[In the following post, Akash Santosh Loya, who is a IIIrd Year Student, 5-year B.A. LL.B.
(Hons.) Course, National University of Advanced Legal Studies, Kochi, provides
a summary of a recent Supreme Court decision that has implications for
international taxation.]
(Hons.) Course, National University of Advanced Legal Studies, Kochi, provides
a summary of a recent Supreme Court decision that has implications for
international taxation.]
In Formula One
World Championship Ltd v. Commissioner of Income Tax, International Taxation –
3, Delhi,[1]
the Supreme Court of India held that the Buddh Circuit in Noida was a Permanent
Establishment (PE) of Formula One World Championship Ltd (FOWC) in India.
Therefore, FOWC was liable to pay tax in India with respect to its income
arising from the Formula One Race event on the Buddh Circuit.
World Championship Ltd v. Commissioner of Income Tax, International Taxation –
3, Delhi,[1]
the Supreme Court of India held that the Buddh Circuit in Noida was a Permanent
Establishment (PE) of Formula One World Championship Ltd (FOWC) in India.
Therefore, FOWC was liable to pay tax in India with respect to its income
arising from the Formula One Race event on the Buddh Circuit.
Concept
of Permanent Establishment
of Permanent Establishment
Before adverting to the concept of PE, it is
necessary to set out the two basic rules of taxation, i.e., the residence rule
and the source rule. The income of a person is taxable either because the
person is the resident of the country as per the domestic laws of that country
or because the person is carrying out certain business activities in that
country, directly or through some other person, and derives income from that
business activity. The former is referred to as the ‘residence rule’ of
taxation and the latter is called the ‘source rule’ of taxation.
necessary to set out the two basic rules of taxation, i.e., the residence rule
and the source rule. The income of a person is taxable either because the
person is the resident of the country as per the domestic laws of that country
or because the person is carrying out certain business activities in that
country, directly or through some other person, and derives income from that
business activity. The former is referred to as the ‘residence rule’ of
taxation and the latter is called the ‘source rule’ of taxation.
Article 5 of the OECD’s
Model Tax Convention on Income and on Capital deals with the concept of PE.
A PE is existence or presence of an entity/person in a foreign country which is
of substantial nature. There are two kinds of PE. An establishment or existence
in form of office, branch, installation, etc. is termed as ‘Associated PE’. The
presence and carrying out of business activity by an entity through an agent is
termed as ‘Unassociated PE’. With respect to the first type of PE i.e.,
Associated PE, the two-fold test for determination of PE is: (a) firstly,
there should be a ‘fixed place of business’ and 2) Secondly,
the business activity of the entity should be carried from the same place. The
two-fold test for determination of ‘fixed place of business’ is: (a) firstly, there should be a fixed place
and (b) secondly, that the place
should be ‘at the disposal’ of the person.
Model Tax Convention on Income and on Capital deals with the concept of PE.
A PE is existence or presence of an entity/person in a foreign country which is
of substantial nature. There are two kinds of PE. An establishment or existence
in form of office, branch, installation, etc. is termed as ‘Associated PE’. The
presence and carrying out of business activity by an entity through an agent is
termed as ‘Unassociated PE’. With respect to the first type of PE i.e.,
Associated PE, the two-fold test for determination of PE is: (a) firstly,
there should be a ‘fixed place of business’ and 2) Secondly,
the business activity of the entity should be carried from the same place. The
two-fold test for determination of ‘fixed place of business’ is: (a) firstly, there should be a fixed place
and (b) secondly, that the place
should be ‘at the disposal’ of the person.
A place is said to be ‘at the disposal’ of the
enterprise when that enterprise has control over that place. It can use that
place at any time of its own choice and for work relating to more than one
customer and for its internal administrative and bureaucratic work. Ownership
is not necessary for a place to constitute ‘fixed place of business’ of an
enterprise. As long as an enterprise is able to use the premise for its own
business as well, it can be said that the premise is ‘at the disposal’ of
enterprise.
enterprise when that enterprise has control over that place. It can use that
place at any time of its own choice and for work relating to more than one
customer and for its internal administrative and bureaucratic work. Ownership
is not necessary for a place to constitute ‘fixed place of business’ of an
enterprise. As long as an enterprise is able to use the premise for its own
business as well, it can be said that the premise is ‘at the disposal’ of
enterprise.
