sec. 50C having come on the statute book with effect from 1-4-2003, and the capital asset which is the subject-matter of transfer, being land, the same would apply, and thus stands rightly invoked by the AO. The assessees case, and on the basis of which it found favour with the first appellate authority, is that the transfer in the first five (5) cases stood effected much prior the relevant year, i.e., on 15-01-1998, so that it could not be subject to the rigor of section 50C. In fact, there is no dispute between the sale value adopted by the assessee and that assessed by the Stamp Valuation Authority (SVA for short) in these cases. For the balance 10 (ten), the assessment by the SVA took place only on 27-11-2007, i.e., subsequent to the date of transfer. The words or assessable in s. 50C(1) stand inserted in the section only by Finance (No.2) Act 2009, with effect from 1-10-2009. The amendment is prospective and, as such, would have no application for the current year. That is, prior to 01-102009, it is only where the transfer under reference is subject to assessment by the SVA in the same year, i.e., the year of transfer, that the legal fiction per section 50C would come into play. Reliance is placed on the decisions in the case of ITO v. Mangal Shree Estate Ltd. (ITA No.88/Jp/2011 dated 05-08-2011) and Smt. Rajshree Bihani v. ITO [2011] 48 SOT 594 (Kol) (copy on record). 4.3 We have perused the material on record, as well as the case law cited. The primary facts are not in dispute, and the only issue arising is of the applicability or otherwise of section 50C of the Act to the LTCG disclosed by the assessee for the relevant year in the given facts and circumstances of the case. Our first observation in the matter is that year of transfer is not in dispute. This aspect

was got specifically confirmed by the Bench during hearing from both the parties, as there is no question of assessment of capital gains u/s. 45 for the current year, much less applicability of section 50C, if no transfer has taken place during the relevant year. In fact, we also observe no dispute with regard to this aspect before the authorities below and, consequently, no finding by them in the matter per their respective orders. The only issue, therefore, that survives, and which stood agitated before us (also refer ground nos. 2 and 3 by the Revenue) is the applicability or otherwise of section 50C to the impugned transfers per the 15 (fifteen) conveyance deeds in the facts and circumstances of the case. 4.4 Section 50C stands co-opted on the statute by Finance Act, 2002, with effect from 01-04-2003. Its relevant part reads as under:Special provisions for full value of consideration in certain cases. 50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government (hereafter in this section referred to as the stamp valuation authority) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer. The words or assessable stand inserted after the word assessed and before the words by any authority by Finance (No.2) Act, 2009 with effect from 1-10-2009. 4.5 Our first observation in the matter is that section 50C would apply in respect of capital gains arising on the transfer of any capital asset, being land or building or both, chargeable u/s. 45 of the Act for A.Y. 2003-04 or any subsequent year. As such, the impugned capital gains, being chargeable u/s. 45 for the current year, i.e., AY 2006-07, section 50C would be per se applicable. 4.6 Now let us examine the assessees case, which is in two separate limbs, vis--vis the said provision. For the first five (5) deeds dated 15-01-1998, the issue is academic inasmuch as undisputedly there is no difference between the value assessed by the SVA and that disclosed by the assessee per the said deeds. There is no question, as has been done by the AO, of the value assessable for a subsequent year, i.e., subsequent to the assessment by the SVA, as being relevant or made applicable for the purpose of sec. 50C. As such, section 50C, though applicable in principle for the first 5 (five) deeds dated 15-01-1998, would be of no consequence, and no modification to the disclosed sale consideration could be made with reference to section 50C. 4.7 Next, we take up the assessees case qua the balance ten (10) conveyance deeds for an aggregate disclosed sale consideration of Rs.96 lakhs, executed on 26-05-2006. The assessees case is that the assessment of the fair market value of the property (land) by the SVA was done only on 27-11-2007 and, therefore, there being no assessment by it by the end of the relevant year, i.e., 31-03-2006, section 50C would not apply; the words or assessable having been brought on the statute only with effect from 01-10-2009. We find no force in the argument. There is no dispute that a circle rate had been prescribed by the competent authority (of the State Government) under the Stamp Act for the relevant year and, further, that the transfer under reference is covered by sec.

