1 NON-REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 11064-65 OF 2017 (ARISING OUT OF SLP (CIVIL) NOS. 3073-3074 OF 2017) ROYAL BANK OF SCOTLAND PLC APPELLANT(S) VERSUS AXIS BANK LIMITED & ORS. RESPONDENT(S) WITH CIVIL APPEAL NOS. 11066-67 OF 2017 (ARISING OUT OF SLP (CIVIL) NOS. 5317- 5318 OF 2017) AND CIVIL APPEAL NOS. 11068 OF 2017 (ARISING OUT OF SLP (CIVIL) NO. 5383 OF 2017) JUDGMENT A.K. SIKRI, J. Leave granted. Signature Not Verified Digitally signed by ASHWANI KUMAR 2) parties in these proceedings are Income Tax Department (Union of Date: 2017.08.28 17:38:46 IST Reason: India), Formula One World Championship Limited (FOWC), which is 2 U.K. Company, Jaypee Sports International Limited (Jaypee), Indian Company, Axis Bank, which is Indian Bank, Lloyds Bank, international Bank incorporated in U.K. and Royal Bank of Scotland (RBS), another international Bank incorporated under U.K. laws. These three appeals are filed by RBS, Lloyds Bank and Axis Bank in which other parties are impleaded as respondents. Therefore, for sake of clarity and to avoid confusion, it would be apt to refer these parties by their aforesaid names, rather than addressing them as appellants or respondents. 3) Though nature of grievances of three appellants in these three appeals is different, root cause thereof is same. issues raised in these appeals have arisen as result of income tax liability which was disputed by FOWC (or, for that matter, by Jaypee as well, albeit at behest of FOWC) in respect of income earned by FOWC in India for conducting Formula One races in India, as result of contractual arrangement between FOWC and Jaypee. Though, it was disputed by FOWC as well as Jaypee that income generated for conducting such races is not exigible to tax in India because of provisions contained in Double Taxation Avoidance Agreement (DTAA) between India and U.K., said controversy has been put to rest by this Court in Civil Appeal Nos. 3849 of 2017, 3850 of 2017 and 3851 of 2017 decided by this Court vide common judgment dated April 24, 2017. 3 Before we advert to disputes involved in these appeals, brief background of dispute which led to aforesaid judgment would be necessary. 4) FOWC and Jaypee entered into 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 Formula One Grand Prix of India to be held at Buddha International Circuit, Noida and was also given rights to use certain intellectual property for facilitating organisation of Formula One Grand Prix in India for consideration and upon terms and conditions stated therein. 5) In order to secure consideration due and payable to FOWC under RPC, 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 total sum of 51.35 million US Dollars. These LCs provided that English Law will apply and English Courts will have jurisdiction. Formula One race was organised in India for years 2011, 2012 and 2013. Jaypee made certain payments under aforesaid arrangements without deducting tax in India. In order to get clarity on issues of income tax payable on income generated in India, both, FOWC and Jaypee filed References before Authority for Advance Rulings (AAR). During 4 pendency of References before AAR, Tax Department passed order dated March 10, 2014 under Section 281B of Income Tax Act, 1961 (hereinafter referred to as Act ) provisionally attaching consideration payable by Jaypee to FOWC under RPC and ALA. 6) Upon Jaypee informing Tax Department that it had submitted irrevocable LCs in favour of FOWC towards payment of consideration due under RPC/ALA, Tax Department by letter dated March 21, 2014 informed Reserve Bank of India (RBI) about aforesaid attachment order passed by it and requested RBI to take action to ensure compliance of said attachment order. Axis Bank was also sent copy of that letter dated March 21, 2014. Acting upon request of Tax Department and in view of aforesaid Attachment Order, RBI by its letter dated April 2, 2014, inter alia, directed Axis Bank not to make any remittance of money to FOWC without approval of Tax Department. 7) It may be mentioned that on April 30, 2014, one LC (for USD 15,450,000) was to expire. same was invoked by FOWC on RBS. RBS made payment to FOWC and, in turn, claimed reimbursement from Axis Bank with value date of May 7, 2014. 