REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3849 OF 2017
FORMULA ONE WORLD CHAMPIONSHIP LTD. …..APPELLANT(S)
VERSUS
COMMISSIONER OF INCOME TAX,
INTERNATIONAL TAXATION – 3,
DELHI & ANR. …..RESPONDENT(S)
W I T H
CIVIL APPEAL NO. 3850 OF 2017
A N D
JUDGMENT
CIVIL APPEAL NO. 3851 OF 2017
J U D G M E N T
A.K. SIKRI, J.
INTRODUCTION
These appeals are filed by Formula One World
Championship Limited (hereinafter referred to as
Page 1
'FOWC'), Jaypee Sports International Limited (for
short, 'Jaypee') and Union of India (hereinafter
referred to as the 'Revenue'). In all these appeals,
challenge is laid to the judgment dated November 30,
2016 passed by the High Court of Delhi whereby three
writ petitions preferred by FOWC, Jaypee and Revenue
have been decided.
2) The matter originated from filing of applications by
FOWC and Jaypee before the Authority for Advance
Ruling (AAR). FOWC had entered into a 'Race
Promotion Contract' (RPC) dated September 13, 2011
with Jaypee, granting Jaypee the right to host, stage
and promote the Formula One Grand Prix of India event
for a consideration of US$ 40 million. Some other
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agreements were also entered into between FOWC and
Jaypee as well as group companies of FOWC and Jaypee,
particulars whereby would be mentioned later at an
appropriate stage. In the applications filed by FOWC
and Jaypee before the AAR, advance ruling of AAR was
solicited on two main questions/queries:
(i)
whether the payment of consideration receivable
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by FOWC in terms of the said RPC from Jaypee was
or was not royalty as defined in Article 13 of
the 'Double Taxation Avoidance Agreement' (DTAA)
entered into between the Government of United
Kingdom and the Republic of India?; and
(ii)whether FOWC was having any 'Permanent
Establishment' (PE) in India in terms of Article
5 of DTAA?
Another related question was also raised, viz.,
(iii)whether any part of the consideration received
or receivable by FOWC from Jaypee outside India
was subject to tax at source under Section 195 of
the Indian Income Tax Act, 1961 (hereinafter
after referred to as the 'Act').
JUDGMENT
3)
AAR answered the first question holding that the
consideration paid or payable by Jaypee to FOWC
amounted to ‘Royalty’ under the DTAA. Second
question was answered in favour of FOWC holding that
it did not have any PE in India. As far as the
question of subjecting the payments to tax at source
under Section 195 of the Act is concerned, AAR ruled
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that since the amount received/receivable by FOWC was
income in the nature of Royalty and it was liable to
pay tax there on to the Income Tax Department in
India, it was incumbent upon Jaypee to deduct the tax
at source on the payments made to FOWC. FOWC and
Jaypee challenged the ruling on the first issue by
filing writ petitions in the High Court contending
that the payment would not constitute Royalty under
Article 13 of the DTAA. Revenue also filed the writ
petition challenging the answer of the AAR on the
second issue by taking the stand that FOWC had PE in
India in terms of Article 5 of the DTAA and,
therefore, tax was payable accordingly.
4) As mentioned above, all these three writ petitions
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have been decided by the High Court vide common
judgment dated November 30, 2016. Interestingly, the
High Court has reversed the findings of the AAR on
both the issues. Whereas it has held that the amount
paid/payable under RPC by Jaypee to FOWC would not be
treated as Royalty, as per the High Court FOWC had
the PE in India and, therefore, taxable in India.
While deciding this question, the High Court has not
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accepted the plea of the Revenue that it was not a
dependent PE. The High Court has also held, as the
sequitur, that Jaypee is bound to make appropriate
deductions from the amount payable to FOWC under
Section 195 of the Act. It is for this reason all
the three parties are again before us.
5) As per FOWC and Jaypee, no tax is payable in India on
the consideration paid under RPC as it is neither
Royalty nor FOWC has any PE in India. It is
pertinent to mention that the Revenue has not
challenged the findings of the High Court that the
amount paid under RPC does not constitute royalty.
Therefore, that aspect of the matter has attained
finality. The main question in the appeals,
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therefore, pertains to PE.
FACTUAL MATRIX
6) In order to decide this question, following facts,
having bearing on the matter, need a recapitulation:
7)
Federation Internationale de I' Automobile (for
short, 'FIA'), a non-profit association, is
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established as the Association Internationale des
Automobile Clubs Reconnus to represent the interests
of motoring organizations and motor car users
globally. FIA, as the federation of the world’s
leading motoring organizations and the governing body
for motorsports worldwide, consists of 213 national
member organizations in 125 countries
internationally. FIA is the principal body for
establishing the rules and regulations for all major
international four-wheel motorsport events. FIA is a
regulatory body; it regulates the FIA Formula One
World Championship ('Championship') which has been
the premier form of motor racing since its inception
in 1950. This Championship is established and run
every year subsequently since. The Championship is
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an annual series of motor races, conducted in the
name and style of the Grand Prix over a three day
duration at purpose-built circuits, and in some
cases, across public roads, in different countries
around the world. The Championship is considered the
most prestigious motor sport series in the world.
'Formula One' (F-1) refers to the rules and
regulations that define the characteristics of the
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race, as opposed to any other form of motor race.
Thus, 'the formula' , is with reference to a set of
rules that all participants’ cars must conform to.
F-1 seasons consist of a series of races, known as
Grand Prix (from French, meaning grand prizes), held
across the world on specially designed and built F-1
circuits across 26 different locales.
8) F-1 Grand Prix events are held under the aegis of the
FIA Formula One World Championship’s competition – in
which F-1 racing cars, assembled and manufactured
strictly in terms of the F-1 technical regulations,
compete against each other, under F1 Sporting
Regulations and the F-1 International Sporting Code
framed and made effective by the FIA. F-1 drivers
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across the world have the ability, competence and
skill to drive an F-1 car and participate in F-1
racing events. About 12 to 15 teams typically
compete in these Championship in any one annual
racing season. Some celebrated and well-known
participating teams are the Ferrari, McLaren, Red
Bull etc. The teams assemble and construct their
vehicles, which comply with defined technical
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specifications, and engage drivers who can
successfully manoeuvre the F-1 cars in the racing
events.
9)
FOWC is incorporated under the laws of the United
Kingdom, and is a tax resident of the United Kingdom.
It is the Commercial Rights Holder (CRH) in respect
of the Championship with effect from January 01,
2011. FOWC has entered into an agreement with the
FIA and Formula One Asset Management Limited
(‘FOAM’). Under these agreements, FOAM licensed all
commercial rights in the FIA Formula One World
Championship (hereinafter referred to as ‘F1
Championship’) to FOWC for 100 year term effective
from January 01, 2011. As mentioned above, the teams
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which participate in F1 World Championship
Competitions have to strictly comply with the terms
and conditions set out for such competitions as per
Sporting Regulations and Sporting Code. For this
purpose, all these teams, known as ‘Constructors’,
enter into a contract, known as the 'Concorde
Agreement' , with FOWC and the FIA. In these
agreements, they undertake to participate to the best
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of their ability, in every F-1 event included in the
official annual F-1 racing calendar. They also bind
themselves to an unequivocal negative covenant with
FOWC that they would not participate in any other
similar motor racing event whatsoever nor would they
promote in any manner any other rival event. The F-1
racing teams exclusively participate in about 19 to
21 listed F-1 annual racing events on the official
racing calendar, set by the FIA. This is, in effect,
a closed circuit event since no team other than those
bound by contract with FOWC are permitted
participation.
Thus, on the one hand, participating teams enter
into Concorde Agreement. Likewise, promoters are
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also chosen for holding these F-1 racing events.
Every F-1 racing event is hosted, promoted and staged
by a promoter with whom FOWC as the right holder,
enters into contract and whose event is nominated by
the CRH (i.e. Commercial Right Holder, which is in
effect, FOWC) to the FIA for inclusion in the
official F-1 racing calendar. In other words, FOWC
is the exclusive nominating body at whose instance
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the event promoter is permitted participation. The
points scored by each F-1 racing team in every event
is listed in the official racing calendar and it
counts towards the Constructor's Championship and the
Driver’s Championship for the racing season as a
whole. Any team’s position in these Championships at
the end of the season determines, together with
certain other factors which are elaborately dealt
with in the Concorde Agreements (which in the present
instance, was latest in the series of Concorde
Agreements the last being the one of 2009 i.e. August
05, 2009), the prize money payable to the teams for
their participation during the season. Grant of a
right to host, stage and promote the F-1 racing
event, therefore, carries with it a covenant or
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representation that F-1 racing teams with their cars,
drivers and other auxiliary and supporting staff will
participate in the motor racing event hosted at the
promoter’s motor racing circuit displaying the
highest levels of technical skill achievement etc. in
the fields of construction of single seat motorcars
to attain the highest levels of performance in the
world. These teams and the FOWC also represent that
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the highest levels of skill in racing management and
maintenance of the cars would be on display in the
event. All these are a part of the relevant
contractual provisions, embodied in RPC 2011. In
this manner, FOWC has acquired all commercial rights
in respect of the F-1 Championship wherever such
tournaments take place, i.e. with the permission of
FOWC.
10)
Jaypee was interested to acquire this right for
hosting, staging and promoting the F-1 Grand Prix of
India event. In order to do so, it entered into
agreement with FOWC dated September 13, 2011 which is
known as ‘Race Promotion Contract’ (RPC). By this
agreement, FOWC granted Jaypee the right to host,
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stage and promote F-1 Grand Prix of India event for a
consideration of US$ 40 millions. Another agreement
known as ‘Artwork License Agreement’ (‘ALA’) was
entered into between FOWC and Jaypee on the same day
whereby FOWC permitted Jaypee to use certain marks
and intellectual property belonging to FOWC for a
consideration of US$ 1 million. Prior to this RPC of
2011, another RPC of October 25, 2007 had been
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entered into between FOA and Jaypee which was
replaced by agreement dated September 13, 2011
between FOWC and Jaypee. Pursuant thereto, races
were held in India in 2011, 2012 and 2013.
11)
After entering into the aforesaid arrangement for
hosting F-1 Grand Prix in India, both FOWC and Jaypee
approached AAR seeking its advance ruling on the two
questions, the nature of which, including the opinion
of AAR thereupon, is already mentioned above.
12)
As pointed out earlier, first question was as to
whether considerations received/receivable under the
RPC by FOWC from Jaypee Sports was in the nature of
business income and ‘Royalty’ as defined under the
Act as well as DTAA. Plea of FOWC and Jaypee was
JUDGMENT
that what was granted to Jaypee by FOWC was a
commercial right to use the event, i.e., a hosting
right and the consideration received/receivable
therefrom by FOWC was not for the use of trademark,
copyright, equipment etc. and hence was not in the
nature of ‘Royalty’ . It was also stated by them that
there was a limited permitted use of Formula One
(‘F-1’) Mark which was only to enable the promoter
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(Jaypee) to advertise the Indian Grand Prix and
reproduction of names of the sports events was
routine and customary in business parlance. For this
purpose, ALA was executed to enable Jaypee to use F-1
Marks in a limited way and to prevent it from using
the Marks for any commercial exploitation.
Revenue had opposed the aforesaid plea of FOWC
and Jaypee on the ground that the consideration
comprised not only of hosting rights but also
permission to use F-1 Marks and, therefore, entire
consideration of US$ 40 million was attributable to
the usage of F-1 Marks in terms of ALA. According to
the Revenue, RPC and ALA had to be read together for
a comprehensive view of the matter, particularly,
JUDGMENT
whey they were executed on the same day.
The AAR accepted the argument of the Revenue
holding that the consideration received by FOWC
amounted to royalty and was to be, accordingly, taxed
under the Indian Income Act. However, this view is
reversed by the High Court by the impugned judgment
after detailed discussion on this issue and in the
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opinion of the High Court the consideration received
under the Agreement cannot be termed as royalty. As
mentioned above, Revenue has accepted the judgment of
the High Court on this issue and, therefore, it is
not necessary to discuss in detail the reasons given
by the High Court for coming to the aforesaid
conclusion. This fact is mentioned only for the sake
of completeness of the issues raised and their
outcome.
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
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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.
At this stage, we would, therefore, record the
arguments which were presented before us and in the
process mention the basis of the conclusion arrived
at by the High Court for the purpose of forming an
opinion as to whether the view of the High Court is
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correct and justified in law.
RELEVANT STATUTORY PROVISIONS & DTAA REGIME
14)
Before adverting to the question at hand, it would be
appropriate to take note of the scheme of the Act as
well as relevant provisions of DTAA on this subject.
The Act provides two modes of taxation, namely,
resident based and source based. Any person who is a
resident of India is subjected to the Act and liable
to pay income tax on the ‘total income’ earned by
such a resident, after getting various deductions
therefrom as admissible under different provisions of
the Act. Charging section is Section 4 which, inter
alia, stipulates that income tax shall be charged for
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any Assessment Year in respect of total income of the
previous year of every of such person. Section 5
contains the scope of total income of a resident and
includes all income from whatever source derived by a
person who is resident which is received or deemed to
be received in India, accrues or arises or is deemed
to accrue or arise to him in India or accrues or
arises to him outside India during such year. Thus,
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a resident is supposed to pay income tax on all
incomes so earned whether in India or outside India.
On the other hand, those persons who are not
ordinarily residents of India (which term is defined
under sub-section (6) of Section 6) are not liable to
pay income tax on any income which accrues or arises
to such non-resident outside India. However, in the
case of non-resident persons, if the income is
derived from a business controlled in or a profession
set up in India, these non-residents are subjected to
pay tax for such an income earned in India. In their
case, all such incomes from whatever source derived
which is received or is deemed to be received in
India in such a year by or on behalf of such person
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or accrues or arises or is deemed to accrue or arise
to them in India during that year, is taxable in
India. In this sense, the income tax on non-resident
is source based, i.e., source of such income is India
and, therefore, even a non-resident is liable to pay
tax on incomes earned in India. ‘Resident in India’
and ‘Not-ordinarily Resident in India’ are covered by
the provisions contained in Section 6.
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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 India.
Since the question is whether the aforesaid
consideration/income earned by FOWC is subject to tax
in India or not, it is to be decided as to whether
that income accrued or arose in India. For this
purpose, relevant provision is Section 9 of the Act.