50C. It is this value that is relevant, and to be adopted by the assessee while filing his return of income, i.e., where no formal assessment has been made by the SVA. Again, if it has been by the due date of filing of the return of income or the actual filing of return, the same being available, and only in relation to the transfer, capital gains on which has arisen for the relevant year, the same would stand to be adopted. The words adopted or assessed (as also assessable) in s. 50C(1) qualify the word value preceding it, and not the word transfer. The only condition is that the said value should be in respect of the relevant transfer, i.e., of a defined capital asset, capital gains on which is assessable for the relevant year. In our view, the purport or relevance of the word assessable, the prospective operation of which is being advanced by the assessee as the reason for non-applicability of the provision of s. 50C, would be where there is a difference between the value adopted or assessed, and that assessable, on the other. In fact, as we see it, the provision (50C(1)) contemplates no difference in value adopted or assessed or the value assessable by the SVA. It is to be appreciated that the value only seeks to estimate or determine the fair market value of the relevant capital asset on the date of transfer. As such, whether the assessees assessment took place during the relevant year or subsequent thereto, would be of little consequence. The other circumstance where the word assessable could draw a distinction is where the value under the Stamp Act comes to be stipulated only subsequent to the date of transfer, though from a retrospective date. Clearly, no value having been provided for (in such a hypothetical case), no value could be said to have been adopted or assessed by SVA, so that it can be argued that such a transfer is not covered by section 50C. Similarly, would be the case where the guideline value available (under the Stamp Act) is subject to revision at the relevant time, and a higher value is prescribed subsequently, albeit with retrospective effect. The words or assessable would make a distinction inasmuch as the latter prescription (of rate) could give rise to a controversy as to whether the transaction (of transfer) is at all covered u/s.50C, or if the higher value would hold, as the case may be. No such controversy is present in the instant case; we clarifying at the outset, and also confirmed during hearing, that a circle rate obtained in respect of the land under reference during the relevant year (i.e., the previous year relevant to AY 2006-07), and at which it stood assessed, though subsequently. We have, in fact, read the provision considering the words or assessable as not present in the provision. Merely because the assessment takes place subsequent to the relevant year, would not make u/s. 50C inapplicable where the transfer is otherwise covered by it. Once a circle rate has been prescribed by the competent authority for the purpose, i.e., the payment of stamp duty, which is a pre-requisite for the registration of any transfer under the Registration Act, 1908, and which in turn is mandatory for the same to have a legal effect, it can fairly be said to be the value adopted by the competent authority, in respect the relevant transfer. One can understand a controversy where the value subsequently assessed is at variance with the value claimed to have been adopted by the said authority. However, no such controversy obtains in the instant case, with, rather, there being a separate procedure where the assessee contests the value as assessed (see s. 50C(2)), so that the same would need to be observed. 4.8 Finally, we may deal with the case law cited before us. The decision in the case of Mangal Shree Estate Ltd. (supra) is based on the decision in the case of Navneet Kumar Thakkar v. ITO [2008] 110 ITD 525 (Jd). In the facts of that (latter) case, the transfer, capital gains arising on which was subject to tax, was per an unregistered document. The transfer under the Act being complete, it was held that there was no warrant for the substitution of the actual sale consideration with the value adopted or that may be assessed by the SVA, i.e., if and when the said transfer is subject to registration, for the purpose of computing capital gains under the Act. Accordingly, the

