Whether Formula One Championship Constitutes a Fixed Place of Business/Permanent Establishment (PE) in India? - Held Yes
1. A PE must have three characteristics: stability, productivity and dependence. All characteristics are present in this case
2. 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
1. These appeals are filed by Formula One World Championship Limited (hereinafter referred to as 'FOWC'), Jaypee Sports International Limited (for short, 'Jaypee') and Union of India (hereinafter referred to as the 'Revenue')
2. In all these appeals, challenge is laid to the judgment dated November 30, 2016 passed by the High Court of Delhi whereby three writ petitions preferred by FOWC, Jaypee and Revenue have been decided
3. The matter originated from filing of applications by FOWC and Jaypee before the Authority for Advance Ruling (AAR)
4. FOWC had entered into a 'Race Promotion Contract' (RPC) dated September 13, 2011 with Jaypee, granting Jaypee the right to host, stage and promote the Formula One Grand Prix of India event for a consideration of US$ 40 million. Some other agreements were also entered into between FOWC and Jaypee as well as group companies of FOWC and Jaypee, particulars whereby would be mentioned later at an appropriate stage
5. In the applications filed by FOWC and Jaypee before the AAR, advance ruling of AAR was solicited on two main questions/queries:
(i) whether the payment of consideration receivable by FOWC in terms of the said RPC from Jaypee was or was not royalty as defined in Article 13 of the 'Double Taxation Avoidance Agreement' (DTAA) entered into between the Government of United Kingdom and the Republic of India?; and
(ii)whether FOWC was having any 'Permanent Establishment' (PE) in India in terms of Article 5 of DTAA?
6. AAR answered the first question holding that the consideration paid or payable by Jaypee to FOWC amounted to ‘Royalty’ under the DTAA. Second question was answered in favour of FOWC holding that it did not have any PE in India. As far as the question of subjecting the payments to tax at source under Section 195 of the Act is concerned, AAR ruled that since the amount received/receivable by FOWC was income in the nature of Royalty and it was liable to pay tax there on to the Income Tax Department in India, it was incumbent upon Jaypee to deduct the tax at source on the payments made to FOWC
7. FOWC and Jaypee challenged the ruling on the first issue by filing writ petitions in the High Court contending that the payment would not constitute Royalty under Article 13 of the DTAA. Revenue also filed the writ petition challenging the answer of the AAR on the second issue by taking the stand that FOWC had PE in India in terms of Article 5 of the DTAA and, therefore, tax was payable accordingly
8. As mentioned above, all these three writ petitions have been decided by the High Court vide common judgment dated November 30, 2016
9. Interestingly, the High Court has reversed the findings of the AAR on both the issues. Whereas it has held that the amount paid/payable under RPC by Jaypee to FOWC would not be treated as Royalty, as per the High Court FOWC had the PE in India and, therefore, taxable in India
10. While deciding this question, the High Court has not accepted the plea of the Revenue that it was not a dependent PE. The High Court has also held, as the sequitur, that Jaypee is bound to make appropriate deductions from the amount payable to FOWC under Section 195 of the Act
11. It is for this reason all the three parties are again before Supreme Court
12. As per FOWC and Jaypee, no tax is payable in India on the consideration paid under RPC as it is neither Royalty nor FOWC has any PE in India. It is pertinent to mention that the Revenue has not challenged the findings of the High Court that the amount paid under RPC does not constitute royalty. Therefore, that aspect of the matter has attained finality
13. The main question in the appeals, therefore, pertains to PE
14. Federation Internationale de I' Automobile (for short, 'FIA'), a non-profit association, is established as the Association Internationale des Automobile Clubs Reconnus to represent the interests of motoring organizations and motor car users globally. FIA, as the federation of the world’s leading motoring organizations and the governing body for motorsports worldwide, consists of 213 national member organizations in 125 countries internationally. FIA is the principal body for establishing the rules and regulations for all major international four-wheel motorsport events. FIA is a regulatory body; it regulates the FIA Formula One World Championship ('Championship') which has been the premier form of motor racing since its inception in 1950
15. F-1 Grand Prix events are held under the aegis of the FIA Formula One World Championship’s competition – in which F-1 racing cars, assembled and manufactured strictly in terms of the F-1 technical regulations, compete against each other, under F1 Sporting Regulations and the F-1 International Sporting Code framed and made effective by the FIA
16. FOWC is incorporated under the laws of the United Kingdom, and is a tax resident of the United Kingdom. It is the Commercial Rights Holder (CRH) in respect of the Championship with effect from January 01, 2011. FOWC has entered into an agreement with the FIA and Formula One Asset Management Limited (‘FOAM’)
17. Under these agreements, FOAM licensed all commercial rights in the FIA Formula One World Championship (hereinafter referred to as ‘F1 Championship’) to FOWC for 100 year term effective from January 01, 2011
18. Jaypee was interested to acquire the right for hosting, staging and promoting the F-1 Grand Prix of India event
19. In order to do so, it entered into agreement with FOWC dated September 13, 2011 which is known as ‘Race Promotion Contract’ (RPC). By this agreement, FOWC granted Jaypee the right to host, stage and promote F-1 Grand Prix of India event for a consideration of US$ 40 millions