Background
of the Case
of the Case
Federation International L’ Automobile (FIA) is
the body which governs and provides all the rules and regulations for all
Formula One (F1) races. By virtue of an agreement between FIA and Formula One
Asset Management Ltd (FOAM) in 2001, FOAM was made the Commercial Rights Holder
(CRH) for the F1 Race events. FOWC, the
appellant in the present case, is a company incorporated by FIA in the United
Kingdom (UK) to look into the promotion, hosting and organization of various
racing and non-racing events. Under the Contract between FIA, FOAM and FOWC,
FOAM transferred the commercial rights to FOWC. Thus, FOWC had been made the commercial
rights Holder. Further, under the same contract FOWC was given the authority to
choose promoters for various events. In order to organize the Formula One Race
event in India, Jaypee Sports International Ltd (Jaypee) was chosen as the
Promoter by FOWC. A ‘Race Promoter Contract’ (RPC) along with various other
agreements were entered into between Jaypee on one hand and FOWC and its
affiliates on the other hand. Further, a service agreement was also entered
into between FOWC and FOAM during the same period.
the body which governs and provides all the rules and regulations for all
Formula One (F1) races. By virtue of an agreement between FIA and Formula One
Asset Management Ltd (FOAM) in 2001, FOAM was made the Commercial Rights Holder
(CRH) for the F1 Race events. FOWC, the
appellant in the present case, is a company incorporated by FIA in the United
Kingdom (UK) to look into the promotion, hosting and organization of various
racing and non-racing events. Under the Contract between FIA, FOAM and FOWC,
FOAM transferred the commercial rights to FOWC. Thus, FOWC had been made the commercial
rights Holder. Further, under the same contract FOWC was given the authority to
choose promoters for various events. In order to organize the Formula One Race
event in India, Jaypee Sports International Ltd (Jaypee) was chosen as the
Promoter by FOWC. A ‘Race Promoter Contract’ (RPC) along with various other
agreements were entered into between Jaypee on one hand and FOWC and its
affiliates on the other hand. Further, a service agreement was also entered
into between FOWC and FOAM during the same period.
The present matter originated from the filing of
applications before the Authority for Advance Rulings (AAR) by FOWC and Jaypee.
One of the queries posed by the parties was whether FOWC had a PE in India. The
AAR granted a ruling in favor of FOWC and Jaypee holding that FOWC did not have
any PE in India. In the appeal filed by the Revenue with respect to the
aforesaid issue before the Delhi High Court, the appeal was allowed. The Delhi
High Court held that FOWC has a PE in India.
applications before the Authority for Advance Rulings (AAR) by FOWC and Jaypee.
One of the queries posed by the parties was whether FOWC had a PE in India. The
AAR granted a ruling in favor of FOWC and Jaypee holding that FOWC did not have
any PE in India. In the appeal filed by the Revenue with respect to the
aforesaid issue before the Delhi High Court, the appeal was allowed. The Delhi
High Court held that FOWC has a PE in India.
Arguments
Advanced
Advanced
FOWC:
1. The twin-test
for determination of PE is not satisfied. Firstly,
the circuit and its surrounding area are not ‘at the disposal’ of FOWC, as the
premises was owned and constructed by the Jaypee at its own cost and the said
premises is also used by Jaypee for hosting events other than the F1 race. Secondly, no business of FOWC was
conducted from the aforesaid premises, as the business of FOWC was exploitation
of commercial rights. The source of its income was through the grant of
advertisement and television rights and consideration received from Jaypee.
Therefore, it had no connection whatsoever in holding the race on Buddh Circuit.
The business was not related to the physical circuit.
for determination of PE is not satisfied. Firstly,
the circuit and its surrounding area are not ‘at the disposal’ of FOWC, as the
premises was owned and constructed by the Jaypee at its own cost and the said
premises is also used by Jaypee for hosting events other than the F1 race. Secondly, no business of FOWC was
conducted from the aforesaid premises, as the business of FOWC was exploitation
of commercial rights. The source of its income was through the grant of
advertisement and television rights and consideration received from Jaypee.
Therefore, it had no connection whatsoever in holding the race on Buddh Circuit.
The business was not related to the physical circuit.
2. There was no
substantial presence of FOWC, as the event was organized for only three days
during which FOWC had its presence.
substantial presence of FOWC, as the event was organized for only three days
during which FOWC had its presence.
