The Hon’ble Supreme Court held that Buddh International Circuit constitutes a fixed place permanent establishment (PE) of the foreign taxpayer (Formula One) where the commercial/ economic activity of conducting F-1 Championship was carried out.

 

Supreme Court of India

Formula One World Championship Limited vs.

Commissioner of Income-tax, International Taxation - 3, Delhi & Anr.

 [Civil Appeal No. 3849, 3850 and 3851 of 2017]

 

1. Whether Buddh International Circuit was put at the disposal of the taxpayer?

2. Whether the taxpayer carried on any business and commercial activity in India or not?

3. Whether Jaypee was bound to make appropriate deduction from the amount paid under section 195 of the Act?

 

Facts of the case:

• Federation Internationale de I' Automobile (‘FIA’), a non-profit association, is established as the International Association of Recognized Automobile Clubs to represent the interests of motoring organizations and motor car users globally. FIA is a regulatory body; it regulates the FIA Formula One World Championship ('Championship').

• The Championship is an annual series of motor races, conducted in the name and style of the Grand Prix over three day duration at purpose-built circuits, and in some cases, across public roads, in different countries around the world.

• Formula One World Championship Limited (‘FOWC’ or ‘taxpayer’) is a company incorporated under the laws of the United Kingdom (‘UK’) and a tax resident of UK.

• FIA had assigned commercial rights in favour of Formula One Asset Management Limited (‘FOAM’) (which is engaged in generating TV Feeds) vide agreement dated April 24, 2001. On the same day, another agreement was signed between FOAM and FOWC vide which these commercial rights were transferred to FOWC. Further, by another agreement of 2011, FOAM licensed all these commercial rights in the Championship to FOWC for a 100 year term.

• The taxpayer signed the first agreement with Jaypee Sports International Limited (‘Jaypee’) on October 25, 2007 whereby only promotion rights were granted for the event to Jaypee, for which Jaypee constructed the Buddh International Circuit (‘the circuit’). On September 13, 2011, the said agreement was replaced with the “Race Promotion Contract” (‘RPC’), which granted Jaypee the right to host, stage and promote the event for a consideration of US$ 40 million.

• Another agreement ‘Artworks License Agreement’ as contemplated in RPC was also entered between the taxpayer and Jaypee on the same day, permitting the use of certain marks and intellectual property belonging to the taxpayer for a consideration of US$ 1 million. Further, some other agreements were also entered into between FOWC and Jaypee as well as group companies of FOWC and Jaypee for transfer of certain rights.

• After entering into the aforesaid arrangement, both FOWC (the taxpayer) and Jaypee approached Authority for Advance Ruling (‘AAR’) seeking its advance ruling on the two main questions i.e.
  1. Whether the consideration receivable towards granting of commercial rights to Jaypee was in the nature of Royalty as defined in Article 13 of the DTAA between India and UK; and
  2. Whether FOWC was having any 'Permanent Establishment' (PE) in India in terms of Article 5 of DTAA between India and UK.

• In reply to the above questions, the AAR held that the consideration receivable in terms of agreement was in the nature of Royalty and the taxpayer had no fixed place of business in India, it is not doing any business activity in India and has not authorised any entity to conclude contracts on their behalf, and therefore the taxpayer had no PE in India as per Article 5 of the DTAA between India and UK.

• Thus, aggrieved by the ruling of AAR; FOWC, Jaypee and the Revenue filed a writ petition before the Delhi High Court (‘the HC’) under Article 226 of the Constitution of India.

• The HC while deciding the above writ petitions had held that the taxpayer had a PE in India and thus, the consideration received / receivable by the taxpayer from Japyee was chargeable to tax as business income and not as royalty income. However, the HC did not accept the plea of the Revenue that the taxpayer had a dependent agency PE in India.

• Aggrieved by the decision of the HC, all three parties filed an appeal before the Hon’ble Supreme Court (‘the SC’) and thus, the main question in the appeals to the SC was, whether the taxpayer had a PE in India or not in terms of Article 5 of the DTAA between India and UK.

Reference to relevant statutory provisions & DTAA regime:

• In order to determine whether the taxpayer had PE in India or not, the SC observed that section 9 of the Income-tax Act, 1961 (‘the Act’), provides that a non-resident may be taxed in India on an income that accrues or arises in India (directly or indirectly) through or from any business connection in India.

• The SC also cited Explanation 2 to section 9 of the Act, which defines a “business connection” to include business activities carried on by an agent on behalf of its foreign principal. Further, it went on to examine the definition of “permanent establishment” as contained in Article 5 of the DTAA between India and UK, applying it to the facts and circumstances of the present case. The Supreme Court stated that if a non-resident had a PE in India, then business connection in India stands established.

• The SC, for determining whether there exists a PE in India in the facts of the present case, had relied on:  
  1. A Manual on the OECD Model Tax Convention on Income and on Capital by Philip Baker Q.C.,
  2. Klaus Vogel on Double Taxation Conventions (Klaus Vogel Commentary), 
  3. Condensed version on Model Tax Convention on Income and on Capital by OECD (OECD Commentary), and
  4. Indian and few foreign judicial decisions.