20. After entering into the aforesaid arrangement for hosting F-1 Grand Prix in India, both FOWC and Jaypee approached AAR seeking its advance ruling on the two questions, the nature of which, including the opinion of AAR thereupon, is already mentioned above
21. The bone of contention before Supreme Court pertains to the issue of existence of a PE of FOWC in India
RELEVANT STATUTORY PROVISIONS & DTAA REGIME
22. The Act provides two modes of taxation, namely, resident based and source based. Any person who is a resident of India is subjected to the Act and liable to pay income tax on the ‘total income’ earned by such a resident, after getting various deductions therefrom as admissible under different provisions of the Act. Charging section is Section 4 which, inter alia, stipulates that income tax shall be charged for any Assessment Year in respect of total income of the previous year of every of such person. Section 5 contains the scope of total income of a resident and includes all income from whatever source derived by a person who is resident which is received or deemed to be received in India, accrues or arises or is deemed to accrue or arise to him in India or accrues or arises to him outside India during such year. Thus, a resident is supposed to pay income tax on all incomes so earned whether in India or outside India
23. On the other hand, those persons who are not ordinarily residents of India (which term is defined under sub-section (6) of Section 6) are not liable to pay income tax on any income which accrues or arises to such non-resident outside India. However, in the case of non-resident persons, if the income is derived from a business controlled in or a profession set up in India, these non-residents are subjected to pay tax for such an income earned in India. In their case, all such incomes from whatever source derived which is received or is deemed to be received in India in such a year by or on behalf of such person or accrues or arises or is deemed to accrue or arise to them in India during that year, is taxable in India. In this sense, the income tax on non-resident is source based, i.e., source of such income is India and, therefore, even a non-resident is liable to pay tax on incomes earned in India. ‘Resident in India’ and ‘Not-ordinarily Resident in India’ are covered by the provisions contained in Section 6
24. In the present case, Supreme Court is concerned with the consideration received by FOWC as a result of Agreement signed with Jaypee Sports. FOWC, being a UK Company, is admittedly the non-resident in India. Since the question is whether the aforesaid consideration/income earned by FOWC is subject to tax in India or not, it is to be decided as to whether that income accrued or arose in India
Mr. Ganesh, opened the case of FOWC, whereafter M/s. Arvind P. Datar and Dushant Dave, learned senior advocates, made their submissions on behalf of Jaypee. Mr. Mukul Rohatgi, learned Attorney General for India, argued on behalf of the Revenue and countered those submissions. He also argued the appeal of Union of India insofar as it challenges the findings of the High Court interpreting Article 5(4) and (5) and holding that the other companies of FOWC group did not act as agents of FOWC in India. M/s. S. Ganesh and Arvind P. Datar made their submissions in rejoinder and also refuted the arguments of Mr. Mukul Rohatgi advanced in the appeal of Union of India, to which Mr. Rohatgi made his submissions in rejoinder.
Emphasis in the submission of Mr. Ganesh was that in order to constitute a PE, condition which was necessary to satisfy was that the particular ‘fixed place’ is ‘at the disposal’ of FOWC and further that from the said ‘fixed place’ FOWC was doing its business activity. Submission of Mr. Ganesh was that both the ingredients were missing in the instant case. For this purpose, he referred to the agreement of 2009 which was entered into between FIA and Jaypee and pointed out that FOWC was not party to the said agreement and contended that this agreement clearly evinced that it is the FIA which had control over the manner in which the Championship was to be conducted. This agreement further reflected that it is Jaypee who was responsible for conducting races and had complete control of the Event in question. All obligations for conduct of the Championship were to be discharged by Jaypee as organisers. For this purpose, he referred to the counter affidavit filed by Jaypee in SLP(Civil) No. 3112 of 2017 wherein the role of Jaypee in organising these Events is stated. From there, it was pointed out that the track was constructed by Jaypee; for this purpose they had their own engineers, architects etc.; entire expenditure for this purpose was borne by Jaypee. It was also stated that this circuit was owned by Jaypee and control thereon was that of Jaypee on which not only Championship in question was organised, but Jaypee was utilising this track for many other events which are organised on regular basis, all year round.
Mr. Datar, learned senior counsel appearing for Jaypee, supplemented the aforesaid submissions of Mr. Ganesh on the issue of the PE. He argued that the judgment of the High Court was flawed in its approach as it had gone by inductive logic instead of deductive logic. According to him, the first question which has to be focused upon was as to what is the business of FOWC. His submission was that since in this case business of FOWC was not to organise these races, the question of its PE in India, that too in the form of circuit where the race is to be held, could not be PE of FOWC. He also submitted that even after going through all the clauses of the agreement between FOWC and Jaypee with a toothcomb, it would be found that FOWC had no physical control over the said circuit.
