India: F1 Indian Grand Prix Circuit Is A Fixed Place PE: Supreme Court Of India

Last Updated: 9 May 2017
Article by Shashwat Sharma and Ashish Sodhani
  • Supreme Court of India rules that that Formula One World Championship Limited has a fixed place Permanent Establishment in the Buddh International Circuit, the venue of the Indian Grand Prix.
  • Holds that all India sourced business income of Formula One World Championship Limited is taxable in India.
  • As long as a non-resident has an Indian presence is in a physically defined geographical area, permanence in such fixed place could be relative having regard to the nature of the business.
  • Adopts a discerning approach to determine which party has a real and dominant control over the conduct of the Indian Grand Prix.

Recently, the Supreme Court of India in the case of Formula One World Championship Ltd. v. Commissioner of Income-tax, (IT)-3, Delhi,1 held that the Buddh International Circuit, Greater Noida, Uttar Pradesh, ("Buddh International Circuit") should be construed as a fixed place Permanent Establishment ("PE") in India within the meaning of the India UK Double Taxation Avoidance Agreement ("India UK DTAA") for Formula One World Championship Limited ("FOWC") and all business income attributable to such PE would be taxable in India.

This judgment of the Supreme Court has upheld the judgment of the Delhi High Court,2 which had reversed the decision of the Authority for Advance Ruling ("AAR") made in this matter.

Background

The FOWC, a company which is a resident of the United Kingdom for the purposes of the India UK DTAA entered into various agreements with Formula One Asset Management Limited ("FOAM") and the Federation Internationale de I' Automobile ("FIA"), the international body regulating motor sports), wherein FIA transferred its commercial rights in the FIA Formula One World Championship ("F1 Championship") to FOAM, and FOAM in turn licensed all the above mentioned commercial rights to FOWC for a period of 100 years commencing from January 1, 2011.

A Concorde Agreement was also entered into between FIA, FOWC and the participating teams in 2009 through which FOWC was given the exclusive commercial rights in relation to the F1 Championship which it could exploit directly or through its affiliates. As per this Agreement, FOWC had the right to include the circuits in which races would take place.

Jaypee Sports International Limited ("Jaypee"), an Indian company entered into a Race Promotion Contract dated September 13, 2011 with the FOWC ("RPC"), by which Jaypee was granted the right to host, stage and promote the Formula One Grand Prix of India ("Event") for a consideration of USD 40 million. On the same day, an Artworks License Agreement (ALA) was also entered into between FOWC and Jaypee permitting the use of certain trademarks and intellectual property belonging to FOWC. Further, on the same day, Jaypee signed another agreement with three affiliates of FOWC whereby (i) Jaypee engaged FOAM to generate television feed; (ii) gave back circuit rights, mainly media and title sponsorship, to Beta Prema 2 Limited; and (iii) paddock rights to Allsports Management SA.

The RPC was preceded by another similar agreement between FOWC and Jaypee whereby Jaypee was only given a right to promote the Event while the RPS gave Jaypee the right to "host, stage and promote" the Event.

FOWC and Jaypee approached the AAR for a ruling to decide whether the payment of consideration receivable by FOWC outside India in terms of RPC from Jaypee was "royalty" as defined in Article 13 of the India UK DTAA and also, whether FOWC was justified in its position that it did not have a PE in India in terms of Article 5 of the India UK DTAA. A related question was whether any part of the consideration received or receivable from Jaypee by FOWC outside India was subject to tax at source under section 195 of the Income Tax Act, 1961 ("ITA"). The AAR had held that this payment was in the nature of "royalty" and that FOWC did not have any PE in India within the meanings ascribed to such terms under the India UK DTAA.

Jaypee, FOWC and the revenue department, separately challenged different aspects of this ruling before the Delhi High Court which disagreed with the ruling of the AAR on both these questions. An appeal was filed against the judgment of the Delhi High Court before the Supreme Court of India by FOWC. Since no appeal was preferred by the tax authorities against the finding of the Delhi High Court with respect to that ruling that payments made by Jaypee to FOWC were not in the nature of royalty, this issues was considered as final and hence not discussed by the Supreme Court.

