F1 Indian Grand Prix Circuit is a fixed place PE: Supreme Court of India
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.
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.
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:
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.
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.
1  80 taxmann.com 347 (SC); Judgement dated April 24, 2017
2 Formula One World Championship Ltd. v. Commissioner of Income-tax, International Taxation-3  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