Saurabh N. Soparkar, Sr. Advocate & Bandish S. Soparkar, Advocate

I . Introduction:

A recent judgment of the Supreme Court in the case of PILCOM v. CIT is likely to create significant confusion if not examined from proper perspective. On a first blush it seeks to unsettle a settled law, viz. a person is not liable to deduct tax at source in relation to payment made to a non resident which is, in the hands of the payee, not chargeable to tax. It seemingly lays down that

The obligation to deduct Tax at Source under Section 194E of the Act is not affected by the DTAA and in case the exigibility to tax is disputed by the assessee on whose account the deduction is made, the benefit of DTAA can be pleaded and if the case is made out, the amount in question will always be refunded with interest. But, that by itself, cannot absolve the liability under Section 194E of the Act.”

Thereby probably it creates a situation which is quite drastic for the Assessees. But does it really do that? In this article an attempt is being made to understand and examine the true scope of this judgment to find out in which cases the same may be applicable.

II. Facts:

2.1 No judgment can be appreciated unless the facts in question are understood from a proper perspective. We must therefore first see the facts of the judgment. In as much as in this article we are only concerned with the question of relevance of the Double Taxation Avoidance Agreement (DTAA) with the obligation to deduct income tax by the payer, the other facts which have no relevance to the controversy in hand are not being discussed.

2.2 The Assessee was a PAK-INDO-LANKA, JOINT MANAGEMENT COMMITTTEE (known in short as PILCOM) a Committee 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. International Cricket Council (ICC) is a non-profit making organization having its Headquarters at London, which controls and conducts the game of cricket in the different countries of the world. In a special meeting of ICC held on 2.2.1993 at London, India, Pakistan and Sri Lanka were selected, on the basis of competitive bids, to have the privilege of jointly hosting the 1996 World Cup Cricket Tournament. 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. For the purpose of conducting the final phase of the tournament in India, Pakistan and Sri Lanka, a Committee was formed by the three host members under the name PILCOM. 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. For the purpose of hosting the World Cup matches in India, the Board of Cricket Control of India (BCCI) appointed its own committee for discharge of its responsibilities and functions. The Committee was to be known as INDICOM. Since the Convener-Secretary of INDCOM was functioning from Calcutta necessary Bank accounts were opened in Calcutta by INDCOM for receipts and expenditure relating to matches to be held in India. 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.

2.3 During the course of enquiry, it came to the knowledge of tie I.T.O. (TDS), Ward- 21(4), Calcutta that PILCOM had made payments to ICC as well as to the Cricket Control Boards/Associations of the different Member countries of ICC from its two London Bank Accounts. The ITO issued a notice to PILCOM asking it to show-cause why actions under Section 201/194E of the Income Tax Act, 1961 (The Act) would not be taken against PILCOM for its failure to deduct taxes from the payments made by it and as referred to above in accordance with the provisions of section 194E. The PILCOM represented before the I.T.O. that the provisions of section 194E would not be attracted to the payments for various reasons which are not material for our discussion.

2.4 The I.T.O. did not agree with the contentions of PILCOM. He referred to the provisions of section 115BBA and held that taxes should have been deducted at source from the payments made by PILCOM in accordance with the provisions of Sec 194E and he passed an order under section 201(1)/194E dated 6-5-1997, in which he held that the PILCOM was liable to pay under section 201(1) the amount it had failed to deduct from the payments under. The CIT(A), held that on part of the payments made the Assessee ought to have deducted tax at source. Before the Income Tax Appellate Tribunal, in cross appeals, the Assessee got some further relief but was still held liable to deduct tax at source on some of the payments considering the fact that some matches were held in India.

2.5. The Order passed by the Tribunal was challenged by the Assessee as well as by the Revenue before the High Court and after considering rival submissions, by its Judgment and Order under appeal, the High Court affirmed the view taken by the Tribunal and dismissed the appeals by holding that the payments were exigible to tax in India. As regards the submission regarding non deduction of tax on because of applicability of DTAA the High Court observed:-

“Although it is not argued but we feel that obligation to deduction under Section 194E is not affected by the DTAA since such a deduction is not the final payment of tax nor can be said to be an assessment of tax. The deduction has to be made and after it is done the assessee concerned gets the credit of the same and once it is found later on that income from which the deduction is made is not eligible to tax then on application being made refund with interest is always allowed. Fundamental distinction between the deduction at source by the payer is one thing and obligation to pay tax is another thing.

Advantage of the DTAA can be pleaded and taken by the real assessee on whose account the deduction is made not by the payer.

We are of the view irrespective of the existence of DTAA the obligation under Section 195E has to be discharged once the income accrues under Section 115BBA.”

