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Tuesday, 09 May 2017 12:25

PE Test - Is Fixed place of business @ the disposal of foreign enterprise?

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Permanent Establishment - As analysed by Supreme Court Permanent Establishment - As analysed by Supreme Court

The relevance to determine existence of PE of a foreign enterprise earning income in India cannot be undermined particularly when it involves huge tax inflow to India Revenue and consequential TDS obligation on resident payer.

Supreme Court in the recent decision in case of Formula One World Championship Ltd vs. CIT 417 Taxpundit 334 [Civil Appeal No. 3849/3850/3851 of 2017] observed certain broad parameters to determine existence of fixed base permanent establishment after analysing the OECD model convention, judicial precedents of India and other countries and various international commentaries authored by Klaus Vogel, Philip Baker Q.C.

Brief facts of the case: 

  • Federation Internationale  de  I'  Automobile (FIA), regulating body of Formula one Championship since its inception in 1950. The championship is conducted for 3 days on purpose-built circuits. 
  • Formula One World Championship Limited, UK (FOWC) is an exclusive commercial rights holder to host 4 wheeler motor sports worldwide in accordance with FIA regulations under an agreement with FIA and Formula One  Asset  Management  Limited (FOAM). 
  • FOWC, UK enters into ‘Rate Promotion Contract’ with Japee Sports International Ltd, India to grant the right to host, promote and stage ‘Formula 1 Grand Prix of India’ event for consideration receivable at 40USD Million which has to be paid irrespective of sport event being conducted. Further, Artwork License Agreement was entered to use IP and marks belonging to FOWC for one million USD. 
  • The annual racing calendar events around 19-21 events are set by FIA. The fixed participating teams around 12-15 in number– say Ferrari, Red Bull etc that enter into ‘Concorde’ agreement with FOWC. Participating teams have to construct and assemble single seat 4 wheeler motor in accordance with technical specifications laid down by FIA, focus on high performance of engine and have to appoint racing drivers. Promoters like Jaypee International are finalised by FOWC and referred to FIA.
  • Promoter, in this case Jaypee to construct racing circuits (Buddh International Circuit) in accordance with technical specifications of FIA providing seating capacity for public, paddock space of 4500 seats, media centre, helipads, administration and fuel storage utilities, concrete based areas to host competitors and sponsors, exhibition areas, host and broadcast facilities, medical centre, press room for national and international commentators, security, third party insurance and all other infrastructure 
  • Public could enter the premises only with valid entry pass issued by FOWC bearing its own trademarks. 
  • Exclusive permission to enter racing circuit to FOWC and its affiliates at all times during 3 days of racing event and 14 days before and 7 days after the racing event. Only persons authorised by FOWC can enter circuit to make audio-visual recordings. Jaypee cannot permit any dispay of advertisements on or near circuits. FOWC enter into agreement with various parties to exploit its rights relating to TV feed, exhibition, telecasting, media etc. Paddock rights, Sponsorship and Media rights (all audio, video, data in media space) vests with the affiliates of FOWC and revenue accrues to them.
  • Jaypee cannot permit any sort of audio-visual recording and also ensure public do not have any rights /access to capture any image or record the racing event. Jaypee assigns to FOWC, all imaging and recordings that are invented & developed by it which are pertaining to racing event.

Gist of international commentaries, judicial verdicts of other countries and India

According to Article 5(1) of India – UK DTAA (which follows OECD model convention),

For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

The SC observed that for a foreign enterprise to carry on its business either wholly or partly through a fixed place of business, it would require some power to use that place of business directly which need not exceed the level that is required for carrying on specific type of activities that forms its concrete business. Broadly, the key attributes of fixed place of business are summarised as under: 

  • The place of business through which business is wholly or partly carried on must be at the disposal of foreign enterprise 
  • Place’ connotes existence of physical location. Even a small place on the soil including place occupied by any tangible / movable property or even certain amount of space which is at the disposal of the foreign enterprise; 
  • The foreign enterprise is said to have carried on its business ‘through’ fixed place when - 
  • The foreign enterprise has some right to use the place where the activity takes place for the purpose of its business and has control thereupon.
  • The foreign enterprise is said to have used the place of business as an instrument  for  carrying  on  its  business  when  it controls  the  place  of  business  to  a  considerable extent.  The control need not exceed the level that is required to carry out the specific activities which forms its concrete business
  • However, mere access to enter the place of business solely for the purpose of undertaking the project on behalf of the owner of enterprise would not be sufficient. 
  • The place of business is said to be ‘at the disposal’ of foreign enterprise when, the foreign enterprise is free to use the place of business : 
    • @ any time of his choice
    • Work for more than one customer
    • Use for its internal administrative and bureaucratic work

 then, PE is said to exist.  

Permanent Establishment

Based on aforesaid parameters, the Apex Court held: 

  • Buddh International Circuit is a fixed place of business and Championship is the business activity of FOWC
  • Real & dominant control over fixed place is with FOWC and its affiliates. Bulk of the revenue is enjoyed by FOWC and its affiliates. Affiliate Beta 2, Allsports, FOAM were given media rights, paddock rights and TV feed respectively. FOAM engaged FOWC to supervise event, travel, transport and data support services. Every right was monetised. FOWC decides venue, teams, event, access to circuit and each & every activity of championship. The consideration paid by Jaypee was only part of the rights exploited by FOWC.
  • Event is conducted in India and rights are exploited by conducting races through active participation of FOWC. FOWC had excessive control over the racing circuits and restricted the rights of Jaypee.

Accordingly, it was held that FOWC had PE in India and Buddh International Circuit being fixed place of business is at the disposal of FOWC.

Cases Referred to

Formula One World Championship Ltd vs. CIT 417 Taxpundit 334

Disclaimer: Views expressed are strictly personal. The content of this document are solely for informational purpose. It doesn’t constitute professional advice or recommendation. The Author does not accept any liabilities for any loss or damage of any kind arising out of information in this article and for any actions taken in reliance thereon. The readers are requested to consult their Tax Consultant before implementing.

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Read 4900 times Last modified on Wednesday, 10 May 2017 16:01
Sapna Ramamurthy

Sapna Ramamurthy is a well known Chartered Accountant and a professional blogger. She is a visionary, leader and guiding force with varied experience in the field of Accounting, Audit, Tax & Project Consultancy. | This email address is being protected from spambots. You need JavaScript enabled to view it.

1 comment

  • Comment Link Siddesh Gaddi Wednesday, 17 May 2017 14:45 posted by Siddesh Gaddi

    good analysis

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