advocatemmmohan

My photo

ADVOCATEMMMOHAN -  Practicing both IN CIVIL, CRIMINAL AND FAMILY LAWS,Etc.,

WELCOME TO LEGAL WORLD

WELCOME TO MY LEGAL WORLD - FOR KNOWLEDGE IN LAW & FOR LEGAL OPINIONS - SHARE THIS

Tuesday, May 2, 2017

whether the payment of consideration receivable 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').

                                                                  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

                        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  '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.

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  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:

whether the payment of consideration receivable 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').

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 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.

As mentioned above, all these three writ petitions 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 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.

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, therefore, pertains to PE.


FACTUAL MATRIX


In order to decide this question, following facts,  having  bearing  on  the
matter, need a recapitulation:

Federation Internationale de I' Automobile (for short, 'FIA'), a  non-profit
association,  is  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 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 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.

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 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 specifications, and engage drivers who can successfully  manoeuvre
the F-1 cars in the racing events.

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  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  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  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
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  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  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.

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, 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 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.

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.

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 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
(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, 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  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.

The bone of contention before this Court pertains to the issue of  existence
of a PE of FOWC in India.  We may say  at  the  outset  that  the  arguments
advanced by both the parties before us were  virtually  the  same  arguments
which were advanced before the High Court as well.  Therefore, spelling  out
the submissions of the parties before the High Court may  not  be  necessary
as it would be  duplicating  and  repetitive.   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 correct and justified in law.


RELEVANT STATUTORY PROVISIONS & DTAA REGIME

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  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, 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 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.


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 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.

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 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:”

It is clear from the reading of the said clause that it includes  all  those
incomes, whether directly or  indirectly,  which  are  accruing  or  arising
through or from any business connection in India.  It is, thus,  clear  that
an income which is earned directly or indirectly, i.e. even  indirectly,  is
to be deemed to accrue or earned in India.  Further, such an  income  should
have some business connection in India. Explanation (1) for the  purpose  of
this clause provides five explanations from clauses (a) to (e).  Clause  (a)
stipulates that where all the business operations are not carried  in  India
and only some such operations of business are carried in India,  the  income
of the business deemed under this clause to accrue or arise in  India  shall
be only such part of  the  income  as  is  reasonably  attributable  to  the
operations carried in India.  We are not concerned with clauses (b) to  (e).
 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, –

      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

      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

      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:

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 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.”



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”.”


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.   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;”


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.

2.  The term “permanent establishment” shall include especially:

      a place of management;

      a branch;


      an office;

      a factory;

      a workshop;

      premises used as  a  sales  outlet  or  for  receiving  or  soliciting
orders;

      a warehouse in relation to a person  providing  store  facilities  for
others;

      a mine, an oil or gas well, quarry on other  place  of  extraction  of
natural resources;

      an installation or structure used for the exploration or  exploitation
of natural resources;

      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;

      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:

      activities of that nature continue within that State for a  period  or
periods aggregating more than 90 days within any twelve-month period; or

      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;

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:

      the use of facilities solely for the purpose of storage or display  of
gods or merchandise belonging to the enterprise;

      the maintenance of a stock of goods or merchandise  belonging  to  the
enterprise solely for the purpose of storage or display;

      the maintenance of a stock of goods or merchandise  belonging  to  the
enterprise solely for the purpose of processing by another enterprise;

      the maintenance of a fixed place of business solely  for  the  purpose
of purchasing goods or merchandise, or for collecting information,  for  the
enterprise;

      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 Contracting State for any purpose or purposes  other  than  the
purposes specified in this paragraph;

      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:

      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

      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

      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  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.”

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  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  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

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  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.

Philip Baker explains that the  concept  of  PE  is  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. Visakhapatnam Port Trust[1]:

“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.”

Emphasising that as a creature of international tax law, the concept  of  PE
has a particularly strong claim to a uniform international  meaning,  Philip
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
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  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.

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  preparing
hides was held to constitute a PE[2].  Similarly, a writer’s study has  been
held to constitute a PE[3].  A stand at a  trade  fair,  occupied  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  a
PE[4].  A temporary restaurant operated in a mirror tent at a  Dutch  flower
show for a period of seven months  was  held  to  constitute  a  PE[5].   An
office, workshop and storeroom for the maintenance of aircraft,  which  were
leased out by the enterprise, has been held to constitute a PE[6].