This section contains varied situations where income
is deemed to accrue or arise in India and it is not
necessary to spell out each of such contingencies.
Insofar as income by way of royalty earned by a
non-resident is concerned, that is mentioned in
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clause (vi) of Section 9(1) of the Act. As the
consideration of US$ 40 million received by FOWC from
Jaypee is held as ‘no income by way of royalty’ , we
may conveniently skip that provision.
16) Clause (i) of sub-section (1) of Section 9 of the Act
mentions certain kinds of income which are deemed to
accrue or arise in India. This clause is reproduced
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below:
“(i) all income accruing or arising, whether
directly or indirectly, through or from any
business connection in India, or through or
from any property in India, or through or
from any asset or source of income in India,
or through the transfer of a capital asset
situate in India:”
17)
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.
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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
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operations carried in India. We are not concerned
with clauses (b) to (e). Explanation (2) provides
certain exceptions in respect of ‘business
connection’ and reads as under:
“ Explanation 2. – For the removal of doubts,
it is hereby declared that “business
connection” shall include any business
activity carried out through a person who,
acting on behalf of the non-resident, –
(a) has and habitually exercises in India,
an authority to conclude contracts on
behalf of the non-resident, unless his
activities are limited to the purchase of
gods or merchandise for the non-resident;
or
(b) has no such authority, but habitually
maintains in India a stock of gods or
merchandise from which he regularly
delivers goods or merchandise on behalf
of the non-resident; or
(c) habitually secures orders in India,
mainly or wholly for the non-resident or
for that non-resident and other
non-residents controlling, controlled by,
or subject to the same common control, as
that non-resident:
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Provided that such business connection shall
not include any business activity carried out
through a broker, general commission agent or
any other agent having an independent status,
if such broker, general commission agent or
any other agent having an independent status
is acting in the ordinary course of his
business:
Provided further that where such broker,
general commission agent or any other agent
works mainly or wholly on behalf of a
non-resident (hereafter in this proviso
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referred to as the principal non-resident) or
on behalf of such non-resident and other
non-residents which are controlled by the
principal non-resident or have a controlling
interest in the principal non-resident or are
subject to the same common control as the
principal non-resident, he shall not be
deemed to be a broker, general commission
agent or an agent of an independent status.”
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. The meaning of the expression
‘through’ is again clarified in Explanation (4),
which reads as under:
“ Explanation 4. – For the removal of doubts,
it is hereby clarified that the expression
“through” shall mean and include and shall be
deemed to have always meant and included “by
means of”, “in consequence of” or “by reason
of”.”
JUDGMENT
19)
If a non-resident has a PE in India, then business
connection in India stands established. Section 92F
of the Act contains definitions of certain terms,
though those definitions have relevance for the
purposes of computation of arms length price, etc.
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Clause (3) thereof defines ‘enterprise’ and such an
enterprise includes a PE of a person. PE is defined
in clause (iiia) in the following manner:
“(iiia) “permanent establishment”, referred
to in clause (iii), includes a fixed place of
business through which the business of the
enterprise is wholly or partly carried on;”
20)
At this juncture, we would also like to point out
that Article 5 of DTAA between India and United
Kingdom lays down as to what would constitute a PE.
It reads as under:
“ARTICLE 5
PERMANENT ESTABLISHMENT
1. 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.
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2. The term “permanent establishment” shall
include especially:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) premises used as a sales outlet or for
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receiving or soliciting orders;
(g) a warehouse in relation to a person
providing store facilities for others;
(h) a mine, an oil or gas well, quarry on
other place of extraction of natural
resources;
(i) an installation or structure used for
the exploration or exploitation of natural
resources;
(j) a building site or construction,
installation or assembly project or
supervisory activities in connection
therewith, where such site, project or
supervisory activity continues for a
period of more than six months, or where
such project or supervisory activity,
being incidental to the sale or machinery
or equipment, continues for a period not
exceeding six months and the charges
payable for the project or supervisory
activity exceed 10 per cent of the sale
price of the machinery and equipment;
(k) the furnishing of services including
managerial services, other than those
taxable under Article 13 (Royalties and
fees for technical services), within a
Contracting State by an enterprise through
employees or other personnel, but only if:
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(i) activities of that nature
continue within that State for a
period or periods aggregating more
than 90 days within any
twelve-month period; or
(ii) services are performed within
that State for an enterprise within
the meaning of paragraph 1 of
Article 10 (Associated enterprises)
and continue for a period or
periods aggregating more than 30
days within any twelve-month
period;
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Provided that for the purposes of
this paragraph an enterprise shall
be deemed to have a permanent
establishment in a Contracting
State and to carry on business
through that permanent
establishment if it provides
services or facilities in
connection with, or supplies plant
and machinery on hire used or to be
used in, the prospecting for, or
extraction or production of mineral
oils in that State.
3. The term “permanent establishment” shall
not be deemed to include:
(a) the use of facilities solely for the
purpose of storage or display of gods or
merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or
merchandise belonging to the enterprise
solely for the purpose of storage or
display;
(c) the maintenance of a stock of goods or
merchandise belonging to the enterprise
solely for the purpose of processing by
another enterprise;
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(d) the maintenance of a fixed place of
business solely for the purpose of
purchasing goods or merchandise, or for
collecting information, for the
enterprise;
(e) the maintenance of a fixed place of
business solely for the purpose of
advertising, for the supply of
information or for scientific research,
being activities solely of a preparatory
or auxiliary character in the trade of
business of the enterprise. However,
this provision shall not be applicable
where the enterprise maintains any other
fixed place of business in the other
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Contracting State for any purpose or
purposes other than the purposes
specified in this paragraph;
(f) the maintenance of a fixed place of
businesses solely for any combination of
activities mentioned in sub-paragraphs
(a) to (e) of the paragraph, provided
that the overall activity of the fixed
place of business resulting from this
combination is of a preparatory or
auxiliary character.
4. A person acting in a Contracting State
for or on behalf of an enterprise of the
other contracting State – other than an agent
of an independent status to whom paragraph
(5) of this Article applies, shall be deemed
to be a permanent establishment of that
enterprise in the first mentioned State if:
(a)
he has, and habitually exercises in
that State, an authority to negotiate and
enter into contracts for or on behalf of
the enterprise, unless his activities are
limited to the purchase of gods or
merchandise for the enterprise; or
(b)
he habitually maintains in the
first-mentioned Contracting State a stock
of gods or merchandise from which he
regularly delivers goods or merchandise
for or on behalf of the enterprise; or
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(c)
he habitually secures orders in the
first-mentioned State, wholly or almost
wholly for the enterprise itself or for
the enterprise and the enterprises
controlling, controlled by, or subject to
the same common control, as that
enterprise.
5. An enterprise of a Contracting State
shall not be deemed to have a permanent
establishment in the other Contracting State
merely because it carries on business in that
other State through a broker, general
commission agent or any other agent of an
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independent status, where such persons are
acting in the ordinary course of their
business. However, if the activities of such
an agent are carried out wholly or almost
wholly for the enterprise (or for the
enterprise and other enterprises which are
controlled by it or have a controlling
interest in it or are subject to same common
control) he shall not be considered to be an
agent of an independent status for the
purposes of this paragraph.
6. The fact that a company which is a
resident of a Contracting State controls or
is controlled by a company which is a
resident of the other Contracting State, or
which carries on business in that other State
(whether through a permanent establishment or
otherwise), shall not of itself constitute
either company a permanent establishment of
the other.
7. For the purposes of this Article the term
“control”, in relation to a company, means
the ability to exercise control over the
company’s affairs by means of the direct or
indirect holding of the greater part of the
issued share capital or voting power in the
company.”
JUDGMENT
21)
As per sub-clause (1) of Article 5, a fixed place of
business through which the business of an enterprise
is wholly or partly carried on, is known as
‘permanent establishment’ . It requires that there
has to be a fixed place of business. It also
requires that from such a place business of an
enterprise (FOWC in the instant case) is carried on,
whether wholly or partly. Sub-clause (2) gives the
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illustrations of certain places which will be treated
as PEs. Likewise, sub-clause (3) excludes certain
kinds of places from the term PE. Sub-clause (4)
enumerates the circumstances under which a person is
to be treated as acting on behalf of non-resident
enterprise. Likewise, sub-clause (5) excludes
certain kinds of agents of enterprise, namely,
broker, general commission agent or agent of an
independent status, by clarifying that if the
business is carried on through these persons, the
enterprise shall not be deemed to be a PE. However,
one exception thereto is carved out, namely, if the
activities of such an agent are carried out wholly or
almost wholly for the enterprise, or for the
enterprise and other enterprises which are controlled
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by it or have a controlling interest in it or are
subject to same common control, then, such an agent
will be treated as an agent of an independent status.
It means that if the business is carried out with
such a kind of agent, the enterprise will be deemed
to have a PE in India.
THE LEGAL COMMENTARIES AND CASE LAW
Page 26
22) It is an undisputed fact that Article 5 of DTAA
between India and the United Kingdom follows the
Organisation for Economic Cooperation and
Development’s (OECD) Model of Double Taxation
Convention. There are various commentaries on Double
Taxation Conventions. Celebrated among those are: “A
Manual on the OECD Model Tax Convention on Income and
on Capital” by Philip Baker Q.C., and Klaus Vogel on
"Double Taxation Conventions" . OECD has also given
its ‘condensed version’ on "Model Tax Convention on
Income and on Capital" . What constitutes PE under
various circumstances has also been the subject
matter of judicial verdicts in India as well as in
other countries. For better understanding of what
JUDGMENT
may constitute a PE, it would be imperative to refer
to these commentaries and judicial decisions. This
discussion would disclose the principles enunciated
to determine the existence of a PE, application
whereof to the given facts would facilitate in
answering the surging debate.
23)
Philip Baker explains that the concept of PE is
Page 27
important for several Articles of the Conventions;
the concept, or its cognate, also appears in the
domestic law of some countries. According to him,
the concept marks the dividing line for businesses
between merely trading with a country and trading in
that country; if an enterprise has a PE, its presence
in a country is sufficiently substantial that it is
trading in the country. He has quoted the following
passage from the judgment of the Andhra Pradesh High
Court, authored by Justice (Retd.) Jagannadha Rao (as
His Lordship’s then was, later Judge of this Court)
in Commissioner of Income Tax, A.P.-I v.
1
Visakhapatnam Port Trust :
“The words ‘permanent establishment’
postulate the existence of a substantial
element of an enduring or permanent nature of
a foreign enterprise in another country which
can be attributed to a fixed place of
business in that country. It should be of
such a nature that it would amount to a
virtual projection of the foreign enterprise
of one country into the soil of another
country.”
JUDGMENT
24)
Emphasising that as a creature of international tax
law, the concept of PE has a particularly strong
claim to a uniform international meaning, Philip
(1983) 144 ITR 146
Page 28
Baker discerns two types of PEs contemplated under
Article 5 of OECD Model. First, an establishment
which is part of the same enterprise under common
ownership and control – an office, branch, etc., to
which he gives his own description as an ‘associated
permanent establishment’ . The second type is an
agent, though legally separate from the enterprise,
nevertheless who is dependent on the enterprise to
the point of forming a PE. Such PE is given the
nomenclature of ‘unassociated permanent
establishment’ by Baker. He, however, pointed out
that there is a possibility of a third type of PE,
i.e. a construction or installation site may be
regarded as PE under certain circumstances. In the
first type of PE, i.e. associated permanent
JUDGMENT
establishments, primary requirement is that there
must be a fixed place of business through which the
business of an enterprise is wholly or partly carried
on. It entails two requirements which need to be
fulfilled: (a) there must be a business of an
enterprise of a Contracting State (FOWC in the
instant case); and (b) PE must be a fixed place of
business, i.e. a place which is at the disposal of
Page 29
the enterprise. It is universally accepted that for
ascertaining whether there is a fixed place or not,
PE must have three characteristics: stability,
productivity and dependence . Further, fixed place of
business connotes existence of a physical location
which is at the disposal of the enterprise through
which the business is carried on.
25) Some of the examples of fixed place of business given
by Baker are the following: The place of business
must be fixed and permanent. Thus, a shed which had
been rented for thirteen years for storing and
2
preparing hides was held to constitute a PE .
Similarly, a writer’s study has been held to
3
constitute a PE . A stand at a trade fair, occupied
JUDGMENT
regularly for three weeks a year, through which the
enterprise obtained contracts for a significant part
of its annual sales, has also been held to constitute
4
a PE . A temporary restaurant operated in a mirror
tent at a Dutch flower show for a period of seven
5
months was held to constitute a PE . An office,
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)
Joseph Fowler v. M.N.R. (1990) 90 D.T.C. 1834; (1990) 2 C.T.C. 2351 (Tax Court of Canada)
Antwerp Court of Appeal, decision of February 6, 2001, noted in 2001 WTD 106-11
Page 30
workshop and storeroom for the maintenance of
aircraft, which were leased out by the enterprise,
6
has been held to constitute a PE .
26)
On the other hand, possession of a mailing address in
a state – without an office, telephone listing or
7
bank account – has been held not to constitute a PE .
The mere supply of skilled labour to work in a
country did not give rise to a PE of the company
8
supplying the labour . A drilling rig which, although
anchored while in operation, was moved to a new site
every few months, has been held not to constitute a
9
PE . Similarly, a remotely operated vessel which was
used to inspect and repair submarine pipelines was
held not to constitute a PE because a moving vessel
JUDGMENT
10
is not a fixed place of business .
27)
The principal test, in order to ascertain as to
whether an establishment has a fixed place of
business or not, 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
Page 31
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
thereupon.
28)
Some of the illustrative cases decided by courts of
different jurisdictions given by Baker in his
commentary are contained in the following passages
from that book:
11
(i) In the Canadian case of William Dudney v. R , the
taxpayer was a resident of the United States who
JUDGMENT
was contracted to supply training to employees of
a Canadian company. For the purposes of the
training contract, the taxpayer was given various
offices at the premises of the Canadian company,
which he was only allowed to enter at normal
office hours. He was allowed to use the client’s
telephone only on client’s business. He spent
(1999) 99 DTC 147
Page 32
300 days in one tax year and 40 in the subsequent
year at the premises. The Tax Court of Canada
and the Federal Court of Appeal confirmed that he
had no fixed base – which was treated as having
the same meaning as PE – at the premises since he
had no right to use the premises as the base for
the operation of his own business.
