# FORMULA ONE WORLD CHAMPIONSHIP LTD v. COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION - 3, DELHI & ANR

- **Citation:** [2017] 2 S.C.R. 152
- **Court:** Supreme Court of India
- **Decided:** 2017-04-24
- **Case number:** Civil Appeal No. 3849 of2017
- **Bench:** A. K. Sikri, Ashok Bhushan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/formula-one-world-championship-ltd-v-commissioner-of-income-tax-international-31804
- **Pages:** 68

## Headnote

Income Tax Act, 1961:
s. 1-95 - TDS on non-residents - Appellants-FOWC, UK
Company (NRI), entered into Race Promotion Contract (RPC) with
Jaypee Sports, Indian entity -: Grant of rights to Jaypee to host,
stage and promote Formula One Grand Prix of India event at the
Buddh International Circuit in India for a consideration of US$ 40
million - FOWC, if having any Permanent Establishment in India in
terms of Art. 5 - Consideration received or receivable by FOWC
from Jaypee, if subject to tax at source u!s. 195 - Held: FOWC is
the Commercial Right Holder (CRH) - Buddh International Circuit
is a fixed place where the commercial/economic activity of
conducting F-1 Championship was carried out, and it was a virtual
projection of foreign enterprise-FOWC in India - Fixed place of
business in the form of physical location-Buddh International
Circuit, was at the disposal of FOWC through which it conducted
business, though for a short duration - Thus, FOWC had a
Permanent Establishment in India - Taxable event took place in
India and non-resident FOWC is liable to pay tax in India on the
income it has earned in India - Since payments made by Jaypee to
FOWC under RPC were business income of the FOWC through PE
at Buddh International Circuit, and, thus, chargeable to tax, Jaypee
bound to make appropriate deductions from the amounts paid u/s.
195 - Double Taxation Avoidance Agreement (between India and
United Kingdom) - Art. 5
Double Taxation Avoidance Agreement (between India and
United Kingdom):
Art. 5 - Permanent Establishment - What constitutes
Permanent Establishment - Explained.
152
FORMULA ONE WORLD CHAMPIONSHIP LTD. v.
153
COMMISSIONER OF INCOME TAX
Art. 5 - Permanent Establishment - Conditions to be
A
··satisfied - Held: Twin conditions to be satisfied are existence of a
fixed place of business; and through that place business of an
enterprise is wholly or partly carried out.
Dismissing the appeals by FOWC and Jaypee and disposing
of the appeal by the Revenue, the Court
B
HELD: 1.1 As per Article 5 of the Double Taxation
Avoidance Agreement, the Permanent Establishment has to be a
fixed place of business 'tftrougft' which business of an enterprise
is wholly or partly carried on. A combined reading of sub-articles
(1 ), (2) and (3) of Article 5 would clearly show that only certain . c
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. [Para
66]
(207-C~F]
D
1.2 The Buddh International Circuit is a fixed place. From
E
this circ.uit different races, including the Grand Prix is conducted,
which is undoubtedly an economic/business activity. The manner
in which commercial rights, which are held by FOWC and its
affiliates, have been exploited, the entire arrangement between
FOWC and its associates on the one hand and Jaypee on the
F
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
G
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
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SUPREME COURT REPORTS
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Jaype

