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The Royal Bank of Scotland PLC v. Axis Bank Limited & Ors.

Civil Appeal · 2017 INSC 811Decided 25 Aug 2017
Civil Appeal Nos. 11064-65 of 2017
Justice A.K. Sikri · Justice Ashok Bhushan

Background

This dispute arose from the taxation of Formula One World Championship Limited's (FOWC) income from hosting Formula One races in India under a contract with Jaypee Sports International. Jaypee's payments to FOWC were secured by four Standby Letters of Credit (LCs) opened by Axis Bank and confirmed by the Royal Bank of Scotland (RBS) and Lloyds Bank. After courts ultimately held that FOWC did have a taxable presence in India and owed tax on this income, the Income Tax Department issued an attachment order under Section 281B of the Income Tax Act freezing the LC funds, but FOWC, anticipating this, hastily invoked the LCs anyway, and RBS and Lloyds Bank paid out to FOWC, leaving Axis Bank caught between the foreign banks demanding reimbursement and the tax attachment order barring it from paying.

Decision Breakdown

The Supreme Court upheld the validity of the Income Tax Department's attachment order, holding that since FOWC's liability to pay tax in India had already been conclusively established, and FOWC had tried to "overreach" the judicial process by rushing to encash the LCs right after the adverse Delhi High Court ruling (even before the Supreme Court decided its own appeal), the Revenue's interest in securing that tax liability deserved protection. At the same time, the Court recognised that RBS and Lloyds Bank, as confirming banks under the LCs, were legally bound to honour the LCs once invoked and could not be faulted or restrained for having already paid FOWC. To resolve this three-way deadlock fairly, the Court directed FOWC itself, as the party actually owing the tax, to deposit the disputed sum (USD 15.45 million) with the Bombay High Court's Registry within four weeks, with that deposit to then be released to the confirming banks (RBS/Lloyds) only once FOWC paid it in.

Lesson Learnt

When a tax attachment collides with a bank's independent contractual obligation to honour a Letter of Credit, courts will generally protect both interests rather than pick one over the other: by making the actual taxpayer secure the disputed funds directly, instead of forcing banks that acted in good faith on their LC commitments to bear the loss.

Official source (sci.gov.in)View Judgment (PDF)

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