How’s that!
Recently the Apex Court has pronounced a ruling[1] against the appellant for non-deduction of tax at source for the payments made to a non-resident.
Background:
PAK-INDO-LANKA joint management committee (“PILCOM” or “Assessee”) was a committee formed by the cricket boards of India, Pakistan, and Sri Lanka for jointly hosting the 1996 ICC cricket world cup tournament (“CWCT”). The Assessee opened two bank accounts in London and thereafter made various payments to ICC (the apex body which controls the game of cricket across the globe) and other cricket boards. Such payments were held as liable to tax withholding by the assessing officer. On appeal, the lower appellate authorities held as follows:
| Sr. No. | Nature of payment | Treatment of these payments as held by the lower appellate authorities: |
| 1 | Payments to countries which did not participate in CWCT. | Since the source of income was not derived from India it is not taxable in India. |
| 2 | Payments to Pakistan and Sri Lanka cricket boards for disbursement of prize money in those countries. | Since it is outside the purview of section 115BBA of the Income Tax Act,1961 (“IT Act”), it is not taxable in India. |
| 3 | Payment to ICC pursuant to a prior resolution. | It was incurred for meeting expenses of ICC and for development of the game of cricket and therefore there is no connection of the same with the matches played in India- not taxable in India. |
| 4 | Payment for ICC trophy for qualifying matches between member countries which was held outside India. | It denotes payments for reimbursement of expenses and hence it has no connection with the matches played in India- not taxable in India. |
| 5 | Payments to South Africa and UAE cricket boards which did not play any matches in India. | The source of income was not derived from India and hence not taxable in India. |
The liability against the above payments were deleted by the lower appellate authorities and the same was not appealed against by the revenue before the higher authorities.
Apart from the above, there were payments to the cricket boards of countries participating in CWCT including those countries with India shares a double tax avoidance agreement (“DTAA”) totalling to 15.95 lakh Pounds. For this payment, pursuant to an enquiry, a notice was issued to the Assessee for non-deduction of tax at source under section 194E read with section 115BBA of the IT Act.
The Assessee contested this liability before all appellate authorities, and the issue finally reached Supreme Court, where the question raised by the appellant before the Apex Court was whether any income had accrued or arisen in India for the payment made to the non-resident sports associations for the matches played in India. Obviously, if that is the case, then the Assessee ought to have deducted tax at source in accordance with the provisions of the IT Act.
The Apex Court also affirmed that the liability of such non-resident sports associations stands restricted only for the matches that were played in India (17 out of the 37 matches were played in India. In other words, only 17/37th portion of the liability would be subject to tax in India)
Arguments advanced by both parties:
While the appellant claimed that the guarantee payment made was towards a grant of a privilege and was not related to any matches played in India, the respondent contemplated that income in question had arisen from a source in India by virtue of matches being played in India and thus taxable in India.
The Apex court took cognizance of the following relevant rulings as relied upon by the Assessee:
- Performing Rights Society Ltd [1977] 106 ITR 11 wherein it was held that income derived from broadcast of copyright music from the stations of All India Radio did arise in India. In the given case as well, since the payment made was intricately linked to the event where several participating countries were scheduled to play, the source of income was playing of matches was indeed ‘in India’.
- In E. India Technology Centre Pvt. Ltd [2010] 327 ITR 456 (SC), it was held that the payer is obliged to deduct tax only on the income which is chargeable to tax under the IT Act. In the given case, only income attributable to India was held to be liable to tax, and hence no further relief was granted by the Apex court on this count.
- On similar lines, though CIT vs. Eli Lilly and Co. (India) Pvt. Ltd [2009] 312 ITR 225 was pertaining to section 192 of the IT Act, it was held that where payment of income is chargeable under the head ‘Income from Salaries’ and is also covered under section 9(1)(ii) of the IT Act, it would be subject to tax deduction at source.
Succinctly, as per section 5(2) of the IT Act, the total income of a non-resident includes any income from whatever source which is received or deemed to be received in India or accrues or arises or is deemed to accrue or arise to such non-resident in India. Also, as per section 9(1) of the IT Act, income is deemed to accrue or arise in India if the income accrues or arises, whether directly or indirectly inter-alia through or from any business connection in India.
Separately, the scope of section 115BBA(1)(b) also covers guarantee money paid in relation to any game or sport in India.
Conclusion:
The Apex Court has upheld the High Court’s decision and accordingly, the payments made to the non-resident sports association for the income which has accrued or arisen in India ought to have been subject to deduction of tax at source basis the proportion of matches played in India.
Further, regarding the applicability of DTAA, the Apex Court has upheld the High court’s decision that existence of DTAA shall not absolve the payer’s obligation to deduct tax at source, and it was open for the payee to file a return and claim refund of the tax withheld by relying upon DTAA. It is pivotal to note that treaty eligibility was not argued before the High court or Supreme court by the Assessee. However, the observations were made suo-moto by the High Court and commented.
Comments:
Nearly after 25 years form the date of transaction, this ruling brings finality as the Supreme Court of India affirms that only the income accruing or arising in India is taxable.
However, with regard to applicability of DTAA, it should be noted that ordinarily, an assessee is entitled to avail the DTAA benefits[2] for the payments made to a non-resident. While the said section is silent about its applicability for tax withholding purposes, reference may be invited to CIT v. Hindusthan Paper Corpn. Ltd. [1994] 77 Taxman 450 (Cal.) wherein it was held that where DTAA exists, such provisions of Income-tax Act which are against the assessee, can never be made applicable. Also, in Gujarat Narmada Valley Fertilisers Co. Ltd. v. ITO [1982] 2 ITD 515 (Ahd.), it was held that the provisions of DTAA would constitute as ‘provisions of the Act’ for the purpose of determining the chargeability of income-tax for the purpose of deduction of tax at source.
In the present case, the non-availment of DTAA provisions was not argued before the High Court or the Apex Court. The Apex Court has held as above perhaps without referring to the judicial precedents cited above, and had that been done, in my view, it would have resulted in an ruling allowing reliance on treaty benefits for tax withholding purposes. Such treaty benefits are routinely allowed for withholding under section 195, and there is no reason for the same not being so allowed u/s 194E.
Disclaimer: The views mentioned herein are personal and application of the same should be made in consultation with a professional depending upon facts and circumstances of each case.
[1] PILCOM v. CIT West Bengal-VII – Civil appeal no. 5749 of 2012 etc.
[2] Section 90(2) of IT Act