Issues

  1. Whether FOWC was justified in its position that it did not have a PE in India in terms of Article 5 of the India UK Tax Treaty?
  2. Whether Jaypee was under an obligation to withhold tax from the payments made to FOWC as per Section 195 of the ITA?

Ruling

Buddh International Circuit as fixed place PE:

The essential conditions which need to be satisfied for the existence of a fixed placed PE under Article 5(1) of the India UK DTAA3 are:

(a) existence of a fixed place of business; and

(b) the business of the enterprise is wholly or partly carried out through that fixed place.

A major contention put forward on behalf of FOWC and Jaypee was the fact that any access to FOWC was only given during the period of 3 weeks, i.e., two weeks prior to it and a week succeeding it, ("Access Period") and that the Buddh International Circuit was built by Jaypee using its own engineers and architects and was at the disposal of Jaypee as the promoter of the Event.

The Supreme Court considered the manner in which commercial rights were enjoyed by FOWC and its affiliates to determine who was in actual control of the Event. Reference was made to several clauses of the RPC which clearly highlighted that though Jaypee was designated as the promoter of the Event, in reality Jaypee's authority to act as promoter was severely restricted. These clauses clearly highlighted that, inter alia:

  • the Buddh International Circuit is required to be constructed in the form and manner prescribed by FIA and FOWC;
  • FOWC is responsible for the inclusion of the Event in the F1 Championship;
  • FOWC had full access to the pit, padlock buildings, etc. during the Access Period;
  • the passes issued by FOWC could not be questioned by Jaypee;
  • Jaypee could not permit any recording of footage of the Event in the confines of the circuit or the land over which it had control;
  • all intellectual property relating to the Event had been irrevocable and unconditionally assigned to FOWC; and
  • Jaypee was mandated to engage a third party approved by FOWC to carry out all service relating to the origination of international television feed.

To further evidence the reality of FOWC's and its affiliates' control over the event, the Supreme Court noted that while Beta Prema 2 SA was given media rights, etc., it had already entered into title sponsorship agreement with Bharti Airtel before such rights were given to it by Jaypee.

Based on a reading of the above mentioned clauses of the RPC along with the other agreements entered into between Jaypee and the affiliates of FOWC, the Supreme Court arrived at the conclusion that Buddh International Circuit has indeed been placed at the disposal of FOWC. It was held that the mere construction of the track by Jaypee at its expense will be of no consequence in determining who was in actual control of the Event.

Reference was also made to the Concorde Agreement through which the participating teams had undertaken to participate in every race in any circuit chosen by FOWC. This agreement gave the FOWC the right to exploit the commercial rights related to the F1 Championship directly or through its affiliates. Further, even the RPC required FOWC to ensure that the teams participate in the Event. Thus, it was held that while Jaypee may have held the title to the Buddh International Circuit, it is FOWC which is the holder of the commercial rights associated with the F1 Championship and the Event.

The Supreme Court held that even though FOWC had full access to the Buddh International Circuit through its personnel for only a limited period (i.e., the Access Period) as part of its business model, this would not have any bearing on the characterization of this circuit as a fixed place PE of FOWC in India as the necessary ingredients for the creation of a PE had been met. The Supreme Court thus agreed with the judgment of the Delhi High Court which referred to the OECD commentary and Klaus Vogel's commentary to conclude that as long as the presence is in a physically defined geographical area, permanence in such fixed place could be relative having regard to the nature of the business. The Supreme Court referred to a catena of cases4 to buttress its point in this regard. Further, the Supreme Court held that it was pertinent to note that the duration of the RPC was for 5 years with the option of extending it to another 5 years and hence the Access Period was not just limited to 3 weeks in a year but was a continuous one.

Withholding Tax:

The Supreme Court held that since it had been established that the payments being made by Jaypee to was in the nature of business income earned by FOWC through its fixed place PE in India, i.e., the Buddh International Circuit, Jaypee was under an obligation to withhold taxes on such payment. Reference was made to the landmark judgement of the Supreme Court in GE India Technology Centre Private Limited v. Commissioner of Income Tax & Anr.,5 in this regard. However, the Supreme Court partially agreed with the submission of Jaypee that this liability to withhold taxes could only arise for that portion of the income which was chargeable to tax in India on account of the existence of the PE. It was left to the discretion of the assessing officer to ascertain this amount based on the facts.