(ii) In a case generally referred to as Hotel
12
Manager , the Bundesfinanzhof held that a UK
hotel management company had a PE in Germany when
it entered into a 20 year contract with a limited
partnership which owned a hotel. The agreement
required the UK company to supply a general
manager: the general manager’s office constituted
JUDGMENT
the PE (and not the entire hotel) since the UK
company had a secured right to use this office
for the purposes of the agreement.
(iii)
A Swiss company was held not to have a PE when it
contracted with a German company to produce salad
dressings in the name of and in accordance with
the recipe of the Swiss company. No employees of
Bundersfinanzhof, February 3, 1993, IR 80-81/91, IStR 1993, p. 226, (1993) BStBl., II, 462.
Page 33
the Swiss company were present at the production
13
facility to supervise production . The
Bundestinanzhof has also held that a scene
painter who was commissioned to carry out a work
in France for six weeks, and given special rooms
for the purpose, did not have a fixed base at
those premises.
(iv) The Administrative Court of Appeal of Paris has
held that a German travel agency did not have a
14
PE in France . A travel agency in Paris had made
an office available to the German company from
time to time, and the manager of the German
company had a flat in Paris; the Court held that
the German company had no PE at its disposal in
JUDGMENT
France.
(v)
The Brussels Court of Appeal has held that a
German resident engaged in the transportation of
15
vehicles had a PE in Belgium . The taxpayer had
an office 3m by 6m at his disposal on the
premises of his principal supplier in Belgium,
together with telephone and telex, where the
taxpayer and four of his staff worked.
Page 34
29) According to Philip Baker, the aforesaid
illustrations confirm that the fixed place of
business need not be owned or leased by the foreign
enterprise, provided that is at the disposal of the
enterprise in the sense of having some right to use
the premises for the purposes of its business and not
solely for the purposes of the project undertaken on
behalf of the owner of the premises.
30)
Interpreting the OECD Article 5 pertaining to PE,
Klaus Vogel has remarked that insofar as the term
‘business’ is concerned, it is broad, vague and of
little relevance for the PE definition. According to
him, the crucial element is the term ‘place’ .
Importance of the term ‘place’ is explained by him in
JUDGMENT
the following manner:
“In conjunction with the attribute ‘fixed’,
the requirement of a place reflects the
strong link between the land and the taxing
powers of the State. This territorial link
serves as the basis not only for the
distributive rules which are tied to the
existence of PE but also for a considerable
number of other distributive rules and, above
all, for the assignment of a person to either
Contracting State on the basis of residence
(Article 1, read in conjunction with Article
4 OECD and UN MC).”
Page 35
31) We would also like to extract below the definition to
the expression ‘place’ by Vogel, which is as under:
“A place is a certain amount of space within
the soil or on the soil. This understanding
of place as a three-dimensional zone rather
than a single point on the earth can be
derived from the French Version
(‘installation fixe’) as well as the term
‘establishment’. As a rule, this zone is
based on a certain area in, on, or above the
surface of the earth. Rooms or technical
equipment above the soil may quality as a PE
only if they are fixed on the soil. This
requirement, however, stems from the term
‘fixed’ rather than the term ‘place’, given
that a place (or space) does not necessarily
consist of a piece of land. On the contrary,
the term ‘establishment’ makes clear that it
is not the soil as such which is the PE but
that the PE is constituted by a tangible
facility as distinct from the soil. This is
particularly evident from the French version
of Article 5(1) OECD MC which uses the term
‘installation’ instead of ‘place’.
The term ‘place’ is used to define the term
‘establishment’. Therefore, ‘place’ includes
all tangible assets used for carrying on the
business, but one such tangible asset can be
sufficient. The characterization of such
assets under private law as real property
rather than personal property (in common law
countries) or immovable rather than movable
property (in civil law countries) is not
authoritative. It is rather the context
(including, above all, the terms
‘fixed’/’fixe’), as well as the object and
purpose of Article 5 OECD and UN MC itself,
in the light of which the term ‘place’ needs
to be interpreted. This approach, which
follows from the general rules on treaty
interpretation, gives a certain leeway for
including movable property in the
understanding of ‘place’ and, therefore, the
JUDGMENT
Page 36
assume a PE once such property has been
‘fixed’ to the soil.
For example, a work bench in a caravan,
restaurants on permanently anchored river
boats, steady oil rigs, or a transformator or
generator on board a former railway wagon
qualify as places (and may also be ‘fixed’).
In contrast, purely intangible property
cannot qualify in any case. In particular,
rights such a participations in a
corporation, claims, bundles of claims (like
bank accounts), any other type of intangible
property (patents, software, trademarks etc.)
or intangible economic assets (a regular
clientele or the goodwill of an enterprise)
do not in themselves constitute a PE. They
can only form part of PE constituted
otherwise. Likewise, an internet website
(being a combination of software and other
electronic data) does not constitute tangible
property and, therefore, does not constitute
a PE.
Neither does the mere incorporation of a
company in a Contracting State in itself
constitute a PE of the company in that State.
Where a company has its seat, according to
its by-laws and/or registration, in State A
while the POEM is situated in State B, this
company will usually be liable to tax on the
basis of its worldwide income in both
Contracting States under their respective
domestic tax law. Under the A-B treaty,
however, the company will be regarded as a
resident of State B only (Article 4(3) OECD
and UN MC). In the absence of both actual
facilities and a dependent agent in State A,
income of this company will be taxable only
st
in State B under the 1 sentence of Article
7(1) OECD and UN MC.
JUDGMENT
There is no minimum size of the piece of
land. Where the qualifying business
activities consist (in full or in part) of
human activities by the taxpayer, his
employees or representatives, the mere space
Page 37
needed for the physical presence of these
individuals is not sufficient (if it were
sufficient, Article 5(5) OECD MC and Article
5(5)(a) UN MC and the notion of agent PEs
were superfluous). This can be illustrated
by the example of a salesman who regularly
visits a major customer to take orders, and
conducts meetings in the purchasing
director’s office. The OECD MC Comm. has
convincingly denied the existence of a PE,
based on the implicit understanding that the
relevant geographical unit is not just the
chair where the salesman sits, but the entire
office of the customer, and the office is not
at the disposal of the enterprise for which
the salesman is working.”
32) Taking cue from the word ‘through’ in the Article,
Vogel has also emphasised that the place of business
qualifies only if the place is ‘at the disposal’ of
the enterprise. According to him, the enterprise
will not be able to use the place of business as an
instrument for carrying on its business unless it
JUDGMENT
controls the place of business to a considerable
extent. He hastens to add that there are no absolute
standards for the modalities and intensity of
control. Rather, the standards depend on the type of
business activity at issue. According to him,
‘disposal’ is the power (or a certain fraction
thereof) to use the place of business directly. Some
of the instances given by Vogel in this behalf, of
Page 38
relative standards of control, are as under:
“The degree of control depends on the type of
business activity that the taxpayer carries
on. It is therefore not necessary that the
taxpayer is able to exclude others from
entering or using the POB.
The painter example in the OECD MC Comm.
(no. 4.5 OECD MC Comm. on Article 5) (however
questionable it might be with regard to the
functional integration test) suggests that
the type and extent of control need not
exceed the level of what is required for the
specific type of activity which is determined
by the concrete business.
By contrast, in the case of a self-employed
engineer who had free access to his
customer’s premises to perform the services
required by his contract, the Canadian
Federal Court of Appeal ruled that the
engineer had no control because he had access
only during the customer’s regular office
hours and was not entitled to carry on
businesses of his own on the premises.
Similarly, a Special Bench of Delhi’s
Income Tax Appellate Tribunal denied the
existence of a PE in the case of Ericsson.
The Tribunal held that it was not sufficient
that Ericsson’s employees had access to the
premises of Indian mobile phone providers to
deliver the hardware, software and know-how
required for operating a network. By
contrast, in the case of a competing
enterprise, the Bench did assume an Indian PE
because the employees of that enterprise
(unlike Ericsson’s) had exercised other
businesses of their employer.
JUDGMENT
The OECD view can hardly be reconciled with
the two court cases. All three examples do
indeed shed some light onto the method how
the relative standards for the control
threshold should be designed. While the OECD
MC Comm. suggests that it is sufficient to
Page 39
require not more than the type and extent of
control necessary for the specific business
activity which the taxpayer wants to exercise
in the source State, the Canadian and Indian
decisions advocate for stricter standards for
the control threshold.
The OECD MC shows a paramount tendency
(though no strict rule) that PEs should be
treated like subsidiaries (cf. Article 24(3)
OECD and UN MC), and that facilities of a
subsidiary would rarely been unusable outside
the office hours of one of its customers
(i.e. a third person), the view of the two
courts is still more convincing.
Along these lines, a POB will usually exist
only where the taxpayer is free to use the
POB:
- at any time of his own choice;
- for work relating to more than one
customer; and
-
for his internal administrative and
bureaucratic work.
In all, the taxpayer will usually be regarded
as controlling the POB only where he can
employ it at his discretion. This does not
imply that the standards of the control test
should not be flexible and adaptive.
Generally, the less invasive the activities
are, and the more they allow a parallel use
of the same POB by other persons, the lower
are the requirements under the control test.
There are, however, a number of traditional
PEs which by their nature require an
exclusive use of the POB by only one taxpayer
and/or his personnel. A small workshop (cf.
Article 5(2)(e) OECD and UN MC) of 10 or 12
square meters can hardly be used by more than
one person. The same holds true for a room
where the taxpayer runs a noisy machine.”
JUDGMENT
33) OECD commentary on Model Tax Convention mentions that
a general definition of the term ‘PE’ brings out its
Page 40
essential characteristics, i.e. a distinct “situs” , a
“fixed place of business” . This definition,
therefore, contains the following conditions:
- the existence of a “place of business”, i.e.
a facility such as premises or, in certain
instances, machinery or equipment.
-
this place of business must be “fixed”, i.e.
it must be established at a distinct place
with a certain degree of permanence;
- the carrying on of the business of the
enterprise through this fixed place of
business. This means usually that persons
who, in one way or another, are dependent on
the enterprise (personnel) conduct the
business of the enterprise in the State in
which the fixed place is situated.
34) The term “place of business” is explained as covering
any premises, facilities or installations used for
JUDGMENT
carrying on the business of the enterprise whether or
not they are used exclusively for that purpose. It
is clarified that a place of business may also exist
where no premises are available or required for
carrying on the business of the enterprise and it
simply has a certain amount of space at its disposal.
Further, it is immaterial whether the premises,
facilities or installations are owned or rented by or
Page 41
are otherwise at the disposal of the enterprise. A
certain amount of space at the disposal of the
enterprise which is used for business activities is
sufficient to constitute a place of business. No
formal legal right to use that place is required.
Thus, where an enterprise illegally occupies a
certain location where it carries on its business,
that would also constitute a PE. Some of the
examples where premises are treated at the disposal
of the enterprise and, therefore, constitute PE are:
a place of business may thus be constituted by a
pitch in a market place, or by a certain permanently
used area in a customs depot (e.g. for the storage of
dutiable goods). Again the place of business may be
situated in the business facilities of another
JUDGMENT
enterprise. This may be the case for instance where
the foreign enterprise has at its constant disposal
certain premises or a part thereof owned by the other
enterprise. At the same time, it is also clarified
that the mere presence of an enterprise at a
particular location does not necessarily mean that
the location is at the disposal of that enterprise.
Page 42
35) The OECD commentary gives as many as four examples
where location will not be treated at the disposal of
the enterprise. These are:
(a) The first example is that of a salesman who
regularly visits a major customer to take orders
and meets the purchasing director in his office
to do so. In that case, the customer's premises
are not at the disposal of the enterprise for
which the salesman is working and therefore do
not constitute a fixed place of business through
which the business of that enterprise is carried
on (depending on the circumstances, however,
paragraph 5 could apply to deem a permanent
establishment to exist).
JUDGMENT
(b)
Second example is that of an employee of a
company who, for a long period of time, is
allowed to use an office in the headquarters of
another company (e.g. a newly acquired
subsidiary) in order to ensure that the latter
company complies with its obligations under
contracts concluded with the former company. In
that case, the employee is carrying on activities
Page 43
related to the business of the former company and
the office that is at his disposal at the
headquarters of the other company will constitute
a permanent establishment of his employer,
provided that the office is at his disposal for a
sufficiently long period of time so as to
constitute a "fixed place of business" (see
paragraphs 6 to 6.3) and that the activities that
are performed there go beyond the activities
referred to in paragraph 4 of the Article.
(c)
The third example is that of a road
transportation enterprise which would use a
delivery dock at a customer's warehouse every day
for a number of years for the purpose of
delivering goods purchased by that customer. In
JUDGMENT
that case, the presence of the road
transportation enterprise at the delivery dock
would be so limited that that enterprise could
not consider that place as being at its disposal
so as to constitute a permanent establishment of
that enterprise.
(d)
Fourth example is that of a painter, who, for two
years, spends three days a week in the large
Page 44
office building of its main client. In that case,
the presence of the painter in that office
building where he is performing the most
important functions of his business (i.e.
painting) constitute a permanent establishment of
that painter.
36) It also states that the words ‘through which’ must be
given a wide meaning so as to apply to any situation
where business activities are carried on at a
particular location which is at the disposal of the
enterprise for that purpose. For this reason, an
enterprise engaged in paving a road will be
considered to be carrying on its business ‘through’
the location where this activity takes place.
JUDGMENT
THE AGREEMENTS
37) 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
Page 45
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 Jaypee.
38)
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
2009.
JUDGMENT
39)
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
Page 46
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 Circuit. Salient features of this
Agreement, which is the most vital document, are as
follows:
JUDGMENT
"WHEREAS
(A) The Federation Internationale de
l’Automobile (FIA) is the governing body of
world motor sport. The FIA is responsible for
the sporting organization and regulation of
the FIA Formula One World Championship (the
Championship), and has the right to supervise
the sporting organization of individual
rounds of the Championship
(B) Pursuant to various agreements between
the FIA, POWC and its Affiliates (as defined
in Clause I(p) etc. FOWC has the exclusive
right to exploit the commercial rights in the
Championship, including the exclusive right
Page 47
to propose the Championship calendar and to
award, to promoters the right to host, stage
and promote Formula One Grand Prix events
that count towards the Championship,
exclusive media rights (including all use of
audio-visual material and data in the media
space).