position existing prior to the co-option of section 50C of the Act would apply. In fact, this represents one more area or circumstance under which the word assessable, which came on the statute only later, would become relevant. The transfer in the case of Mangal Shree Estate Ltd. (supra) was, again, only per an unregistered document, with the tribunal finding the words assessable in s. 50C (1) as operative from a later date, and which, as clarified earlier, have not been taken into consideration by us. The said decisions are clearly distinguishable on facts inasmuch as each transfer in the instant case stands executed per a registered document. In fact, as sought to be clarified earlier, the assessee himself declares a value, paying stamp duty thereon, with reference to the prescribed circle rate. The said decisions would thus have no application in the facts and circumstances of the present case. In the case of Smt. Rajshree Bihani (supra), the assessee, on the impugned transfer being sought to be subject to the rigor of section 50C, contended that transfer was effected in fact much earlier to the relevant assessment year (being A.Y. 2005-06), i.e., in A.Y. 2001-02. Also, the property purchased out of the sale proceeds was also within the stipulated time of the date of the transfer, so that the capital gains was not assessable even for that year, being exempt u/s.54F. It was in this situation that it was held by the tribunal that no cognizance of the subsequent deed for the purpose of computation of capital gains under the Act could be taken and, accordingly, section 50C could not be applied. In the facts of the present case, without doubt, the assessee has returned capital gains for the current year, and admits it to be the year of the transfer of the relevant land, and which, as clarified at the outset, is not the subject matter of dispute or determination. The capital gains being assessable for the current year, the provision of sec. 50C would apply. The assessee could not possibly take a stand that while capital gains would stand to be charged u/s. 45 for the current year, sec. 50C would not apply; the assessment year under reference being subsequent to AY 2002-03 (also refer para 4.3, 4.5). The said decision is thus, again, distinguishable, and would be of no assistance to the assessee. We decide accordingly. 5. In the result, the Revenues appeal is partly allowed. 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. 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.

Reassessment on the basis of Income Tax amendment not justified

On the date of issue of notice under section 148 on 31-3-2008 by the Assessing Officer for reopening of the assessment, the earlier view taken by the Assessing Officer in the assessment framed under section 143(3) on 31-3-2006 was supported by the decision of the Supreme Court in the case of HCL Comnet Systems & Services Ltd. (supra), and the decision of Delhi High Court in the case of CIT v. Eicher Ltd. [2006] 287 ITR 170. Further, the amendment to Explanation 1 to section 115JB was brought by the Finance (No.2) Act, 2009 with retrospective effect from 1-4-2001. On the date of issue of notice for reassessment on 31-3-2008, there was no amendment to Explanation 1 to section 115JB providing for adding of the amount or amounts set aside as provision for dimunition in the value of any asset by way of debiting in the profit and loss account. Therefore, in view of the decision of the Bombay High Court in the case of Rallis India Ltd. v. Asstt. CIT [2010] 323 ITR 54, the Assessing Officer could not have reasons to believe on 31-3-2008 that the income had escaped assessment on the ground that the provisions for bad and doubtful debts were not added back in computing the book profit under section 115JB. Therefore, there was no fresh material available with the Assessing Officer on the basis of which he could have justifiably formed reasons to believe that any income chargeable to tax had escaped assessment in the instant case. Therefore, initiation of reassessment proceedings in the instant case was bad in law and consequently the impugned order is liable to be cancelled. IN THE ITAT CHENNAI BENCH C Saint Gobain Glass India Ltd. v. Assistant Commissioner of Income-tax, Company Circle-VI (1) IT Appeal No. 276 (Mad.) of 2012 [Assessment year 2003-04] May 18, 2012 ORDER N.S. Saini, Accountant Member This is an appeal filed by the Assessee against the order of the Commissioner of Income Tax(Appeals) Large Taxpayer Unit, Chennai dated 18.11.2011 for Assessment Year 2003-04. 2. The assessee has taken the following grounds of appeal. 1. The order of the Commissioner of Income Tax(A) is contrary to law, facts and circumstances of the case. 2.a. The Commissioner of Income Tax(A) erred in confirming the reopening of the assessment.

