2017 (9) TMI 53 - SC - Income Tax

Validity of attachment orders u/s 281B - High Court 2016 (12) TMI 123 - DELHI HIGH COURT has confirmed the tax liability of non-resident (FOWC) having PE in India - SC confirmed the order of HC 2017 (4) TMI 1109 - SUPREME COURT OF INDIA - Income tax department directed the Axis Bank to have the drawing of LCs restricted to the extent of the liability of Jaypee to deduct Tax Deducted at Source (TDS) of FOWC. - On the one hand, Axis Bank was restrained from remitting the amount under the LCs to the extent of tax liability of FOWC and, on the other hand, Confirming Banks had taken the position that once LCs were invoked, they had no option but to make the payment. Axis Bank, faced with this situation, filed Writ Petition in the High Court of Delhi. - HC dismissed the petition and confirmed the attachment orders. Held that - There is only one methodology which can be adopted in breaking this impasse or deadlock viz. to direct FOWC to secure the amount. After all, this stalemate is the creation of FOWC. 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 over reach the judicial orders. 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 directed accordingly.

Summary

Issues Involved:

1. Tax liability of FOWC and Jaypee under the Double Taxation Avoidance Agreement (DTAA) between India and the U.K.
2. Validity of the provisional attachment order under Section 281B of the Income Tax Act, 1961.
3. Obligation of Axis Bank to honor Standby Letters of Credit (LCs) despite the attachment order.
4. Legal obligations of Confirming Banks (RBS and Lloyds Bank) under the LCs.
5. Appropriate measures to secure the tax liability amount.

Issue-wise Detailed Analysis:

1. Tax Liability of FOWC and Jaypee:
The core issue revolves around the income tax liability of Formula One World Championship Limited (FOWC) and Jaypee Sports International Limited (Jaypee) for the income earned from conducting Formula One races in India. The dispute centers on whether this income is taxable in India under the Double Taxation Avoidance Agreement (DTAA) between India and the U.K. The Supreme Court upheld the Delhi High Court's judgment, which concluded that FOWC had a Permanent Establishment (PE) in India and the income attributed to this PE was liable to tax in India. The Court dismissed the appeals, affirming that tax is payable on the income earned by FOWC for conducting the races in India.

2. Validity of Provisional Attachment Order:
The Income Tax Department issued provisional attachment orders under Section 281B of the Income Tax Act to secure the tax liability. The Delhi High Court upheld these orders, and the Supreme Court affirmed this decision. The Court noted that the attachment was necessary to protect the interests of the Revenue, given the conclusive finding that FOWC had a PE in India and was liable to pay tax on the income earned. The attachment aimed to secure the amount due for tax purposes, ensuring compliance with the tax liability.

3. Obligation of Axis Bank under LCs:
Axis Bank faced conflicting demands due to the attachment order and its obligation to honor the LCs confirmed by RBS and Lloyds Bank. The Court acknowledged Axis Bank's dilemma but emphasized that the attachment order precluded the bank from remitting the amount under the LCs. Despite this, Axis Bank was under a contractual obligation to reimburse the Confirming Banks once they made payments to FOWC. The Court directed that the amount deposited by Axis Bank with the prothonotary and Senior Master of the Bombay High Court be released to the Confirming Banks only after FOWC deposits the equivalent amount.

4. Legal Obligations of Confirming Banks:
The Confirming Banks (RBS and Lloyds Bank) were legally bound to honor the LCs and make payments to FOWC upon invocation. The Court recognized that these banks could not be restrained from fulfilling their obligations under the LCs, irrespective of the disputes between FOWC, Jaypee, and the Tax Department in India. The payments made by the Confirming Banks to FOWC were deemed lawful, and the Axis Bank was obligated to reimburse them.

5. Measures to Secure Tax Liability:
To resolve the impasse, the Court directed FOWC to deposit the amount received under the LCs with the prothonotary and Senior Master of the Bombay High Court. This measure aimed to secure the tax liability while allowing the Confirming Banks to be reimbursed by Axis Bank. The Court emphasized that FOWC's actions in invoking the LCs, despite being aware of the attachment orders, were an attempt to overreach judicial orders. The directive ensured that the tax liability was secured without undermining the legal obligations of the banks involved.

Conclusion:
The Supreme Court's judgment meticulously addressed the complex interplay between tax liability, contractual obligations under LCs, and the need to secure revenue interests. By directing FOWC to deposit the amount received under the LCs and allowing Axis Bank to reimburse the Confirming Banks, the Court provided a balanced resolution that upheld the validity of the attachment orders while ensuring compliance with international banking obligations.