Case nº A.A.R. Nos. 1364, 1370 and 1433 of 2012 of AAR Cases, January 19, 2016 (case In Re: Aberdeen Claims Administration Inc. and Ors. Vs)

JudgeFor Appellant: Rajesh Simhan and Prateek Bagharia, Advocates
PresidentV.S. Sirpurkar, J. (Chairman) and A.K. Tewary, Member (R)
DefenseIncome Tax Act, 1961 - Sections 115AB, 115AD, 115O, 2 (14), 2(14), 2(24), 2(24) (vi), 2(24)(vi), 2(47), 2(47)(ii), 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 4, 45, 48, 5, 55 (3), 6, 9; Transfer Of Property Act, 1882 - Section 6, 6 (e), 6(e)
Resolution DateJanuary 19, 2016
Issuing OrganizationAAR Cases

Judgment:

A.K. Tewary, Member (R)

1. These are three applications - Aberdeen Claimants Administration Inc., USA (Aberdeen US) has filed application Nos. 1364 & 1370 and Aberdeen Asset Management PLC, UK (Aberdeen UK) has filed one application No. 1433. The issues involved in all three applications relate to taxability of the settlement amount received from Satyam Computers Services Limited (Satyam) and Price Water House Coopers (PWC) under the provisions of the Income-tax Act, 1961. Therefore, all three applications have been taken together for hearing and a common order is being passed.

Facts

2. The facts related to Aberdeen US and Aberdeen UK are summarized below:--

"(i) Twelve mutual funds, namely, (i) Aberdeen EAFE plus Sri Fund, a series of Aberdeen Delaware Business Trust, United States; (ii) Aberdeen EAFE plus Ethical Fund, a series of Aberdeen Claims Trust, United States; (iii) City of Albany Employees Pension Trust, United States; (iv) Franciscan Sister of Chicago, United States; (v) the City of New York deferred compensation plan, United States; (vi) Thrivent Partners Emerging Markets Portfolio, a serious Trivent Series Fund, Inc. United States; (vii) Aberdeen Global - Responsible World Equity Fund, Luxembourg; (viii) Aberdeen IICVC - Ethical World Fund, Scotland; (ix) Mackenzie Financial Corporation - Mackenzie Universal Sustainable Opportunities Capital Class, Canada; (x) Aberdeen Canada - Socially Responsible International Fund, Canada; (xi) Aberdeen Canada - Socially Responsible Global Fund, United States; (xii) NCB Capital Company, Bahrain; Raiffeisen Kapitalangage - Gessellsc mbg R 77 - Fonds Segment B, Austria were all holders of American Depository Shares ("ADS") (collective "ADS Holders") of Satyam Computer Services Ltd.("Satyam")

(ii) Seven mutual funds, namely, (i) First Trust/Aberdeen Emerging Opportunity Fund; (ii) Aberdeen Emerging Markets Fund Institutional Funds, a series of Aberdeen Funds, United States; (iii) Aberdeen Emerging Markets Fund Institutional Funds, a series of Aberdeen Funds; (iv) Aberdeen Asia Pacific excluding Japan Fund a series of Aberdeen Delawre business Trust, United States; (v) Halliburton Company Employee Benefit Master Trust; United States and (vi) Thrivent Partners Worldwide Allocation Fund, a series of Thrivent Mutual Funds, United States and (vii) Aberdeen Asia Pacific including Japan Fund, a series of Aberdeen Delaware Business Trust, United States were all holders of ordinary equity shares ("Equity Holders") of Satyam.

(iii) On January 7, 2009, Ramalinga Raju, the then Chief Executive Officer of Satyam confessed that Satyam's financial results had been manipulated and inflated over a period of years. PricewaterhouseCoopers ("PwC") played a key role in preparing and auditing Satyam's financial statements as well as Securities Exchange Commission (SEC) filings. PwC possessed the documents that showed Satyam's true financial condition, and its active participation in the fraud was thus essential and apparent.

(iv) As a result of the public disclosure of the contents of the letter, the value of ordinary equity shares and ADS of Satyam dropped precipitously, forcing the ADS and Equity Holders (collectively, "Aberdeen Investors") to dispose of their entire shareholding by two transactions dated January 7, 2009 and January 9, 2009.

(v) This actionable conduct of Satyam and its directors, gave rise to legal claims by the Aberdeen Investors against inter alia Satyam and PwC ("Legal Claims"). The Aberdeen Investors thus decided to establish two Trusts, namely, Aberdeen Claims Trust and Aberdeen Claims Trust (II) (together referred to as 'claims trust') and granted, assigned, conveyed and transferred the aforesaid Legal Claims to the trust ("Assigned Claims"), while retaining all beneficial interest in the Trust. The Aberdeen Investors also appointed Aberdeen claims Administration Inc. (Aberdeen US) as the Trustee of Claim Trusts in order to evaluate/prosecute, and/or settle the aforesaid claims and to distribute the funds collected or received in resolution of the Assigned Claim, if any, to the Aberdeen Investors, after payment of certain litigation costs, all in accordance with the terms of Recovery Agreement.

