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.
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Definitions and Interpretation
1. In this Agreement unless the context requires otherwise:
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(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);
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(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
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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.
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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
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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;
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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.
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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.
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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
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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
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