On the other hand, possession of a mailing address in a state –  without  an
office, telephone listing or bank account – has been held not to  constitute
a PE[7].  The mere supply of skilled labour to work in  a  country  did  not
give rise to a PE of the company supplying the labour[8].   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 PE[9].  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  is  not  a  fixed
place of business[10].

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
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.

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:

In the Canadian case  of  William  Dudney  v.  R[11],  the  taxpayer  was  a
resident of the United States who  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 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.

In a case generally referred to as Hotel  Manager[12],  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 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.

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  the  Swiss  company  were
present  at  the  production  facility  to  supervise  production[13].   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.

The Administrative Court of Appeal of Paris has held that  a  German  travel
agency did not have a PE in France[14].  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 France.

The Brussels Court of Appeal has held that a German resident engaged in  the
transportation of vehicles had a PE in Belgium[15].   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.

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.

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 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).”


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 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 in State B under the 1st sentence of Article 7(1) OECD and UN MC.

      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  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.”

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 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  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.

      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 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.”

OECD commentary on Model Tax Convention mentions that a  general  definition
of the term ‘PE’ brings out its 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.


The term  “place  of  business”  is  explained  as  covering  any  premises,
facilities or installations  used  for  carrying  on  the  business  of  the
enterprise whether or not they are used exclusively for  that  purpose.   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 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 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.

The OECD commentary gives as many as four examples where location  will  not
be treated at the disposal of the enterprise.  These are:

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).
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
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.
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
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.
Fourth example is that of a painter, who, for two years, spends  three  days
a week in the large 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.

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.

THE AGREEMENTS

Having got a fair idea of what would constitute a PE, we may advert  to  the
discussion in that part of the impugned judgment where the  High  Court  has
given its reasons to conclude that FOWC had a PE in India  in  the  relevant
Assessment Year.  However, before that, it would be necessary  to  refer  to
the salient provisions of the relevant agreements between the  parties,  not
only between FOWC and Jaypee, but some agreements which  were  entered  into
by the group companies of FOWC with Jaypee.

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.

It is relevant to mention that before  RPC  dated  September  13,  2011  was
entered into between FOWC and Jaypee, one Organisation Agreement (OA)  dated
January 20, 2011 was signed between  FIA/FMSCI  and  Jaypee.   As  per  this
agreement, Jaypee was to organise the event. Thereafter,  another  agreement
known as ‘Title Sponsorship Agreement’ dated  August  16,  2011  was  signed
between Beta Prema 2 (an associated company of FOWC) and Bharti  Airtel,  as
per which Beta Prema  2  transferred  title  sponsorship  rights  to  Bharti
Airtel for US$ 8 million in respect of  the  race  which  was  conducted  on
October 29, 2011.  It is thereafter that RPC dated September  13,  2011  was
signed by FOWC and Jaypee.  That was one month before the scheduled date  of
race, which was fixed as October 29, 2011.  Under this agreement,  right  to
host, stage and promote the event was given to Jaypee by FOWC.  As  per  the
Revenue, FOWC carried  on  business  in  India  through  a  fixed  place  of
business, namely, the Buddh  International  Circuit.   Salient  features  of
this Agreement, which is the most vital document, are as follows:

"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  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.


                            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 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.

                            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.  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.

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 (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.

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  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.

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 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  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

(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  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:-

(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 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 OF THE HIGH COURT
Taking note of this agreement, the High  Court  went  ahead  to  decide  the
following aspects, which revolved around the question of PE:
Whether FOWC had control over the Buddh International Circuit and  that  the
circuit could be constituted as a fixed place of business?
Whether FOWC carried on business?  IF so, they did  carry  on  business  and
commercial activity in India.
Whether FOWC carried on business through its agents under  Article  5(4)  or
Article 5(5) of the DTAA?

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 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 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 consideration  of  US$
40 million in the event of termination of RPC.

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 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.

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 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  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
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  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
Mr. Ganesh, opened the case of FOWC, whereafter M/s.  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 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.

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 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 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  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.

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  ‘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 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
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  Event  at  the  circuit  were  that  of   Jaypee
exclusively.

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 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.

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 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 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.

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 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  Bachao  Andolan  &  Anr.[16]  in
respect of his submission that transactions could not be treated as sham.

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 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 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.