(C) FOWC has the exclusive right to enter
into contracts solely for the hosting,
standing and promotion of Formula One Grand
Prix events entered on the FIA International
Sporting Calendar and counting towards the
Championship, it being understood that such a
contract will govern exclusively the
commercial and financial management of the
Event (as defined in Clause 3.1 (xx not
legible)).
(D) The Promoter is the owner of a motor
racing circuit in the National Capital Region
of India which is capable of hosting various
motor racing events. The Promoter wishes to
host various motor racing events at such
circuit, to include the hosting of Formula
One Grand Prix events. The Promoter had
secured the privilege to host such events and
is no executing this agreement with FOWC to
set out the terms and conditions on which it
will host, stage and promote Formula One
Grand Prix events at such circuit.
JUDGMENT
XXXXXX XXXXXX XXXXXX
Definitions and Interpretation
1. In this Agreement unless the context
requires otherwise:
XXXXXX XXXXXX XXXXXX
(q) Circuit shall mean a motor racing circuit
suitable in every respect for the staging of
the Event (including permanent buildings,
permanent infrastructure, track layout,
amenities, spectator viewing facilities, the
pit/paddock, building, media centre, car
parks, helipads, garages, race control and
Page 48
administration, office administration, fuel
and tyre storage, utilities (including back
up power supplies), concrete based areas
suitable to host the Competitors and
sponsors, vending and exhibition areas,
international TV compounds, host and
broadcast facilities and medical centre);
XXXXXX XXXXXX XXXXXX
(t) Event shall mean the FORMULA 1 GRAND PRIX
OF INDIA (including all support events
therein and peripheral entertainment),
designated and endorsed as a round of the FIA
Formula One World Championship, which shall
commence at the Circuit at the time scheduled
by the FIA for Scrutinizing and Sporting
Checks and including all Practice and the
Race itself and ending at the later of the
time for the lodging of a Protest under the
terms of the Sporting Code and the time when
a technical or sporting verification has been
carried out under the terms of the Sporting
Code; and
XXXXXX XXXXXX XXXXXX
Conditions Precedent
2.1 The grant of rights by FOWC to the
Promoter under this Agreement is conditional
on the Conditions having been fulfilled or
waived in accordance with this Agreement and
the Promoter shall use its best endeavour to
satisfy the Conditions in accordance with
this Clause 2.
JUDGMENT
XXXXXX XXXXXX XXXXXX
Term
3.1 This Agreement shall commence and become
operative when it is signed by the parties
and dated.
3.2 Subject to Clause 2 the rights granted to
the Promoter under this Agreement shall be
exercisable from the Unconditional Date.
Page 49
Accordingly, the initial term of this
Agreement (the Initial Term) shall begin on
the Unconditional Date and shall expire on 31
December 2015 and shall apply to the
Championship for the calendar years 2011 to
2015 (inclusive).
3.3 On or before 30 June 2015, FOWC shall in
its absolute discretion be entitled to give
notice to the Promoter which, if given, shall
be effective to extend the Term for a further
period of up to five calendar years (the
Extended Term ). The terms of this Agreement
shall apply to the Extended Term save for
this Clause 3.3.
3.4 The term of this Agreement as prescribed
in this Clause 3 shall be referred to as the
Term and shall include the initial Term and
(if applicable) the Extended Term.
3.5 Subject to the performance by FOWC of its
obligations contained in Clause 4, the
Promoter agrees to host, stage and promote
the Event as the FORMULA 1 GRAND PRIX OF
INDIA or [Year] GRAND PRIX OF INDIA in
accordance with this Agreement once in every
calendar year of the Term commencing 2011 at
the Circuit on the date approved and
announced by the FIA on and subject to the
terms of the Regulations and the Sporting
Code.
JUDGMENT
FOWC’s Obligations and Warranties
XXXXXX XXXXXX XXXXXX
Promoter’s Warranties
(e) On the area of land, the outer perimeter
of which is edged in red, depicted on the
document attached to this Agreement as the
Annex and initialed by the Parties for
identification, the Circuit shall be
constructed, laid out and prepared in
accordance with this Agreement, in a form and
manner approved by both FOWC and the FIA,
meeting all requirements of the Regulations
Page 50
(including as to timing of inspections) and
completed in good time for final inspection
by the FIA not later than 12 October 2011;
XXXXXX XXXXXX XXXXXX
Access to Circuit Prior to Event
11. The Promoter shall take whatever action
is necessary to ensure that the pit and
paddock buildings and surrounding areas
within Circuit and the Land are open to
receive the competitors, FOWC, Affiliates of
FOWC, FOWC’s contractors and licensees and
their respective personnel and equipment (if
any) at all times during the period
commencing fourteen days before the day of
the race and ending seven days after the Race
(the Access Period) and the security of the
paddock and garage area is properly
safeguarded at all times during the Access
Period.
XXXXXX XXXXXX XXXXXX
Competitor/Media Facilities
13.1 The Promoter will in so far as the same
is practicable provide an entrance for the
Competitor personnel and for Officials
separate from the public entrance to the
Circuit.
JUDGMENT
13.2 The Promoter will provide free of charge
a zone measuring whichever is the greater of
that which has last been provided in respect
of a round of the FIA Formula One World
Championship at that Circuit and 140 metres
by 100 metres or 15,0000 square metres within
or adjoining the paddock for the promotional
facilities of the Competitors and/or their
sponsors.
13.3 The Promoter undertakes to set up a
media compound and telephones and facsimile
equipment, Press Room plus the installations
and premises necessary for national and
Page 51
international television commentators and
journalists (such premises and installations
to meet the prestige of a World Championship)
and to grant professional accredited
journalists use of all facilities for the
exercise of their profession as well as the
organization of a Press Conference with the
winner of the Race immediately after the
Podium Ceremony.
13.4 Upon the arrival of the Formula One cars
and their spares and ancillary equipment at
nearest suitable International airport (as
such is determined by FOWC) (the Landing) the
Promoter will transport them free of charge
from the Landing to the Circuit and from the
Circuit back to the Landing. The Promoter
shall procure that transportation from the
Circuit to the Landing shall take place on
the day following the Race. All ancillary
costs including airport taxes customs
clearance handling, loading and unloading
both at the Landing and at the Circuit shall
be paid by the Promoter. The Parties agree to
liaise with each other throughout the Term
with a view to discussing and implementing
all reasonable measures which may reduce such
ancillary cots.
13.5 The Promoter undertakes to provide all
such other facilities as specified in the
Circuit General Specifications Manual.
JUDGMENT
Access to Restricted Areas
14. The Promoter undertakes to ensure that:
(a) only Passes and tabards issued by FOWC
under the authorization of the FIA will
authorize access to parts of the Circuit not
open to the paying public;
(b) notwithstanding Clause 14(a) above, the
public do not have access to the cars in any
of the places where any Competitor’s
mechanics may be called upon to work on them
and without prejudice to the generality of
the foregoing there is at no time any
Page 52
obstruction to the free passage of the cars
and Competitor personnel in the paddock or
pit area;
(c) the validity of any Passes and tabards
issued by FOWC under the authorization of the
FIA is upheld; and
(d) the necessary steps are taken to ensure
that all police and Circuit officials are
familiar with the Passes and tabards and
uphold their validity.
Insurance
15.1 The Promoter shall provide at its
expense third party liability insurance (in a
form approved by FOWC and the FIA insuring
FOWC and all its Affiliates, Beta Prema 2
Limited and all its Affiliates, the
Competitors, Drivers and guests of any of the
above mentioned parties (such parties to
include where relevant all directors,
officers, employees, agents and contractors)
and such other persons involved in the
organization of the Event (including
officials, marshals, rescue and medical
staff) as the FIA or FOWC may from time to
time advise the Promoter (the Insured
Parties) against all risks (including death
of or bodily or mental injury to any person)
relating to (i) the event (ii) support races
and (iii) peripheral entertainment organized
as part of the Event, for the Access Period.
If such insurance is not permitted under the
law of the country in which the Event takes
place or the FIA is satisfied that such
insurance is not commercially viable then the
insurance shall be the maximum permitted by
that law or the market conditions. The
insurers must be a company recognized by
Standard and Poor’s and/or AM. Best and must
be of first class international standing with
sufficient resources to honour and discharge
in full the insurance requirements prescribed
in this agreement. A copy of the relevant
policy will be given to FOWC by the Promoter
at least 60 days before the start of the
JUDGMENT
Page 53
first practice session (with the exception of
the year 2011, when such copy will be given
to FOWC at least 30 days before the start of
the first Practice session of the Event in
2011). If the language of the relevant policy
is in a language other than English, FOWC
shall obtain a translation of the policy at
the expense of the Promoter.
XXXXXX XXXXXX XXXXXX
Filming/Recording at the Event
18.1 Save with the prior written consent of
the FOWC and save for the Promoter’s
obligation in Clause 18.3, throughout the
Term during the Access Period (and any test
session held at the Circuit in which more
than one Competitor is participating
(Non-Private F1 Test Series) the
Promoter shall not (nor shall the Promoter
permit, enable, assist, procure or encourage
others to) make, create, store, record or
transmit an kind of sound recording or visual
or audio-visual footage (Recording)
whatsoever, whether for broadcast or any
other purpose.
(a) of at or pertaining to the Event
(including cars, Drivers, Competitors), any
Non-Private F1 Test Session or any aspect of
them; or
JUDGMENT
(b) within the confines of the Circuit or the
Land (or any other part of its surroundings
over which the Promoter has control).
18.2 Without prejudice to the generality of
Clause 18.1, the Promoter shall ensure that
the terms of sale of tickets giving
admittance to an Event include acceptance by
a ticket holder:
(a) that he shall not make, create, store,
record or transmit any Recording of the Event
(including cars, Drivers, Competitors) or any
aspect of it, and shall not take into the
Circuit any equipment that may enable him to
Page 54
do the aforementioned acts (other than mobile
telephones use of which is subject to this
Clause 18 and Clause 19.1 below);
(b) that as a spectator he may be filmed and
sound made by him may be recorded for
broadcast (or similar transmission); and
(c) of such other terms and conditions as
FOWC(acting reasonably) may request the
Promoter to include from time to time
provided that the Promoter is notified in due
time and that such terms and conditions are
compatible with applicable local laws.
18.3 The Promoter shall engage a third party
(the Identity of which shall be approved by
FOWC in its sole discretion) to carry out and
perform on behalf of the Promoter all
services relating to the origination of the
international television feed and host
broadcasting for each Event during the Term
as are specified in guidelines published
annually by FOWC and provided to the Promoter
from time to time.
Intellectual Property
XXXXXX XXXXXX XXXXXX
19.2 The Promoter hereby irrevocably and
unconditionally:-
JUDGMENT
(a) assigns to FOWC with full title guarantee
all copyright and other intellectual property
rights and all other rights, titles and
interests (if any) which it may now or in the
future have in any Image or Recording or any
other representation or recording in any
media whether now known or hereafter invented
or developed in, of or pertaining to the
Event, any NonPrivate F1 Test Session or any
aspect of them (irrespective of who
originated the same)for the duration of those
rights (including all renewals, extensions,
reversions and revivals thereof); and
(b) gives its consent (if such consent should
Page 55
be required) for FOWC to deal in such rights
in any way it may see fit.
Accreditation for Filming/recording
20.1 The Promoter shall ensure that persons
accredited and authorized by FOWC are
permitted to enter upon the Circuit to make
sound, television or other recordings or
transmissions or to make films or other
moving picture and use the facilities
throughout the Access Period and the Promoter
shall accord all such persons the help and
facilities that they or FOWC may reasonably
require for such purposes, including
assistance with obtaining any necessary
consents, permissions or authorizations with
any local authority.
20.2 The Promoter undertakes to Notify FOWC
of the dates of any test sessions which are
proposed to be held at the Circuit.
Circuit Advertising
21. The Promoter shall not cause, permit,
enable, assist, procure or encourage the
display of any advertising (other than the
advertising normally displayed on any
Competitor’s cars, Drivers or personnel) or
other displays on, near or which can be seen
from the Circuit and/or the Land which might
(in the opinion of FOWC which shall be final
and binding upon the Parties) Prevent the
lawful transmission of Images or Recordings
of the Events or any part of it in any
country."
JUDGMENT
JUDGMENT OF THE HIGH COURT
40)
Taking note of this agreement, the High Court went
ahead to decide the following aspects, which revolved
around the question of PE:
Page 56
(a) Whether FOWC had control over the Buddh
International Circuit and that the circuit could
be constituted as a fixed place of business?
(b)
Whether FOWC carried on business? IF so, they
did carry on business and commercial activity in
India.
(c)
Whether FOWC carried on business through its
agents under Article 5(4) or Article 5(5) of the
DTAA?
41) Answering the first question, the High Court
discerned that for the duration of the event as well
as two weeks prior to it and a week succeeding it,
FOWC had full access through its personnel, the team
contracted to it, both racing as well as spectator
JUDGMENT
teams to the said Buddh International Circuit. It
could also dictate who was authorised to enter the
areas reserved for it. As per the High Court, though
Jaypee was designated as the promoter or the host of
the event in terms of RPC, when the matter was to be
examined in a correct perspective by seeking through
the other terms contained in the agreement as well as
terms of agreements between JP and Allsports, Beta
Page 57
Prema 2 as well as FOA, it was clear that Jaypee’s
capacity to act was extremely restricted. At all
material times, FOWC had exclusive access to the
circuit and all the places where the teams were
located. The High Court was also conscious of the
fact that such an access or right to access was not
permanent in the sense of its being everlasting.
However, having regard to the model of commercial
transactions, such an access for a period up to six
weeks at a time during the F-1 Championship season
was sufficient for the purposes of Article 5(1) of
DTAA. Further, as the tenure of RPC was five years,
it meant that such an access for the period in
question was of repetitive nature. Moreover, FOWC
was entitled to two years payment of the assured
JUDGMENT
consideration of US$ 40 million in the event of
termination of RPC.
