Case Law Details
In brief- In a recent ruling, the Calcutta High Court (“HC”) in the case of PILCOM Vs. CIT [2010-TII-23-HC-KOL-INTL], held that if any payment in the nature of guaranteed amount was paid to any non-resident sports association in relation to any match played in India, the provisions of section 194E of the Income-tax Act, 1961 (“the Act”) would be applicable with respect to deduction of tax at source. Furthermore, the HC has held that the provisions of section 115BBA of the Act which deals with tax ability of non-resident sportsmen or sports associations, are independent from the other provisions of the Act and would override the generality of section 9(1) of the Act which deals with the accrual or assessing of income in India.
The HC while pronouncing the judgment in favor of the Revenue, has held that that the advantage of the Double Tax Avoidance Agreement (“tax treaty”) can be pleaded and taken by the assessee on whose account the withholding of taxes are made and not by the payer.
Facts
• In a meeting of the International Cricket Council (“ICC”), three member countries, India, Pakistan and Sri Lanka (“Host countries”) were selected for hosting the 1996 World Cup cricket tournament (“Tournament”) at a guarantee amount of £ 50,00,000.
• As a part of this bid, the host countries were required to pay varying amounts to the Cricket Control Boards of different countries as well as to the ICC, for conducting the preliminary phases of the tournament and also for the purpose of promoting the game in their respective countries.
• For managing the expenses of conducting the tournament, the host countries formed a committee in the name of the assessee.
• Bank accounts were opened by the assessee in London and Calcutta, to be operated jointly by the cricket boards of the host countries, in which the receipts from sponsorship, TV rights etc. were deposited and from which expenses of the tournament were met. Accordingly, certain amounts were transferred from the assessee’s London account to the host countries, for disbursement of fees payable to umpires and referees and also for defraying administrative expenses and prize money.
• Guarantee Payments were also made from the London bank account to the ICC as well as to the Cricket Control Boards/Association of different member countries of the ICC.
• The Assessing Officer (the “AO”) issued a notice to the Calcutta office of the assessee for its failure to withhold taxes under section 194E of the Act, read with section 115BBA of the Act, from the payments made to ICC and to the Cricket Control Boards/Associations of different ICC member countries, from its London bank account.
• The explanation offered by the assessee that section 194E of the Act would not be attracted on these payments was turned down by the AO and held that the assessee was responsible for withholding tax under section 194E of the Act. Furthermore, the AO held that the assessee had failed to deduct taxes under section 194E of the Act, it was also liable to pay interest under section 201(1A) of the Act from the date of tax being deductible to the date of actual payment of taxes.
• In appeal, the Commissioner of Income-tax (Appeal) (“CIT(A)”) confirmed the order of the AO. However, on further appeal by the assessee, the Income-tax Appellate Tribunal (the “Tribunal”) set aside the CIT(A)’s order and remanded the matter for a fresh decision to the CIT(A). The CIT(A) reheard the appeal and passed the final order, holding that except for the payment representing transfer from the assessee’s London bank account to Pakistan and Sri Lanka for disbursement of prize money for matches played there, all other payments would be covered under section 115BBA of the Act.
•On further appeal to the Tribunal, the Tribunal confirmed the CIT(A)’s order and held that the payment made by the assessee to ICC was liable to tax withholding under section 194E of the Act. Further, the Tribunal held that the provisions of section 194E of the Act are also applicable to the various payments made by the assessee to ICC member countries, notwithstanding the existence of tax treaties with some of these countries.
• However, modifying the CIT(A)’s order, the Tribunal deleted the tax ability of other payments made by the assessee by way of transfer from its London bank account to Pakistan and Sri Lanka for the qualifying matches between ICC associate members which were held outside India and on the guarantee money paid to South Africa and the UAE.
Issue
• Whether the assessee can legally be described to be a “person” within the meaning of Section 194E of the Act
• Whether provisions of section 194E of the Act would be applicable for payments made by the assessee to various sports associations or institutions or personalities in view of provisions of section 115BBA of the Act
Assessee’s contentions
The assessee contended that,
• It was not liable to withhold any tax under the Act, as the bid amount was payable to ICC irrespective of the games being played.
• The payment to the various foreign cricket associations were made out of the bid money by ICC through the assessee for promotion of the game of cricket in their countries much before the games were even played and were neither refundable nor had any relation to the matches.
• Merely because the three host Cricket Associations obtained funds by way of corporate sponsorship, the source of funds of the host association could not be a source of income of the foreign Cricket Associations. The source of income of the foreign Cricket Associations was the grant of the privilege at London to the host countries to hold the tournament. Accordingly, the bid money had no relation to the matches.
