Controversy

1. In a recent decision[1] (hereinafter referred to as the “PILCOM Ruling”), the Hon’ble Supreme Court of India has made some observations regarding the applicability of the Double Taxation Avoidance Agreements (“DTAAs”) at the time of discharge of withholding tax obligations in the context of section 194E of the Income-tax Act, 1961 (“ITA”). Even though the observations are case and issue specific, they may potentially be misunderstood while analysing tax withholding obligations under section 195 of the ITA.  Hence, this article attempts to analyse the correct legal position considering the astuteness with which the Hon’ble Apex Court has explained the law in context of the peculiar situation before them.

2.  What the PILCOM Ruling has observed is that for the purposes of withholding tax obligations, no recourse to the DTAAs can be taken and the assessee must suffer the withholding tax as per the domestic law and then claim the benefit/refund, going through the rigours of a regular assessment.  Notwithstanding the fact that this observation has been given by the Court in the background of the peculiar provisions of section 194E of the ITA, the possibility of the Revenue applying it as the general law of the land to deny DTAA benefits at the time of withholding under the general provisions of section 195 of the ITA cannot be ruled out.  Not only such an interpretation by the Revenue would be against the very grain and substance of section 90(2) of the ITA, but also contrary to the intent of the PILCOM Ruling, given that the Court was not examining the withholding obligations qua section 195 of the ITA, which operates in a totally separate field and is applicable on “income chargeable to tax under the ITA” as opposed to the taxability of a non-resident on a presumptive basis (e.g. 115BBA of the ITA).  That apart, if such a position is taken by the Revenue on a misunderstanding of the observations of the Hon’ble Apex Court, it would be against the Revenue’s own stand on the subject matter[2], as well as the position of law propounded by the Hon’ble Apex Court itself in a series of preceding judgments[3]. The Hon’ble Apex Court, being conscious of the earlier judgment (in GE India’s case), explicitly kept such observations qua the operation of the DTAAs limited to the provision which was a subject matter of consideration i.e. section 194E of the ITA.

3. In para 18 of its judgment in the PILCOM Ruling, the Apex Court observed as under-

“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.”

Background of the Case

4. Before the law is explained, it may be relevant to discuss the issue which arose before the Hon’ble Calcutta High Court in the case of PILCOM[4].  The Court was examining the question of applicability of the provisions of section 115BBA of the ITA on the payments being made from India and consequently the obligation to withhold taxes under section 194E of the ITA.

5. Section 115BBA of the Act finds its place in Chapter XII of the Act, which deals with determination of tax in certain special cases.  These provisions operate as deeming provisions and deal with presumptive taxation for certain classes of income.  Section 115BBA reads as under-

Tax on non-resident sportsmen or sports associations.
115BBA. (1) Where the total income of an assessee,—

(a) being a sportsman (including an athlete), who is not a citizen of India and is a non-resident, includes any income received or receivable by way of—

(i) participation in India in any game (other than a game the winnings wherefrom are taxable under section 115BB) or sport; or

(ii) advertisement; or

(iii) contribution of articles relating to any game or sport in India in newspapers, magazines or journals; or

(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 ; or

 (c) being an entertainer, who is not a citizen of India and is a non-resident, includes any income received or receivable from his performance in India, the income-tax payable by the assessee shall be the aggregate of—

 (i) the amount of income-tax calculated on income referred to in clause (a) or clause (b) or clause (c) at the rate of twenty per cent; and

 (ii) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income referred to in clause (a) or clause (b) or clause (c) :

Provided that no deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the income referred to in clause (a) or clause (b) or clause (c).

(2) It shall not be necessary for the assessee to furnish under sub-section (1) of section 139 a return of his income if—

(a) his total income in respect of which he is assessable under this Act during the previous year consisted only of income referred to in clause (a) or clause (b) or clause (c) of sub-section (1); and

 (b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.

6. Correspondingly, the withholding obligation qua section 115BBA finds its place in section 194E of the ITA, which reads as under-

Payments to non-resident sportsmen or sports associations.

194E. Where any income referred to in section 115BBA is payable to a non-resident sportsman (including an athlete) or an entertainer 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 twenty per cent.