42)
While discussing the second question, the High Court
took note of agreement between FIA and FOWC under
which FOWC became CRH. It also pointed out that the
Concorde Agreement assured the participating teams
that the FIA had exclusive rights in the F-1
Page 58
Championship and was entitled to the grant of CRH,
the exclusive right to exploit the commercial rights
in the F-1 Championship. Subject to these
conditions, each team undertook to participate in the
FIA F-1 Championship each year for several events and
make cars available. In fact, every team undertook
to participate in each event with two cars. Taking
note of the aforesaid arrangement and other clauses
of these agreements, the High Court concluded that
FOWC carried on business in India within the meaning
of expression under Article 5(1) of the DTAA.
43)
The High Court was conscious of the fact that after
its finding to the effect that FOWC had PE in India,
the issue as to whether FOWC carried on business
JUDGMENT
through its agents or not, became academic.
Notwithstanding the same, it chose to discuss that
issue as well so that the judgment had the coverage
of all the questions that had arisen before it. This
aspect has been discussed in the light of
sub-articles (4) and (5) of Article 5 of DTAA. It is
pertinent to mention that argument of the Revenue was
that since FOWC had to exploit commercial rights
Page 59
arising from races and this business is carried on
through exploitation of these commercial rights
either by itself or through anyone or more members of
CRH group, as mentioned in the Conorde Agreement,
FOWC is obliged to propose consolidated accounts
incorporating profits of all entities forming part of
CRH group. The Revenue had relied on the Events
right from the time when commercial rights were
originally owned by FIA and thereafter transferred to
SLEC Holding Company (parent company of FOWC) for a
consideration, then given to FOAM and with effect
from January 01, 2011 transferred to FOWC. It was
also pointed out that FOWC’s three affiliates, i.e.
Formula One Management Ltd. (‘FOM’), Allsports
Management SA and Beta Prema 2 Ltd. were its agents
JUDGMENT
who carried on its business and on its behalf,
through the fixed place.
AAR had rejected this submission of the Revenue
holding that the theory of Revenue that all the three
entities were acting on behalf of FOWC was unfounded
as there was no evidence to this effect and all
arrangements and agreements in relation to activities
performed by three entities were sham. The High
Page 60
Court approved the aforesaid approach of AAR in the
following manner:
“64. Article 5(5) has certain preconditions
if an entity has to be treated as dependent
agent. The agent must have the authority to
conclude contracts, which bind the
represented enterprise, and it must
habitually exercise such authority. If these
positive preconditions are met, then only an
enterprise shall be deemed to have a PE in
that state in respect of any activities,
which that person undertakes for the
enterprise. The contention that because the
three entities were subsidiaries of FOWC,
they acted on its behalf and thus become
dependent agents is insubstantial. The mere
circumstance that the three subsidiaries had
a connection with FOWC was not enough; what
is to be shown is that the contracts they
entered into and the businesses they were
engaged in, was for and on behalf of FOWC.
Each of the three agreements independently
entered into by them with Jaypee contains no
pointers to this fact.”
THE ARGUMENTS
44)
Mr. Ganesh, opened the case of FOWC, whereafter M/s.
JUDGMENT
Arvind P. Datar and Dushant Dave, learned senior
advocates, made their submissions on behalf of
Jaypee. Mr. Mukul Rohatgi, learned Attorney General
for India, argued on behalf of the Revenue and
countered those submissions. He also argued the
appeal of Union of India insofar as it challenges the
findings of the High Court interpreting Article 5(4)
and (5) and holding that the other companies of FOWC
Page 61
group did not act as agents of FOWC in India. M/s.
S. Ganesh and Arvind P. Datar made their submissions
in rejoinder and also refuted the arguments of Mr.
Mukul Rohatgi advanced in the appeal of Union of
India, to which Mr. Rohatgi made his submissions in
rejoinder.
45) After referring to the important dates and events,
Article 5 of DTAA and the commentaries of OECD,
Philip Baker and Klaus Vogel thereon, salient
features whereof have already been reproduced by us,
emphasis in the submission of Mr. Ganesh was that in
order to constitute a PE, condition which was
necessary to satisfy was that the particular ‘fixed
place’ is ‘at the disposal’ of FOWC and further that
JUDGMENT
from the said ‘fixed place’ FOWC was doing its
business activity. Submission of Mr. Ganesh was that
both the ingredients were missing in the instant
case. For this purpose, he referred to the agreement
of 2009 which was entered into between FIA and Jaypee
and pointed out that FOWC was not party to the said
agreement and contended that this agreement clearly
evinced that it is the FIA which had control over the
Page 62
manner in which the Championship was to be conducted.
This agreement further reflected that it is Jaypee
who was responsible for conducting races and had
complete control of the Event in question. All
obligations for conduct of the Championship were to
be discharged by Jaypee as organisers. For this
purpose, he referred to the counter affidavit filed
by Jaypee in SLP(Civil) No. 3112 of 2017 wherein the
role of Jaypee in organising these Events is stated.
From there, it was pointed out that the track was
constructed by Jaypee; for this purpose they had
their own engineers, architects etc.; entire
expenditure for this purpose was borne by Jaypee. It
was also stated that this circuit was owned by Jaypee
and control thereon was that of Jaypee on which not
JUDGMENT
only Championship in question was organised, but
Jaypee was utilising this track for many other events
which are organised on regular basis, all year round.
46)
Mr. Ganesh also drew the attention of this Court to
Organisation Agreement dated January 20, 2011 signed
between FIA, Jaypee and Federation of Motors Sports
Clubs of India wherein Jaypee is described as the
Page 63
‘Organiser’ and given the responsibility to organise
the Event. It specifically delineates various
responsibilities of Jaypee as organisers which have
already been taken note of above. In nutshell, he
submitted that right from construction/laying down
the contract for the motor races people till the
conclusion of the Events/Championship, all acts and
obligations were to be performed by Jaypee, with no
role of FOWC therein. According to him, in contrast,
it could be seen from the Agreement dated September
13, 2011 between FOWC and Jaypee that FOWC had simply
given permission to host the Event as a round of the
Championship, since it is the FOWC, who has the
exclusive right to exploit the commercial rights in
the Championship, including exclusive right to
JUDGMENT
propose the Championship calendar. Condition
precedent from entering into this Agreement, as
mentioned in the Agreement itself, was that Jaypee
(as promoter) had entered into a valid and binding
agreement with such third party in accordance with
Clause 18.3 (Service Agreement). Referring to the
clause pertaining to obligations and warranties of
FOWC, Mr. Ganesh submitted that the role of FOWC was
Page 64
primarily that of advising, assisting and consulting
with the promoter in relation to the Event in such
manner as FOWC shall consider necessary and/or
appropriate for the staging and promotion of the
Event to the mutual benefit of the parties. On the
other hand, Jaypee was given exclusive right to act
as the promoter of the Event, to construct the
circuit which was to be laid out and prepared in
accordance with that agreement in a form and manner
approved both by FOWC and FIA. Thus, construction
was to be carried out by Jaypee; albeit, in the form
and the manner approved by FOWC and FIA to ensure
that the track meets all requirements of the
Regulations. Otherwise, all those rights which were
necessary for the purposes of hosting and staging the
JUDGMENT
Event at the circuit were that of Jaypee exclusively.
47)
On the basis of the aforesaid documents and clauses
and terms therein, Mr. Ganesh submitted that the
circuit was not under the control or at the disposal
of FOWC. As regards 4500 seats in paddock space
given to FOWC in that circuit is concerned,
explanation of Mr. Ganesh was that it is Allsports
Page 65
which was in-charge of paddock and the same was taken
from Allsports by FOWC in the year 2006 and,
therefore, it would not make any difference.
48)
His further submission was that no business was
conducted by the FOWC from the said site as well.
According to him, since FOWC was commercial rights
holder of these events, main business of FOWC was to
exploit these rights. including intellectual property
rights. According to him, the exploitation of these
commercial rights yields two revenue streams – first,
the consideration received from the
Promoter/Organizer of the Event, to whom FOWC has
granted the necessary right to host, stage and
promote the Event; secondly, FOWC exploits the TV
JUDGMENT
feed in respect of the Event, which is made available
to it by the Promoter/Organiser, at his cost. FOWC
grants screening, exhibition, telecasting and media
rights arising out of and relating to this TV feed to
a number of parties around the world, by entering
into contracts with them at London. It is for this
reason that insofar as holding of the Event is
concerned, FOWC was not responsible therefor and for
Page 66
this reason it was necessary for Jaypee as promoter
to enter into a valid and binding agreement with a
third party (FIA in the present case). He also
pointed out that insofar as sale of advertisement
rights during the Event is concerned that was also to
be given to Beta Prema 2 Ltd. which was again an
independent company and taken over by FOWC in the
year 2006.
49)
Mr. Ganesh, extensively referred to the findings of
AAR on this issue wherein the case of FOWC and Jaypee
on this aspect was accepted by AAR and pleaded that
the aforesaid findings be accepted and restored by
this Court. Referring to the judgment of the High
Court, his submission was that the Organisation
JUDGMENT
Agreement entered into between FIA and Jaypee was not
even discussed and the conclusions given in
paragraphs 52 and 53 of the said judgment were
erroneous. He also relied upon certain observations
of this Court in Union of India & Anr. Vs. Azadi
16
Bachao Andolan & Anr. in respect of his submission
that transactions could not be treated as sham.
2004 (10) SCC 1 = 2003 (262) ITR 706
Page 67
50) Mr. Datar, learned senior counsel appearing for
Jaypee, supplemented the aforesaid submissions of Mr.
Ganesh on the issue of the PE. He argued that the
judgment of the High Court was flawed in its approach
as it had gone by inductive logic instead of
deductive logic. According to him, the first
question which has to be focused upon was as to what
is the business of FOWC. His submission was that
since in this case business of FOWC was not to
organise these races, the question of its PE in
India, that too in the form of circuit where the race
is to be held, could not be PE of FOWC. He also
submitted that even after going through all the
clauses of the agreement between FOWC and Jaypee with
a toothcomb, it would be found that FOWC had no
JUDGMENT
physical control over the said circuit. In this
behalf, he emphasised the test laid down by Andhra
Pradesh High Court in Visakhapatnam Port Trust , which
is recognised by Philip Baker in his commentary. He
also argued that entire Formula One Event was a
temporary model for three days in a year only and
even if it is accepted that the FOWC had control over
this place for those three days, possession of the
Page 68
site for three days in a year cannot be termed as PE.
He also emphasised the fact that since FOWC was a UK
resident company, it had been paying taxes in its own
country. For a non-resident to pay taxes in other
country, as in India in the instant case, threshold
has to be very high and the issue of PE had to be
examined with this focus in mind. He submitted that
this was precisely the reason that such sports events
held in other countries are never taxed in those
countries.
51)
His alternate submission was that the agreement in
question was signed in UK under which consideration
of US$ 40 million was paid and, therefore, this
income accrued in UK. Thus, such income was taxable
JUDGMENT
in UK. He argued that insofar as rights to hold the
events are concerned they were granted in UK and it
is the grant of rights which was the determinative
test and implementation of those rights took place in
India. In support of this proposition, he relied on
the judgment of this Court in the case of
Commissioner of Income Tax, Andhra Pradesh v. M/s.
17
Toshoku Ltd., Guntur & Ors. where the law is
(1980) Supp SCC 614 = 1981 AIR 148
Page 69
discussed in the following manner:
| “12. The second aspect of the same question<br>is whether the commission amounts credited in<br>the books of the statutory agent can be<br>treated as incomes accrued, arisen, or deemed<br>to have accrued or arisen in India to the<br>non-resident assessees during the relevant<br>year. This takes us to Section 9 of the Act.<br>It is urged that the commission amounts<br>should be treated as incomes deemed to have<br>accrued or arisen in India as they, according<br>to the Department, had either accrued or<br>arisen through and from the business<br>connection in India that existed between the<br>non-resident assessees and the statutory<br>agent. This contention overlooks the effect<br>of clause (a) of the Explanation to clause<br>(i) of sub-section (1) of Section 9 of the<br>Act which provides that in the case of<br>business of which all the operations are not<br>carried out in India, the income of the<br>business deemed under that clause to accrue<br>or arise in India shall be only such part of<br>the income as is reasonably attributable to<br>the operations carried out in India. If all<br>such operations are carried out in India, the<br>entire income accruing therefrom shall be<br>deemed to have accrued in India. If, however,<br>all the operations are not carried out in the<br>taxable territories, the profits and gains of<br>JUDGMENT<br>business deemed to accrue in India through<br>and from business connection in India shall<br>be only such profits and gains as are<br>reasonably attributable to that part of the<br>operations carried out in the taxable<br>territories. If no operations of business are<br>carried out in the taxable territories, it<br>follows that the income accruing or arising<br>abroad through or from any business<br>connection in India cannot be deemed to<br>accrue or arise in India. [See CIT v. R.D.<br>Aggarwal & Co. [AIR 1965 SC 1526 : (1964) 1<br>SCR 234, 247 : 56 ITR 20] and Carborandum<br>Co. v. CIT[(1977) 2 SCC 862 : 1977 SCC (Tax)<br>391 : (1977) 3 SCR 475 : (1977) 108 ITR 335]<br>which are decided on the basis of Section 42<br>of the Indian Income Tax Act, 1922, which | | 12. | | | | The second aspect of the same question | | | | | | | | | | | | |
|---|
| is whether the commission amounts credited in | | | | | | | | | | | | | | | | | |
| the books of the statutory agent can be | | | | | | | | | | | | | | | | | |
| treated as incomes accrued, arisen, or deemed | | | | | | | | | | | | | | | | | |
| to have accrued or arisen in India to the | | | | | | | | | | | | | | | | | |
| non-resident assessees during the relevant | | | | | | | | | | | | | | | | | |
| year. This takes us to Section 9 of the Act. | | | | | | | | | | | | | | | | | |
| It is urged that the commission amounts | | | | | | | | | | | | | | | | | |
| should be treated as incomes deemed to have | | | | | | | | | | | | | | | | | |
| accrued or arisen in India as they, according | | | | | | | | | | | | | | | | | |
| to the Department, had either accrued or | | | | | | | | | | | | | | | | | |
| arisen through and from the business | | | | | | | | | | | | | | | | | |
| connection in India that existed between the | | | | | | | | | | | | | | | | | |
| non-resident assessees and the statutory | | | | | | | | | | | | | | | | | |
| agent. This contention overlooks the effect | | | | | | | | | | | | | | | | | |
| of clause ( | | | | | | | | | a | ) of the Explanation to clause | | | | | | | |
| ( | i | ) of sub-section (1) of Section 9 of the | | | | | | | | | | | | | | | |
| Act which provides that in the case of<br>business of which all the operations are not | | | | | | | | | | | | | | | | | |
| carried out in I | | | | | | | | | | | ndia, the income of the | | | | | | |
| business deemed un | | | | | | | | | | | der that clause to accrue | | | | | | |
| or arise in India | | | | | | | | | | | shall be only such part of | | | | | | |
| the income as is | | | | | | | | | | | reasonably attributable to | | | | | | |
| the operations car | | | | | | | | | | | ried out in India. If all | | | | | | |
| such operations ar | | | | | | | | | | | e carried out in India, the | | | | | | |
| entire income accruing therefrom shall be | | | | | | | | | | | | | | | | | |
| deemed to have accrued in India. If, however, | | | | | | | | | | | | | | | | | |
| all the operations are not carried out in the | | | | | | | | | | | | | | | | | |
| taxable territories, the profits and gains of | | | | | | | | | | | | | | | | | |
| JUDGMENT<br>business deemed to accrue in India through | | | | | | | | | | | | | | | | | |
| and from business connection in India shall | | | | | | | | | | | | | | | | | |
| be only such profits and gains as are | | | | | | | | | | | | | | | | | |
| reasonably attributable to that part of the | | | | | | | | | | | | | | | | | |
| operations carried out in the taxable | | | | | | | | | | | | | | | | | |
| territories. If no operations of business are | | | | | | | | | | | | | | | | | |
| carried out in the taxable territories, it | | | | | | | | | | | | | | | | | |
| follows that the income accruing or arising | | | | | | | | | | | | | | | | | |
| abroad through or from any business | | | | | | | | | | | | | | | | | |
| connection in India cannot be deemed to | | | | | | | | | | | | | | | | | |
| accrue or arise in India. [See | | | | | | | | | | | | | CIT | | v. | | R.D. |
| Aggarwal & Co. [AI | | | | | | | | | | | R 1965 SC 1526 : (1964) 1 | | | | | | |
| SCR 234, 247 : 56 ITR 20] and | | | | | | | | | | | | | Carborandum | | | | |
| Co. | | | | v. | | | CIT | [(1977) 2 SCC 862 : 1977 SCC (Tax) | | | | | | | | | |
| 391 : (1977) 3 SCR 475 : (1977) 108 ITR 335] | | | | | | | | | | | | | | | | | |
| which are decided on the basis of Section 42 | | | | | | | | | | | | | | | | | |
| of the Indian Income Tax Act, 1922, which | | | | | | | | | | | | | | | | | |
Page 70
| corresponds to Section 9(1)( | i | ) of the Act.]” |
|---|
52)
Another submission of Mr. Ganesh was that the High
Court did not have jurisdiction, in exercise of its
powers under Article 226 of the Constitution, to go
into the 'findings' of AAR on the issue of ‘fixed
place’ . He argued that under Article 226 of the
Constitution, the High Court exercised Certiorari
jurisdiction and in exercise of such a jurisdiction,
findings of facts recorded by the Tribunal, which are
the subject matter of judicial review, cannot be gone
into.
