Champions League termination Compensation Payment made by BCCI to foreign Cricket bodies Tax Free

Income Tax Appellate Tribunal (ITAT) in the matter of the Board of Control for Cricket in India (BCCI) vs Dy. Commissioner of Income Tax (DCIT) held that payment of compensation to foreign Cricket bodies under the Termination Agreement is also not taxable in India. Further, since the payment is not chargeable to tax in India, therefore, there is no obligation on the assessee to deduct tax at source under section 195 of the Act.

Relevant Text:

12. We have considered the rival submissions and perused the material available on record. The only dispute, in the present appeal, is regarding the taxability of compensation paid to the overseas Cricket Association for the termination of the agreement. Since the year 2008, the assessee conducted an annual Cricket tournament called CLT20 during the months of September/October every year, till the year 2014. The assessee entered into an arrangement with CSA and CA to ensure the participation of their winners and/or runner-up teams of the domestic Twenty20 Cricket competition in the CLT20 Tournament apart from other ICC member countries. In consideration of ensuring the participation of its domestic teams, the assessee paid annual participation fees to these overseas cricket associations. As per the assessee, during the continuation of the CLT20 Tournament, it had deducted the taxes under section 194E of the Act in respect of annual participation fees paid to CSA, which is not in dispute. The main income from the CLT20 Tournament arose from the sale of media rights. Accordingly, the assessee, through its sub-committee i.e. Champions League Governing Council (“Governing Council”), entered into Rights Agreement on 10/09/2008 with ESPN Star Sports for the grant of certain rights like Media Rights, Umpires Sponsorship Rights, Title Sponsorship Rights, Official Sponsorship Rights, etc. in relation to CLT20 Tournament. From the perusal of the aforesaid Rights Agreement, which forms part of the paper book from pages 8-37, we find that the assessee, through its sub-committee, which is referred to as “Newco”, agreed to stage the CLT20 Tournament with at least 8 teams and 15 matches in each year during the term with the involvement of domestic T20 winners and runners-up of CA and CSA, and other ICC member countries that are invited by the Governing Council. Vide Novation Agreement dated 24/10/2013, ESPN Star Sports, the assessee, and Star India Private Ltd agreed that the rights held by ESPN Star Sports will be vested in favour of Star India Private Ltd. From the perusal of the Novation Agreement, forming part of the paper book from pages 38-74, we find that the parties agreed to certain amendments in the Rights Agreement dated 10/09/2008. As per one of these amendments, the assessee, through its sub-committee, guaranteed at least 23 matches to be played each tournament year featuring at least the top three finalists of the Indian Premier League and at least two finalists from any Twenty20 competition played in each of Australia and South Africa. Though, the Governing Council, constituted three members of the assessee, two from CA and one from CSA, however, the same was stated to be a sub-committee of the assessee in the Novation Agreement and the agreement was also signed by the assessee through the Governing Council.

13. Subsequently, Star India Private Ltd conveyed its desire to discontinue the exercise of its rights and requested for termination of the CLT20 Rights Agreement. Accordingly, vide agreement dated 29/05/2015, the assessee and Star India Private Ltd agreed to terminate CLT20 Rights Agreement. As compensation, Star India agreed to pay the Indian Rupee equivalent of USD 380 million to the assessee. This agreement was signed by the Honary Secretary of the assessee and the Authorised Signatory of Star India Private Ltd. In the present appeal, there is no dispute regarding the amount received under this agreement by the assessee.

14. Vide Termination Agreement dated 25/06/2015, forming part of the paper book from pages 87-92, it is evident that the assessee and CSA agreed to cease in full all arrangements amongst them and accordingly CSA was not obligated to ensure participation of any domestic team in the CLT20 Tournament. In the said agreement in clause 5, it was agreed that for a period of 4 years, if the assessee organises any similar tournament, CSA shall, if reasonably called upon to do so by the assessee, ensure participation of at least two teams from South Africa in such similar tournament organised by the assessee on such reasonable terms and conditions as agreed in writing amongst the parties. As per clause 6 of the agreement, it was also agreed that CSA shall not, directly or indirectly, manage, operate, stage, involve itself and/or any teams from South Africa and/or otherwise participate in any tournament which is anyway similar to CLT20 Tournament. As compensation for the termination of the CLT20 Tournament and CSA’s obligation, the assessee agreed to pay CSA, net of taxes, an amount of USD 22,696,000. The dispute, in the present appeal, is pertaining to the taxability of this amount paid by the assessee to CSA.

15. Thus, from the perusal of the aforesaid agreement, we find that the payment made to CSA by the assessee under the Termination Agreement dated 25/06/2015 was not only for the premature termination of the arrangement amongst them, whereby CSA was required to ensure the participation of teams from South Africa in the CLT20 Tournament each year, but the compensation was also for the non-compete clause as provided in clause 6 of the agreement. However, there is no clause in the agreement that supports the submission of the assessee that the compensation was for the purpose of avoiding any litigation and settling the disputes, therefore we find no merits in the said submission.

