In the recent judgment of the Formula One World Championship Ltd (FOWC)1, the Supreme Court held that the fixed place of business in the form of Buddh International Circuit (Circuit) built in the National Capital Region of India was at the disposal of FOWC through which it conducted business. The relevant facts and views of the Supreme Court emerging from this elaborate judgment are summarised below:
- Federation International de I'Automobile (FIA), an international motor sports events regulating association, is a regulatory body for the FIA Formula One World Championship (the Championship).
- Agreements were entered between FIA, Formula One Asset Management Ltd (FOAM) and FOWC, pursuant to which all commercial rights in the Championship were licensed to FOWC for 100 years with effect from 1 January 2011. Consequently, FOWC, as the Contract Right Holder (CRH), nominates the promoter for hosting, staging and promoting the F1 racing event.
- Armed with these rights as CRH, FOWC signed a Race Promotion Contract dated 25 October 2007 (RPC-2007) with Jaypee Sports International Ltd (Jaypee) for the promotion of the Formula One Grand Prix of India (the Event).
- The Concorde Agreement was signed in 2009 between FIA, FOWC and the teams for participation in F1 annual racing events as per the official racing calendar set by FIA. No teams, other than those bound by the contract with FOWC, are permitted participation in the F1 racing event.
- The Organisation Agreement, dated 20 January 2011, was signed between FIA and Jaypee for organising the Event.
- The Title Sponsorship Agreement dated 16 August 2011 was signed for transfer of Title Sponsorship Rights by Beta Prema 2 (Beta), an affiliate of FOWC, to Bharti Airtel Ltd.
- Although RPC-2007 was not rescinded, the Race Promotion Contract dated 13 September 2011 (RPC-2011) was signed between FOWC and Jaypee. As per RPC-2011, FOWC granted the rights to host, stage and promote the Event for USD 40 million annually. FOWC was entitled to two years' payment of assured consideration of USD 40 million annually even if RPC-2011 was terminated.
- On the same day (13 September 2011), the rights granted to Jaypee were transferred back to FOWC's affiliates. Accordingly Beta acquired Media and Title Sponsorship Rights, All Sports Management SA (All Sports) acquired rights to sell the tickets and Formula One Management Ltd (FOM) was engaged to generate a television feed.
- The Service Agreement, dated 28 October 2011 (the day of race), was signed between FOWC and FOM. As per this agreement, FOM was engaged by FOWC to provide various services such as liaison and supervision of other parties at the Event, travel, transport and data support services.
- The Supreme Court and earlier, the Delhi High Court, considered the following conditions and stipulations in RPC-2011:
- The Circuit, which is suitable in every respect for staging the Event, needs to be constructed in a form and manner approved by FIA and FOWC.
- FOWC is an exclusive agency through which any particular circuit is introduced for an event in any FIA annual calendar.
- The initial term of RPC is five years.
- Jaypee needs to ensure that the pit, paddock buildings and surrounding areas within the Circuit and land are open to receive competitors, FOWC, its affiliates and contractors, etc. at all times during the 14-day period before the race and the 7-day period after the race (Access Period).
- Access to certain parts of the Circuit, which are not open to the public, was authorised only through passes issued by FOWC.
- The public cannot have access to places where competitors' mechanics may be called upon to work on cars.
- Throughout the term during the Access Period, Jaypee shall neither itself nor permit others to carry out any sound recording or visual/audio visual footage of the Event as well as the Circuit over which Jaypee itself has control.
- Jaypee needs to ensure that any ticket-holder of the Event is bound by the terms that he can neither make any kind of recording nor carry any recording device. However, the ticket-holder, as a spectator, could be filmed and a sound made by him could be recorded for broadcasting, etc.
- Jaypee shall engage a third-party approved by FOWC to perform services relating to the origination of the international television feed and host broadcasting for each Event as per the guidelines published by FOWC.
- Jaypee unconditionally and irrevocably assigned all copyright and other intellectual property rights, title and interest, which Jaypee may now or in future possesses in any image or recording, etc. to FOWC. Jaypee also granted consent to FOWC to deal with such rights as it may deem fit.
- Jaypee needs to ensure that the persons authorised by FOWC are permitted to enter the premises to make sound, recording, transmissions, films or other pictures and use facilities throughout the Access Period.
- Jaypee was prohibited from causing, permitting, etc. the display of any advertisement or other displays on, near, or which could be seen from the Circuit or the land, if it prevents the lawful transmission of images or recordings of the Event. In this regard, the opinion of FOWC shall be final.
