Legal Wrangle | Direct Tax | Episode 58

THE ROYAL BANK OF SCOTLAND PLC Vs AXIS BANK LIMITED & ORS : SUPREME COURT OF INDIA: (Dated: August 25, 2017)

Income tax - Sections 195 & 281B - India-UK DTAA.

Keywords: Attachment Order - LCs - PE - Promotion of car racing game - right to use - IPRs

Whether when the assessee had filed appeal against the HC order fastening tax laibility on it, any effort to encash LCs is to be construed as an 'act of playing smart' - YES: SC

Whether the act of invoking LCs in this case is nothing short of overreaching the judicial order - YES: SC

The parties in this case are Income Tax Department, Formula One World Championship Limited (FOWC), which is a U.K. Company, Jaypee Sports International Limited (Jaypee), an Indian Company, Axis Bank, which is an Indian Bank, Lloyds Bank, an international Bank incorporated in U.K. and Royal Bank of Scotland (RBS), another international Bank incorporated under U.K. laws. The issues raised in these appeals arose as a result of income tax liability which was disputed by the FOWC in respect of income earned by FOWC in India for conducting Formula One races in India, as a result of contractual arrangement between FOWC and Jaypee. Though, it was disputed by FOWC as well as Jaypee that the income generated for conducting such races was not exigible to tax in India because of the provisions contained in Double Taxation Avoidance Agreement (DTAA) between India and U.K., the said controversy was been put to rest by this Court.

FOWC and Jaypee had entered into a Race Promotion Contract (RPC) and Artwork License Agreement (ALA), as amended from time to time, under which Jaypee was granted rights to host and promote the Formula One Grand Prix of India to be held at the Buddha International Circuit, Noida and was also given rights to use certain intellectual property for facilitating the organisation of Formula One Grand Prix in India for the consideration.

In order to secure the consideration due and payable to FOWC under the RPC, the Axis Bank, at Jaypee’s request, opened four Standby Letters of Credit (LCs) in favour of FOWC which were confirmed by RBS and Lloyds Bank (collectively referred as ‘Confirming Banks’) for a total sum of 51.35 million US Dollars. These LCs provided that English Law will apply and English Courts will have the jurisdiction. The Formula One race was organised in India for the years 2011, 2012 and 2013. Jaypee made certain payments under the arrangements without deducting tax in India. In order to get clarity on issues of income tax payable on the income generated in India, both, FOWC and Jaypee filed References before the Authority for Advance Rulings (AAR).

During the pendency of the References before AAR, the Tax Department passed an order dated March 10, 2014 under Section 281B of the Income Tax Act, 1961 provisionally attaching the consideration payable by Jaypee to FOWC under the RPC and ALA.

Upon Jaypee informing the Tax Department that it had submitted irrevocable LCs in favour of FOWC towards payment of the consideration due under the RPC/ALA, the Tax Department by a letter dated March 21, 2014 informed the Reserve Bank of India (RBI) about the attachment order passed by it and requested RBI to take action to ensure compliance of the said attachment order. Axis Bank was also sent the copy of that letter dated March 21, 2014. Acting upon the request of the Tax Department and in view of the aforesaid Attachment Order, RBI directed the Axis Bank not to make any remittance of money to FOWC without the approval of the Tax Department.

On April 30, 2014, one LC (for USD 15,450,000) was to expire. The same was invoked by FOWC on RBS. RBS made the payment to FOWC and, in turn, claimed reimbursement from the Axis Bank with value date of May 7, 2014. Later they were reversed after some court orders.

Meanwhile, the AAR gave its ruling which was reversed by the High Court and the same was upheld by the Apex Court. And the final verdict went against the FOWC.

Insofar as Income Tax Department was concerned, it had issued fresh Attachment Orders dated December 1, 2016 under Section 281B of the Act by which LCs were attached and Axis Bank was informed accordingly. Copy of this Attachment Order was marked to Jaypee, RBI, RBS, Lloyds Bank as well. Axis Bank informed about the said attachment also to RBS and Lloyds Bank by e-mail dated December 1, 2016.

Even as one more round of litigation was continuing, another round of ligitation was commenced. And the key facts are:

(i) That part of royalty paid by Jaypee to FOWC under the agreement entered into between them, income tax was payable on that portion of the income which was attributable to PE in India;

(ii) Pending proceedings for fixation of this liability, Income Tax Department had passed attachment orders dated December 1, 2016 under Section 281B of the Act. As per this attachment, Axis Bank is precluded from remitting the amount under LCs to the foreign banks.