8) As per Axis Bank, it resulted in two conflicting demands faced by it. By 5 its letter dated May 5, 2014, Axis Bank wrote to RBI, inter alia, highlighting various issues regarding LCs and its obligations therein and also fact that its failure to honour invocation thereof by RBS would undermine international reputation of Bank in banking circles, and further requested RBI to permit Bank to make payment under LCs. RBI, however, did not issue any communication permitting Bank to do so. 9) By letter dated May 6, 2014, U.K. Solicitors for Lloyds Bank replied to Axis Bank s letter dated April 5, 2014, and contended that order dated March 10, 2014 did not apply to Axis Bank s obligation to make payment under LCs. By another letter dated May 7, 2014, U.K. Solicitors for RBS took same stand and asked Axis Bank to make payment under LCs for USD 15,450,000 and also threatened legal action against Axis Bank in event of non-payment under LCs. 10) At that stage, Axis Bank filed Writ Petition No. 2129 of 2014 in High Court of Bombay seeking various protective reliefs. FOWC also filed Writ Petition (L) No. 3245 of 2015. In this writ petition, orders were passed from time to time. Even one Review Petition (L) No. 54 of 2015 was filed. Ultimately, with consent of FOWC and Jaypee, following arrangements were arrived at disposing of said review 6 petition: (i) LCs invoked by FOWC was reversed and not given effect to; (ii) four LCs referred to above were kept alive to be renewed from time to time, pending ruling by AAR; and (iii) attachment of Tax Department was continued till period of eight weeks thereafter. 11) Thereafter, on August 17, 2016, AAR gave its ruling, inter alia, holding that FOWC had no Permanent Establishment (PE) in India. However, it further held that consideration paid by Jaypee to FOWC was in nature of royalty which was chargeable to tax in India. Challenging this order, Tax Department as well as FOWC and Jaypee filed their respective writ petitions in High Court of Delhi. High Court of Delhi decided these writ petitions vide judgment dated November 30, 2016 thereby reversing ruling of AAR on both counts. It held that consideration paid by Jaypee to FOWC was not in nature of royalty. Instead, it came to conclusion that FOWC had PE in India and, therefore, income attributed to said PE was liable to tax in India. special leave petitions were filed by FOWC and Jaypee against this judgment in which leave was granted. However, vide judgment dated April 24, 2017, view taken by High Court has been upheld and appeals have been dismissed. effect thereof is that tax is 7 payable on income which is earned by FOWC for conducting races in India. 12) At this stage, we mention developments which took place in respect of these cases after ruling was rendered by AAR. 13) writ petition which was filed by Income Tax Department challenging ruling of AAR was numbered as W.P. (C) No. 9509 of 2016. In that writ petition, Delhi High Court passed order dated October 7, 2016 restraining FOWC from drawing up LCs which order remained operative till writs were decided by High Court on November 30, 2016. After decision in writ petition by High Court, Axis Bank was served with letter from Tax Department referring to judgment of High Court in which Axis Bank was directed to have drawing of LCs restricted to extent of liability of Jaypee to deduct Tax Deducted at Source (TDS) of FOWC. Similar communications were addressed by Income Tax Department to RBS and Lloyds Bank as well. Axis Bank informed RBS as well as Lloyds Bank about aforesaid communication from Income Tax Department. Essence of these letters was that Delhi High Court had concluded that FOWC is liable to pay tax on payments which it had received from Jaypee under RPC and, therefore, amount to extent of said liability had to be secured inasmuch as while making 8 payments, Jaypee had not deducted tax at source which was, otherwise, its obligation under Act. 14) Fearing that FOWC may not get at least part of amount under LCs in view of tax liability, FOWC acted hastily by triggering LCs on November 30, 2016 itself (the date on which judgment was pronounced by Delhi High Court) and called upon Confirming Banks i.e. RBS and Lloyds Bank to make payments to it. Confirming Banks also obliged instantly by releasing payment under LCs to FOWC. 15) Insofar as Income Tax Department is concerned, it issued fresh Attachment Orders dated December 1, 2016 under Section 281B of 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 said attachment also to RBS and Lloyds Bank by e-mail dated December 1, 2016. 