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 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. Toshoku  Ltd.,  Guntur  &
Ors.[17] where the law is discussed in the following manner:
“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  business  of  which  all  the
operations are not carried out in India, the income of the  business  deemed
under that clause to accrue or arise in India shall be  only  such  part  of
the income as is reasonably attributable to the operations  carried  out  in
India. If all such operations are 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 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. [AIR  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 corresponds to Section 9(1)(i) of the Act.]”


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.

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 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.   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  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. Commissioner of Income Tax  &  Anr.[18]
was pressed into service which reads as follows:
“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 Corpn. [(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.”

Last submission of Mr. Datar  was  that  in  any  case  it  was  yet  to  be
determined as to how much of US$ 40 million  fee  paid  by  Jaypee  to  FOWC
could be attributed to PE, inasmuch as it is only  that  portion  of  income
that is relatable to PE which is liable for tax  in  India.   This  has  not
happened so far.

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  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 Etc. v.  Union  of  India  and
Another[19].  He also referred to paragraph 6 of  the  UK  judgment  in  the
case of Sepet v. Secretary of State for the Home Department[20]  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.

From Azadi Bachao Andolan following passages were relied upon:
“17.  Every country seeks to tax the income generated within  its  territory
on the basis 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  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.

                       xx               xx         xx

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.

… 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, 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.)].]”

                       xx               xx         xx

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.

Because treaty negotiations are 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.”

And, finally, in paragraph 1.08:

“Apart from the allocation of tax between the treaty partners, tax  treaties
can also help to resolve problems and can obtain benefits  which  cannot  be
achieved unilaterally.”

                       xx               xx         xx

134. Developing countries need foreign investments, and the  treaty-shopping
opportunities can be an additional  factor  to  attract  them.  The  use  of
Cyprus as a treaty haven has helped capital  inflows  into  eastern  Europe.
Madeira (Portugal) is attractive for investments into  the  European  Union.
Singapore is developing itself as a base for investments in South-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 “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.”

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).                       |
|                                                                | |
|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:             |
|Building of the circuit was started in terms of this RPC.       |
|FOWC was granted only the right to promote the event (clause    |
|4(1).                                                           |
|FOM was declared the business manager and agent of FOWC (Recital|
|D).                                                             |
|This agreement was signed by FOM on behalf of FOWC.             |
|No condition precedent clause obligating Jaypee to enter into   |
|any agreements with FOWC group entities.                        |
|No clause obligating Jaypee to enter into an agreement with FOM |
|for generation of television feed.                              |
|Agreement in the same template as Schedule IV to the Concorde   |
|Agreement.                                                      |
|                                                                | |
|Concorde Agreement (2009) between FIA, FOWC and teams:          |
|FOWC becomes the exclusive CRH.                                 |
|FOWC could exploit the commercial rights directly or through its|
|affiliates only.                                                |
|‘F1 business’ defined to mean exploitation of various rights,   |
|including media rights, hospitality rights, title sponsorship,  |
|etc.                                                            |
|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:                                                     |
|Jaypee to organise the event.                                   |
|As of this date, Jaypee has entered into an agreement with the  |
|CRH (Recital B).                                                |
|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:                                      |
|Transfer of title sponsorship rights by Beta to Bharti Airtel   |
|for US$ 8 million.                                              |
|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:           |
|Agreement entered one month before the race.                    |
|Fresh RPC entered without rescinding the RPC of 2007.           |
|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.                                               |
|Conditions precedent binding Jaypee to transfer the rights back |
|to the affiliates of FOWC.                                      |
|Clause 18.3 binding Jaypee to engage FOM for generating         |
|television feed introduced in this RPC.                         |
|Recital D of the previous RPC which declared FOM the business   |
|manager and agent removed.                                      |
|                                                                | |
|Agreements between JP and the three affiliates (September 13,   |
|2011)                                                           |
|Agreements entered on the same day as RPC, i.e. September 13,   |
|2011.                                                           |
|Rights allegedly given to Jaypee are transferred back to the    |
|FOWC affiliates.  Beta Prema 2 acquires circuit rights (mainly  |
|media and title sponsorship) and Allsports gets paddock rights. |
|FOM engaged to generation television feed.                      |
|Agreement provides that all revenues from the rights would flow |
|to the affiliates and not Jaypee (clause 11).                   |
|Agreement provides that there does not exist an agency          |
|relationship between the affiliates and Jaypee (clause 26).     |
|                                                                | |
|Service Agreement dated October 28, 2011 between FOWC and FOM:  |
|Agreement entered into on October 28, 2011, on the day of race. |
|FOM engaged by FOWC to provide various services – liaison and   |
|supervision of other parties at the event, travel, transport and|
|data support 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”.                                            |


From the features described above, it was submitted by the learned  Attorney
General that clear 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  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 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.

