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The taxman is again on the prowl and this time the target seems to be the multi-million dollar

Indian Premier League (IPL).While the Punjab Government is reportedly giving a "re-look" at

the free security and entertainment tax exemption granted to Punjab Cricket Association (PCA)

for hosting IPL matches, the Eden Gardens is the only stadium where the IPL is paying

entertainment tax. And the income-tax department is supposedly looking at the income and

expenses relating to players, cheerleaders, coaches, and even the moolah spent on ads. Looks like

the IPL matches, which have become a symbol of the innovative sports world, have attracted a

lot of curiosity from those in charge of the coffers! Mr Aseem Chawla, Partner (Tax Practice

Group), Amarchand Mangaldas, New Delhi, says, "One of the significant tax challenges with

regard to ascertainment of taxability of team owners is due to the inherent nature of tradability of

players in this format of game. Much would depend on how the contracts between the IPL and

the team owners are interpreted by the tax authorities." When Business Line asked him, over the

email, about what should be the right course to take, he is of the view that it would be proper if

the tax laws and double taxation avoidance agreements are enhanced operationally to deal with

such crucial issues. "Maybe it is best to look towards the West and see that how the UK taxes theEnglish Premier League and get some innovative ideas." Read the Q&A to gains more

insights.Excerpts from the interview:

Are players to be looked at as `assets' of the franchisees from the tax perspective?

When a franchisee bids for certain player, he wins a `right to play' of such player during

the tournament. The issue which arises here is how to recognise such right in the books of

account. As per Accounting Standard 26 (AS-26) issued by the Institute of Chartered

Accountants of India (ICAI), intangible assets are to be first recorded at initial cost and then

reduced by the amortised value. The amortisation method used should reflect the pattern in

which the asset's economic benefits accrue to the enterprise. Here the rights of players will be

valued initially at their bid prices; and after that, based on their performance, their amortisation

value will be calculated. This probably addresses the concern of a team owner who, after the

dismal performance of some of his celebrated players and his team, intends to devalue them in

his books of account. However, whether the tax authorities would allow such devaluation as

deductible expenditure is doubtful.

Do we have a good definition of an intangible asset?

The definition of intangible asset given in the I-T Act, 1961 is very narrow; therefore,

whether the franchises would be allowed depreciation on such intangible assets is questionable.In this regard, Supreme Court's observation in the CIT, Kolkata vs Hooghly Mills & Co. Ltd case

is worth studying. It was held that under Section 32 of the Act, depreciation is allowable only in

respect of buildings, machinery, plant or furniture, being tangible assets, and knowhow, patents,

copyrights, trademarks, licences, franchises or other business or commercial rights of similar

nature being intangible assets. In the present case, the right to these players is a commercial right

that the franchisees possess; hence, depreciation can be claimed as deduction by the franchisees.

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IPL has icon players. Will big-ticket players attract big-ticket taxes too?

It is open to discussion whether a team owner has to pay capital gain tax if he decides to

transfer a celebrated cricketer to some other team. If the `right to play' is considered as an asset,

the franchisee would be subject to capital gains tax liability. The long-term capital gains tax rate

at 20 per cent is lower than the regular effective tax rate of 33.99 per cent on business profit.This huge difference in the magnitude of the tax rates brings the question to the forefront as to

whether the players are to be treated as stock-in-trade or capital assets.

So, are the players stock-in-trade or capital assets!

The term "capital asset" is defined in Section 2(14) of the Act. Capital asset is defined as

property of any kind held, excluding stock-in-trade and personal effects. It is common ground

that the franchisee owns the right to the use of the players, that is, own the right of those players

playing. Thus, it can be said that for the franchisees, the players will be a corporeal property as

they possess a right in them. The players cannot be treated as stock-in-trade of the franchisees, asthey are not in existence for the purpose of being sold but for rendering service. Hence, these

players would fall under the definition clause; the players for the purposes of IPL will be treated

as capital asset for the team owners and their transfer would be subject to capital gains tax

liability.

There have been concerns of taxing foreign players, coaches and even trainers too. What's

your take on that?