 

Key observations and decision of the Hon’ble Supreme Court:

A. Whether Buddh International Circuit was put at the disposal of FOWC?

• The SC had placed more reliance on crucial parameters and agreements viz. the manner in which commercial rights were held and exploited by FOWC and its affiliates in the instant case. For this purpose, the entire arrangement between FOWC and its associates on the one hand and Jaypee on the other hand, brought out the real substance of the transaction between the parties.

• The SC while evaluating the various agreements and arrangements, made critical observations, which clearly captures the substance of the said transactions, and some of them are as follows:
  1. Commercial rights as allegedly given to Jaypee are transferred back to the taxpayer’s affiliates vide various other agreements; Beta Prema 2 (an associated company of FOWC) acquired circuit rights (mainly media and title sponsorship) and Allsports (an associated company of FOWC) got paddock rights.
  2. Beta Prema 2, though, was given media rights, etc., on September 13, 2011, it had entered into ‘Title Sponsorship Agreement’ with Bharti Airtel on August 16, 2011 (i.e. more than a month before getting the rights from Jaypee) whereby it transferred the said rights to Bharti Airtel for a consideration of US$ 8 million.

• The SC disregarded FOWC’s argument that the racing event did not constitute a PE because the duration of the event was only three days. The SC held that the HC had rightly concluded that having regard to the duration of the event, even though it was for limited days, FOWC had full and exclusive access through its personnel to the circuit for the entire duration of the event; thus, number of days for which the access was available would not make any difference, in coming to the conclusion that FOWC had the circuit to its disposal.

• Further, the SC, for coming to the aforesaid conclusion, relied on the reasoning given by the High Court which in turn depended on the OECD commentary and Klaus Vogel’s commentary on PE, e.g.:

1. A stand at a trade fair, occupied regularly for three weeks a year, through which an enterprise obtained contracts for a significant part of its annual sales, was held to constitute a PE.
2. Likewise, a temporary restaurant operated in a mirror tent at a Dutch flower show for a period of seven months was held to constitute a PE.

 

B. Whether FOWC carried on any business and commercial activity in India or not?

• The SC observed that the substantial part of this aspect had already been discussed in the first question. The SC also observed that FOWC is the commercial right holder and these rights can be exploited with the conduct of F-1 Championship, which is organized in various countries.

• The SC also observed that in order to organize the event, FOWC would require circuit track, teams to participate in competition, public / viewers, etc. Further, for augmenting the earnings in these events, there would be advertisements, media rights, etc. FOWC and its affiliates had also been responsible for all the aforesaid activities. All possible commercial rights, including advertisement, media rights, etc. and even right to sell paddock seats, were assumed by FOWC and its affiliates.

• The SC concluded that the taxpayer carried on business in India within the meaning of expression under Article 5(1) of the DTAA, i.e., dealing with determination of a fixed place PE, and also concurred with the view of the HC wherein it was held that:

“57..………The conceptualization of the event and the right to include it in any particular circuit, such as Buddh Circuit is that of the FOWC; it decides the venue and the participating teams are bound to it to compete in the race in the terms agreed with the FOWC. All these, in the opinion of the Court, unequivocally, show that the FOWC carried on business in India for the duration of the race (and for two weeks before the race and a week thereafter). Every right, which it possessed was monetized; the US$ 40 million which Jaypee paid was only a part of that commercial exploitation by the FOWC.

58. Consequently, the Court concludes that the FOWC carried on business in India within the meaning of expression under Article 5(1) of the DTAA……..”

• Thus, SC held that the test laid down by Andhra Pradesh High Court in Visakhapatnam Port Trust (1983) 144 ITR 146 stands fully satisfied, that not only the Buddh International Circuit is a fixed place where the commercial/ economic activity of conducting F-1 Championship was carried out, but one could clearly discern that it was a virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on the soil of this country (India).

• Further, the SC also observed that all three characteristics of a PE i.e. stability, productivity and dependence were present in this case. Thus, the SC held that:

“Fixed place of business in the form of physical location, i.e. Buddh International Circuit, was at the disposal of FOWC through which it conducted business. Aesthetics of law and taxation jurisprudence leave no doubt in our mind that taxable event has taken place in India and non-resident FOWC is liable to pay tax in India on the income it has earned on this soil.”

 

C. Whether Jaypee was bound to make appropriate deduction from the amount paid under section 195 of the Act?

• On this incidental issue, the SC had held that Jaypee was bound to make appropriate deductions from the amount paid under section 195 of the Act. However, only that portion of the income of FOWC, which is attributable to the said PE, would be treated as business income of FOWC and only that part of income, deduction was required to be made under section 195 of the Act.

 

Our Comments:

The judgement of the Hon’ble SC clearly highlights that in the present day, the tests to determine whether a non-resident carries on business in the source state, especially due to the advancement of information technology and communication, the methodology of conduct of business will be considered more broadly than yesteryears. The tests of permanence, duration, will breakdown and will need to be interpreted in a more dynamic and broad setting.

01 May 2017

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