Issuing guidelines on the scope of taxability beyond what was emanating from the Memorandum to the finance bill and Section introduced in the Act. For issuing such a widened scope, the circular is also discussing a judgment of the Hon’ble Supreme court. But the important question is, has the department quoted it in the right context?
CIRCULAR NO. 12/2022 [F. NO. 370142/27/2022-TPL], DATED 16-6-2022
GUIDELINES FOR REMOVAL OF DIFFICULTIES UNDER SUB-SECTION (2) OF SECTION194R OF THE INCOME-TAX ACT, 1961.
The circular (amongst other guidelines) also explained that the payer need not examine the taxability in the hands of the payee before deduction of tax as reproduced here:
Question 1. Is it necessary that the person providing benefit or perquisite needs to check if the amount is taxable under clause (iv) of section 28 of the Act, before deducting tax under section 194R of the Act?
Answer: No. The deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under clause (iv) of section 28 of the Act. The amount could be taxable under any other section like section 41(1) etc. Section 194R of the Act casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source @10%. There is no further requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.
In this regard it may be highlighted that in the context of section 195 of the Act it is a requirement to know whether the payment made by the deductor is income in the hands of the non-resident recipient as section 195 of the Act requires deduction on any other sum chargeable under the provisions of this Act at the rates in force. Thus there is requirement that deductor needs to verify if the “sum is chargeable under the Income-tax Act”. The term “rate in force” is defined in clause (37A) of section 2 of the Act and it allows benefit of agreement under section 90 or section 90A of the Act. if eligible, in determining the rate of tax at which the tax is to be deducted at source. Hence, there is further requirement of checking if the amount is taxable under tax treaty and if yes, at what rate. Such a requirement is not there in section 194R of the Act, in the absence of these two terms in this section. Hence, there is no requirement for deductor to verify whether the amount is taxable in the hands of the recipient or section under which it is taxable.
It may also be highlighted that these two terms are also not there in section 194E of the Act and Hon’ble Supreme Court in the case of PILCOM vs. CIT West Bengal (Civil Appeal No. 5749 of 2012)), held that tax is to be deducted under section 194E of the Act at a specific rate indicated there in and there is no need to see the taxability or the rate of taxability in the hands of the non-resident.
Now, it is imperative to cross check on the ruling of the Hon’ble court that whether it has actually held that there is no need to see the taxability or the rate of taxability in the hands of the non-resident.
For this, we need to understand the facts of the case and observation of the Hon’ble court and final ruling of the Honorable SC (116 taxmann.com 394, PILCOM V. Commissioner of Income Tax, West Bengal-VII).
Facts:
The assessee was a joint management committee (PILCOM) formed by the Cricket Control Boards/Associations of three countries viz. Pakistan, India and Sri Lanka, for the purpose of conducting the World Cup Cricket tournament for the year 1996 in these three countries. These three host countries were required to pay varying amounts to the Cricket Control Boards/Associations of different countries as well as to ICC in connection with conducting the preliminary phases of the tournament and also for the purpose of promotion of the game in their respective countries.
Two Bank accounts were opened by PILCOM in London to be operated jointly by the representatives of Indian and Pakistan Cricket Boards, in which the receipt from sponsorship, T.V. rights etc. were deposited and from which the expenses were met. The surplus amount remaining in the said Bank account was decided to be divided equally between the Cricket Boards of Pakistan and India after paying a lump-sum amount to Sri Lanka Board as per mutual agreements amongst the three Boards. From the said Bank accounts in London, certain amounts were transferred to the three co-host countries for disbursement of fees payable to the umpires and referees and also defraying administrative expenses and prize money.
During the assessment proceedings, it came to the knowledge of the Assessing Officer that the assessee had made payments to ICC as well as to the cricket control boards/associations of different member countries of ICC from its two London bank accounts on which it had failed to deduct tax at source in accordance with provisions of section 194E. The Assessing Officer computed short deduction of tax and also held the assessee to be liable to pay interest under section 201(1A).
The relevant content of the judgement is reproduced below:
Para 13, “In the present case, the Non-resident Sports Associations had participated in the event, where cricket teams of these Associations had played various matches in the country. Though the payments were described as Guarantee Money, they were intricately connected with the event where various cricket teams were scheduled to play and did participate in the event. The source of income, as rightly contended by the Revenue, was in the playing of the matches in India”.
Para 19 , “it must be held that the payments made to the Non-Resident Sports Associations in the present case represented their income which accrued or arose or was deemed to have accrued or arisen in India. Consequently, the Appellant was liable to deduct Tax at Source in terms of Section 194E of the Act.“
Where lies the difference in understanding ?
Question: Is it necessary to examine taxability in the hands of the payee before deducting TDS?
Hon’ble Court’s view: The source of the Income was the events i.e., matches played in India which represented their income which accrued or arose or was deemed to have accrued or arisen in India.
Circular’s Interpretation: SC held that tax is to be deducted under section 194E of the Act at a specific rate indicated therein and there is no need to see the taxability or the rate of taxability in the hands of the non-resident.
Conclusion:
The Hon’ble Court while deciding the matter in favor of the revenue has actually determined that It is represented the income of the payee in India as per the scope of the section 9 of the Income Tax Act, whereas department taking an interpretation that the Court did not examine the taxability in the hands of the Non-Resident.
Having said this, Section 194R is definitely having a large impact on the businesses in India. These kinds of interpretation used in circulars will certainly lead to more disputes in future, when discussed in court of law on the scope of applicability of the section.
The author can also be reached at cadeepakkakkar@icai.org
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