Case: Formula One World Championship Ltd Vs. Commissioer Of Income Tax, International Txation-3 Delhi


Decision reasoning: 0[ds]13. The bone of contention before this Court pertains to the issue of existence of a PE of FOWC in India. We may say at the outset that the arguments advanced by both the parties before us were virtually the same arguments which were advanced before the High Court as well. Therefore, spelling out the submissions of the parties before the High Court may not be necessary as it would be duplicating and repetitive.15. In the present case, we are 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 India17. It is clear from the reading of the said clause that it includes all those incomes, whether directly or indirectly, which are accruing or arising through or from any business connection in India. It is, thus, clear that an income which is earned directly or indirectly, i.e. even indirectly, is to be deemed to accrue or earned in India. Further, such an income should have some business connection in India. Explanation (1) for the purpose of this clause provides five explanations from clauses (a) to (e). Clause (a) stipulates that where all the business operations are not carried in India and only some such operations of business are carried in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried in India. We are not concerned with clauses (b) to (e).18. This exception, thus, clarifies and declares that even when business activity is carried through a person who is acting on behalf of the non-resident (which means agent of the non-resident), it will be treated that the non-resident is having business connection in India.19. If a non-resident has a PE in India, then business connection in India stands established27. The principal test, in order to ascertain as toestablishment has a fixed place of business ornot, is that such physically located premises have to be `at the disposal of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as `at the disposal of the enterprise when the enterprise has right to use the said place and has control thereupon37. Having got a fair idea of what would constitute a PE, we may advert to the discussion in that part of the impugned judgment where the High Court has given its reasons to conclude that FOWC had a PE in India in the relevant Assessment Year. However, before that, it would be necessary to refer to the salient provisions of the relevant agreements between the parties, not only between FOWC and Jaypee, but some agreements which were entered into by the group companies of FOWC with Jaypee38. We have already mentioned above that there is an Agreement between FIA and FOAM which is dated April 24, 2001 whereby FIA has parted with the commercial rights in favour of FOAM making FOAM exclusive CRH. Thereafter, vide the aforesaid agreement FOAM transferred the commercial rights in favour of FOWC with effect from 2011 for a period of 10 years. Insofar as Concorde Agreement which is signed between FIA, FOWC and teams is concerned, that is of the year 200939. It is relevant to mention that before RPC dated September 13, 2011 was entered into between FOWC and Jaypee, one Organisation Agreement (OA) dated January 20, 2011 was signed between FIA/FMSCI and Jaypee. As per this agreement, Jaypee was to organise the event. Thereafter, another agreement known as `Title Sponsorship Agreement dated August 16, 2011 was signed between Beta Prema 2 (an associated company of FOWC) and Bharti Airtel, as per which Beta Prema 2 transferred title sponsorship rights to Bharti Airtel for US$ 8 million in respect of the race which was conducted on October 29, 2011. It is thereafter that RPC dated September 13, 2011 was signed by FOWC and Jaypee. That was one month before the scheduled date of race, which was fixed as October 29, 2011. Under this agreement, right to host, stage and promote the event was given to Jaypee by FOWC. As per the Revenue, FOWC carried on business in India through a fixed place of business, namely, the Buddh International Circuit65. 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 challenge67. We are of the firm opinion, and it cannot be denied, that Buddh International Circuit is a fixed place. From this circuit different races, including the Grand Prix is conducted, which is undoubtedly an economic/business activity. The core question is as to whether this was put at the disposal of FOWC? Whether this was a fixed place of business of FOWC is the next question. We would like to start our discussion on a crucial parameter viz. the manner in which commercial rights, which are held by FOWC and its affiliates, have been exploited in the instant case. For this purpose entire arrangement between FOWC and its associates on the one hand and Jaypee on the other hand, is to be kept in mind. Various agreements cannot be looked into by isolating them from each other. Their wholesome reading would bring out the real transaction between the parties. Such an approach is essentially required to find out as to who is having real and dominant control over the Event, thereby providing an answer to the question as to whether Buddh International Circuit was at the disposal of FOWC and whether it carried out any business therefrom or not. There is an inalienable relevance of witnessing the wholesome arrangement in order to have complete picture of the relationship between FOWC and Jaypee. That would enable us to capture the real essence of FOWCs role69. We are in agreement with the aforesaid analysis which correctly captures the substance of the relevant clauses of the agreement70. We are also of the opinion that the High Court has rightly concluded that having regard to the duration of the event, which was for limited days, and for the entire duration FOWC had full access through its personnel, number of days for which the access was there would not make any difference.71. 