Foreign cricketers, who might have received a lower bid than most of the Indian players,

would go home happy as their net fee would still be more, as the domestic players have to pay 30

per cent tax; foreign players pay only 10 per cent (plus applicable surcharge and cess). Tax

authorities are already up against the governing body for not withholding tax at the rate of 11.33

per cent when payments were made to such players. The taxation of international sportsmen and

athletes is specifically enshrined in Section 115BBA which provides that income earned by non-

resident sportsmen by participating in India in any game or sports and advertisements would be

subject to tax in India. However, one needs to examine this in light of the relevant tax treaties

executed by India with the other countries.

Does the treating of `cricket players' as `athletes' queer the pitch for some foreign players?

IPL has mainly attracted cricketing stars from New Zealand, Australia, South Africa, andPakistan. India has signed double tax avoidance agreements (DTAAs) with these countries

(except Pakistan with which there is a limited treaty). The tax treaties executed by India contain

an Article dealing with taxation of "entertainers and athletes/sportspersons". The tax treaty with

countries such as Australia, New Zealand and Sri Lanka spells out taxability of "athletes";

however, the one with South Africa specifies "sportspersons". Hence, in the case of players of

South Africa there is no controversy, whereas in treaties where the word `athlete' is used,

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concerns may be raised. In this regard one may refer to the commentary on the OECD model tax

convention which indicates that the Article relating to athletes should cover sportspersons in the

broad sense, and not restricted to traditionally thought of athletic events. With respect to players

from countries with whom we do not have a treaty (for example, Pakistan), they would be

subject to tax in India as per the `source rule' and their liability would be governed under Section

115BBA.

What about foreign players who are enjoying resident status?

As India does not have a tax treaty with its neighbour, there is a good possibility that

players like Shahid Afridi and Shoaib Akhtar may cross the threshold limit specified in Section 6

of the Act and thereby become tax residents of India considering the number of days they spend

in India for playing IPL, training, representing their own country and shooting for

advertisements. From the tax perspective, would physiotherapists possibly escape from the tax

net thrown at them if they were not to be classified as doctors? The point for physiotherapist is

distilled clear. They would fall within the ambit of independent personal services, as they couldbe considered as doctors, and hence their income from IPL would be subject to tax in India, if the

conditions are satisfied.

What about the coaches such as John Buchanan, who is non-resident?

As regards foreign (non-resident) coaches like John Buchanan and fitness trainers, there

seems to be ambiguity. If it can be said that these persons are employed by the franchisees for

their services, their income would be taxed under the head of `dependent personal services',

otherwise, there is a possibility that their income may not be taxed in India, subject to relevant

treaty provision as generally the residual clause of most treaties gives the state of residence to taxthe income.

There seems to a view that BCCI may lose its charitable status because of IPL? Is that

true?

Indian Premier League seems to have spoilt it for BCCI. As per the Circular No. 395

dated September 24, 1984, promotion of sports/games was considered as a charitable purpose

under Section 2(15) of the Act and, hence, could claim exemption under Section 11 or Section

10(23C) of the Act. D. MURALIHowever, this year's Budget squeezed the breadth of charitable

activities to ensure that only genuine activities such as `relief to the poor' and `education' and

`medical relief' get tax exemptions.Exemptions for promoting an object of general public utility

by undertaking commercial activities have been done away with. In the light of this amendment,

the exemption claimed by the nodal cricket body may be jeopardised, especially if IPL is

considered as a commercial activity.

Lastly, where do you see all this going. Foreign players being taxed, BCCI losing status,

Pakistani players perhaps complaining that India doesn't have any tax treaty to help them.

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There is still much to do and lots of grey areas regarding tax implications of Indian

Premier League. There are myriad concerns, which are left open to elucidation and would entail

a critical analysis of the facts and circumstances to arrive at an apposite conclusion. Though the

law cannot make available a regulatory framework for every aspect, it would be proper if the tax

laws and double taxation avoidance agreements are enhanced operationally to deal with these

such crucial issues. Maybe it would be best to look towards the West and see how the UK taxes

English Premier League and get some innovative ideas.