53)
Without prejudice to the aforesaid submissions, next
argument of Mr. Datar was that having regard to the
facts of this case, no interest should be held
JUDGMENT
payable under Section 201 of the Act. Referring to
the scheme of Chapter XXIX-B which pertains to
advance rulings, he submitted that the parties had
shown their bona fides in having the question raised
before the AAR, and it was specifically agreed to
between FOWC and Jaypee in Clause 24.6 of the
Agreement that the parties should approach AAR for
determination of the questions which were referred.
Page 71
He pointed out that once an application was made
before the AAR, procedure that is contained in
Section 245R, on receipt of such applications, had to
be followed by AAR and in that event Section 245 RR
mandates that no income tax authority or the
appellate tribunal shall proceed to decide any issue
in respect of which an application has been made by
the applicant, being a resident, under Section 245QQ
for advance ruling. Once advance ruling is
pronounced by AAR, it was binding on the applicant
who had sought the same in respect of a particular
transaction as well as on the Principal Commissioner
and Commissioner of Income Tax Authorities
subordinate to him. According to him, in such a
scenario, it should not be considered that Jaypee had
JUDGMENT
failed to deduct tax at source from the amounts paid
to FOWC and as a consequence of failure to deduct, it
should be fastened with the liability to pay interest
under Section 201. In support, paragraph 12 of GE
India Technology Centre Private Limited v.
18
Commissioner of Income Tax & Anr. was pressed into
service which reads as follows:
(2010) 10 SCC 29
Page 72
| “12. Reference to ITO(TDS) under Section<br>195(2) or Section 195(3) either by the<br>non-resident or by the resident payer is to<br>avoid any future hassles for both the<br>resident as well as the non-resident. In our<br>view, Sections 195(2) and 195(3) are<br>safeguards. The said provisions are of<br>practical importance. This reasoning of ours<br>is based on the decision of this Court<br>in Transmission Corpn. [(1999) 7 SCC 266 :<br>(1999) 239 ITR 587] in which this Court has<br>observed that the provision of Section 195(2)<br>is a safeguard. From this it follows that<br>where a person responsible for deduction is<br>fairly certain then he can make his own<br>determination as to whether the tax was<br>deductible at source and, if so, what should<br>be the amount thereof.”<br>Last submission of Mr. Datar was that in any cas<br>was yet to be determined as to how much of US<br>million fee paid by Jaypee to FOWC could<br>attributed to PE, inasmuch as it is only that po | | 12. | | | | Reference to ITO(TDS) under Section | |
|---|
| 195(2) or Section 195(3) either by the | | | | | | |
| non-resident or by the resident payer is to | | | | | | |
| avoid any future hassles for both the | | | | | | |
| resident as well as the non-resident. In our | | | | | | |
| view, Sections 195(2) and 195(3) are | | | | | | |
| safeguards. The said provisions are of | | | | | | |
| practical importance. This reasoning of ours | | | | | | |
| is based on the decision of this Court | | | | | | |
| in | | | Transmission Co | | | rpn. [(1999) 7 SCC 266 : |
| (1999) 239 ITR 587] in which this Court has | | | | | | |
| observed that the provision of Section 195(2) | | | | | | |
| is a safeguard. From this it follows that | | | | | | |
| where a person responsible for deduction is | | | | | | |
| fairly certain then he can make his own | | | | | | |
| determination as to whether the tax was | | | | | | |
| deductible at source and, if so, what should | | | | | | |
| be the amount thereof.” | | | | | | |
of income that is relatable to PE which is liable for
JUDGMENT
tax in India. This has not happened so far.
55)
Mr. Dushant Dave, learned senior counsel, again
appearing for Jaypee, made an additional submission
to the effect that international treaties which are
signed between the two sovereign countries have to be
given adequate and due respect which they command.
He exhorted the Court to keep this fundamental
principle in mind while interpreting clause 5 of DTAA
Page 73
and submitted that such an approach has been
commanded by this Court time and again. By way of
example, he cited the judgements in the cases of
Azadi Bachao Andolan and Maganbhai Ishwarbhai Patel
19
Etc. v. Union of India and Another . He also
referred to paragraph 6 of the UK judgment in the
case of Sepet v. Secretary of State for the Home
20
Department wherein it was pressed that single
autonomous meaning was required to be given to the
treaties which are living instruments whose meaning
does not change over time but application will.
56)
From Azadi Bachao Andolan following passages were
relied upon:
| “ | 17. Every country seeks to tax the income |
|---|
| generated within its territory on the basis | |
| JUDGMENT<br>of one or more connecting factors such as | |
| location of the source, residence of the | |
| taxable entity, maintenance of a permanent | |
| establishment, and so on. A country might | |
| choose to emphasise one or the other of the | |
| aforesaid factors for exercising fiscal | |
| jurisdiction to tax the entity. Depending on | |
| which of the factors is considered to be the | |
| connecting factor in different countries, the | |
| same income of the same entity might become | |
| liable to taxation in different countries. | |
| This would give rise to harsh consequences | |
| and impair economic development. In order to | |
| avoid such an anomalous and incongruous | |
| situation, the Governments of different | |
1970 (3) SCC 400
2003 (3) AllER 304
Page 74
| countries enter into bilateral treaties, | |
|---|
| conventions or agreements for granting relief | |
| against double taxation. Such treaties, | |
| conventions or agreements are called Double | |
| Taxation Avoidance Treaties, Conventions or | |
| Agreements. | |
130. The principles adopted in
interpretation of treaties are not the same
as those in interpretation of a statutory
legislation. While commenting on the
interpretation of a treaty imported into a
municipal law, Francis Bennion observes:
“With indirect enactment, instead of
the substantive legislation taking the
well-known form of an Act of
Parliament, it has the form of a
treaty. In other words, the form and
language found suitable for embodying
an international agreement become, at
the stroke of a pen, also the form and
language of a municipal legislative
instrument. It is rather like saying
that, by Act of Parliament, a woman
shall be a man. Inconveniences may
ensue. One inconvenience is that the
interpreter is likely to be required
to cope with disorganised composition
instead of precision drafting. The
drafting of treaties is notoriously
sloppy usually for a very good reason.
To get agreement, politic uncertainty
is called for.
JUDGMENT
… The interpretation of a treaty
imported into municipal law by
indirect enactment was described by
Lord Wilberforce as being
‘unconstrained by technical rules of
English law, or by English legal
precedent, but conducted on broad
principles of general acceptation.
This echoes the optimistic dictum of
Lord Widgery, C.J. that the words ‘are
to be given their general meaning,
Page 75
general to lawyer and layman alike …
the meaning of the diplomat rather
than the lawyer’. [Francis Bennion:
Statutory Interpretation, p. 461
[Butterworths, 1992 (2nd Edn.)].]”
131. An important principle which needs to be
kept in mind in the interpretation of the
provisions of an international treaty,
including one for double taxation relief, is
that treaties are negotiated and entered into
at a political level and have several
considerations as their bases. Commenting on
this aspect of the matter, David R. Davis
in Principles of International Double
Taxation Relief [David R. Davis: Principles
of International Double Taxation Relief, p. 4
(London, Sweet & Maxwell, 1985)], points out
that the main function of a Double Taxation
Avoidance Treaty should be seen in the
context of aiding commercial relations
between treaty partners and as being
essentially a bargain between two treaty
countries as to the division of tax revenues
between them in respect of income falling to
be taxed in both jurisdictions. It is
observed (vide paragraph 1.06):
“The benefits and detriments of a
double tax treaty will probably only
be truly reciprocal where the flow of
trade and investment between treaty
partners is generally in balance.
Where this is not the case, the
benefits of the treaty may be weighed
more in favour of one treaty partner
than the other, even though the
provisions of the treaty are expressed
in reciprocal terms. This has been
identified as occurring in relation to
tax treaties between developed and
developing countries, where the flow
of trade and investment is largely
one-way.
JUDGMENT
Because treaty negotiations are
Page 76
largely a bargaining process with each
side seeking concessions from the
other, the final agreement will often
represent a number of compromises, and
it may be uncertain as to whether a
full and sufficient quid pro quo is
obtained by both sides.”
| “Apart from the allocation of tax<br>between the treaty partners, tax<br>treaties can also help to resolve<br>problems and can obtain benefits which<br>cannot be achieved unilaterally.”<br>xx xx xx<br>134. Developing countries need foreign<br>investments, and the treaty-shopping<br>opportunities can be an additional factor to<br>attract them. The use of Cyprus as a treaty<br>haven has helped capital inflows into eastern<br>Europe. Madeira (Portugal) is attractive for<br>investments into the European Union.<br>Singapore is developing itself as a base for<br>investments in South-East Asia and China.<br>Mauritius today provides a suitable treaty<br>conduit for South Asia and South Africa. In<br>recent years, India has been the beneficiary<br>of significant foreign funds through the<br>JUDGMENT<br>“Mauritius conduit”. Although Indian economic<br>reforms since 1991 permitted such capital<br>transfers, the amount would have been much<br>lower without the India-Mauritius Tax Treaty | | | | | |
| 134. | | Developing countries need foreign | | |
| investments, and the treaty-shopping<br>opportunities can be an additional factor to | | | | |
| attract them. The | | | use of Cyprus as a treaty | |
| haven has helped c | | | apital inflows into eastern | |
| Europe. Madeira (P | | | ortugal) is attractive for | |
| investments into<br>Singapore is devel | | | the European Union.<br>oping itself as a base for | |
| investments in So | | | uth-East Asia and China. | |
| Mauritius today provides a suitable treaty | | | | |
| conduit for South Asia and South Africa. In | | | | |
| recent years, India has been the beneficiary | | | | |
| of significant foreign funds through the | | | | |
| JUDGMENT<br>“Mauritius conduit”. Although Indian economic | | | | |
| reforms since 1991 permitted such capital | | | | |
| transfers, the amount would have been much | | | | |
| lower without the India-Mauritius Tax Treaty | | | | |
| 135. | Overall, countries need to take, and do | |
|---|
| take, a holistic view. Developing countries | | |
| allow treaty shopping to encourage capital | | |
| and technology inflows, which developed | | |
| countries are keen to provide to them. The | | |
| loss of tax revenues could be insignificant | | |
| compared to the other non-tax benefits to | | |
| their economy. Many of them do not appear to | | |
| be too concerned unless the revenue losses | | |
| are significant compared to the other tax and | | |
| non-tax benefits from the treaty, or the | | |
| treaty shopping leads to other tax abuses.” | | |
Page 77
57) Mr. Mukul Rohtagi, learned Attorney General, came out
with strong refutation to the aforesaid submissions.
Responding in an equally salubrious style, he
demonstrated the 'flow of commercial rights' in
relation to these events, under various agreements
executed between different stakeholders from time to
time and the manner in which such rights are
ultimately exploited by FOWC and its other group
companies in respect of the F-1 race organized in
India. For this purpose, he referred to eleven
agreements between different parties highlighting
certain features and aspects in the following manner:
Agreement between FIA and FOAM dated April 24, 2001
– FIA parts with commercial rights in favour of
FOAM. FOAM becomes the exclusive Commercial Rights
Holder (CRH).
JUDGMENT
Agreement between FOAM and FOWC dated April 24,
2001 – FOAM transfers the commercial rights in
favour of FOWC with effect from 2011 for a period
of 100 years.