7. The issue, that came up for consideration before the Hon’ble Calcutta High Court was regarding the taxability of the payments made from India and whether the same fell within the purview of section 115BBA and consequently whether there arose withholding tax obligations under section 194E of the ITA.  One of the questions which was raised before the High Court was regarding the applicability of the DTAAs and whether the Assessee was required to comply with such withholding obligations notwithstanding the DTAAs[5].  On facts, the High Court came to the conclusion that the payments under consideration were subject to tax in terms of section 115BBA of the ITA and consequently there arose a withholding tax obligation by the payer under section 194E of the ITA, relevant observations of the High Court being reproduced below:

“On perusal of the said section it would appear that once income referred to in Section 115BBA is held to be payable to foreigner non-resident sportsman or non-resident sports association or institution the person responsible for making payment is obliged at the time of making payment or at the time of credit of such income to the account of the payee to deduct income tax thereon at the rate of 10%. It is significant that said section nowhere says whether the income is chargeable to tax or not. It therefore be concluded that once the income accrues deduction is a matter of course. Naturally failure to deduct will have a consequence under Section 201 of the said Act. …”

8. While dealing with the arguments on the applicability of the DTAAs, the High Court observed as under-

30. Both the CIT(A) and Tribunal have rightly held so. It is rightly argued that the DTAA in the transaction has no connection at all for the reason firstly both the tax authorities factually found that neither of the articles of the agreement concerned does help to claim exemption from payment of tax under s. 115BBA nor relieves PILCOM from the obligation of deducting tax from the payment made under s. 194E. According to the contention of the Department that irrespective of place of game being held once the payment is made through the source of India the entire amount is taxable has no force at all.

31. Although it is not argued but we feel that obligation to deduction under s. 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 exigible 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 and not by the payer.

We are of the view irrespective of the existence of DTAA the obligation under s. 194E has to be discharged once the income accrues under s. 115BBA.

9. Without going into the question whether the observations of the Supreme Court in para 18 amounted to an obiter dicta, it would be seen that these observations have to be read in conjunction with the observations of the High Court which were given in the context of the special provisions of section 194E as well as the fact that in none of the DTAAs referred to by the appellant, there arose any provision dealing with the taxation of income as covered by section 115BBA of the ITA.  This is evident from para 15 of the High Court’s judgment. That said, the relevance of PILCOM Ruling with regard to applicability of DTAAs while discharging withholding obligations under section 195 of the ITA has been discussed in the subsequent paragraphs.

Discussion and Analysis

10. At the very outset, the question of applicability of the DTAAs at the time of determining withholding obligations was examined by the CBDT in its circular no. 728 dated 30.10.1995 stating as under:

Applicable rates of taxes under the Double Taxation Avoidance Agreement between India and the United Arab Emirates

1. It has been represented to the Board that when making remittances of the nature of royalties and technical fees, tax is being deducted at source at the rates specified in the Finance Act of the relevant year, without taking into account the special rates for taxation of such income provided for under the Double Taxation Avoidance Agreement with the country concerned.

2. The expression “rates in force” has been defined in section 2(37A) of the Income-tax Act. Under sub-clause (iii) of section 2(37A), for the purposes of deduction of tax under section 195, the expression is to mean the rate or rates of income-tax specified in this behalf in the Finance Act in the relevant year or the rates of tax specified in the Double Taxation Avoidance Agreement entered into by the Central Government whichever is applicable by virtue of the provisions of section 90 of the Income-tax Act, 1961.

3. It is hereby clarified that in view of the provisions of sub-section (2) of section 90 of the Act, in the case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.

11. While taking note of the above circular issued by the CBDT, the Hon’ble Apex Court in GE India’s case observed as under-

It may be noted that s. 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has 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 tax at source in respect of such composite payments. The obligation to deduct tax at source 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 s. 195(1), namely, “chargeable under the provisions of the Act”. It is for this reason that vide Circular No. 728, dt. 30th Oct., 1995 the 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 tax at source.

12. In view of the above observations of the Hon’ble Apex Court in GE India’s case, the issue of applicability of the DTAAs in context of section 195 of the ITA, stood settled.

13.  As regards the applicability of section 90(2) of the ITA, the Hon’ble Delhi High Court has very lucidly explained the legal position in the case of Danisco India[6].  While explaining the interplay between sections 90, 195 and the DTAAs in the context of applicability of the penal withholding tax rate under section 206AA, the Court held as under-

“In case of Azadi Bachao Andolan Vs. Union of India, (2003) 263 ITR 706 (SC) supreme court held that Provisions made in the DTAAs will prevail over the general provisions contained in the Act to the extent they are beneficial to the assessee. In this context, it would be worthwhile to observe that the DTAAs entered into between India and the other relevant countries in the present context provide for scope of taxation and/or a rate of taxation which was different from the scope/rate prescribed under the Act. Thus, in so far as the applicability of the scope/rate of taxation with respect to the impugned payments make to the non-residents is concerned, no fault can be found with the rate of taxation invoked by the assessee based on the DTAAs, which prescribed for a beneficial rate of taxation. However, the case of the Revenue is that the tax deduction at source was required to be made at 20% in the absence of furnishing of PAN by the recipient non-residents, having regard to section 206AA of the Act. In our considered opinion, it would be quite incorrect to say that though the charging section 4 of the Act and section 5 of the Act dealing with ascertainment of total income are subordinate to the principle enshrined in section 90(2) of the Act but the provisions of Chapter XVII-B governing tax deduction at source are not subordinate to section 90(2) of the Act. Notably, section 206AA of the Act which is the centre of controversy before us is not a charging section but is a part of a procedural provisions dealing with collection and deduction of tax at source. The provisions of section 195 of the Act which casts a duty on the assessee to deduct tax at source on payments to a non-resident cannot be looked upon as a charging provision.”