2.6 The Assessee carried the matter to the Supreme Court of India. The Revenue did not. In the appeal filed by the Assessee the Supreme Court first examined the question of taxability of the amount paid by the Assessee to income tax in India and confirmed the view of the Tribunal that it was taxable in India. Having held that income was so taxable the Supreme Court then held that “The mandate under Section 115 BBA (1)(b) is also clear in that if the total income of a Non-resident Sports Association includes the amount guaranteed to be paid or payable to it in relation to any game or sports played in India, the amount of income tax calculated in terms of said Section shall become payable”. The Court then proceeded to examine the argument of the Assessee that it was not liable to deduct tax at source in view of the provisions of DTAA and rejected that argument in following terms.

“18. We now come to the issue of applicability of DTAA. As observed by the High Court, the matter was not argued before it in that behalf, yet the issue was dealt with by the High Court. In our view, the reasoning that weighed with the High Court is quite correct. The obligation to deduct Tax at Source under Section 194E of the Act is not affected by the DTAA and in case the exigibility to tax is disputed by the assessee on whose account the deduction is made, the benefit of DTAA can be pleaded and if the case is made out, the amount in question will always be refunded with interest. But, that by itself, cannot absolve the liability under Section 194E of the Act.”

2.7 Apparently, The Supreme Court seeks to lay down the following principles:

  1. The obligation of the payer to deduct tax at source is not affected by the DTAA;
  2. It is only for the payee to dispute such deduction of tax and not for the payer to raise this contention by relying on DTAA;
  3. If, at the instance of the payee, it is found that no such tax was payable by him, the same would be refunded to him.

In other words, the payer must deduct tax at source, irrespective of the fact that the in the hands of the payee, by reason of operation of DTAA, the receipt may not be exigible to tax in India.

III. Analysis of the judgment

3.1 On a first blush it may appear that this judgment requires every Assessee making payments to a Non Resident, which is otherwise taxable in India, to deduct tax on or before paying any such amount without considering the fact that under DTAA, the amount is to be taxed by the Payee’s country and not India. The question that we are considering is – does it lay down such a broad principle?

3.2 In G.E. India Technology Centre Pvt. Ltd.[2], the question that arose was whether the appellant was liable to deduct Tax at Source in respect of payments made to certain foreign software suppliers. According to the appellant, the payments were for purchase of software whereas according to the Revenue, the payments also included payments towards royalty. The Tribunal, while accepting the case of the appellant had held that the amount paid by the appellant to foreign software suppliers was not towards royalty and the same did not give rise to any income taxable in India. The High Court had reversed the decision of the Tribunal and had held that unless the payer had obtained appropriate permission under Section 195(2) of the Act, the payer was obliged to deduct Tax at Source. In this context the matter was considered by the Supreme Court and while dealing with scope of Section 195(1) of the Act, it was stated:-

“8. The most important expression in Section 195(1) consists of the words chargeable under the provisions of the Act. A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the IT Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the IT Act.

9. It may be noted that Section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which have an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, “chargeable under the provisions of the Act”. It is for this reason that vide Circular No. 728 dated 30-10-1995 CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3-B) of the 1922 Act.

10. While deciding the scope of section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of section 195. Hence, apart from section 9(1), sections 4, 5, 9, 90 and 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions.

**** **** **** ****

16. The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression “sum chargeable under the provisions of the Act” from Section 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging sections of that Act dehors the machinery sections. The Act is to be read as an integrated code.

17. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in CIT v. Eli Lilly & Co. (India) (P) Ltd.[(2009) 15 SCC 1 : (2009) 312 ITR 225] the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the IT Act form one single integral, inseparable code and, therefore, the provisions relating to TDS applies only to those sums which are “chargeable to tax” under the IT Act. It is true that the judgment in EliLilly[(2009) 15 SCC 1 : (2009) 312 ITR 225] was confined to Section 192 of the IT Act. However, there is some similarity between the two. If one looks at Section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income “chargeable under the head ‘Salaries'”. Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum “chargeable under the provisions of the Act”, which expression, as stated above, does not find place in other sections of Chapter XVII. It is in this sense that we hold that the IT Act constitutes one single integral inseparable code. Hence, the provisions relating to DS applies only to those sums which are chargeable to tax under the IT Act.” (emphasis supplied)

3.3 Accordingly in this judgment the Supreme Court very clearly held that for the purpose of determining the liability to deduct tax at source, the payer is entitled to look into the fact is to whether or not the amount paid by him is chargeable to income tax or not on the basis of the provision of DTAA. In fact the Supreme Court clearly laid down that the provisions relating to TDS applies only to those sums which are chargeable to tax under the Act.