RPC dated October 25, 2007 between FOWC and Jaypee:
(1) Building of the circuit was started in terms of
this RPC.
(2) FOWC was granted only the right to promote the
event (clause 4(1).
(3) FOM was declared the business manager and agent
of FOWC (Recital D).
(4) This agreement was signed by FOM on behalf of
FOWC.
Page 78
(5) No condition precedent clause obligating Jaypee
to enter into any agreements with FOWC group
entities.
(6)
No clause obligating Jaypee to enter into an
agreement with FOM for generation of television
feed.
(7)
Agreement in the same template as Schedule IV
to the Concorde Agreement.
Concorde Agreement (2009) between FIA, FOWC and
teams:
(1) FOWC becomes the exclusive CRH.
(2) FOWC could exploit the commercial rights
directly or through its affiliates only.
(3)
‘F1 business’ defined to mean exploitation of
various rights, including media rights,
hospitality rights, title sponsorship, etc.
(4) Revenue of FOWC and its affiliates to be taken
for distributing the prize money to the teams
under Schedule X
Organisation Agreement dated January 20, 2011
between FIA/FMSCI and Jaypee:
(1) Jaypee to organise the event.
(2) As of this date, Jaypee has entered into an
agreement with the CRH (Recital B).
(3) Template of the agreement contained in Schedule
VI of the Concorde Agreement.
Title Sponsorship Agreement dated August 16, 2011
between Beta Prema 2 and Bharti Airtel:
JUDGMENT
(1) Transfer of title sponsorship rights by Beta to
Bharti Airtel for US$ 8 million.
(2) This agreement is one month before the
agreement between Beta Prema 2 and Jaypee
through which Beta Prema 2 allegedly acquired
this right.
RPC dated September 13, 2011 between FOWC and
Jaypee:
(1) Agreement entered one month before the race.
(2) Fresh RPC entered without rescinding the RPC of
2007.
(3) Right to host, stage and promote the event
allegedly given to Jaypee by FOWC, unlike the
previous RPC which only gave the right to
promote.
Page 79
| (4) Conditions precedent binding Jaypee to transfer<br>the rights back to the affiliates of FOWC.<br>(5) Clause 18.3 binding Jaypee to engage FOM for<br>generating television feed introduced in this<br>RPC.<br>(6) Recital D of the previous RPC which declared<br>FOM the business manager and agent removed. | |
|---|
| |
| Agreements between JP and the three affiliates<br>(September 13, 2011)<br>(1) Agreements entered on the same day as RPC, i.e.<br>September 13, 2011.<br>(2) Rights allegedly given to Jaypee are<br>transferred back to the FOWC affiliates. Beta<br>Prema 2 acquires circuit rights (mainly media<br>and title sponsorship) and Allsports gets<br>paddock rights.<br>(3) FOM engaged to generation television feed.<br>(4) Agreement provides that all revenues from the<br>rights would flow to the affiliates and not<br>Jaypee (clause 11).<br>(5) Agreement provides that there does not exist an<br>agency relationship between the affiliates and<br>Jaypee (clause 26). | |
| |
| Service Agreement dated October 28, 2011 between<br>FOWC and FOM:<br>(1) Agreement entered into on October 28, 2011, on<br>the day of race.<br>(2) FOM engaged by FOWC to provide various services<br>– liaison and supervision of other parties at<br>JUDGMENT<br>the event, travel, transport and data support<br>services. | |
Director’s report of financial statements of FOWC
for the year 2011:
Defines the business of FOWC as ‘The company’s
principal activity during the year was the
organisation, management and administration of
motorsport conducted principally through the
exploitation of the commercial rights to the FIA
Formula One World Championship”.
58)
From the features described above, it was submitted
by the learned Attorney General that clear
Page 80
manifestation of the aforesaid agreements was that
FOWC and its subsidiaries had taken total control
over the event that took place in India which,
according to him, was to be kept in mind for proper
examination of the issues in their right perspective.
Mr. Rohtagi argued that Section 5(2)(b) of the Act,
which applies in the instant case, specifically
includes ‘income’ of a non-resident from ‘whatever
source derived’ , if this income accrues or arises or
is deemed to accrue or arise to him in India during
such year. Referring to Section 9 of the Act, which
specifies the circumstances under which income shall
be deemed to accrue or arise in India, he pointed out
that it covers all income, ‘whether directly or
indirectly’ , that accrues or arises, if it is through
JUDGMENT
or from any ‘business connection in India’ .
Therefore, if business connection is established,
then all incomes, whether earned directly or
indirectly, would come within the net of taxability
of such incomes in India. Referring to explanation
(2) to Section 9(1)(i), he laid stress on the
submission that ‘business connection’ shall include
any business activity ‘through’ a person who acts on
Page 81
behalf of the non-resident. The expression ‘through’
is clarified in explanation (4) thereof to mean and
include and shall be deemed to have always meant and
include ‘by means of’ , ‘in consequence of’ or ‘by
reason of’ . He submitted that these deeming
provisions are of very vide import and when the facts
of this case are examined keeping in view the
aforesaid provisions, the High Court rightly
concluded that FOWC had PE in India. He also
argued that Jaypee was only to host the event,
whereas total access at the time of construction as
well as at the time of event was that of FOWC.
According to him, at the most, it was in the nature
of Jaypee and FOWC as partners in the business.
JUDGMENT
59) Mr. Rohatgi also submitted that comparisons of first
Agreement of 2007 with the second Agreement dated
September 13, 2011 clearly demonstrates that the
second agreement was totally subterfuge to avoid
payment of tax in India. He pointed out that in the
Agreement dated October 25, 2007, FOWC was granted
only the right to 'promote' the event (Clause 4(1)),
whereas in the Agreement dated September 13, 2011,
Page 82
right to 'host, stage and promote' the event was
allegedly given to Jaypee by FOWC. According to him,
right to host and stage the event was conferred upon
Jaypee only on paper to give it a semblance as if
Jaypee was in real control of the affairs, which was
not actually so. Therefore, in any case, it would
not make any difference when in reality the rights of
hosting and staging the competition were with FOWC.
60)
Referring to the Agreement dated September 13, 2011
between Jaypee and three affiliates of FOWC, the
argument of Mr. Rohatgi was that the so-called rights
given to Jaypee were transferred back to FOWC
affiliates inasmuch as Beta Prema 2 acquired circuit
rights, mainly media and title sponsorship, whereas
JUDGMENT
Allsports was given paddock rights. His submission
was that business was carried from the circuit,
paddock, etc. and, therefore, it cannot be said that
no business activity was carried from this place. He
also pointed out how FOWC granted rights to FOAM to
provide various services in case FOWC had no control
over the race. It also showed physical management of
the business as well.
Page 83
61) Coming to the issue of dependent PEs, submission of
the learned Attorney General was that in view of the
flowchart depicting commercial rights with FOWC and
its affiliates, this issue was virtually an academic
issue once it is found that FOWC and its affiliates
are one conglomerate, the commercial rights of
different nature, viz. the CRH bouquet was with the
group companies under the control of same management
which exploited all these rights. These companies
had pooled all the profits and sharing thereof was in
the ratio of 50:50 between the teams and CRH
companies.
62)
As far as power of the High Court under Article 226
of the Constitution of India to go into the issue is
JUDGMENT
concerned, Mr. Rohatgi drew the attention of the
Court to its earlier judgment in Columbia Sportswear
21
Company v. Director of Income Tax, Bangalore wherein
this Court had impressed that from the rulings of AAR
the aggrieved person was required to approach the
High Court in the first instance. He, thus,
submitted that it was the first forum of judicial
(2012) 11 SCC 224
Page 84
review of the opinion given by the AAR and,
therefore, the High Court was very well within its
power to revisit the issue; albeit within the scope
of jurisdiction of Article 226 of the Constitution of
India, and decide the same. According to him, the
High Court had not exceeded its jurisdiction while
deciding the aforesaid issues in the writ petitions
filed by the appellants themselves.
63)
Refuting the arguments of Mr. Datar predicated on
Section 195 of the Act, Mr. Rohatgi referred to the
judgment of this Court in GE India Technology Centre
22
Private Limited v. Commissioner of Income Tax & Anr.
wherein following principle is laid down in paragraph
18:
| “18. | JUDGMENT<br>If the contention of the Department that |
|---|
| any person making payment to a non-resident | |
| is necessarily required to deduct TAS then | |
| the consequence would be that the Department | |
| would be entitled to appropriate the monies | |
| deposited by the payer even if the sum paid | |
| is not chargeable to tax because there is no | |
| provision in the IT Act by which a payer can | |
| obtain refund. Section 237 read with Section | |
| 199 implies that only the recipient of the | |
| sum i.e. the payee could seek a refund. It | |
| must therefore follow, if the Department is | |
| right, that the law requires tax to be | |
| deducted on all payments. The payer, | |
| therefore, has to deduct and pay tax, even if | |
| the so-called deduction comes out of his own | |
(2010) 10 SCC 29
Page 85
| pocket and he has no remedy whatsoever, even<br>where the sum paid by him is not a sum<br>chargeable under the Act. The interpretation<br>of the Department, therefore, not only<br>requires the words “chargeable under the<br>provisions of the Act” to be omitted, it also<br>leads to an absurd consequence. The<br>interpretation placed by the Department would<br>result in a situation where even when the<br>income has no territorial nexus with India or<br>is not chargeable in India, the Government<br>would nonetheless collect tax. In our view,<br>Section 195(2) provides a remedy by which a<br>person may seek a determination of the<br>“appropriate proportion of such sum so<br>chargeable” where a proportion of the sum so<br>chargeable is liable to tax.”<br>He, thus, submitted that if there was any breac<br>the said provision, the Income Tax Department<br>well within its right to charge interest a<br>impose penalty. | pocket and he has no remedy whatsoever, even |
|---|
| where the sum paid by him is not a sum |
| chargeable under the Act. The interpretation |
| of the Department, therefore, not only |
| requires the words “chargeable under the |
| provisions of the Act” to be omitted, it also |
| leads to an absurd consequence. The |
| interpretation placed by the Department would |
| result in a situation where even when the |
| income has no territorial nexus with India or |
| is not chargeable in India, the Government |
| would nonetheless collect tax. In our view, |
| Section 195(2) provides a remedy by which a |
| person may seek a determination of the |
| “appropriate proportion of such sum so |
| chargeable” where a proportion of the sum so |
| chargeable is liable to tax.” |
64)
In rejoinder, M/s. Ganesh and Datar gave their
JUDGMENT
answers to the aforesaid submissions, but it may not
be necessary to reproduce the same at this stage as
we would like to take note of the same while dealing
with the respective submissions.
ANALYSIS, FINDINGS & CONCLUSION
65)
We have pondered over the aforesaid submissions of
the learned counsel for the parties with all
seriousness and sincerity they deserve. We have also
Page 86
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 challenge.
66)
As per Article 5 of the DTAA, the PE has to be a
fixed place of business ‘through’ which business of
an enterprise is wholly or partly carried on. Some
examples of fixed place are given in Article 5(2), by
way of an inclusion. Article 5(3), on the other
hand, excludes certain places which would not be
JUDGMENT
treated as PE, i.e. what is mentioned in clauses (a)
to (f) as the ‘negative list’ . A combined reading of
sub-articles (1), (2) and (3) of Article 5 would
clearly show that only certain forms of establishment
are excluded as mentioned in Article 5(3), which
would not be PEs. Otherwise, sub-article (2) uses
the word ‘include’ which means that not only the
places specified therein are to be treated as PEs,
Page 87
the list of such PEs is not exhaustive. In order to
bring any other establishment which is not
specifically mentioned, the requirements laid down in
sub-article (1) are to be satisfied. Twin conditions
which need to be satisfied are: (i) existence of a
fixed place of business; and (b) through that place
business of an enterprise is wholly or partly carried
out.
67)
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?
JUDGMENT
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
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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 FOWC's role.
68) A mere running of the eye over the flowchart of these
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commercial rights, produced by the Revenue, bring
about the following material factors, evidently
discernible:
(i)
FIA had assigned commercial rights in favour of
FOAM vide agreement dated April 24, 2001 and on
the same day another agreement was signed between
FOAM and FOWC vide which these rights were
transferred to FOWC. Vide another agreement of
Page 89
2011, these rights stand transferred in favour of
FOWC for a period of 100 years. Vide Concorde
Agreement of 2009, FOWC is authorised to exploit
the commercial rights directly or through its
affiliates only. Significantly, this agreement
defines ‘F-1 Business’ to mean exploitation of
various rights, including media rights,
hospitality rights, title sponsorship, etc.
(ii) Armed with the aforesaid rights, FOWC signed
first agreement with Jaypee on October 25, 2007
whereby it granted right to promote the event to
Jaypee. This is replaced by RPC dated September
13, 2011. Under this agreement, right to host,
stage and promote the event are given by FOWC to
Jaypee for a consideration of US$ 40 million. On
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the same day, another agreement is signed between
Jaypee and three affiliates of FOWC whereby
Jaypee gives back circuit rights, mainly media
and title sponsorship, to Beta Prema 2 and
paddock rights to Allsports. FOAM is engaged to
generate TV Feed. All the revenues from the
aforesaid activities are to go to the said
companies, namely, Beta Prema 2, Allsports and
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FOAM respectively. These three companies are
admittedly affiliates to FOWC.
Though Beta Prema 2 is given media rights,
etc., on September 13, 2011, it had entered into
title sponsorship agreement dated August 16, 2011
with Bharti Airtel (i.e. more than a month before
getting these rights from Jaypee) whereby it
transferred those rights to Bharti Airtel for a
consideration of US$ 8 million.
Service agreement is signed between FOWC and
FOAM on October 28, 2011 (i.e. on the date of the
race) whereby FOAM engaged FOWC to provide
various services like licensing and supervision
of other parties at the event, travel and
transport and data support services. The
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aforesaid arrangement clearly demonstrates that
the entire event is taken over and controlled by
FOWC and its affiliates. There cannot be any
race without participating/ competing teams, a
circuit and a paddock. All these are controlled
by FOWC and its affiliates. Event has taken
place by conduct of race physically in India.
Entire income is generated from the conduct of
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this event in India. Thus, commercial rights are
with FOWC which are exploited with actual conduct
of race in India.
