The Union finance ministry may have to battle it out in court with the sponsors of the Indian Premier League cricket tournament to make them comply with its service tax payment demands.
Companies which sponsored IPL in its first season have contested their liability to pay service tax in reply to showcause notices in this regard from the finance ministry. DLF, Hero Honda, JP Associates, Coca-Cola, United Breweries and United Spirits have refused to pay tax, saying the law prevalent in 2008-09 showed they were not liable to pay it on the sponsorship of sports events.
While revenue officials agree the then provisions of the Finance Act, 1994, left a grey area with regard to levy of service tax on sponsorship of sports events, they have issued notices on revenue considerations. Beginning with Chandigarh, the commissioners of service tax in other cities like Delhi, Mumbai, Hyderabad, Kolkata, Chennai and Jaipur have also issued notices to players of the IPL teams.
"The service tax commissioners feel it is a grey area and the Directorate General of Service Tax has taken up the matter with the finance ministry. But, to protect revenues, we have sent notices to sponsors. We have also written to players, as they are also participating in activities other than sports," a revenue official told Business Standard on condition of anonymity.
However, Religare Enterprises and Adidas, which were also served the notice, have paid service tax of Rs 2.5 million (Rs 25 lakh) and Rs 1 million (Rs 10 lakh), respectively. On the other hand, DLF, whose liability is 50 times higher than Adidas, at Rs 50 million (Rs 5 crore), contested the notice in its reply last week. Similarly, the government had issued two notices to Hero Honda for not making two service tax payments of Rs 17.3 million(Rs 1.73 crore) and Rs 22.2 million (Rs 2.22 crore). JP Associates and Coca-Cola were also asked to pay Rs 18.5 million (Rs 1.85 crore) and Rs 3.7 million (Rs 37 lakh), respectively.
According to the then Section 65 (105) of the Finance Act, 1994, taxable service is provided to any body corporate or firm, by any person receiving sponsorship, in relation to such sponsorship, in any manner, but does not include services in relation to sponsorship of events. Taking advantage of this ambiguity, the companies sponsoring IPL teams as well as related activities have said they are sponsoring the sports event and should be exempted from service tax.
In this year's Budget, the government amended the clause and brought sponsorship of sports events under the service tax ambit, but the conflict would remain for the first three seasons of IPL.
The sponsors which have responded to the showcause notice will have to appear in person before the service tax commissioner of their respective region. If they still refuse to pay, the government will pass an order raising a demand, following which the companies can approach the Customs, Central Excise and Service Tax Appellate Tribunal.
Any party not satisfied with the judgment of the tribunal would be free to move the Supreme Court. If the government loses, it will have to refund the tax to companies which have already paid.