3.3 The same position is reiterated by Supreme Court in the case of Vodafone International Holdings B.V [3] as under

“89. Section 195 casts an obligation on the payer to deduct tax at source (“TAS” for short) from payments made to non residents which payments are chargeable to tax. Such payment(s) must have an element of income embedded in it which is chargeable to tax in India. If the sum paid or credited by the payer is not chargeable to tax then no obligation to deduct the tax would arise.”

Both of these judgments are not, in anyway, overruled by PILCOM. It could not have done that for the very simple reason that a bench of two learned judges in the case of PILCOM could not have overruled the earlier judgment of G.E. India also of two learned judges and the judgment of Vodafone International of three learned judges. In fact, it has not even attempted to do that. The judgment of GE India was cited in PILCOM but the Court has not chosen to follow the same by making the following observation.

“16.2 This decision, in our view, has no application insofar as payments at serial nos. (vi) and (vii) are concerned. To the extent the payments represented amounts which could not be subject matter of charge under the provisions of the Act, appropriate benefit already stands extended to the Appellant.”

3.4 In our view, the only reason why PILCOM does not follow GE India appears to be that the two judgments operate in two entirely different fields: former deals with section 194E whereas the latter deals with section 195. There is a marked difference in the language of both the sections.

Section 194E Section 195 (relevant extract only)
194-E. Payments to non-resident sportsmen or sports associations. — Where any income referred to in Section 115-BBA is payable to a non-resident sportsman (including an athlete) who is not a citizen of India or a non-resident sports association or institution, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rate of ten percent5.” 195. [(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest……………..or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

(emphasis supplied)

3.5 A bare look at section 194 E shows that obligation to deduct tax at source arises when any income referred to under section 115BBA is credited or paid irrespective of the fact whether it is “chargeable to tax”. In fact, section 115BBA (being part of chapter XII- Determination of Tax in Certain Special Cases) provides for a rate of tax upon certain transactions that are a part of the total income of an assessee. However, in case of section 195 the obligation to deduct the tax at source arises only if the amount which is being paid is chargeable under the provisions of the Act. In other words in case of section 115BBA, the determination of income is undisputable and therefore under section 194E, the obligation to deduct tax at source is absolute on “payment of income” but in case of obligation to deduct tax at source under section 195, there is no such absolute obligation; the person responsible for paying the sum is entitled to examine as to whether the sum so paid is “chargeable under the provisions of the Act”. If it is chargeable, tax must be deducted but if it is not, then there is no need to deduct tax at source. And for the purpose of determining as to whether any amount is chargeable or not, the payer would be entitled to examine, inter alia, DTAA also. This was the view taken by the Supreme Court in the case of GE India, which is not disturbed, and for the obvious reasons, is distinguished in PILCOM.

3.6 Any other view of the matter would lead to serious adverse consequences for all the Assessees who have to make the payments to non-residents. In many cases such payments are being made without deducting tax at source because the amount is not taxable in the hands of payee on account of DTAA. The payments of, for example, fees for technical services would not attract tax in India if covered under DTAA under “make available” clause. Many agreements have been entered into by the Assessees on the basis that there will be no obligation of deduction of tax because the payment would not be chargeable to income tax in the hands of non resident payee. All these agreements also, ordinarily, contain a clause that if any income tax is to be deducted, the same would be borne by the payer and not the payee. In all these cases, therefore, if tax is required to be deducted irrespective of the fact as to whether the same is exigible to tax or not in the hands of payee, it would lead to serious complications. The payee would insist for payment to be made to him without deduction of tax at source, the payer would have to gross up the amount of tax, pay the tax, and then seek refund.

3.7 Apart from this problem there would be one more complication which is more serious. In spite of non-chargeability of such payments in the hands of the payees under DTAA, for non-deduction of tax at source, all the expenses in the form of payment, outside India or to non-residents, of any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act may be disallowed by invoking the provisions of section 40(a)(i) of the Act. This may so happen though section 40(a)(i) requires deduction only if payment is made of a “sum chargeable under this Act”. This could not be the intention of the legislature.

3.8 Before PILCOM is invoked, the factual difference between the two judgments must be kept in mind. In the case of Sun Engg. Ltd (198 ITR297) the Supreme Court held as follows.

“……………It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. ……………….”

3.9 Therefore we are of the view that where the amount being paid to the non-resident payee is not chargeable to tax in India by virtue of a provision of DTAA, there is no obligation to deduct tax at source under section 195 of the Act.

IV Conclusion

4.1 This judgment again brings out the need for closely examining the facts of two seemingly conflicting judgments to avoid disastrous consequences. But we are fully confident that the Revenue would make no such attempt to the delight of the tax practitioners!

[2] [2010] 327 ITR 456(SC)

[3] [2012] 341 ITR 1 (SC)

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