b. The Commissioner of Income Tax(A) ought to have appreciated that the reasons for reopening the assessment and unsustainable. c. The Commissioner of Income Tax(A) ought to have appreciated that there is no escapement of income. d. The Commissioner of Income Tax(A) failed to appreciated that the appellant had furnished fully and truly all the material facts necessary for the assessment and reassessment is merely on the basis of change of opinion. f. The Commissioner of Income Tax(A) failed to appreciated that for deciding the question under Section 147, whether the assessee had disclosed fully and truly all material facts, the law applicable would be the law as it stood on the date of filing of the return. g. The Commissioner of Income Tax(A) failed to appreciated that the appellant could not have assumed that a legislative amendment was going to be made in the year 2009 with retrospective from the year 2001. 3.a. The Commissioner of Income Tax(A) erred in disallowing the provision for bad & doubtful debts amounting to Rs. 1,49,46,022/- in the computation of book profits under Section 115JB of the Act. b. The Commissioner of Income Tax(A) failed to appreciated that the clause (i) to Explanation (1) to Section 115JB of the Act has been inserted vide Finance Act, 2009 and the said provision did not exist while filing the return of income. 4.a. The Commissioner of Income Tax(A) erred in confirming the levy of interest under section 234B of the Act. b. The Commissioner of Income Tax(A) failed to appreciated that the Appellant could not have assumed that a legislative amendment was going to be made in the year 2009 with retrospective effect from the year 2001 and paid the advance tax. 5. The Appellant craves leave to alter, amend or modify any of the foregoing grounds of appeal or add any additional grounds of appeal on or before or during the course of the hearing. 3. The Authorised Representative of the assessee submitted that in ground No.2 of the appeal of the assessee has challenged the reopening of the assessment on the ground that it was based on merely change of opinion on the very same facts on which the assessment was framed under section 143(3) of the Act on 10.03.06 and therefore, it was bad in law. He argued that in the present case of the assessee, the assessee filed return of income declaring loss of Rs. 16,19,41,536/- and the assessment was completed under Section 143(3) read with section 94C(4) on 10.03.2006 assessing the total loss of Rs. 15,90,36,808/- under normal computation and book profit at Rs. 11,19,72,308/-. It was submitted that in this assessment order, the Assessing Officer examined the issue of provision for bad and doubtful debts of Rs. 1,49,46,022/- charged to the profit and loss account by the assessee by issue of notice under Section 143(2) dated 21.07.08

wherein it was stated as per provisions of Sec.115JB, the Provision for Bad & Doubtful Debts amounting to Rs. 1,49,46,022/- should have been added back while computing book profit under Section 115 JB. After examining the same, the Assessing Officer allowed the deduction of provision for bad and doubtful debts of Rs. 1,49,46,022/- in computation of book profit under Section 115JB of the Act. Thereafter, the Assessing Officer issued a notice under Section 148 on 09.12.09 repeating the reasons for reopening the assessment by stating as under:2. As requested by you, the reasons for reopening the assessment under Section.147 and issuing notice under Section.148 for the Assessment Year 2003-04 are communicated as under: Reasons: The assessee made provision of Rs. 1,49,46,022/-towards bad and doubtful debts. While computing book profit under Section.115JB, the above amount should have been added to the net profit as per P&L account and the same was not done by the assessee. Further, it was not considered in the order under Section.143(3) passed on 10.03.2006. Therefore, I have reason to believe that income to the extent of Rs. 1,49,46,022/- escaped assessment. In view of the above, the assessment for the Assessment Year 2003-03 is reopened under Section.147 and notice under Section.148 issued on 28.03.2008. 3. As you have stated that the return of income already submitted on 28.11.03 for the Assessment Year 2003-04 to be treated as the return in pursuant to the notice under Section.148, notice under Section.143(2) has been issued separately and you are requested to comply with the notice. 4. The Authorised Representative of the assessee submitted that the amendment to Explanation-1 to section 115JB was brought by the Finance (No.2) Act, 2009 with retrospective effect from 01.04.2001 by substituting the clause (i) as under: For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by [(i) the amount or amounts set aside as provision for diminution in the value of any asset" It was the submission of the Authorised Representative of the assessee that notice of reassessment was issued on 31.03.08 and the amendment to Explanation-1 to section 115JB was brought by the Finance (No.2) Act, 2009 with retrospective effect from First April, 2001 after the notice was issued by the Assessing Officer seeking to reopen the assessment. He submitted that the validity of the notice of the Assessing Officer seeking to reopen the assessment would have to be determined on the law as prevailed on the date of notice and for this, he placed reliance on judgement of Hon'ble Supreme Court in the case of CIT v. Max India Ltd. [2007] 295 ITR 282. The Authorised Representative of the assessee relied on the decision of Honble Bombay High Court in the case of Rallis India Ltd. v. Asstt. CIT [2010] 323 ITR 54 where on the similar facts and circumstances of the case, the Honble Bombay High Court held that on the date on which the Assessing Officer purported to exercise his power to reopen the assessment under Section 147, the legislative amendment by the insertion of clause (i) to Explanation (1) to Section 115JB had not been brought into force on the statute book. Therefore, it seems, the amendment could not have been and has not the ground, which has been taken by the Assessing Officer while reopening the assessment. The

