Supreme Court Upholds Tax Deduction on Payments to Non-Resident Sports Associations: PILCOM vs. C.I.T. West Bengal-VII (29 April 2020)

Introduction

Date of the Judgment: 29 April 2020
Citation: Civil Appeal No. 5749 of 2012
Judges: Uday Umesh Lalit, J. and Vineet Saran, J.

Are payments made to foreign sports associations for events held in India taxable? The Supreme Court of India recently addressed this question in a case involving the 1996 Cricket World Cup. The court had to decide whether payments made to non-resident sports associations were subject to tax deduction at source under the Income Tax Act, 1961. The case revolved around the interpretation of Sections 115BBA and 194E of the Income Tax Act, 1961, specifically concerning the taxability of income earned by non-resident sports associations from events held in India.

The judgment was delivered by a two-judge bench comprising Justice Uday Umesh Lalit and Justice Vineet Saran. Justice Uday Umesh Lalit authored the judgment.

Case Background

The case involves PILCOM, a committee formed by the cricket boards of Pakistan, India, and Sri Lanka to conduct the 1996 Cricket World Cup. The International Cricket Council (ICC) selected these three countries to jointly host the tournament. PILCOM managed the finances, including sponsorships and TV rights, through bank accounts in London.

A dispute arose when the Income Tax Officer (ITO) in Calcutta noticed that PILCOM had made payments to the ICC and various cricket boards without deducting tax at source, as required under Section 194E of the Income Tax Act, 1961. The ITO issued a notice to PILCOM, which contested the applicability of Section 194E, arguing that the payments were not taxable in India.

The ITO, however, held that taxes should have been deducted at source under Section 115BBA of the Income Tax Act, 1961, and issued an order under Section 201(I)/194E, holding PILCOM liable for the tax it failed to deduct, along with interest. PILCOM appealed this order, leading to a series of proceedings before the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT).

Timeline

Course of Proceedings

The Income Tax Officer (ITO) initially held PILCOM liable for not deducting tax at source on payments made to the ICC and various cricket boards. PILCOM appealed this order, and the Commissioner of Income Tax (Appeals) [CIT(A)] partly allowed the appeal, holding that only a portion of the payments was taxable in India based on the number of matches played in India.

Both PILCOM and the Revenue appealed to the Income Tax Appellate Tribunal (ITAT). The ITAT modified the CIT(A)’s order, holding that payments to countries that did not play in India were not taxable, and only a portion of payments to countries that played in India was taxable based on the ratio of matches played in India.

The High Court of Judicature at Calcutta upheld the ITAT’s decision, leading PILCOM to appeal to the Supreme Court. The Revenue did not appeal the High Court’s decision.

Legal Framework

The Supreme Court considered several key provisions of the Income Tax Act, 1961:

• Section 2(24)(ix): Defines “income” to include winnings from lotteries, crossword puzzles, races, card games, and other games or gambling.
• Section 5(2): States that the total income of a non-resident includes income received or deemed to be received in India, or income that accrues or arises or is deemed to accrue or arise in India.
• Section 9(1): Specifies that income is deemed to accrue or arise in India if it arises from any business connection, property, asset, or source of income in India.
  • Explanation: Clarifies that income from business operations not entirely in India is attributed to the operations carried out in India.
• Section 115BBA: Deals with the taxation of non-resident sportsmen, sports associations, or institutions. It states that income includes any amount guaranteed to be paid or payable to such association or institution in relation to any game or sport played in India.
  • (1)(b) being a non-resident sports association or institution, includes any amount guaranteed to be paid or payable to such association or institution in relation to any game (other than a game the winnings wherefrom are taxable under section 115BB) or sport played in India,
• Section 194E: Requires any person responsible for paying income to a non-resident sportsman or sports association, as referred to in Section 115BBA, to deduct income tax at the rate of ten percent at the time of payment or credit of such income.
  • 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 percent

Arguments

PILCOM’s Submissions:

• PILCOM contended that the payments were for the grant of a privilege to host the matches and not directly related to the matches themselves.
• The payments were made in accordance with decisions of the International Cricket Council (ICC) in London.
• The payments were made in England, and the core issue was whether any income accrued in India.
• PILCOM argued that the source of income was the agreement entered into in London and not the matches played in India.