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, 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.

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 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.

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.

As far as power of the High Court under Article 226 of the  Constitution  of
India to go into the issue is concerned, Mr. Rohatgi drew the  attention  of
the Court  to  its  earlier  judgment  in  Columbia  Sportswear  Company  v.
Director of Income Tax, Bangalore[21] 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  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.

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 Private Limited v. Commissioner of  Income  Tax  &  Anr.[22]  wherein
following principle is laid down in paragraph 18:
“18. 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  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.”

He, thus, submitted that if there was any breach of the said provision,  the
Income Tax Department was well within its right to  charge  interest  and/or
impose penalty.

In rejoinder, M/s. Ganesh and Datar gave  their  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
We have pondered over the aforesaid submissions of the learned  counsel  for
the parties with all seriousness and sincerity they deserve.  We  have  also
minutely gone through the material placed on record.  We have kept  in  mind
the governing law that has already been  stated  in  detail.   We  are  also
conscious of the approach that is needed to examine these kinds  of  issues,
as discussed in the judgments referred to by Mr. Dave.   Likewise,  we  have
also microscopically examined the judgment of the High Court which is  under
challenge.

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 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,  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.

We  are  of  the  firm  opinion,  and  it  cannot  be  denied,  that   Buddh
International Circuit is a fixed place.  From this circuit different  races,
including  the  Grand  Prix  is   conducted,   which   is   undoubtedly   an
economic/business activity.  The core question is as  to  whether  this  was
put at the disposal of FOWC?  Whether this was a fixed place of business  of
FOWC is the next question.  We would like  to  start  our  discussion  on  a
crucial parameter viz. the manner in  which  commercial  rights,  which  are
held by FOWC and its affiliates, have been exploited in  the  instant  case.
For this purpose entire arrangement between FOWC and its associates  on  the
one hand and Jaypee on the other hand, is  to  be  kept  in  mind.   Various
agreements cannot be looked into by isolating them from each  other.   Their
wholesome reading would bring out the real transaction between the  parties.
 Such an approach is essentially required to find out as to  who  is  having
real and dominant control over the Event, thereby  providing  an  answer  to
the question as to whether Buddh International Circuit was at  the  disposal
of FOWC and whether it carried out any business therefrom or not.  There  is
an inalienable relevance of witnessing the wholesome  arrangement  in  order
to have complete picture of the relationship between FOWC and Jaypee.   That
would enable us to capture the real essence of FOWC's role.

A mere running of the eye over the flowchart  of  these  commercial  rights,
produced by  the  Revenue,  bring  about  the  following  material  factors,
evidently discernible:
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 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.
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 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  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  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 this event in  India.
 Thus, commercial rights are with  FOWC  which  are  exploited  with  actual
conduct of race in India.
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 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 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.
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".

(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.

(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.

Under Clause 18.2, Jaypee has to ensure 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.

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.

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.

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.

 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 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.

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.”


We are in agreement with the aforesaid  analysis  which  correctly  captures
the substance of the relevant clauses of the agreement.

We are also of the opinion that the High Court has  rightly  concluded  that
having regard to the duration of the event, which was for limited days,  and
for the entire duration FOWC had full access through its  personnel,  number
of days for which the access was there would not make any difference.   This
aspect is discussed by the High Court in the following manner,  and  rightly
so:
“52. It is evident 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
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  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.

A stand at a trade fair, occupied regularly for three weeks a year,  through
which an enterprise obtained contracts for a significant part of its  annual
sales, was held to constitute a PE[23].  Likewise,  a  temporary  restaurant
operated in a mirror tent at a Dutch flower  show  for  a  period  of  seven
months was held to constitute a PE[24].

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 Norway[25], a  Swedish
company sold furniture abroad that was assembled in  Sweden.   It  hired  an
individual tax 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’.
      In Joseph Fowler v. Her Majesty the Queen[26], the issue  was  whether
a United States tax resident individual who  used  to  visit  and  sell  his
wares in a 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  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.