14. Thus, the provisions of Chapter XVII-B of the ITA being subordinate to the provisions of section 90(2) of the ITA, allow the Assessee to consider the DTAAs while determining withholding obligations.  It is for that reason that the Hon’ble Apex Court, while being conscious of the decision in GE India’s case, intentionally kept its observations limited in context of section 194E of the ITA.

15. Thus, to conclude, the observations of the Apex Court in the PILCOM Ruling are to be interpreted in context of the facts of that case and strictly in the context of sections 115BBA and 194E of the ITA, which provisions are a code in themselves as regards taxation of certain non-resident sportspersons, sports associations, and entertainers, 194E only being a mechanism for the deduction of tax owing to the income being covered under section 115BBA.

16. There is a fundamental distinction between section 194E and section 195 of the ITA, in so far as the former is a specific provision applicable to certain specific non-residents, while the latter is the general withholding tax provision applicable to all non-resident payees (unless specified otherwise).  Unlike section 195, section 194E envisages tax deduction at a flat rate without linking it to chargeability of income.  The mechanism for the payee to obtain a Nil or Lower Tax Withholding Certificate from the tax authorities under section 197 of the ITA has also not been extended to the recipients of income covered by section 115BBA r/w section 194E of the ITA.  It may also not be out of place to understand the Legislative rationale for introducing these provisions in the ITA which seemingly indicate a conscious deviation from the regular provisions of section 195 of the ITA:

“Rationalisation in the taxation provisions for non-resident sportsmen and sports bodies

13.1 Under the provisions of the Income-tax Act, any income which accrues or arises or is deemed to accrue or arise in India is taxable in the hands of a non-resident. As per section 9(1)(i) of the Income-tax Act, all incomes accruing or arising directly or indirectly from any source of income in India are deemed to accrue or arise in India. Therefore, any guarantee money paid to the foreign sports teams/Boards and payments to individual players on account of the sports activities taking place in India is liable to be taxed in India. Under section 195 of the Income-tax Act, it is also necessary to deduct tax at source at the time of payment/credit of such income. On the other hand, in countries like the United Kingdom, Australia and New Zealand, the income of the visiting non-resident sportsmen of sports bodies is either not taxed or taxed at lower rates. Further, practical difficulties were being experienced in enforcing the provisions of the Income-tax Act with regard to the payments to be made to the non-resident sportsmen or sports bodies. Therefore, as a measure of reciprocity and rationalisation, a new section 115BBA has been introduced in the Income-tax Act providing that the income of the non-resident sports bodies and non-resident sportsman (who are not citizens of India) other than the income chargeable under section 115BB will be chargeable to tax at a flat rate of 10% of the gross payments due to them. This rate will also be applicable in respect of income derived by non-resident sportsmen from their other activities like participating in advertisements and writing in newspapers, etc. It has also been prescribed that, in such cases, there will be no necessity for filing the return of income by such non-residents, once tax has been deducted at source. It has further been prescribed that the person responsible for paying any sum to these non-resident sports bodies/players will be required to deduct the tax at source at the rate of 10% of the gross payments.”

17. The fact of special nature of section 115BBA has been acknowledged by the Apex Court itself in the PILCOM Ruling in para 14 as below:

“14. 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 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.”

18. In light of the above discussion, as regards the applicability of the DTAAs in context of section 195 of the Act, the decision of the Hon’ble Apex Court in GE India’s case still rules the roost and ought to be treated as the last word on the subject.

Authors:
Akansha Aggarwal, Partner
Rohan Khare, Senior Associate
Ankul Goyal, Senior Associate

Footnotes:

[1] PILCOM Vs. CIT, West Bengal (Civil Appeal 5749 of 2012) (decision dated April 29, 2020) against the Calcutta High Court judgment reported as PILCOM Vs. CIT (2011) (335 ITR 147).
[2] CBDT Circular No. 728 dated 30.10.1995.
[3] GE India Technology Centre (P.) Ltd. Vs. CIT (2010) (327 ITR 456) (SC).
[4] Please refer foot note 1 above.  Calcutta High Court judgment reported as PILCOM Vs. CIT (2011) (335 ITR 147.
[5] Question No. (ii) before the High Court was – Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the appellant was required to deduct tax at source notwithstanding the DTAAs with Australia, England, New Zealand, Sri Lanka, Kenya and Holland?
[6] Danisco India Pvt. Ltd. Vs. UOI (2018) (404 ITR 539) (Del.).