The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has recently held compensation paid to Cricket South Africa for the termination of the CLT20 tournament is not taxable under provisions of the India-the South Africa Double Taxation Avoidance Agreement (DTAA). Therefore the bench granted relief to the Board of Control for Cricket in India (BCCI).
Assesee Board of Control for Cricket in India (BCCI) is the national body for Cricket in India and is a society registered under the Tamil Nadu Societies Registration Act. The assessee is also a member of the International Cricket Council (ICC), the international regulatory body for Cricket.
The assessee derives substantial income from the conduct of Cricket tournaments and matches which was taxed in India.
In the year 2008, the assessee commenced the conduct of a Cricket tournament, namely, CLT20. The tournament included the winners and/or runners-up of the domestic 20-over leagues of India, Australia, South Africa, etc.
To maximise the commercial success of the CLT20 Tournament assessee entered into an arrangement with the national body for Cricket in South Africa.
Under the said arrangement, CSA ensured that the winning and, where appropriate, the runner-up Cricket team(s) involved in the domestic Twenty-20 Cricket competition administered by CSA would be participating in CLT20 Tournament organized by the assessee each year.
It was also agreed between the assessee and CSA that the assessee would pay a quantified participation fee to CSA each year towards the participation of teams from its jurisdiction for the duration of the CLT20 term.
Thereafter, the assessee entered into an agreement with Star India Private Ltd for media/broadcasting relating to the CLT20 Tournament. In the year 2015, the CLT20 Tournament was discontinued revoking the aforesaid arrangements with CSA on mutually settled terms and conditions.
Thereafter, the assessee entered into an agreement with CSA to revoke the arrangement with CSA.
As compensation for the termination of the CLT20 Tournament and in consideration of CSA‟s obligations in the aforesaid agreement, the assessee agreed to pay CSA, net of taxes, an amount of USD 22,696,000. Assessee contended that the said payment was not taxable in India.
Further, the assessee filed an appeal under Section 248 of the Income Tax Act seeking a declaration that the tax was not required to be deducted on the said amount paid by it to the CSA.
The CIT(A) held that CSA received compensation by way of annual price fees and non-compete fees from the assessee also contended that all the agreements and matches are signed and conducted in India.
Accordingly, the income of the CSA was accrued and arose in India. After observing the facts the CIT(A) dismissed the appeal.
Aggrieved by the order assessee filed an appeal before the tribunal.
P.J. Pardiwala, counsel for the assessee submitted that, under the original agreement, CSA had to ensure the participation of the winner and runner-up teams of the T20 domestic league in their country in the CLT20 Tournament.
Upon termination of the arrangement, even this obligation to ensure participation was done away with that neither during the continuation of the arrangement nor upon its termination any services have been rendered by CSA in India.
Further contended that for any income to be chargeable to tax in India, the rendering of services giving rise to income should have been performed in India.
The counsel also argued that CSA has no Permanent establishment in India, due to the absence of any Permanent Establishment the payment of compensation for the discontinuance of the CLT20 Tournament could not be taxed in India.
Surabhi Sharma, counsel for the revenue submitted that the agreement is in the nature of a non-compete agreement as CSA had agreed to not engage in any tournament of nature similar to CLT20 in the near future, therefore the payment is taxable as business income under Section 28(va) of the Income Tax Act.
It was observed by the tribunal that 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 Income Tax Act.
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. Also under the provisions of the India-South Africa DTAA, the payment of compensation under the Termination Agreement is not taxable in India.
After considering the facts and circumstances of the above case the two-member bench of the tribunal comprising G.S. Pannu, (President) and Sandeep Singh Karhail, (Judicial Member) allowed the appeal filed by the assessee and observed that as per Article 5(5) of the India-South Africa DTAA assessee is not Dependant Agent Permanent Establishment (DAPE) of CSA in India. Thus, the payment of compensation to CSA under the Termination Agreement is also not taxable under the provisions of the India-South Africa DTAA.
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