Coming to the second aspect of the issue, namely, whether  FOWC  carried  on
any business and commercial activity in India or not,  substantial  part  of
this aspect has already been discussed and taken  care  of  above.   Without
being repetitive and pleonastic or tautologous, we may only  add  that  FOWC
is the Commercial Right Holder (CRH).  These rights can  be  exploited  with
the conduct of F-1 Championship, which is organised  in  various  countries.
It was decided to have this championship in India  as  well.   In  order  to
undertake conducting of such races, the  first  requirement  is  to  have  a
track for this purpose.  Then, teams are needed  who  would  participate  in
the competition.  Another requirement is  to  have  the  public/viewers  who
would be interested in witnessing such races from the  places  built  around
the track.  Again, for augmenting the earnings in these events, there  would
be advertisements,  media  rights,  etc.  as  well.   It  is  FOWC  and  its
affiliates which have been responsible for  all  the  aforesaid  activities.
The Concorde Agreement is signed between FIA, FOA and FOWC whereby not  only
FOWC became Commercial Rights Holder for 100 years, this  agreement  further
enabled participation of the teams who agreed for such participation in  the
FIA Championship each year for every event and undertook to  participate  in
each event with two cars.  FIA undertook to ensure  that  events  were  held
and FOWC, as CRH, undertook to enter into  contracts  with  event  promoters
and  host  such  events.   All   possible   commercial   rights,   including
advertisement, media rights, etc. and even  right  to  sell  paddock  seats,
were assumed by FOWC and its associates.  Thus, as a part of  its  business,
FOWC  (as  well  as  its  affiliates)  undertook  the  aforesaid  commercial
activities in India.  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  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 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.”


In view of the above, it  is  difficult  to  accept  the  arguments  of  the
appellants that it is Jaypee who was responsible for  conducting  races  and
had complete control over the Event in question.  Mere construction  of  the
track by Jaypee at its expense will be of no consequence.  Its ownership  or
organising other events by Jaypee is also immaterial.   Our  examination  is
limited to the conduct of the F-1 Championship and control  over  the  track
during that period.  Specific arrangement between the  parties  relating  to
the  aforesaid,  which  is  elaborated  above  and  which  FOWC  and  Jaypee
unsuccessfully endeavoured to ignore, has in fact turned the  table  against
them.  It is also difficult to accept their  submission  that  FOWC  had  no
role in the conduct of the Championship and its role came  to  an  end  with
granting permission to host the Event as a round of  the  championship.   We
also reject the argument of the  appellants  that  the  Buddh  International
Circuit was not under the control and at the disposal of FOWC.

No doubt, FOWC, as CRH of these events, is in  the  business  of  exploiting
these  rights,  including  intellectual  property  rights.   However,  these
became possible, in the instant case, only with the actual conduct of  these
races and active participation of FOWC in the said races,  with  access  and
control over the circuit.

We are of the opinion that the test laid down by  the  Andhra  Pradesh  High
Court in Visakhapatnam Port Trust case fully  stands  satisfied.   Not  only
the   Buddh   International   Circuit   is   a   fixed   place   where   the
commercial/economic activity of  conducting  F-1  Championship  was  carried
out, one could clearly discern that it  was  a  virtual  projection  of  the
foreign enterprise, namely, Formula-1  (i.e.  FOWC)  on  the  soil  of  this
country.  It is already noted above that as per Philip Baker[27], a PE  must
have three characteristics: stability,  productivity  and  dependence.   All
characteristics are present in this case.  Fixed place of  business  in  the
form of physical location, i.e. Buddh  International  Circuit,  was  at  the
disposal of FOWC through which it conducted  business.   Aesthetics  of  law
and taxation jurisprudence leave no doubt in our  mind  that  taxable  event
has taken place in India and non-resident FOWC  is  liable  to  pay  tax  in
India on the income it has earned on this soil.

We are now left with two other incidental issues which were  raised  by  Mr.
Datar.  First was on the interpretation of  Section  195  of  the  Act.   It
cannot be disputed that a person who makes the payment to a non-resident  is
under an obligation to deduct tax under Section  195  of  the  Act  on  such
payments.  Mr. Rohatgi had submitted, and rightly so,  that  this  issue  is
covered by the judgment in the case of GE India  Technology  Centre  Private
Limited[28].  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.

