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2012 (8) TMI 780 - AAR - Income TaxTaxability on the Settlement Amount payable under the Stipulation pursuant to the judgment and Final approval of the US Court - whether the applicant is required to deduct income tax u/s 195 at the time of deposit of the Settlement Amount into the Initial Escrow Account to the final Escrow Account - Held that:- Under the terms of the settlement subsequently approved by the Court,three stages in this transaction of IC (Indian Company), 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 to be treated as Qualified Settlement Fund (QSF)- The segregated account stood in the name of IC (Indian Company)and 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 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 - On a settlement of the class action, the sums were agreed to be paid and 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 - Once it is found chargeable to tax in India, IC will have the obligation to withhold tax on the amount under section 195 on the transfer of the fund from the segregated account in India to the initial escrow account in the U.S. 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, thus 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 - the applicant is required to deduct income-tax @ 30% when the settlement amount moves from the segregated account to the initial escrow account.
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