3. A
comprehensive view should be taken while interpreting Article 5 of the India –
U.K. Double Taxation Avoidance Agreement (DTAA).
comprehensive view should be taken while interpreting Article 5 of the India –
U.K. Double Taxation Avoidance Agreement (DTAA).
Revenue:
1. The twin test
for determination of PE is satisfied. A comprehensive reading of all the agreements
entered into between the parties clearly shows that FOWC has complete control
over the event. Further, the circuit and paddock rights, which were granted to
affiliates of FOWC, established that the business was conducted from the Buddh
Circuit premises.
for determination of PE is satisfied. A comprehensive reading of all the agreements
entered into between the parties clearly shows that FOWC has complete control
over the event. Further, the circuit and paddock rights, which were granted to
affiliates of FOWC, established that the business was conducted from the Buddh
Circuit premises.
Decision
The Supreme Court addressed the following two
issues to adjudicate and decide the matter
issues to adjudicate and decide the matter
I. Whether
the premises are ‘at the disposal’ of FOWC?
the premises are ‘at the disposal’ of FOWC?
II. Whether
the business of FOWC was conducted from that place?
the business of FOWC was conducted from that place?
I. Whether the premises are ‘at the
disposal’ of FOWC?
disposal’ of FOWC?
The
flow of commercial rights was considered as follows:
flow of commercial rights was considered as follows:
|
Sr. No.
|
AGREEMENT
|
PARTICULARS
|
|
1.
|
Between FIA and FOAM (2001)
|
Transfer of Commercial Rights in relation to
F1 event to FOAM |
|
2.
|
‘Concorde Agreement’ between FIA, FOWC and
Teams (2009) |
1. Made
FOWC a Commercial Rights Holder (CRH) to exploit rights with respect to the F1 Business
2. Granted
the authority to FOWC to choose the promoter.
3. All the teams should ensure participation
and abide by the regulations prescribed.
4. ‘F1
Business’ was defined as exploitation of various rights including media rights, hospitability rights and title sponsorship rights |
|
3.
|
Between FOWC and Jaypee (September 2011)
|
1. Grant
of ‘hosting, conducting, promoting rights to Jaypee.
2. Grant
of circuit rights which include Title Sponsorship Rights and Paddock Rights to Jaypee |
|
4.
|
Between Jaypee and FOWC’s Affiliates (September
2011) |
Circuit rights (which includes Title
Sponsorship as well) and Paddock rights taken back from Jaypee (on the same day of the entering of agreement on Serial No. 3) |
|
5.
|
Between FOWC Affiliates and Bharti Airtel (August
2011) |
Title Sponsorship rights transferred to Bharti
Airtel |
|
6.
|
Service Agreement between FOAM and FOWC (2011)
|
FOWC to undertake liaison and supervision of other
parties at the event, transport and other data services |
After
analyzing the aforesaid Agreements, the Supreme Court took into consideration
the following factors. First, FOWC
had a complete discretion to choose the Promoter. Secondly, FOWC and its affiliates had a complete control over the
Circuit rights and the Paddock rights which formed a very integral part of the
event. Thirdly, an Agreement for
Title Sponsorship was entered into between FOWC’s Affiliates and Bharti Airtel
in August 2011, which was even before the FOWC’s Affiliates acquired it from
Jaypee. Fourthly, the Service
Agreement between FOWC and FOAM granted FOWC the right to liaison and supervise
other parties at the event. The Agreement also granted FOWC the power to
exercise certain amount of control over transport and other data services.
analyzing the aforesaid Agreements, the Supreme Court took into consideration
the following factors. First, FOWC
had a complete discretion to choose the Promoter. Secondly, FOWC and its affiliates had a complete control over the
Circuit rights and the Paddock rights which formed a very integral part of the
event. Thirdly, an Agreement for
Title Sponsorship was entered into between FOWC’s Affiliates and Bharti Airtel
in August 2011, which was even before the FOWC’s Affiliates acquired it from
Jaypee. Fourthly, the Service
Agreement between FOWC and FOAM granted FOWC the right to liaison and supervise
other parties at the event. The Agreement also granted FOWC the power to
exercise certain amount of control over transport and other data services.