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 (Refer Footnote 4]). 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 (Refer Footnote 5])73. Coming to the second aspect of the issue, namely, whether FOWC carried on any business and commercial activity in India or not, substantial part of this aspect has already been discussed and taken care of above. Without being repetitive and pleonastic or tautologous, we may only add that FOWC is the Commercial Right Holder (CRH). These rights can be exploited with the conduct of F-1 Championship, which is organised in various countries. It was decided to have this championship in India as well. In order to undertake conducting of such races, the first requirement is to have a track for this purpose. Then, teams are needed who would participate in the competition. Another requirement is to have the public/viewers who would be interested in witnessing such races from the places built around the track. Again, for augmenting the earnings in these events, there would be advertisements, media rights, etc. as well. It is FOWC and its affiliates which have been responsible for all the aforesaid activities. The Concorde Agreement is signed between FIA, FOA and FOWC whereby not only FOWC became Commercial Rights Holder for 100 years, this agreement further enabled participation of the teams who agreed for such participation in the FIA Championship each year for every event and undertook to participate in each event with two cars. FIA undertook to ensure that events were held and FOWC, as CRH, undertook to enter into contracts with event promoters and host such events. All possible commercial rights, including advertisement, media rights, etc. and even right to sell paddock seats, were assumed by FOWC and its associates. Thus, as a part of its business, FOWC (as well as its affiliates) undertook the aforesaid commercial activities in India.74. In view of the above, 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 FOWC75. 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 circuit76. 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 Baker (A Manual on the OECD Model Tax Convention on Income and on Capital]), 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 soil77. We are now left with two other incidental issues which were raised by Mr. Datar. First was on the interpretation of Section 195 of the Act. It cannot be disputed that a person who makes the payment to a non-resident is under an obligation to deduct tax under Section 195 of the Act on such payments. Mr. Rohatgi had submitted, and rightly so, that this issue is covered by the judgment in the case of GE India Technology Centre Private Limited (Refer Footnote 23]). Precisely this very judgment is taken note of and relied upon by the High Court also in holding that since payments made by Jaypee to FOWC under the RPC were business income of the FOWC through PE at the Buddh International Circuit, and, therefore, chargeable to tax, Jaypee was bound to make appropriate deductions from the amounts paid under Section 195 of the Act78. We are, however, inclined to accept the submission of Mr. Datar that 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. In GE India Technology Centre Private Limited (Refer Footnote 23]), this Court has clarified that though there is an obligation to deduct tax, the obligation is limited to the appropriate portion of income which is chargeable to tax in India and in respect of other payments where no tax is payable, recourse is to be made under Section 195(2) of the Act. It would be for the Assessing Officer to adjudicate upon the aforesaid aspects while passing the Assessment Order, namely, how much business income of FOWC is attributable to PE in India, which is chargeable to tax. At that stage, Jaypee can also press its argument that penalty etc. be not charged as the move on the part of Jaypee in not deducting tax at source was bona fide. We make it clear that we have not expressed any opinion either way79. Insofar as the argument of Mr. Datar on the powers of the High Court under Article 226 of the Constitution of India is concerned, we are not impressed by the said argument. It is Jaypee itself which had filed the writ petition (and for that matter FOWC as well) and they had challenged the orders of AAR on certain aspects. The High Court has examined legal issues while delivering the impugned judgment, of course having regard to the facts which were culled out from the documents on record