16. As per the Revenue, the payment is taxable in India, since the agreements were executed in India and therefore situs of the entire cause of action lies in India; the payment is in nature of non-compete fees which is taxable under section 28(va) of the Act; and CSA rendered services in India by facilitating two domestic teams for participation in CLT20 Tournament each year and therefore section 9(1) of the Act is applicable. In the present case, there is no dispute regarding the fact that CSA is a resident of South Africa in terms of the India South Africa DTAA and is in the possession of a Tax Residency Certificate of South Africa. Therefore, before proceeding further, it is pertinent to note certain provisions of the Act, which are relevant in order to decide the taxability in the hands of a non-resident assessee. Section 5(2) of the Act provides that the total income of a person who is non-resident includes all income from whatever source derived, which is (a) received or deemed to be received in India; or (b) accrues or arises or is deemed to accrue or arise in India to the assessee. It is not the case of the Revenue that compensation for the termination of the CLT20 Tournament was received in India, therefore clause (a) of section 5(2) of the Act has no application in the present case. As regards clause (b) of section 5(2) of the Act, section 9 elaborates on the expression “Income deemed to accrue or arise in India”. As per section 9(1)(i) of the Act, all the income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source in India, or through the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. Explanation 1 to section 9(1)(i) of the Act, further provides as under:

“(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;”

17. Thus, as per the aforesaid provision of Explanation 1(a) to section 9(1)(i) of the Act, it is only that portion of the income which is ‘reasonably attributable’ to the operations carried out in India shall be deemed to accrue or arise in India for the purpose of taxation under the Act. In the present case, it is evident from the record that the arrangement which existed between CSA and the assessee, whereby CSA was under obligation to ensure the participation of two domestic teams from the T20 league, was terminated vide Termination Agreement dated 25/06/2015, and no Cricket match of the CLT20 Tournament was played anywhere in the world, least in India, in the year consideration. Thus, in the year under consideration no services, as alleged by the Revenue, by facilitating two domestic teams for participation in the CLT20 Tournament were rendered. As regards the compensation being in the nature of non-compete fees is concerned, we agree with the submissions of the assessee that the place where the non-compete clause would apply is outside India because if any tournament takes place in India the same would be organised by the assessee, being the national body for cricket in India, and CSA is not restrained from participating in such tournament, by virtue of clause 5 of the Termination Agreement. Therefore, in the present case, we are of the considered view that the payment to CSA is not arising from any operations carried out in India in the year under consideration and thus the same is not taxable under section 9(1) of the Act. Further, the fact that the agreements were executed in India is of some relevance, but only for the purpose of determining the jurisdiction of the courts and the same will not determine the taxability of receipt in India, unless there are some operations carried out in India and the payment is ‘reasonably attributable’ to same, which condition, as noted above, is absent in the present case. In any case, the payment of compensation to CSA is for the termination of the arrangement, which was a profit-making apparatus, and thus is in the nature of capital receipt and hence not taxable.

18. It is well established that once the taxability fails in terms of the provisions of the Act, there is no occasion to refer to the provisions of the tax treaty, as in terms of section 90(2) the provisions of the Act or the DTAA, whichever is more beneficial to the assessee shall be applicable. However, we find that even under the provisions of the India-South Africa DTAA, the payment of compensation under the Termination Agreement is not taxable in India. The learned CIT(A) vide impugned order held that the assessee acted as a DAPE not only for CA and CSA but also for other teams which participated in CLT20 and therefore the income of the CSA is taxable in India as it had a ‘dependent agent’ in India. While coming to the aforesaid conclusion, the learned CIT(A) referred to the Rights Agreement dated 10/09/2008 between Governing Council and ESPN Star Sports, wherein Governing Council is stated to be constituted of three-member of the assessee, two from CA and one from CSA. Thus, it was held that Governing Council of CLT20 acted in unison and the assessee acted as an agent of CA and CSA.

19. In the present case, it is not in dispute that CSA is a resident of South Africa in terms of the India-South Africa DTAA and therefore is entitled to the benefit of provisions of the DTAA. As per Article 7 of the DTAA, the income of an enterprise of a contracting state shall be taxable in that state unless the enterprise carries on business in the other contracting state through a Permanent Establishment situated therein. Article 7 further provides that if the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other state only so much as is attributable to that Permanent Establishment. As per the Revenue, since CSA had a dependent agent in the form of the assessee in India, therefore, the receipt of compensation under the Termination Agreement is taxable in India even under the provisions of DTAA.