FOWC's and Revenue's contentions before the Supreme Court
FOWC had initially approached the Authority for Advance Rulings (AAR) with the question as to whether it was justified in its position that it did not have a Permanent Establishment (PE) in India as per Article 5 of the Double Taxation Avoidance Agreement between India and UK (the DTAA). The AAR affirmed the position of FOWC and ruled that FOWC did not have a PE in India.
Upon an appeal by the Revenue, the Delhi High Court disagreed with the ruling of AAR and held that FOWC had a Fixed Place PE in India as per Article 5(1) of the DTAA. FOWC filed an appeal before the Supreme Court against the judgment of the Delhi High Court. The main contentions of FOWC and the Revenue before the Supreme Court are broadly summarised below:
FOWC's contentions before the Supreme Court
- Jaypee with its own engineers, architects etc. and at its own expense constructed, owned and controlled the Circuit. Jaypee utilised the Circuit not only for the Championship but also for many other events organised on regular basis all-year around.
- The Circuit was constructed in the form and manner approved by FIA and FOWC to ensure that it meets all requirements of the regulations. Otherwise, all the rights necessary for hosting and staging the Event at the Circuit were that of Jaypee exclusively.
- The Delhi High Court did not even discuss the Organisation Agreement entered between FIA and Jaypee. All the obligations for the conduct of the Championship were to be discharged by Jaypee as organisers whereas FIA controlled the manner in which it was to be conducted.
- As the business of FOWC was not to organise races, the Circuit where the race was to be held could not be a PE of FOWC.
- Even if it is accepted that FOWC had control over the Circuit, the Event (for three days in a year) cannot be termed as a PE. Such sports events held in other countries were never taxed in those countries.
- Alternatively, RPC-2011 granting rights for consideration of USD 40 million was signed in the UK and therefore, such consideration was taxable in the UK. It is the grant of rights which should be a determinative test. In India, these rights are only implemented.
Revenue's contentions before the Supreme Court
- It was clear from various agreements that FOWC and its affiliates had taken total control over the Event.
- RPC-2011, granting rights to 'host, stage and promote' the Event, was totally subterfuge to avoid tax in India when compared with RPC-2007 which granted rights only to 'promote' the Event. The rights to 'host, stage and promote' the Event were granted to Jaypee only to give it semblance as if Jaypee was in real control of the affairs. However, these rights, in reality, were with FOWC.
- The other rights granted to Jaypee were transferred back to FOWC's affiliates (namely Beta, All Sports and FOM).
- It was questionable as to why FOWC granted rights to FOM for providing various services when FOWC had no control over the race. This showed physical management of the business as well.
Supreme Court judgment
The Supreme Court concluded that the fixed place of business in the form of the Circuit was at the disposal of FOWC, through which it conducted the business. In order to reach such conclusion, the Supreme Court pronounced its views as under after categorising the issue into two aspects/questions:
Question 1: Whether the Circuit was the fixed place of business at the disposal of FOWC?
- The wholesome reading of various agreements reveal the real transaction between the parties and clearly demonstrates that the entire Event is taken over and controlled by FOWC and its affiliates.
- There cannot be any race without competing teams, Circuit and paddock. All these are controlled by FOWC and its affiliates. Thus, the commercial rights with FOWC are exploited with the actual conduct of the race in India.
- The omnipresence of FOWC and its stamp over the Event is loud, clear and firm.
- Common sense and plain thinking of the entire situation would lead to the conclusion that FOWC had made earnings in India through the track, over which FOWC had complete control during the period of race.
- Even RPC-2011, which had been analysed by the Delhi High Court, in a flawless manner, points towards the same conclusion.
- The Delhi High Court has rightly concluded that the limited number of days for which FOWC had full access would not make any difference having regard to the duration of the Event2
Question 2: Whether FOWC carried on business in India?
- The track, teams and spectators are required in order to conduct the race. Furthermore, there would be advertisements, media rights, etc. as well to augment earnings from the Event. It is FOWC and its affiliates who are responsible for all these activities. Thus, as a part of its business activities, FOWC undertook these commercial activities in India.
- Mere construction of the track by Jaypee at its expense is of no consequence. Jaypee's ownership or organising other events by Jaypee are also immaterial.
- No doubt, FOWC is in the business of exploiting various rights. However, it became possible only with the actual conduct of the races and active participation of FOWC in these races with access and control over the Circuit.
