Issuing guidelines on scope of taxability beyond what was emanating from Memorandum to the finance bill and Section introduced in the Act. For issuing such a widened scope, circular is also discussing a judgement of Hon’ble Supreme court. But the important question is, has the department quoted it in a right context?
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 (̲1̲1̲6̲ ̲t̲a̲x̲m̲a̲n̲n̲.̲c̲o̲m̲ ̲3̲9̲4̲ ( ̲P̲I̲L̲C̲O̲M̲ ̲v̲.̲ ̲C̲o̲m̲m̲i̲s̲s̲i̲o̲n̲e̲r̲ ̲o̲f̲ ̲I̲n̲c̲o̲m̲e̲-̲t̲a̲x̲,̲ ̲W̲e̲s̲t̲ ̲B̲e̲n̲g̲a̲l̲-̲V̲I̲I̲)̲.
|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, “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||Hon’ble Court’s view||Circular’s Interpretation|
|Is it necessary to examine taxability in the hands of the payee before deducting TDS ?||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.||SC 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.|
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.