16) On one hand, Axis Bank was restrained from remitting amount under LCs to extent of tax liability of FOWC and, on other hand, Confirming Banks had taken position that once LCs were invoked, they had no option but to make payment. Axis Bank, faced with this situation, filed Writ Petition No. 11440 of 2016 in High 9 Court of Delhi. In this petition, orders dated December 2, 2016 were passed holding that attachment of Tax Department was prima facie warranted in law and directed petitioner not to release any amount pursuant to said LCs. Even when this order was communicated to Confirming Banks, they wrote back to Axis Bank stating that there was no legal ground for Axis Bank to refuse to pay amount under LCs. Thereafter, vide communication dated December 6, 2016, Lloyds Bank informed Axis Bank that payment had been made to FOWC under LCs and Axis Bank was called upon to reimburse same. Because of these subsequent developments, Axis Bank filed miscellaneous application in W.P. No. 11440 of 2016 seeking to amend writ petition by including challenge to Attachment Orders dated December 1, 2016 passed under Section 281B of Act. High Court ultimately passed order dated December 21, 2016. By this order, though amendment was allowed, at same time, it was also observed that nothing survived in matter, though writ petition was not finally decided on that date. writ petition was finally heard on January 30, 2017 and it was dismissed, holding that attachment under Section 281B is valid. Challenging that order, SLP(C) No. 5383 of 2015 is filed by Axis Bank. 17) While aforesaid developments were taking place in High Court of Delhi, another litigation chapter was opened in Bombay 10 High Court. 18) As noted above, Conforming Banks had made payment to FOWC in terms of LCs and these Banks were pressing upon Axis Bank to honour its commitment as those LCs were opened at instance of Axis Bank. Since payment was not made by Axis Bank in view of Attachment Orders passed by Income Tax Department, Axis Bank filed Commercial Suit (L) No. 292 of 2016 (re-numbered as Commercial Suit No. 8 of 2017) seeking declaration to effect that Axis Bank was prevented from making payment under LCs and/or was not obliged to make such payments and payments in respect of LCs by said Banks to FOWC was wrongful or illegal etc. Some other prayers of similar nature were also made. This suit was filed on December 13, 2016 and along with that Notice of Motion was taken for emergent interim prayers. In said Notice of Motion (L) No. 233 of 2016 (re-numbered as 10 of 2016), order dated December 14, 2016 was passed by Bombay High Court inter alia restraining Confirming Banks from taking any coercive steps or measures against Axis Bank from enforcing LCs. Further, orders dated December 21, 2016 were passed by Bombay High Court directing Axis Bank to deposit US$ 15.45 million in High Court, being money payable to RBS. Pursuant to these orders, Axis Bank has deposited said amount with prothonotary and Senior Master, 11 High Court of Bombay. Challenging these orders, RBS and Lloyds Bank have filed SLP (C) Nos. 3073-3074 of 2017 and 5317-5318 of 2017. 19) From aforesaid, it is clear that SLP (C) No. 5383 of 2017 filed by Axis Bank challenges order of High Court of Delhi whereby attachment made by Income Tax Department under Section 281B of Act is held to be valid. Other two appeals are by RBS and Lloyds Bank challenging orders dated December 14, 2016 and December 21, 2016 passed by High Court of Bombay whereby these Banks are restrained from taking any coercive steps or measures against Axis Bank from enforcing LCs and direction of High Court to Axis Bank to deposit amount under said LCs in High Court. 20) From facts narrated above, following position emerges: (i) That part of royalty paid by Jaypee to FOWC under agreement entered into between them, income tax is payable on that portion of income which is attributable to PE in India. To put it simply, FOWC and/or Jaypee have liability of income tax which needs to be discharged. (ii) Exact liability of income tax on aforesaid account is yet to be ascertained. (iii) Pending these proceedings for fixation of this liability, Income Tax 12 Department has passed attachment orders dated December 1, 2016 under Section 281B of Act. As per this attachment, Axis Bank is precluded from remitting amount under LCs to foreign banks. (iv) Notwithstanding this attachment and notwithstanding liability of tax to be discharged by FOWC, FOWC invoked those LCs on basis of which it has received moneys under these LCs from Confirming Banks. 