Satyam not liable to withhold TDS US fine

MUMBAI: Satyam Computer Services (now Tech Mahindra) is not required to withhold tax at source in India on $10-million penalty it is required to pay to the United States government, the Authority for Advance Rulings (AAR) said in a December 1 ruling, which is now publicly available.
Consequent to the much publicized scam in 2009 at Satyam Computers, as the ADRs of the company were listed on the NY stock exchange, the US Securities Exchange Commission (SEC) filed a complaint against the company in a US district court.On April 6, 2011, the US district court passed its final judgment and ordered Satyam Computer to pay a civil liability of $10 million, pursuant to section 21(d) of the Exchange Act. This, according to the then prevailing exchange rate, was Rs. 44.4 crore.
The US district court added: "The amount ordered to be paid as civil penalties pursuant to this judgment shall be treated as penalties paid to the government for all purposes, including all tax purposes."
Satyam Computers approached the AAR to determine whether the amount payable pursuant to the final judgment of the US district court would be liable to tax deduction at source in India under the provisions of section 195 of India's Income-tax (I-T) Act and, if so, at what rate should the tax be withheld in India. In general terms, section 195 requires withholding of tax in India against payments made to non-residents (certain categories of payment such as dividend and salary are not covered by this section).
The AAR held, "It is trite law that unless the payment made attracts the tax under the I-T Act, there would be no liability to deduct tax under section 195. A penalty ordered by the US court can never attract any tax nor would such a payment made by the applicant (Satyam Computers) attract any tax liability. Hence, the applicant would not be required to deduct any such amount under section 195." The AAR observed that even the Indian tax authorities had conceded before the AAR that no TDS was applicable on the penalty amount.