• As the amounts were not paid as consideration for playing any game in India, it could not be subjected to withholding tax under section 115BBA of the Act. Moreover, as all the payments were made in London, the provisions of the Act relating to withholding tax could not be applied as the Act cannot have any extra territorial application.
• Furthermore, as per the tax treaty entered into between India and the relevant countries, sports personalities of these countries with whom India has entered into tax treaties, cannot be subjected to tax in India and hence the question of deduction of tax under section 194E of the Act would not arise.
Revenue’s contentions
The Revenue contended that,
• Section 115BBA of the Act had provided for a concessional rate of tax at the rate of 10% for the convenience of the payee, which could not detract from the fact that the section determined the tax ability of the income by way of guarantee money receivable by the non-resident sports associations pertaining to games played in India.
• Section 115BBA of the Act is a specific and special provision and would override the generality of section 9(1) of the Act.
• Section 194E of the Act was peremptory in nature, to the effect that tax had to be withheld from any source of income referred to section 115BBA of the Act.
• The tax treaties would also not be applicable as they postulate tax in both the countries and there are no specific provision in the tax treaties referred by the assessee, regarding tax ability or otherwise of the payments in question. Therefore, the question of provision of the tax treaty exonerating the non-resident foreign associations from taxation in India does not arise.
High Court Ruling
The HO observed and held that,
• Section 115BBA of the Act provided for payment of income tax at a flat rate by non¬resident sports persons, sports associations or institutions, on various receipts from transactions like participation in India in any game or sport, by way of advertisement or by way of contribution of articles in Indian newspapers or publications.
• Further, as per clause (b) of section 115BA of the Act any amount guaranteed to be paid or payable to a sports association or institution in relation to any game (other than winnings which were taxable under section 115BBA of the Act) or sport played in India, are also within the India tax net.
• Accordingly, as per the provisions of section 115BA of the Act, for accrual of income, the pre- condition is that first payment should be made and, second the game or sports must have been played in India in relation to such payment.
• Section 115BBA of the Act is independent from other sections of the Act. Accordingly, the provisions would be applicable irrespective of the place of the payment once the above referred two criteria’s were satisfied. Once the above referred conditions were met, then the statutory obligation of the payer under section 194E of the Act with respect to withholding of taxes from such payments would be applicable.
• Section 194E of the Act nowhere states, whether the income was chargeable to tax or not. Accordingly, the failure to withhold taxes would have a consequence under section 201 of the Act.
• Under the definition of a “person” and “assessee” of the Act, PILCOM was an assessee, as an association of persons and body of individuals. Similarly the ICC and other cricket institutions or associations, whether residents or non-residents, were also assessees.
• If any amount including the guaranteed amount was paid to any non-resident sports association in relation to any match played in India, the withholding tax provisions of the Act would be applicable. As the assessee had made guarantee payment covered under section 115BBA of the Act to the foreign sports association, it would be required to comply with the withholding tax provisions under section 194E of the Act.
• However, if the payment had been received by any sports association or personalities for the matches not held in India, such payment would not be liable to tax in India nor there would be an obligation on the assessee for deduction of tax under section 194E of the Act.
• Advantage of the tax treaty can be pleaded and taken by the assessee on whose account the withholding is made not by the payer. Irrespective of the existence of the tax treaty, the obligation under section 194E of the Act had to be discharged once the income had accrued under section 115BBA of the Act.
• The assessee’s contention of extra territorial application of the Act in relation to payment made in London, was not valid in view of the Supreme Court decision in the case of CIT v. Eli Lilly and Co. (India) Pvt. Ltd. [2009] 312 ITR 225 (SC).
• Hence, it was held that the assessee was liable to withhold tax under section 194E of the Act read with the provisions of section 115BBA of the Act, on guaranteed amount paid to any non-resident sports association in relation to any match played in India.
Conclusion
The decision has laid down an important principle that payment made by an assessee to non-resident sport associations in relation to any match played in India, would be liable to withholding tax under section 194E of the Act, whether or not such payments are liable to tax in India under the treaty, since the language employed in section 194E has no co-relation to the tax ability. This observation made by the High Court appears to be with reference to section 194E of the Act and hence would not apply to section 195 of the Act.
Furthermore, the observation made by the High Court that the advantage of the tax treaty can be pleaded and taken by the assessee on whose account the taxes are withheld and not by the payer, appears to be unreasonable and harsh, in light of the position advocated by the Supreme Court on this issue. As such, this judgement could have adverse implications going forward, on payments made in similar circumstances, where availing of a tax treaty benefit, may have otherwise, obviated the need for withholding tax by the payer.
The decision also advocates that the fundamental distinction between withholding tax by the payer is one thing and the obligation to pay tax is another thing.