- The Circuit is a virtual projection of FOWC in India. The test laid down by the Andhra Pradesh High Court in CIT vs Visakhapatnam Port Trust  144 ITR 146 stands fully satisfied.
- All the characteristics (stability, productivity and dependence) of a PE as per Philip Backer3are present in the instant case.
The case of FOWC, though based on the peculiar facts and complex contractual arrangements, will have far-reaching implications while dealing with the Fixed Place PE issues at a ground-level in various scenarios. Besides certain conditions and stipulations in RPC-2011, it also appears that FOWC was quite weak on certain facts4. These factors also, to some extent, went against FOWC.
It is trite that a fixed place in the source jurisdiction should be at the disposal of the Foreign Enterprise (FE) and the business of the FE should be carried on through such place in order to constitute Fixed Place PE in the source country. This situation could also arise when the FE carries on such business from the premises in the source country belonging to another enterprise.
As there is no time threshold specified for a Fixed Place PE, there is always an uncertainty regarding the duration of any business activity in the source country that could lead to a Fixed Place PE.
In this regard, the FOWC case refers to the general principles laid down in the Organisation for Economic Cooperation and Development's (OECD's) and Klaus Vogel's commentaries to the effect that the permanence in the form of presence in a physically defined geographical area in the source country could be relative having regard to the nature of the business. Applying these principles, FOWC was held to have a Fixed Place PE since there was a repetition as the tenure of RPC-2011 was for five years and full access to the Circuit was available to FOWC during the entire duration of the Event. In these circumstances, it was held that presence for a limited number of days would not make any difference. In this regard, unfortunately, FOWC's argument that Jaypee utilised the Circuit not only for the Championship but also for many other events organised on regular basis all-year-round did not find favour before the Supreme Court.
The FOWC judgment also emphasises the recent heavy reliance by the Courts on international taxation commentaries such as OECD, Klaus Vogel, Philip Backer, etc. and foreign rulings pronounced on international taxation issues.
The FOWC judgment also emphasises the principle of substance over form and gathering the real intention of the parties involved in the transaction from the wholesome reading of all the agreements collectively.
It also appears, from the FOWC judgment, that the home country from where the rights are granted should have the right to tax the transaction as a general rule and not the source state where these rights are merely implemented/exploited. However, an issue could arise if the FE activity participates in the source country for implementation/exploitation of these rights. In this regard, it may be noted that FOWC was entitled to two years' payment of assured consideration of USD 40 million annually even if RPC-2011 was terminated. This term went against FOWC in the final verdict of Delhi Court and was also confirmed by the Supreme Court. Thus the Fixed Place PE of FOWC in India has attained finality, but a question arises whether one could have still successfully argued that the lump-sum payment of USD 40 million is independent of the exercise/implementation of the rights in India and such payment is merely for grant of rights outside India and hence, not exigible to tax in India?
There is not much discussion on the Organisation Agreement between FIA and Jaypee in the judgment. Thus, it was not clear whether similar conditions and stipulations, which existed in RPC-2011, were also there in the Organisation Agreement. If yes, the question arises as to whether the final verdict of the Supreme Court would have been different in that case.
Many other questions arise from this judgment of the Supreme Court. Some of them are:
- What will happen in situations where an FE would exercise a certain level of controls over the activities of its Indian affiliates in relation to the business transactions entered between them for maintaining the uniformity and international standards of the group to which these entities belong?
- How would the profit attribution to such Fixed Place PE be determined?
- Would this ruling of the Indian Supreme Court be an eye-opener for other jurisdictions in the world?
- Would Formula One start facing action from the tax authorities in other jurisdictions as well?
As the flow of transactions, underlying documentation, together with the other facts and circumstances of each case play a vital role in the determination of a PE in the source country, the importance of businesses planning their transactions carefully in the future to mitigate the PE risk in the source country cannot be undermined.
1 Supreme Court judgment dated 24 April 2017 in Civil Appeal Nos. 3849 to 3851 of 2017
2 The foreign rulings in Universal Furniture Ind AB vs Government of Norway (Stavanger Court - Case No. 99-00421 dated 19 December 1999) and Joseph Fowler vs Her Majesty the Queen  2 CTC 2351 - Tax Court of Canada relied on by the Delhi High Court were also considered.
3 A Manual on OECD Model Tax Convention on Income and on Capital
4 Kindly refer the underlined text under the heading 'Facts' at the beginning of this Tax Alert.
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.