On the
basis of the aforesaid factors, it was held by the Supreme Court held that FOWC
had control over all the essential elements of Race, i.e. Circuit, Paddock,
Teams. Without these elements, it was difficult to imagine a F1 Race event
taking place.
basis of the aforesaid factors, it was held by the Supreme Court held that FOWC
had control over all the essential elements of Race, i.e. Circuit, Paddock,
Teams. Without these elements, it was difficult to imagine a F1 Race event
taking place.
In alternative,
it also analyzed the ‘Race Promotion Contract’ entered into between FOWC and
Jaypee. The following factors of the Race Promotion Contract were considered by
the Supreme Court. First, it was only through FOWC that any circuit was allowed to be
introduced in the event. Secondly,
Jaypee was obliged to ensure that Circuit, Paddock, Surroundings and building
open to FOWC, its affiliates and participants. Thirdly, passes were to be issued by FOWC and the same were
unquestionable. Certain areas of premises are not accessible to public and,
further, access can be obtained only through the passes issued by FOWC. Fourthly, no photos, recordings,
broadcast were to be taken by Jaypee within the confines of Circuit. Fifthly, Jaypee was to appoint
International Television and Broadcasting feed during the term specified in the
guideline published by FOWC. Sixthly,
Jaypee was to provide all the present and future intellectual property rights to FOWC and allow exploitation at its own
risk. Lastly, Jaypee was to ensure
that those accredited and authorized were permitted to enter upon premises, and
all the necessary help should be provided by FOWC.
it also analyzed the ‘Race Promotion Contract’ entered into between FOWC and
Jaypee. The following factors of the Race Promotion Contract were considered by
the Supreme Court. First, it was only through FOWC that any circuit was allowed to be
introduced in the event. Secondly,
Jaypee was obliged to ensure that Circuit, Paddock, Surroundings and building
open to FOWC, its affiliates and participants. Thirdly, passes were to be issued by FOWC and the same were
unquestionable. Certain areas of premises are not accessible to public and,
further, access can be obtained only through the passes issued by FOWC. Fourthly, no photos, recordings,
broadcast were to be taken by Jaypee within the confines of Circuit. Fifthly, Jaypee was to appoint
International Television and Broadcasting feed during the term specified in the
guideline published by FOWC. Sixthly,
Jaypee was to provide all the present and future intellectual property rights to FOWC and allow exploitation at its own
risk. Lastly, Jaypee was to ensure
that those accredited and authorized were permitted to enter upon premises, and
all the necessary help should be provided by FOWC.
On the
basis of the aforesaid factors, the Supreme Court held that by virtue of the
terms of RPC, it can be inferred that the Buddh Circuit where the event was
organized was ‘at the disposal’ of the FOWC.
basis of the aforesaid factors, the Supreme Court held that by virtue of the
terms of RPC, it can be inferred that the Buddh Circuit where the event was
organized was ‘at the disposal’ of the FOWC.
II. Whether business of FOWC was carried
from the Buddh Circuit?
from the Buddh Circuit?
The Supreme
Court held that FOWC was engaged in the event of promoting the F1 Race. It had
acquired right to exploit the commercial rights of the event and ,therefore,
the business in which it was involved was exploitation of commercial
rights of the event. The event involved
Circuit, teams, media etc. FOWC had the right to exploit the commercial rights
of the aforesaid elements of the event which it was doing so as it had actual
control over the elements. Therefore, FOWC was carrying on its business through
Buddh Circuit.
Court held that FOWC was engaged in the event of promoting the F1 Race. It had
acquired right to exploit the commercial rights of the event and ,therefore,
the business in which it was involved was exploitation of commercial
rights of the event. The event involved
Circuit, teams, media etc. FOWC had the right to exploit the commercial rights
of the aforesaid elements of the event which it was doing so as it had actual
control over the elements. Therefore, FOWC was carrying on its business through
Buddh Circuit.
In
light of the above, the Supreme Court held that since the Buddh Circuit was a
fixed place which was under the control of
FOWC, and FOWC was carrying on its business through the said place, the Buddh
Circuit constituted a Permanent Establishment of FOWC and therefore, FOWC was
liable to pay tax on the income arising from the Buddh Circuit.
light of the above, the Supreme Court held that since the Buddh Circuit was a
fixed place which was under the control of
FOWC, and FOWC was carrying on its business through the said place, the Buddh
Circuit constituted a Permanent Establishment of FOWC and therefore, FOWC was
liable to pay tax on the income arising from the Buddh Circuit.
– Akash Santosh Loya