21) Confirming Banks, which are foreign banks, were bound under said LCs to make payments to FOWC. action in making payment cannot be treated as illegal. 22) As per terms of LCs, once Confirming Banks have made payment to FOWC, Axis Bank is under obligation to make said payment to Confirming Banks inasmuch as LCs were open by Confirming Banks at instance of Axis Bank. However, at same time, due to attachment orders dated December 1, 2016, Axis Bank is precluded from making this payment. 23) position that emerges from above is that, on one hand, Axis Bank is supposed to make payment for Confirming Banks and, on other hand, amount under attachment orders has to be secured thereby protecting interests of Revenue as well. 13 24) There is only one methodology which can be adopted in breaking this impasse or deadlock viz. to direct FOWC to secure amount. After all, this stalemate is creation of FOWC. Even when judgment of Delhi High Court had come on December 21, 2016 fastening liability of income tax on income generated by FOWC, FOWC tried to play smart by invoking LCs. This was done by FOWC even after it was made aware of attachment orders dated December 1, 2016 passed under Section 281B of Act. No doubt, FOWC had challenged orders of High Court by filing special leave petition in this Court. Such challenge was laid by Jaypee as well. Least that was expected of FOWC was to await decision of this Court and act thereafter, depending upon outcome of those proceedings. Fact remains that this Court has upheld judgment of Delhi High Court dated December 21, 2016 thereby sustaining liability of FOWC. attempt of FOWC was nothing less than trying to over reach judicial orders. 25) In aforesaid scenario, first thing that needs to be determined is as to whether provisional attachment order passed by Assessing Officer under Section 281B of Act is valid or not. This attachment order has to be seen in light of fact that there is conclusive finding, upheld by this Court, that FOWC has PE in India and that 14 taxable event has taken place in India because of which non-resident FOWC is liable to pay tax in India on 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 Act on those payments, irrespective of mode of making these payments i.e. whether through LCs or RTGS or NEFT or outstanding amount has to be retained by Jaypee in form of Fixed Deposits or other securities. As per arrangement between FOWC and Jaypee, 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 Act deals with provisional attachment to protect revenue in certain cases and reads as under: 281B. (1) Where, during pendency of any proceeding for assessment of any income or for assessment or reassessment of any income which has escaped assessment, Assessing Officer is of opinion that for purpose of protecting interests of revenue it is necessary so to do, he may, with previous approval of Principal Chief Commissioner or Chief Commissioner, Principal Commissioner or Commissioner, Principal Director General or Director General or Principal Director or Director, by order in writing, attach provisionally any property belonging to assessee in manner provided in Second Schedule. 26) Obviously, aforesaid provision is intended to secure and safeguard interests of Revenue. It provides for provisional attachment of any property belonging to assessee in accordance with 15 provisions contained in Second Schedule. It has been stated by Income Tax Department that after judgment rendered by High Court, draft assessment order in case of FOWC was passed on January 27, 2017 determining tax liability of Rs.215,64,70,016/- (USD 31,690,890). FOWC filed objections before Dispute Resolution Panel on February 28, 2017 and said proceedings are still pending adjudication. details of draft assessment orders are as under: FOWC Draft Assessment Orders for A.Y. 2012-13, 2013-14 and 2014-15 Date of Orders 27.01.2017 Date of Service of 28.01.2017 Draft Assessment orders Date of objections filed 27.02.2017 by assessee (FOWC) in DRP 27) If income proposed to be assessed in draft assessment orders are accepted by assessee or Draft Resolution Panel, income of assessee and tax thereon would be as under: S. Assessment