validity of the notice issued by the Assessing Officer in seeking to reopen the assessment must be determined with reference to the reasons which are found in support of the reopening of the assessment. These reasons cannot be allowed to be supplemented on a basis, which was not present to the mind of the officer and could not have been so present on the date on which the power to reopen the assessment was exercised. Consequently, it is evident that the order of the Assessing Officer with reference to computation of book profit under Section.115JB was at least a probable view and as a matter of fact, the correct view to take in view of the decision of Honble Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd. [2008] 305 ITR 409. It is well settled that the law laid down by the Supreme Court is declaratory of the position as it always stood. In any event, the view of the Assessing Officer was supported by the interpretation placed even contemporaneously in the judgement of the Bombay High Court in CIT v. Echjay Forgings (P.) Ltd. [2001] 251 ITR 15 and in the judgement of the Delhi High Court in the case of CIT v. Eicher Ltd. [2006] 287 ITR 170 and CIT v. HCL Comnet Systems & Services Ltd. [2007] 292 ITR 299. In the circumstances, there was no warrant for reopening the assessment in exercise of the power conferred under Section. 147. It was therefore, brought that the order of the Commissioner of Income Tax(A) should beset aside and the reassessment order should be cancelled as being bad in law. 5. On the other hand, the Departmental Representative supported the orders of the lower authorities. 6. After considering the rival submissions and perusing the materials available on record, we find that in the instant case, the assessee was assessed to tax on book profit of Rs. 11,19,72,308/- in an assessment made under Section 143(3) read with section 92C(4) on 31.03.06. The assessee contended that the Assessing Officer after examining the issue of provision for bad and doubtful debts of Rs. 1,49,46,022/- debited in the profit and loss account of the assessee by issue of notice under Section 143(2) dt.21.07.08. Thereafter, the Assessing Officer issued notice under Section.148 on 31.03.08 to reopen the assessment on the very same ground that the provision for bad and doubtful debts of Rs. 1,49,46,022/- should be added back in computing the book profit under Section 115JB of the Act. The Authorised Representative of the assessee has submitted that on the date of issue of notice under Section.148 on 31.03.08 by the Assessing Officer for reopening of the assessment, the earlier view taken by the Assessing Officer in the assessment framed under Section. 143(3) on 31.03.06 was supported by the decision of the Honble Supreme Court in the case of HCL Comnet Systems & Services Ltd. (supra) and the decision of Honble Delhi High Court in the case of Eicher Ltd. (supra). Further, the Authorised Representative of the assessee has also submitted that the amendment to Explanation-1 to section 115JB was brought by the Finance (No.2) Act, 2009 with retrospective effect from First April, 2001. Thus, on the date of issue of notice for reassessment on 31.03.08, there was no amendment to Explanation-1 to section 115JB providing for adding of the amount or amounts set aside as provision for diminution in the value of any asset by way of debiting in the profit and loss account. Therefore, in view of the decisions of Honble Bombay High Court in the case of Rallis India Ltd. (supra), the Assessing Officer could not have reasons to believe on 31.03.08 that the income had escaped assessment on the ground that the provisions for bad and doubtful debts were not added back in computing the book profit under Section 115JB of the Act. The Departmental Representative could not controvert the above submissions of the Authorised Representative of the assessee. Therefore, in our considered opinion as on 31.03.2008 there was no fresh material available with the Assessing

Officer on the basis of which he could have justifiable formed reasons to believe that any income chargeable to tax had escaped assessment in the instant case. Therefore, initiation of reassessment proceedings in the instant case was bad in law and consequently the impugned order is liable to be cancelled. We order accordingly. Thus, the grounds of appeal of the assessee are allowed. 7. In view of the above decision, the other grounds of appeal taken in this appeal have become infructuous and academic in nature. Hence, we are not adjudicating the same. 8. In the result, the appeal of assessee is allowed.