(iii) Notwithstanding this attachment and notwithstanding the liability of tax to be discharged by FOWC, FOWC invoked those LCs on the basis of which it had received moneys under these LCs from the Confirming Banks.

(iv) on the one hand, Axis Bank was supposed to make the payment for the Confirming Banks and, on the other hand, the amount under attachment orders had to be secured thereby protecting the interests of the Revenue as well.

Having heard the parties, the Bench held that,

+ even when judgment of the Delhi High Court had come on December 21, 2016 fastening liability of income tax on the income generated by FOWC, FOWC tried to play smart by invoking the LCs. This was done by FOWC even after it was made aware of the attachment orders dated December 1, 2016 passed under Section 281B of the Act. No doubt, FOWC had challenged the orders of the High Court by filing special leave petition in this Court. Such a challenge was laid by Jaypee as well. Least that was expected of FOWC was to await the decision of this Court and act thereafter, depending upon the outcome of those proceedings. Fact remains that this Court has upheld the judgment of the Delhi High Court dated December 21, 2016 thereby sustaining the liability of FOWC. The attempt of the FOWC was nothing less than trying to overreach the judicial orders;

+ the Revenue's attachment order has to be seen in the light of the fact that there is a conclusive finding, upheld by this Court, that FOWC has PE in India and that taxable event has taken place in India because of which non-resident FOWC is liable to pay tax in India on the income it has earned on this soil. In this context, it is also to be borne in mind that when payments made by Jaypee to FOWC have been held to be business income, Jaypee was required to pay TDS under Section 195 of the Act on those payments, irrespective of the mode of making these payments i.e. whether through LCs or RTGS or NEFT or the outstanding amount has to be retained by the Jaypee in the form of Fixed Deposits or other securities. As per the arrangement between FOWC and Jaypee, the payments to be made to FOWC were secured through LCs. In that sense, these LCs can be treated as assets of FOWC in India. Section 281B of the Act deals with provisional attachment to protect revenue in certain cases;

+ obviously, the provision of Sec 281B is intended to secure and safeguard the interests of the Revenue. It provides for the provisional attachment of any property belonging to an assessee in accordance with the provisions contained in the Second Schedule. It has been stated by the Income Tax Department that after the judgment rendered by the High Court, draft assessment order in case of FOWC was passed on January 27, 2017 determining the tax liability of Rs.215,64,70,016/- (USD 31,690,890). FOWC filed objections before the Dispute Resolution Panel on February 28, 2017 and the said proceedings are still pending adjudication;

++ FOWC had got the indication that there was likelihood of fastening it with liability to pay tax after the pronouncement of the decision by the Delhi High Court. No doubt, the order of Delhi High Court was challenged in this Court. FOWC, however, did not even wait for the decision of this Court (though, ultimately decision of the High Court is upheld). Immediately after the pronouncement of the decision of the Delhi High Court, the department sent e-mail communications on November 30, 2016 itself to Axis Bank, Lloyds Bank and the RBS informing them about the final verdict of the Delhi High Court and called upon Axis Bank not to make payment under the LCs to the extent of the tax liability of FOWC with a copy to Jaypee requesting the banks that the drawing of LCs may be restricted to the extent of the tax liability of FOWC. Axis Bank also communicated this embargo to Lloyds Bank and RBS. Despite this, on the same day i.e. November 30, 2016, FOWC still invoked the LCs by making a demand on Lloyds Bank and RBS for the encashment of the four LCs;

+ we, therefore, affirm the order of the High Court which has upheld the attachment order made by the Income Tax Department;

+ having upheld the attachment order, the important moot question that arises is as to how to secure the amount? Whether Axis Bank be restrained from transmitting the amount to the Confirming Banks? Here, we find that insofar as Confirming Banks are concerned, they are under legal obligations to make the payments under the LCs once these LCs are invoked. These banks cannot go by any disputes between FOWC and Jaypee or FOWC and Tax Department in India. Therefore, it may be difficult to restrain Axis Bank from reimbursing the Confirming Banks, notwithstanding attachment orders. Best solution to the whole controversy, in these circumstances, is to direct the FOWC to remit the amount which it has received under the LCs as it is the FOWC which is to discharge the tax liability;

+ FOWC is directed to deposit the amount of 15.45 million USD with the prothonotary and Senior Master of Bombay High Court within a period of four weeks from today. FOWC is directed to deposit the amount of 15.45 million USD with the prothonotary and Senior Master of Bombay High Court within a period of four weeks from today. Amount deposited by the Axis Bank with the prothonotary and Senior Master shall be released to the Confirming Banks. It is made clear that this amount shall be released only after FOWC makes deposit thereof.

Assessees' appeals dismissed