We are, however, inclined to accept the submission of Mr.  Datar  that  only
that portion of the income of FOWC, which is attributable to  the  said  PE,
would be treated as business income of FOWC and only  that  part  of  income
deduction was required to be made under Section  195  of  the  Act.   In  GE
India Technology Centre Private Limited[29], this Court has  clarified  that
though there is an obligation to deduct tax, the obligation  is  limited  to
the appropriate portion of income which is chargeable to tax  in  India  and
in respect of other payments where no tax is  payable,  recourse  is  to  be
made under Section 195(2) of  the  Act.   It  would  be  for  the  Assessing
Officer  to  adjudicate  upon  the  aforesaid  aspects  while  passing   the
Assessment Order, namely, how much business income of FOWC  is  attributable
to PE in India, which is chargeable to tax.  At that stage, Jaypee can  also
press its argument that penalty etc. be not charged as the move on the  part
of Jaypee in not deducting tax at source was bona fide.  We  make  it  clear
that we have not expressed any opinion either way.

Insofar as the argument of Mr. Datar on the powers of the High  Court  under
Article 226 of the Constitution of India is concerned, we are not  impressed
by the said argument.   It  is  Jaypee  itself  which  had  filed  the  writ
petition (and for that matter FOWC as well)  and  they  had  challenged  the
orders of AAR on certain aspects.  The High Court has examined legal  issues
while delivering the impugned judgment,  of  course  having  regard  to  the
facts which were culled out from the documents on record.

In view of the foregoing, the appeals preferred by the FOWC and  Jaypee  are
dismissed, subject to observations as made above.

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)



NEW DELHI;
APRIL 24, 2017.

-----------------------
[1]    (1983) 144 ITR 146
[2]   Transvaal Associated Hide & Skin Merchants (Pty) Ltd. (1967) 29
S.A.T.C. 97 (Court of Appeal, Botswana).
[3]   Georges Simenon (1965) 44 T.C. (US) 820 (US Tax Court)
[4]         Joseph Fowler v. M.N.R. (1990) 90 D.T.C. 1834; (1990)  2  C.T.C.
2351  (Tax Court of    Canada)
[5]         Antwerp Court of Appeal, decision of February 6, 2001, noted  in
2001 WTD 106-11
[6]         Income Tax Appeals Nos. 759/KB to 761/KB of 1997-98 (Tarom  SA),
(1998) PTD (Trib.) 3749 (Income-tax Appellate Tribunal, Pakistan)
[7]   Consolidated Premium Iron Ores Ltd. (1959) 265 F 2d. 320
[8]         Tekniskil  (Sendirian)  Bhd.  v.  Commissioner  of  Income  Tax,
(1996) 222 I.T.R. 551 (Authority for Advance Rulings, India)
[9]         Lower Tax Court of the Hague, September 10, 1990, noted in
(1991) Tax Notes Intl. 161
[10]        Deputy Commissioner of Income Tax v. Subsea Offshore Ltd.
(1998) 66 I.T.D. 296 (Income Tax Appellate Tribunal, Mumbai), noted in 17
Tax Notes Intl. 1795
[11]        (1999) 99 DTC 147
[12]        Bundersfinanzhof, February 3, 1993, IR 80-81/91, IStR 1993, p.
226, (1993) BStBl., II, 462.
[13]        Decision of the Lower Tax Court of  Baden-Wurttemberg,  May  11,
1992, decision No. 3K 309/91, RIW 1993, 81, IStR 1992, p. 104
[14]        Decision of November 10, 1998, (199) Revue de Droit Fiscal,  No.
25, comm.. 503, reported with translation in (1998) 1 ITLR 857
[15]        Cour de Cassation of February 15, 1980 (1980) J1. De Droit
Fiscal 321.
[16]    2004 (10) SCC 1 = 2003 (262) ITR 706
[17]    (1980) Supp SCC 614 = 1981 AIR 148
[18]    (2010) 10 SCC 29
[19]    1970 (3) SCC 400
[20]    2003 (3) AllER 304
[21]        (2012) 11 SCC 224
[22]        (2010) 10 SCC 29
[23]        Refer Footnote 4
[24]  Refer Footnote 5
[25]        (Stavanger Court, Case No. 99-00421, dated  19-12-1999  referred
to in Principles of International Taxation by Anghard Miller and Lyn  Oates,
2012)
[26]        1990 (2) CTC 2351
[27]  A Manual on the OECD Model Tax Convention on Income and on Capital
[28]  Refer Footnote 23
[29]  Refer Footnote 23

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.