2022 (12) TMI 1278 - AT - Income Tax

TDS credit treated as income of the assessee - Nature of income - Jaypee Associates Limited ( JAL ) liability to withhold taxes in respect of payment made to the Appellant - assessee is the commercial rights holder of Formula One World Championship as exclusively entitled to award event promoters with the right to host, stage and promote Grand Prix on various Circuits worldwide and in that capacity entered into a Race Promotion Contract (RPC) with Jaypee Sports International Ltd. now merged with Jaiprakash Associates Limited (JAL) granting right to host the Indian Grand Prix - TDS credit claimed by the assessee is over and above the actual RPC fee paid to the assessee by JAL - TDS u/s 195 - existence of fixed place PE and liability of JAL to deduct tax at source on the RPC fee paid to the assessee - while computing the tax demand AO did not grant credit for TDS by JAL, though, the TDS amounts were reflected in Form 26AS of the assessee - In the final assessment orders the Assessing Officer held that the consideration received by the assessee with the Indian Grand Prix represented its profit with 56% of the said profit being attributable to the PE in India HELD THAT - Credit/actual payment of RPC fee to the assessee, JAL had not deducted any amount of tax at source in terms of section 195 of the Act. This is, probably by entertaining a view that RPC fee is not taxable in India. However, on an application filed by the assessee before the AAR, a Ruling was delivered holding that RPC fee is in the nature of royalty in terms of Article 13 of India UK Tax Treaty. Thus, AAR held that JAL was obliged to deduct tax at source on the RPC fee paid to the assessee. Being aggrieved with the AAR Ruling, both the assessee and JAL filed Writ Application before the Hon ble Delhi High Court. In their judgment, the Hon ble Delhi High Court overruled the decision of AAR by holding that RPC fee is not in the nature of royalty. However, the Hon ble High Court held that the assessee had a fixed placed PE in India; hence, the RPC fee is taxable in India. Thus, the Hon ble High Court held that the JAL was bound to make appropriate deduction under section 195 of the Act from the RPC fee paid to the assessee. Admittedly, by the time, the decision of the Hon ble Delhi High Court came, which ultimately got confirmed by Hon ble Supreme Court, JAL has paid the RPC fee to the assessee without withholding tax under section 195 of the Act. Thus, it is a fact on record that the RPC fee received by the assessee was the full amount without suffering any withholding of tax at source. This is the reason, why the assessee did not claim credit for TDS in return of income. Subsequently, as a consequence of the judgment of the Hon ble Delhi High Court, proceedings under section 201 of the Act was initiated against JAL on account of failure to deduct tax at source under section 195 of the Act and basis demand raised under section 201(1) and 201(1A) of the Act, JAL deposited the amount of tax which should have been withheld under section 195 of the Act while paying RPC fee to the assessee. Of course, it is a fact on record that TDS credit of Rs.35.68 crores appears in favour of assessee in Form 26AS. Subsequently, JAL has also issued TDS certificates in Form 16A in favour of the assessee in respect of TDS deposits. However, it is a fact on record that the TDS credit claimed by the assessee is not a part of the income offered to tax in the returns of income. The TDS credit claimed by the assessee is over and above the actual RPC fee paid to the assessee by JAL. Thus, essentially the TDS credit now claimed by the assessee is in the nature of an additional income over and above the RPC fee the assessee was entitled to receive under the contract. Thus, it is an additional item of income which has not suffered tax at the hands of the assessee. Therefore, the issue arising for consideration is, what is the nature of such income at the hands of the assessee. In this regard, we accept the submission of learned counsel for the assessee that the TDS credit partakes the character of original income, i.e., the RPC fee and has to be taxed in the same manner in which the Assessing Officer taxed the RPC fee. We direct the AO to factually verify the actual amount of TDS credit by matching figures in Form 26AS and TDS certificates issued in Form 16A and thereafter treat the TDS credit as income of the assessee partaking the character of RPC fee and tax it in the same manner in which RPC fee was brought to tax in the final assessment order. At this stage, we make it clear that the mandate given to the Assessing Officer in this order is only for taxation of the TDS credit and no other item of income. Needless to mention, before deciding the issue, the Assessing Officer must provide a reasonable opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Non-grant of tax credit for TDS deposited by JAL.
2. Non-grant of refund of excess taxes paid by the assessee.

Detailed Analysis:

1. Non-grant of tax credit for TDS deposited by JAL:

The assessee, a non-resident corporate entity and tax resident of the UK, entered into a Race Promotion Contract (RPC) with Jaypee Sports International Ltd. (now merged with Jaiprakash Associates Limited - JAL) to host the Indian Grand Prix. The RPC fee received by the assessee was initially treated as royalty by the Authority of Advance Ruling (AAR), which also held that JAL was obligated to deduct tax at source. This was challenged, and the Delhi High Court later ruled that the RPC fee was not royalty but that the assessee had a fixed place Permanent Establishment (PE) in India, thus requiring JAL to deduct tax at source. The Supreme Court upheld this decision.

Despite the ruling, the Assessing Officer did not grant credit for the TDS deposited by JAL, reflected in Form 26AS of the assessee. The assessee argued that as per section 199 of the Act and Rule 37BA, the taxes deposited by JAL should be considered as TDS and credited to the assessee's account. The Departmental Representative contended that since JAL did not deduct tax at the time of payment, the subsequent deposit was penal and not eligible for credit. The Tribunal noted that the TDS credit claimed was not part of the income offered to tax and thus directed the Assessing Officer to verify the TDS credit and treat it as income partaking the character of RPC fee, taxing it accordingly.

2. Non-grant of refund of excess taxes paid by the assessee:

The assessee claimed that the taxes deposited by JAL were in addition to the taxes already paid by the assessee, and thus, there should not be double taxation on the same income. The Tribunal accepted the assessee's submission that the TDS credit should be treated as income and taxed in the same manner as the RPC fee. The Tribunal directed the Assessing Officer to verify the TDS credit and provide a reasonable opportunity for the assessee to be heard before making a decision.

Conclusion:

The Tribunal partly allowed the appeals, directing the Assessing Officer to verify the TDS credit and treat it as part of the RPC fee income, ensuring it is taxed in the same manner. The Tribunal emphasized that the mandate was solely for the taxation of the TDS credit and no other income items.