In this behalf, he emphasised the test laid down by Andhra Pradesh High Court in Visakhapatnam Port Trust, which is recognised by Philip Baker in his commentary. He also argued that entire Formula One Event was a temporary model for three days in a year only and even if it is accepted that the FOWC had control over this place for those three days, possession of the site for three days in a year cannot be termed as PE. He also emphasised the fact that since FOWC was a UK resident company, it had been paying taxes in its own country. For a non-resident to pay taxes in other country, as in India in the instant case, threshold has to be very high and the issue of PE had to be examined with this focus in mind. He submitted that this was precisely the reason that such sports events held in other countries are never taxed in those countries.
Mr. Mukul Rohtagi, learned Attorney General, came out with strong refutation to the aforesaid submissions. Responding in an equally salubrious style, he demonstrated the 'flow of commercial rights' in relation to these events, under various agreements executed between different stakeholders from time to time and the manner in which such rights are ultimately exploited by FOWC and its other group companies in respect of the F-1 race organized in India.
It was submitted by the learned Attorney General that clear manifestation of the aforesaid agreements was that FOWC and its subsidiaries had taken total control over the event that took place in India which, according to him, was to be kept in mind for proper examination of the issues in their right perspective. Mr. Rohtagi argued that Section 5(2)(b) of the Act, which applies in the instant case, specifically includes ‘income’ of a non-resident from ‘whatever source derived’, if this income accrues or arises or is deemed to accrue or arise to him in India during such year. Referring to Section 9 of the Act, which specifies the circumstances under which income shall be deemed to accrue or arise in India, he pointed out that it covers all income, ‘whether directly or indirectly’, that accrues or arises, if it is through or from any ‘business connection in India’.
Therefore, if business connection is established, then all incomes, whether earned directly or indirectly, would come within the net of taxability of such incomes in India. Referring to explanation (2) to Section 9(1)(i), he laid stress on the submission that ‘business connection’ shall include any business activity ‘through’ a person who acts on behalf of the non-resident. The expression ‘through’ is clarified in explanation (4) thereof to mean and include and shall be deemed to have always meant and include ‘by means of’, ‘in consequence of’ or ‘by reason of’. He submitted that these deeming provisions are of very vide import and when the facts of this case are examined keeping in view the aforesaid provisions, the High Court rightly concluded that FOWC had PE in India. He also argued that Jaypee was only to host the event, whereas total access at the time of construction as well as at the time of event was that of FOWC. According to him, at the most, it was in the nature of Jaypee and FOWC as partners in the business.
ANALYSIS, FINDINGS & CONCLUSION
We have pondered over the aforesaid submissions of the learned counsel for the parties with all seriousness and sincerity they deserve. We have also minutely gone through the material placed on record. We have kept in mind the governing law that has already been stated in detail. We are also conscious of the approach that is needed to examine these kinds of issues, as discussed in the judgments referred to by Mr. Dave. Likewise, we have also microscopically examined the judgment of the High Court which is under challenge.
As per Article 5 of the DTAA, the PE has to be a fixed place of business ‘through’ which business of an enterprise is wholly or partly carried on. Some examples of fixed place are given in Article 5(2), by way of an inclusion. Article 5(3), on the other hand, excludes certain places which would not be treated as PE, i.e. what is mentioned in clauses (a) to (f) as the ‘negative list’. A combined reading of sub-articles (1), (2) and (3) of Article 5 would clearly show that only certain forms of establishment are excluded as mentioned in Article 5(3), which would not be PEs. Otherwise, sub-article (2) uses the word ‘include’ which means that not only the places specified therein are to be treated as PEs, the list of such PEs is not exhaustive. In order to bring any other establishment which is not specifically mentioned, the requirements laid down in sub-article (1) are to be satisfied. Twin conditions which need to be satisfied are: (i) existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out.....
...it is difficult to accept the arguments of the appellants that it is Jaypee who was responsible for conducting races and had complete control over the Event in question. Mere construction of the track by Jaypee at its expense will be of no consequence. Its ownership or organising other events by Jaypee is also immaterial. Our examination is limited to the conduct of the F-1 Championship and control over the track during that period. Specific arrangement between the parties relating to the aforesaid, which is elaborated above and which FOWC and Jaypee unsuccessfully endeavoured to ignore, has in fact turned the table against them. It is also difficult to accept their submission that FOWC had no role in the conduct of the Championship and its role came to an end with granting permission to host the Event as a round of the championship. We also reject the argument of the appellants that the Buddh International Circuit was not under the control and at the disposal of FOWC.
No doubt, FOWC, as CRH of these events, is in the business of exploiting these rights, including intellectual property rights. However, these became possible, in the instant case, only with the actual conduct of these races and active participation of FOWC in the said races, with access and control over the circuit. We are of the opinion that the test laid down by the Andhra Pradesh High Court in Visakhapatnam Port Trust case fully stands satisfied. Not only the Buddh International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Championship was carried out, 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. It is already noted above that as per Philip Baker27, a PE must have three characteristics: stability, productivity and dependence. All characteristics are present in this case. 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.
In view of the foregoing, the appeals preferred by the FOWC and Jaypee are dismissed, subject to observations as made above.
Cases Referred to
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