(iii) Even the physical control of the circuit was
with FOWC and its affiliates from the inception,
i.e. inclusion of event in a circuit till the
conclusion of the event. Omnipresence of FOWC
and its stamp over the event is loud, clear and
firm. Mr. Rohatgi is right in his submission
that the undisputed facts were that race was
physically conducted in India and from this race
income was generated in India. Therefore, a
commonsense and plain thinking of the entire
situation would lead to the conclusion that FOWC
had made their earning in India through the said
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track over which they had complete control during
the period of race. The appellants are trying to
trivialize the issue by harping on the fact that
duration of the event was three days and,
therefore, control, if at all, would be for that
period only. His reply was that the duration of
the agreement was five years, which was
extendable to another five years. The question
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of the PE has to be examined keeping in mind that
the aforesaid race was to be conducted only for
three days in a year and for the entire period of
race the control was with FOWC.
(iv) Even when we examine the matter by examining the
RPC agreement itself, it points towards the same
conclusion. The High Court in its judgment has
reproduced relevant clauses of the agreement
which we have already reproduced above.
This agreement is analysed by the High Court.
Therefore, we are spared of doing a diagnostic of
sorts, which exercise is accomplished by the High
Court itself in a flawless manner:
“(a) The Buddh International Circuit, is
defined in Clause 1(q), as one suitable in
every respect for the staging of the event,
including permanent buildings, permanent
structure, track laid-out, amenities,
spectator viewing facilities, paddock
building, media centre, car parks, helipads,
garages, race control and administration,
office administration, fuel and storage, tyre
store, utilities, including backup power
supplies, concrete-based areas suitable to
host competitors and sponsor, vending and
exhibition areas, international TV compounds
etc. These specifications are more
elaborately spelt out in Clause 5(e) which
states that a circuit shall be constructed,
laid out and prepared in accordance with the
agreement, i.e. RPC, "in a form and manner
approved by the FOWC and the FIA".
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Page 93
(b) The inclusion of the event is through
the FOWC's actions. In terms of its
arrangement with the FIA, it is the exclusive
agency through which any particular circuit
is introduced for an event in a given
calendar year.
(c) The term of the RPC is 5 years according
to Clauses 3.3 and 3.4.
(d) In terms of Clause 11, Jaypee is obliged
to take all action necessary to ensure that
the pit, paddock buildings and surrounding
areas within the circuit and land are open to
receive the competitors, FOWC, affiliates of
FOWC, FOWC's contractors and licensees, other
personnel and equipment at all times during
the period commencing 14 days before the race
and ending 7 days after the race. It also has
to assure security to these areas.
(e) Under Clause 14, the promoter is obliged
to authorize access to parts of the circuit
not open to the main public only through
passes issued by the FOWC. Under Clause
14(b), the public cannot have access to the
cars in any of the places where the
competitor's mechanics may be called upon to
work on them and under Clause 14(c), the
validity of passes issued by FOWC is
unquestionable.
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(f) Under Clause 18.1, throughout the term
during the access period, from the test
session held at the circuit till the end of
the event, the promoter, i.e. Jaypee cannot
permit, access, enable, procure or in any
manner encourage others to make, create,
store, record or transmit any sound recording
or visual or audio-visual footage whatsoever,
for broadcast or any other purpose, of any of
at or pertaining to the event, including
cars, drivers, competitors etc. and in fact
cannot make any such recording etc. within
the confines of the circuit or the land over
which Jaypee itself has control.
(g) Under Clause 18.2, Jaypee has to ensure
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that the terms of the ticket sale, giving
admittance to the event include a condition
imposed on the ticket holder not to make any
kind of recording or take any recording
device that can store or transmit any part of
the event and that the ticket holder as a
spectator could be filmed and a sound made by
him could be recorded for broadcast or any
other such item that the FOWC could impose on
Jaypee.
(h) Jaypee is obliged to engage a third
party approved by FOWC to carry out and
perform on its behalf all service relating to
the origination of the international
television feed and host broadcasting for
each event during the term specified in the
guidelines published by FOWC and provided to
Jaypee.
(i) Jaypee unconditionally and irrevocably
under Clause 19.2 assigned to FOWC all
copyright and other intellectual property
rights, titles and interest which it may now
or may in future possess, in any image or
recording or other presentation or recording
in any image/form whatsoever for the duration
of the rights and also give consent to FOWC
to deal with such rights as it pleased.
(j) Clause 20.1 obliged Jaypee to ensure
that those accredited and authorized by FOWC
were permitted to enter upon the premises to
make sound, television or recordings or
transmissions or make films or other pictures
and use the facilities throughout the access
period and also undertook to accord to such
personnel all help and facilities that FOWC
would require, including assistance for
consent, permission or authorization with any
local authority.
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(k)
Under Clause 21, Jaypee was prohibited
from causing, permitting, enabling assisting
or in any manner encouraging display of any
advertisement (other than the normal
advertisement displayed on any competitor's
cars) or other displays on, near or which
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could be seen from the circuit or the land
which, in the opinion of the FOWC, could
prevent lawful transmission of images or
recordings of the event. FOWC's say in this
regard was final.
(l) In the Director s report of FOWC, the ‟
company significantly mentioned that its
current company had entered into an agreement
with FIA as a result of which FOWC acquired
commercial interests in the championship
which became operative from 01.11.2011 and
that in exploitation of such commercial
rights in the championship, the total
revenues generated was US$ 1205 million.
There is an express advertence of the Indian
part of the turn-over – inasmuch as the
report said that the company paid US$ 127
million to FOM in return of provision of
services.”
69)
We are in agreement with the aforesaid analysis which
correctly captures the substance of the relevant
clauses of the agreement.
70)
We are also of the opinion that the High Court has
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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. This aspect is
discussed by the High Court in the following manner,
and rightly so:
“52. It is evident that for the duration of
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the event as well as two weeks prior to it
and a week succeeding it, FOWC had full
access through its personnel, the team
contracted to it, both racing as well as
spectator teams and could also dictate who
were authorized to enter the areas reserved
for it. No doubt, in terms of the agreement,
i.e. RPC, Jaypee was designated as the
promoter or the event host. A look at the RPC
and its terms as well as the other terms
contained in the agreement between the Jaypee
on the one hand and Allsports, Beta Prema 2
as well as FOAM show that Jaypee's capacity
to act - though it promoted the event, was
extremely restricted. At all material times,
FOWC had access - exclusively, to the
circuit, and all the spaces where the teams
were located. Jaypee created the circuit for
the purposes of the event and other events;
yet, during the event, i.e. the F1
Championship, no other event was possible.
53. Having regard to the nature of the
preceding discussion, it is evident that
though FOWC's access or right to access was
not permanent, in the sense of its being
everlasting, at the same time, the model of
commercial transactions it chose is such that
its exclusive circuit access - to the team
and its personnel or those contracted by it,
was for up-to six weeks at a time during the
F1 Championship season. This nature of
activity, i.e racing and exploitation of all
the bundle of rights the FOWC had as CRH,
meant that it was a shifting or moving
presence: the teams competed in the race in a
given place and after its conclusion, moved
on to another locale where a similar race is
conducted. Now with this kind of activity,
although there may not be substantiality in
an absolute sense with regard to the time
period, both the exclusive nature of the
access and the period for which it is
accessed, in the opinion of the Court, makes
the presence of a kind contemplated under
Article 5(1), i.e. it is fixed. In other
words, the presence is neither ephemeral or
fleeting, or sporadic. The fact that
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Page 97
RPC-2011's tenure is of five years, meant
that there was a repetition; furthermore,
FOWC was entitled even in the event of a
termination, to two years' payment of the
assured consideration of US$ 40 million
(Clause 24 of the RPC). Having regard to the
OECD commentary and Klaus Vogel 's commentary
on the general principles applicable 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, it is hereby
held that the circuit itself constituted a
fixed place of business.
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,
23
was held to constitute a PE . Likewise, a temporary
restaurant operated in a mirror tent at a Dutch
flower show for a period of seven months was held to
24
constitute a PE .
JUDGMENT
72)
The High Court has also referred to some of the
judgments which are of relevance. We would like to
take note of those judgments as we had agreed with
the conclusions of the High Court on this issue:
In Universal Furniture Ind. AB v. Government of
25
Norway , a Swedish company sold furniture abroad that
was assembled in Sweden. It hired an individual tax
Refer Footnote 4
Refer Footnote 5
(Stavanger Court, Case No. 99-00421, dated 19-12-1999 referred to in Principles of
International Taxation by Anghard Miller and Lyn Oates, 2012)
Page 98
resident of Norway to look after its sales in Norway,
including sales to a Swedish company, which used to
compensate him for use of a phone and other
facilities. Later, the company discontinued such
payments and increased his salary. The Norwegian tax
authorities said that the Swedish company had its
place of business in Norway. The Norwegian court
agreed, holding that the salesman’s house amounted to
a place of business: it was sufficient that the
Swedish Company had a place at its disposal, i.e the
Norwegian individual’s home, which could be regarded
as ‘fixed’.
26
In Joseph Fowler v. Her Majesty the Queen , the
issue was whether a United States tax resident
individual who used to visit and sell his wares in a
JUDGMENT
camper trailer, in fairs, for a number of years had a
fixed place of business in Canada. The fairs used to
be once a year, approximately for three weeks each.
The court observed that the nature of the
individual’s business was such that he held sales in
similar fares, for duration of two or three weeks, in
two other locales in the United States. The court
1990 (2) CTC 2351
Page 99
held that conceptually, the place was one of
business, notwithstanding the short duration, because
it amounted to a place of management or a branch
having regard to peculiarities of the business.
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
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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
Page 100
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
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(as well as its affiliates) undertook the aforesaid
commercial activities in India. Without explaining
this aspect further, our purpose would be served by
reproducing the following discussion, so starkly put
in the judgment of the High Court:
“ 55. If the terms of the Concorde Agreement are
read conjointly with the RPC-2011, it is apparent
that the CRH, which is the FOWC, only and none
else has the right to include a venue in any FIA
annual calendar. FIA is bound to accord
permission for such inclusion; FOWC is the
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exclusive commercial rights holder of a host of
rights (evident from the recital in the Concorde
Agreement that FIA, FOWC and other members of the
CRH group had entered into such contracts to
enable commercial exploitation of the rights for
a 100 year period). Under the RPC-2011, only FOWC
has exclusive rights towards making sound,
television and other recordings and exploitation
of its media rights. FOWC has copyright over
databases and all related information, etc.
generated, during the event, including practice
sessions etc. (Clause 22, RPC-2011). Only those
accredited by FOWC can enter the promoter's
premises and circuit to make sound and television
recordings, etc.
56. It is quite apparent that save a limited
class of rights (those relating to paddock entry,
ticketing, hospitality at the venue and a
restricted class of advertising), all commercial
exploitation rights vest exclusively with FOWC.
FOWC did accept them and was entitled to charge
fees or such other consideration as it deemed
appropriate for the recording, telecasting,
broadcasting and creation of internet and media
rights, including data transmission, and all
other such commercially exploitable rights. In
addition, FOWC charged, by Clause 24 of RPC-2011,
a fee of US$ 40 million annually from Jaypee, in
relation to the race event or FIA F1 Championship
event conducted on the circuit in India.
57. It is also noteworthy that by virtue of the
Concorde Agreement, the teams have undertaken to
engage in every race - with the added condition
that each team would involve two cars for every
race in any circuit chosen by FOWC. RPC-2011 also
assured that the FOWC would ensure that such team
did in fact participate in the event in the Budh
Circuit. This is an important fact- which shows
that the entire event, i.e. F1 FIA Championship
in the circuit was organized and controlled in
every sense of the term by FOWC. The peculiarity
of this activity is such that FOWC's dominant
role is evident; it is the moving spirit with all
pervasive presence and control through the teams,
which are contracted to participate in the event.
In fact, it creates the event, i.e. the race.
Each actor, such the promoter/Jaypee, the racing
teams, the constructing teams and the other
affiliates, plays a part in the event. FOWC's
participation and the undertakings given to it by
each of these actors, who are responsible for the
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Page 102
event as a whole, brings out its central and
dominant role. If Jaypee is the event promoter,
which owns the title to the circuit in the sense
that it owns the land, FOWC is the commercial
rights owner of the event, by virtue of the
Concorde Agreement. FIA parted with all its
rights over each commercial right it possessed to
FOWC. The bulk of the revenue earned is through
media, television and other related rights. The
terms or the basis of those rights is the event.
The conceptualization of the event and the right
to include it in any particular circuit, such as
Buddh Circuit is that of the FOWC; it decides the
venue and the participating teams are bound to it
to compete in the race in the terms agreed with
the FOWC. All these, in the opinion of the Court,
unequivocally, show that the FOWC carried on
business in India for the duration of the race
(and for two weeks before the race and a week
thereafter). Every right, which it possessed was
monetized; the US$ 40 million which Jaypee paid
was only a part of that commercial exploitation
by the FOWC.
58. Consequently, the Court concludes that the
FOWC carried on business in India within the
meaning of expression under Article 5(1) of the
DTAA. It is consequently held that the AAR fell
into error of law in holding that FOWC did not
function through a PE/carry on business through a
fixed place of business in India.”
74) In view of the above, it is difficult to accept the
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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
Page 103
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 FOWC.
75) No doubt, FOWC, as CRH of these events, is in the
business of exploiting these rights, including
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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 circuit.
76)
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
Page 104
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
27
that as per Philip Baker , 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
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is liable to pay tax in India on the income it has
earned on this soil.
77)
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
A Manual on the OECD Model Tax Convention on Income and on Capital
Page 105
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
28
India Technology Centre Private Limited . 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 Act.
78)
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
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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
29
Centre Private Limited , 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
Refer Footnote 23
Refer Footnote 23
Page 106
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 way.
79)
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
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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.
80)
In view of the foregoing, the appeals preferred by
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the FOWC and Jaypee are dismissed, subject to
observations as made above.
81)
Insofar as the appeal filed by the Commissioner of
Income Tax is concerned, it was submitted by Mr.
Rohatgi himself that the issue of dependent PE had
become academic. Therefore, we need not examine this
issue and dispose of the appeal of the Revenue
accordingly.
No costs.
.................J.
(A.K. SIKRI)
................J.
(ASHOK BHUSHAN)
JUDGMENT
NEW DELHI;
APRIL 24, 2017.
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