In order to decide the issue of whether the CSA had a DAPE in India under the provisions of the India-South Africa DTAA, it is relevant to analyse the provisions of Article 5(5) of the DTAA, which reads as under:-

“5. Notwithstanding the provisions of paragraphs 1 and 2, where a person – other than an agent of an independent status to whom paragraph 6 applies – is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.”

20. Therefore as per the provisions of Article 5(5) of the DTAA, it is only when a person acting on behalf of an enterprise has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a Permanent Establishment in that State. Thus, in order to invoke the provisions of Article 5(5) of the DTAA, both the conditions i.e. (a) the person has the authority to conclude contracts; and, (b) the person habitually exercises the authority to conclude the contract, need to be cumulatively satisfied. However, in the present case, the Revenue apart from alleging that the assessee is the agent of CSA did not bring anything on record to show that the assessee had the authority to conclude contracts in the name of CSA and has habitually exercised the said authority. Therefore, the Revenue has failed to discharge the burden cast on it to prove that the twin conditions provided in Article 5(5) of the DTAA are satisfied in the facts of the present case. The Hon’ble Supreme Court in ACIT vs E-Funds IT Solution Inc, (2017) 399 ITR 34 (SC) in para 10 of the judgment held that the burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. We are further of the considered opinion that the emphasis laid on the Governing Council of CLT20, is also of no relevance, since the said Governing Council is stated to be a sub-committee of the assessee in the Novation Agreement and the said agreement was also signed by the assessee. In this regard, the following excerpts from OECD Model Commentary 2017 on Article 5 are of relevance:-

“96. The cases to which paragraph 5 applies must be distinguished from situations where a person concludes contracts on its own behalf and, in order to perform the obligations deriving from these contracts, obtains goods or services from other enterprises or arranges for other enterprises to deliver such goods or services. In these cases, the person is not acting “on behalf” of these other enterprises and the contracts concluded by the person are neither in the name of these enterprises nor for the transfer to third parties of the ownership or use of property that these enterprises own or have the right to use or for the provision of services by these other enterprises…..”

21. In the present case, it is pertinent to note that the entire CLT20 Tournament was conducted by the assessee, and all the agreements, including the media/broadcasting Rights Agreement, in this regard were entered into by the assessee. As noted in the Termination Agreement, in order to maximise the commercial success of the CLT20 Tournament and to ensure the participation of teams from South Africa and Australia in addition to the other teams of ICC member countries, the assessee, inter-alia, entered into an arrangement with CSA to ensure that its winning/runner-up teams involved in domestic Twenty20 Cricket competition administered by CSA participate in the CLT20 Tournament organised by the assessee each year. Further, the assessee also paid annual participation fees to CSA in this regard, and on same TDS under section 194E was also deducted. Therefore, in view of the above, the assessee cannot be said to be DAPE of CSA in India under Article 5(5) of the India-South Africa DTAA. Thus, the payment of compensation to CSA under the Termination Agreement is also not taxable under the provisions of the India-South Africa DTAA. Since the payment is not chargeable to tax in India in the hands of CSA, therefore, there is no obligation on the assessee to deduct tax at source under section 195 of the Act. Accordingly, the impugned order passed by the learned CIT(A), on both counts, is set aside.

22. In respect of the submission of the learned DR regarding the taxability of the receipt under section 115BBA r/w 194E of the Act, we find that the same is not arising from the record and it was also not the basis of the learned CIT(A) to hold that provisions of section 195 of the Act are applicable in the present case. In this regard, the following observations of the Special Bench of the Tribunal in Mahindra and Mahindra Ltd vs DCIT, [2009] 30 SOT 374 (Mumbai) (SB), becomes relevant:-

“In our considered opinion the learned Departmental Representative has no jurisdiction to go beyond the order passed by the Assessing Officer. He cannot raise any point different from that considered by the Assessing Officer or CIT(A). His scope of arguments is confined to supporting or defending the impugned order. He cannot set up an altogether different case. If the learned D.R. is allowed to take up a new contention de hors the view taken by the Assessing Officer that would mean the learned A.R. stepping into the shoes of the CIT exercising jurisdiction under section 263. We, therefore, do not permit the learned D.R. to transgress the boundaries of his arguments.”

23. Therefore, on this preliminary basis only, as noted by the Special Bench of the Tribunal in the aforesaid decision, the contention of the learned DR is rejected. Even otherwise, section 115BBA(1)(b) of the Act has no application to the year under consideration, as the same only covers amount guaranteed to be paid or payable to a non-resident sports association or institution in relation to any game or sport played in India. However, in the present case, it is undisputed that CLT20 Tournament was discontinued from the year 2015, therefore, no game or sport was played in India in the year under consideration. Further, the payment to CSA is compensation for the termination of the CLT20 Tournament, which cannot by any interpretation be said to be ‘in relation to any game or sport played in India’. As a result, the grounds raised by the assessee are allowed.

24. In the result, the appeal by the assessee is allowed.