(vi) Aberdeen US, as a trustee of the Claim Trusts, initiated a civil action against inter alia Satyam and PwC in Aberdeen Claims Admin. Inc. v. Satyam Computers Ltd., 2:09-CV-5453-NS ("Aberdeen Civil Action"), filed in United States District Court of the Eastern District of Pennsylvania ("Pennsylvania Court"), seeking unliquidated damages caused on account of inter alia Satyam's and PwC's wrongdoing. Aberdeen US estimated that the total of Aberdeen Investor's losses for which recovery was sought would exceed US $68 Million.

(vii) On November 17, 2009 the Aberdeen Civil Action was transferred to the United States District Court for the Southern District of New York ("New York Court") for pre-trial consolidation and coordination with In re Satyam Computers Services, Securities Litigation in the New York Court ("US Class Action Litigation"), a class action initiated by other investors of Satyam before the court in New York, asserting claims under Section 10 (b) and 20 (a) of the Securities Exchange Act of 1934 (the US Exchange Act) and Rule 10b-5 promulgated there under.

(viii) Subsequently, the Aberdeen Civil Action was consolidated with the US Class Action Litigation and on May 12, 2011, the New York Court entered an order preliminarily ("Preliminary Approval Order") certifying a class for settlement purpose in connection with the US Class Acton Litigation ("Settlement Class"). In the preliminary Approval Order, the Court preliminary found the settlement to be fair, reasonable and adequate.

On August 15, 2011, Aberdeen US timely filed a request for exclusion from the Settlement Class. Satyam challenged the validity of, and objected to, Aberdeen's request for exclusion.

On September 13, 2011 this New York Court entered final orders and judgments with respect to the settlement, certifying the Settlement Class and approving the Settlement ("Class Action Settlement"). The New York Court in the aforesaid orders and judgments, reserved decision as to the validity of Applicant's request for exclusion, and instructed Aberdeen US and Satyam to engage in discovery and briefing in connection with Satyam's objection to the validity of Aberdeen US's request for exclusion.

(ix) While the aforementioned proceedings were ongoing in the New York Court, conscious of the time, efforts and cost involved in the litigation, Aberdeen US and PwC and Aberdeen US and Satyam entered into two separate Settlement Agreements dated July 18, 2012 and July 27, 2012 respectively.

(x) Under the terms of the Aberdeen US-Satyam Settlement Agreement:

(

  1. Satyam entered into the Settlement to, without limitation, enhance its credibility and business opportunities in the United States market, and eliminated the burden expenses, uncertainty and distraction of further litigation with its attendant risk of monetary damages and reputational harm to Satyam in United States.

    (b) Satyam agreed to pay a total principal settlement amount of US$ 12,000,000 to Aberdeen US ("Primary Settlement Amount").

    (c) The Aberdeen-US fully, finally and forever waived, released, discharged and dismissed each and every of their Legal Claims against Satyam and agreed to be forever barred and enjoined from commencing, instituting, prosecuting or maintaining the Legal Claims. This was also agreed vice-versa. Both Satyam and the Aberdeen Investors extinguished their mutual legal claims.

    (xi) The ADS Holders were deemed members of the Settlement Class and were bound by the terms of the Class Action Settlement. However in the event ADS holders recovered less than US$ 6,000,000 from the Class Action Settlement, Satyam remains obligated to pay the Aberdeen US, net of any transfer taxes, the difference between the Aggregate Aberdeen ADS Recovery and US$ 6,00,000, provided however such payment is capped at US$ 1,500,000 ('"Supplemental Consideration").

    The Equity Holders were excluded from the Settlement Class with respect to the claims that were assigned to Aberdeen US.

    Satyam transferred a sum of Primary Settlement Account to an Escrow Account, maintained with Citibank N.A at New York ("Escrow"). It was agreed between the parties these Escrowed Funds remained the property of Satyam.

    Aberdeen US agreed to file the present application to seek an advance ruling regarding taxability of the Primary Settlement Amount and if occasioned, the Supplemental Consideration ("Satyam Settlement Account").

    (xii) Under the terms of the Aberdeen US-PwC Settlement Agreement:

    (

  2. PwC entered into the Settlement to, without limitation, eliminate burden, expenses, uncertainty and distraction of further litigation with its attendant risk of monetary damages.

    (b) PwC agreed to pay a total principal settlement amount of US$ 2,000,000 to Aberdeen US ("PwC Settlement Account ").

    (c) The Aberdeen US fully, finally and forever waived, released, discharged and dismissed each and every of their Legal Claims against PwC and agreed to be forever barred and enjoined from commencing, instituting, prosecuting or maintaining the Legal Claims. This was also agreed vice-versa. Both PwC and the Aberdeen investors extinguished their mutual legal claims."

    3. Aberdeen UK is a listed UK company which manages and/or advice certain investment funds (Aberdeen investors) that had invested in Satyam Shares. After the confession of manipulation of accounts of Satyam by the then CEO Sri Raju, legal action was initiated by the Aberdeen investors against Satyam and finally Aberdeen investors entered into a Settlement Agreement with Satyam. Under the terms of the Settlement Agreement:

    "(

  3. An amount of US$ 68,000,000 (approximately INR 420 crores) ("Settlement Amount") is to be paid by Satyam to the Applicant for further distribution to the Aberdeen Investors to...

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