Most of us thought that with the conclusion of the third highly successful season of the Indian Premier League (IPL), we would see the cheerleaders only in its fourth edition next year. Hold on, since the service tax authorities have now started cheering and are laughing all their way to the Government Treasury.
Several of the IPL franchisees and many of the players associated with the tournament have been receiving Summons and Show Cause Notices (SCN) from the service tax authorities. The franchisees whose core competence was marketing and event management have suddenly had to acquire expertise on the subtle nuances of service tax.
Similarly, the players, whose mandate was to clear the ropes as many times as possible, have now got to defend themselves against a googly bowled by the service tax authorities. How did IPL get embroiled in all this while the service tax authorities are literally celebrating Diwali?
The genesis to the present set of events appears to have originated from the fact that the Board of Cricket Control of India (BCCI) levied service tax on the franchisee fees charged by it and recovered it from all the franchisees. The franchisees, in some of the cases, levied service tax on the various sponsors who were supporting the tournament in the capacity of sponsor, co-sponsor etc. However, certain franchisees did not levy service tax and the sponsors were required to reverse charge the same. In addition, there were certain revenue streams which were not being subjected to service tax.
This inconsistency was noticed by the service tax authorities, who in due course of time started an investigation into the matter. When they went into the heart of the matter and started reviewing franchisee agreements and player contracts, they felt that they had hit pay dirt. A flurry of Summons and SCN’s followed and many of the franchisees and some of the players started feeling the heat. In addition, based on the views expressed by the field formations, in the Finance Act, 2010, the exclusion in respect of sponsorship of sports events under the category of sponsorship services was removed. A new category covering services of promotion of a brand of goods, services, events, business entity etc. was also introduced from July 2010.
It is understood that while the BCCI charges annual fees to the franchisees, the franchisees are also entitled to a share in certain revenues earned by BCCI. This revenue sharing mechanism has also been challenged by the service tax authorities who seem to be of the view that such revenues connote underlying services which are of a taxable nature. It is an accepted principle in service tax that share of profits is not presumed to be in the nature of consideration for services. There are a few decisions of the Tribunal which state the same in unambiguous terms. In addition the Central Board of Excise and Customs (CBEC), in a matter involving the Media and Entertainment Sector, has clarified that revenue sharing arrangements would not come under the purview of service tax. Further, one also needs to spare a thought as to whether fulfilment of an obligation by a franchisee can tantamount to provision of service and hence a share which is divided amongst the various teams can, in any way, tantamount to consideration for taxable services.
On the player’s front, it is understood that the service tax authorities have demanded service tax on the fees paid to the player by the franchisee. It appears that the player contracts have certain clauses which indicate that the player is engaged in certain promotional activities, which are carried out at the behest of the franchisee. The contention of the authorities is that the fees paid to players are for providing support services to franchisees in the form of promotional activities. What seems to have been apparently overlooked is the fact that the time spent on promotional activities by players is negligible compared to the playing time. The CBEC, has, in the past, clarified that the classification under service tax is to be determined on the basis of the essential features or the dominant element of the transaction and not on the basis of incidental and ancillary activities. Further the attempts of the tax authorities to split indivisible contracts, to subject certain elements of the contract to a specified tax, have been frowned upon by the Courts. While SCN’s have apparently been issued to some of the domestic players, in respect of foreign players and their agents, the franchisees themselves have been asked to pay service tax in terms of the reverse charge mechanism.
The demands which have apparently been issued will take their own course and meander through the appellate process. However, it’s interesting to see the introduction of a new category aptly titled “Services of Promoting a brand of goods, services, events, business entity etc.” from 1st July 2010. The introduction of a new service category would normally imply that the services that are proposed to be covered were not subject to service tax earlier, unless the same is done simultaneously with relevant amendments in an existing category. This principle has been upheld in a plethora of cases starting with the Glaxo Smithkline decision. This could enable the players to take a stand that the tax, if any, would be applicable only from Season 4 (expected in March 2011) and not for earlier seasons.
To conclude, let’s hope that the service tax issues confronting the IPL franchisees and players are resolved before the next season kicks in so that we can see the original cheerleaders in full bloom once again.
The authors are Senior Director and Senior Manager respectively with Deloitte Touche Tohmatsu India Private Limited. Views expressed herein are the personal views of the author and not that of Deloitte