The Supreme Court declined to express its opinion on the subject of the levy of penalty on account of the non-withholding of taxes by Jaypee, and left it open to the assessing officer to decide.

Analysis and Conclusion

The Supreme Court has provided a well-reasoned order which it has arrived at after a thorough discussion of the applicable provision of the ITA and the India UK DTAA and the relevant portions of commentaries by authors of international repute. It has given examples of what courts in foreign jurisdictions have held to be PE and has post analyzing many such decisions come to the conclusion how even 3 weeks in India can be construed as PE of the foreign enterprise. The Court has adopted a discerning approach to look at the reality of the flow of commercial rights as opposed to the picture that was being sought to be presented by Jaypee and FOWC.

Since the India UK DTAA follows the model suggested by the Organisation for Economic Cooperation and Development ("OECD"), the Supreme Court analyzed OECD's commentary on its model tax treaty along with the commentaries written by Philip Baker6 and Klaus Vogel7 as an aid to interpreting the provisions of the India-UK Tax Treaty. The OECD commentary defines the term "place of business" as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose.

In his commentary, Klaus Vogel emphasizes that the place of business qualifies as a PE only if the place is 'at the disposal' of the enterprise. According to him, 'disposal' is the power to use the place of business directly. He does not set as much store by the duration of the presence in that fixed area as according to him, permanence in such an area could be relative depending upon the nature of business. In the instant case, as mentioned above, the Supreme Court concluded that FOWC was carrying out business activity in India through the Buddh International Circuit, which had been placed at its disposal for the access period by Jaypee.

Through this judgment, the Supreme Court has wholeheartedly appreciated the approach and reasoning put forth by the Delhi High court as compared to the AAR which did not fully appreciate the factual matrix involving the flow of commercial rights through the myriad agreements between FOWC, its affiliates and Jaypee.

This judgment has clearly highlighted the fact that it is imperative that taxpayers pay attention to the wording and timing of the contracts they enter into. The fact that FOWC and its affiliates entered into different contracts with Jaypee on the same day added credence to the arguments of the revenue that these contracts did not reflect the commercial reality. While this judgment may cause some consternation among international sporting bodies looking to host events in India, it is pertinent to note that this judgment should not lead to Indian tax consequences for such non-resident sporting institutions in all cases. The reasoning of this judgment shall only apply where a non-resident carries out its business in India through a fixed place which is at its disposal for the duration of the sporting event.

Since Jaypee is only required to withhold tax on the amount of income which is chargeable to tax in India, in the absence of an attribution of a portion of FOWC's profits to its Indian PE, it becomes impossible for Jaypee to determine the amount required to be withheld. In view of this difficulty, Jaypee had requested the Supreme Court to hold that this was not a fit case for the levy of penalty as Jaypee had acted in good faith. By not expressing any opinion on this issue, the Supreme Court has allowed the assessing officer the opportunity to impose penalty which may lead to further hardships for Jaypee as well as separate proceedings relating to penalty. Perhaps the Supreme Court could have taken a more lenient stance and allowed relief to Jaypee on this front.

Footnotes

1 [2017] 80 taxmann.com 347 (SC); Judgement dated April 24, 2017

2 Formula One World Championship Ltd. v. Commissioner of Income-tax, International Taxation-3 [2017] 390 ITR 199 (Delhi)

3 Article 5(1) of the India UK DTAA reads as follows:

"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."

4 Transvaal Associated Hide & Skin Merchants (Pty) Ltd. (1967) 29 S.A.T.C. 97 (Court of Appeal, Botswana); Georges Simenon (1965) 44 T.C. (US) 820 (US Tax Court) Universal Furniture Ind. AB v. Government of Norway (Stavanger Court, Case No. 99-00421, dated December 19, 1999); Joseph Fowler v. Her Majesty the Queen 1990 (2) CTC 2351;

5 (2010) 10 SCC 29

6 A Manual on the OECD Model Tax Convention on Income and on Capital; Philip Baker Q.C.

7 Double Taxation Conventions; Klaus Vogel

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Shashwat Sharma
Ashish Sodhani
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.