Revenue’s Submissions:

• The Income Tax Department argued that the payments were for matches held in India, making the income deemed to accrue or arise in India.
• The department contended that the source of income was the playing of matches in India, thus attracting the provisions of Section 115BBA of the Income Tax Act, 1961.
• The department submitted that the payments were intricately connected with the event where various cricket teams were scheduled to play and did participate in the event.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether any income accrued or arose or was deemed to have accrued or arisen to Non-resident Sports Associations in India.
2. If the answer to the above issue is in the affirmative, the next question would be about the liability on part of the Appellant to deduct Tax at Source and make appropriate deposit in accordance with Section 194E of the Income Tax Act, 1961.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• Performing Right Society Ltd. vs. CIT [1977] 106 ITR 11:* This case was followed to establish that the source of income can be the activity in India, even if the agreement was made abroad.
• CIT vs. Eli Lilly and Co. (India) Pvt. Ltd. (2009) 15 SCC 1:* This case was used to emphasize that TDS provisions are an integrated part of the charging provisions of the Income Tax Act, 1961.
• G.E. India Technology Centre Pvt. Ltd. vs. Commissioner of Income Tax and Another (2010) 327 ITR (SC):* This case was distinguished as it dealt with the obligation to deduct tax at source is limited to the proportion of income chargeable under the Act.
• Metallurgical and Engineering Consultant (India) Ltd. vs. Commissioner of Income Tax (1999) 238 ITR 208:* This case was distinguished as it dealt with payments for acquiring technical know-how abroad, which was not considered income accruing in India.
• Commissioner of Income Tax vs. Manjoo and Co. (2011) 335 ITR 527:* This case was found inapplicable as it dealt with the taxability of lottery winnings.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the direct connection between the payments made to the non-resident sports associations and the cricket matches played in India. The court emphasized that the source of income was the playing of the matches in India, and therefore, the income was deemed to accrue or arise in India, making it subject to tax deduction at source under Section 194E of the Income Tax Act, 1961. The court also highlighted the integrated nature of the charging and machinery provisions of the Income Tax Act, 1961.

Logical Reasoning:

The court rejected the argument that the payments were solely for the grant of a privilege, emphasizing the intrinsic connection between the payments and the matches played in India. The court also clarified that the obligation to deduct tax at source under Section 194E is not affected by the Double Taxation Avoidance Agreements (DTAA). The court stated that the benefit of DTAA can be pleaded by the assessee on whose account the deduction is made, and any excess tax can be refunded with interest.

The court quoted the following from the judgment:

• “The source of income, as rightly contended by the Revenue, was in the playing of the matches in India.”
• “The expression ‘in relation to’ emphasises the connection between the game or sport played in India on one hand and the Guarantee Money paid or payable to the Non-resident Sports Association on the other. Once the connection is established, the liability under the provision must arise.”
• “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 assesse 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.”

There were no dissenting opinions in this case. The bench consisted of two judges, both of whom concurred with the final decision.

Key Takeaways

• Payments made to non-resident sports associations for matches played in India are considered income that accrues or arises in India.
• The payer is obligated to deduct tax at source under Section 194E of the Income Tax Act, 1961, on such payments.
• The source of income is determined by the location of the activity generating the income, not necessarily the location of the agreement or payment.
• The obligation to deduct tax at source under Section 194E is not affected by DTAA.
• The benefit of DTAA can be pleaded by the assessee on whose account the deduction is made, and any excess tax can be refunded with interest.

Directions

No specific directions were given by the Supreme Court in this case.

Specific Amendments Analysis

There is no discussion of any specific amendments in the judgment.

Development of Law

The ratio decidendi of this case is that payments made to non-resident sports associations for matches played in India are considered income that accrues or arises in India, making them subject to tax deduction at source under Section 194E of the Income Tax Act, 1961. The court clarified that the source of income is the activity generating the income and not necessarily the location of the agreement or payment. This case reinforces the principle that the Income Tax Act, 1961, should be read as an integrated code, with charging and machinery provisions working together. There was no change in the previous position of law, but the court clarified the interpretation of Section 115BBA and 194E.

Conclusion

The Supreme Court upheld the decision of the High Court, ruling that payments made to non-resident sports associations for matches played in India are subject to tax deduction at source under Section 194E of the Income Tax Act, 1961. The court emphasized that the source of income was the matches played in India, and thus, the income was deemed to accrue or arise in India. This decision reinforces the principle that the Income Tax Act, 1961, should be read as an integrated code, with charging and machinery provisions working together.