Proposed Proposed Tax + Proposed No. Year Income surcharge + Tax + Interest (in Rs.) surcharge + Interest (In USD) 1 2012-13 123,13,60,140/- 90,40,44,912/- 13,285,595/- 2 2013-14 88,37,92,350/- 60,08,02,039/- 8,829,221/- 3 2014-15 104,19,03,410/- 65,16,23,065/- 9,576,073/- 16 Total 315,70,55,900/- 215,64,70,016/- 31,690,890/- 28) It is also pointed out that as per judgment of this Court, even affiliates of FOWC, namely, Beta Prema 2, Allsport Management and Formula One Management are to pay taxes in India. Whether liability to pay taxes is ultimately determined as per draft assessment order or it may get reduced is not issue. What is significant is that tax liability on FOWC is very much there. 29) It is stated at cost of repetition, as it needs to be reemphasised, that FOWC had got indication that there was likelihood of fastening it with liability to pay tax after pronouncement of decision by Delhi High Court. No doubt, order of Delhi High Court was challenged in this Court. FOWC, however, did not even wait for decision of this Court (though, ultimately decision of High Court is upheld). Immediately after pronouncement of decision of Delhi High Court, department sent e-mail communications on November 30, 2016 itself to Axis Bank, Lloyds Bank and RBS informing them about final verdict of Delhi High Court and called upon Axis Bank not to make payment under LCs to extent of tax liability of FOWC with copy to Jaypee requesting banks that drawing of LCs may be restricted to extent of tax liability of FOWC. Axis Bank also communicated this embargo to Lloyds Bank and 17 RBS. Despite this, on same day i.e. November 30, 2016, FOWC still invoked LCs by making demand on Lloyds Bank and RBS for encashment of four LCs. 30) We, therefore, affirm order of High Court which has upheld attachment order made by Income Tax Department. 31) Having upheld attachment order, important moot question that arises is as to how to secure amount? Whether Axis Bank be restrained from transmitting amount to Confirming Banks? Here, we find that insofar as Confirming Banks are concerned, they are under legal obligations to make payments under 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 Confirming Banks, notwithstanding attachment orders. Best solution to whole controversy, in these circumstances, is to direct FOWC to remit amount which it has received under LCs as it is FOWC which is to discharge tax liability. 32) In these circumstances, these appeals are disposed of with following directions: (i) FOWC is directed to deposit amount of 15.45 million USD with 18 prothonotary and Senior Master of Bombay High Court within period of four weeks from today. (ii) Amount deposited by Axis Bank with prothonotary and Senior Master shall be released to Confirming Banks. It is made clear that this amount shall be released only after FOWC makes deposit thereof. .............................................J. (A.K. SIKRI) .............................................J. (ASHOK BHUSHAN) NEW DELHI; AUGUST 25, 2017 19 ITEM NO.1502 COURT NO.6 SECTION IX (FOR JUDGMENT) S U P R E M E C O U R T O F I N D I RECORD OF PROCEEDINGS Petition(s) for Special Leave to Appeal (C) No(s). 3073-3074/2017 ROYAL BANK OF SCOTLAND PLC Petitioner(s) VERSUS AXIS BANK LTD & ORS. Respondent(s) ([HEARD BY : HON. A.K. SIKRI AND HON. ASHOK BHUSHAN, JJ.]) WITH SLP(C) No. 5317-5318/2017 (IX) SLP(C) No. 5383/2017 (XIV) Date : 25-08-2017 These petitions were called on for pronouncement of judgment today. For Petitioner(s) Mr. E. C. Agrawala, AOR Mr. Ashish Wad, Adv. Ms. Jayashree, Adv. Ms. Paromita Majumdar, Adv. Ms. Sukriti Jaggi, Adv. M/s. J S Wad And Co, AOR Ms. Diya Kapur, Adv. Ms. Manjira Dasgupta, Adv. Mr. Rishabh Sharma, Adv. Ms. Liz Mathew, AOR For Respondent(s) Mr. Dushyant Dave, Sr. Adv. Ms. Fereshte D. Sethna, Adv. Ms. Anuradha Dutt, Adv. Mr. Sachit Jolly, Adv. Ms. Ameya Pant, Adv. Ms. Vijayalakshmi Menon, Adv. Ms. Liz Mathew, AOR Mr. Shiv Kumar Suri, AOR Ms. Anil Katiyar, AOR 20 Hon'ble Mr. Justice A.K. Sikri pronounced judgment of Bench comprising His Lordship and Hon'ble Mr. Justice Ashok Bhushan. Leave granted. appeals are disposed of in terms of signed non-reportable judgment. Pending application(s), if any, stands disposed of accordingly. (Ashwani Thakur) (Madhu Narula) COURT MASTER COURT MASTER (Signed non-reportable judgment is placed on file) Royal Bank of Scotland Plc v. Axis Bank Limited & Or