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[2017] 2 S.C.R. 152
FORMULA ONE WORLD CHAMPIONSHIP LTD.
v.
COMMISSIONER OF INCOME TAX, INTERNATIONAL
TAXATION - 3, DELHI & ANR.
(Civil Appeal No. 3849 of2017)
APRIL 24, 2017
[A. K. SIKRI AND ASHOK BHUSHAN, JJ.)
Income Tax Act, 1961:
s. 1-95 - TDS on non-residents - Appellants-FOWC, UK
Company (NRI), entered into Race Promotion Contract (RPC) with
Jaypee Sports, Indian entity -: Grant of rights to Jaypee to host,
stage and promote Formula One Grand Prix of India event at the
Buddh International Circuit in India for a consideration of US$ 40
million - FOWC, if having any Permanent Establishment in India in
terms of Art. 5 - Consideration received or receivable by FOWC
from Jaypee, if subject to tax at source u!s. 195 - Held: FOWC is
the Commercial Right Holder (CRH) - Buddh International Circuit
is a fixed place where the commercial/economic activity of
conducting F-1 Championship was carried out, and it was a virtual
projection of foreign enterprise-FOWC in India - Fixed place of
business in the form of physical location-Buddh International
Circuit, was at the disposal of FOWC through which it conducted
business, though for a short duration - Thus, FOWC had a
Permanent Establishment in India - Taxable event took place in
India and non-resident FOWC is liable to pay tax in India on the
income it has earned in India - Since payments made by Jaypee to
FOWC under RPC were business income of the FOWC through PE
at Buddh International Circuit, and, thus, chargeable to tax, Jaypee
bound to make appropriate deductions from the amounts paid u/s.
195 - Double Taxation Avoidance Agreement (between India and
United Kingdom) - Art. 5
Double Taxation Avoidance Agreement (between India and
United Kingdom):
Art. 5 - Permanent Establishment - What constitutes
Permanent Establishment - Explained.
152
FORMULA ONE WORLD CHAMPIONSHIP LTD. v.
153
COMMISSIONER OF INCOME TAX
Art. 5 - Permanent Establishment - Conditions to be
A
··satisfied - Held: Twin conditions to be satisfied are existence of a
fixed place of business; and through that place business of an
enterprise is wholly or partly carried out.
Dismissing the appeals by FOWC and Jaypee and disposing
of the appeal by the Revenue, the Court
B
HELD: 1.1 As per Article 5 of the Double Taxation
Avoidance Agreement, the Permanent Establishment has to be a
fixed place of business 'tftrougft' which business of an enterprise
is wholly or partly carried on. A combined reading of sub-articles
(1 ), (2) and (3) of Article 5 would clearly show that only certain . c
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. [Para
66]
(207-C~F]
D
1.2 The Buddh International Circuit is a fixed place. From
E
this circ.uit different races, including the Grand Prix is conducted,
which is undoubtedly an economic/business activity. The manner
in which commercial rights, which are held by FOWC and its
affiliates, have been exploited, the entire arrangement between
FOWC and its associates on the one hand and Jaypee on the
F
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
G
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
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Jaypee, to capture the real essence of FOWC's role. [Para 67)
[207-F-H; 208-A-B)
1.3 The agreement was analysed by the High Court in a
flawless manner. The High Court 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. [Para 68, 70) [210-B; 212-E-F]
1.4 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 e.nabled 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 said commercial activities in India. [Para 73) [214-F-G; 215A-C]
1.5 It cannot be said 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
would be of no consequence; Its ownership or organising other
events by Jaypee is also immaterial. The examination is limited
FORMULA ONE WORLD CHAMPIONSHIP LTD. v.
COMMISSIONER OF INCOME TAX
to the conduct of the }'-1 Championship and control over the
track during that period. Specific arrangement between the
parties relating to the aforesaid, and which FOWC and Jaypee
nnsuccessfully endeavoured to ignore, has in fact turned the table
against them. It cannot be said 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. Also it cannot be said 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, only with the actual conduct of
these races and active participation of FOWC in the said races,
with access and control over the circuit. [Para 74, 75] [217-B-E]
1.6 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, Formula1 (FOWC) on the soil of this .country. PE must have three
characteristics: stability, productivity and dependence. All
characteristics are present in the instant 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 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. [Para 76] [217-F-H; 218-A]
Commissioner of Income Tax, A.P.-I v. Visakhapatnam
Port Trust (1983) 144 ITR 146 - approYed.
A Manual on the OECD Model Tax Convention on
Income and on Capital by Philip Baker Q.C. - referred
to.
1. 7 As regards 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. The High Court rightly held
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that since payments made by Jaypee to }'OWC under the RPC
were bnsiness income of the }'OWC through PE at the Buddh
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International Circuit, and, therefore, chargeable to tax, Jaypee
was bound to make appropriate deductions from the amounts
paid under Section 195 of the Act. However, it is accepted 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. 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 said aspects while
passing the Assessment Order, namely, how much business
income ofFOWC is attributable to PE in India, which is chargeable
to tax. [Para 77, 78]
[218-C-F]
GE India Technology Centre Private Limited v.
Commissioner ()f Income Tax & Anr. [2010] 10 SCR
1142 : (2010) 10 sec 29 - relied on.
Tekniskil (Sendirian) Bhd. v. Commissioner of Income
Tax. (1996) 222 l.T.R. 551 (Authority for Advance
Rulings, India); Deputy Commissioner of Income Tax v.
Subsea Offshore Ltd. (1998) 66 l.T.D. 296 (Income Tax
Appellate Tribunal, Mumbai); Union of India & Anr. v.
Azadi Bachao Ando/an & Anr. [2003] 4 Suppl. SCR
222 : 2004 (lO) sec 1: 2003 (262) ITR 706;
Commissioner of Income Tax. Andhra Pradesh v. fvt!s.
Toshoku Ltd., Guntar & Ors. [1981] SCR 587: (1980)
Supp SCC 614 : 1981AIR148; Maganbhai Ishwarbhai
Patel Etc. v. Union of India and Another [1969] 3 SCR
254; Columbia Sportswear Company v. Director of
Income Tax, Bangalore [2012] 7 SCR 187 - referred to.
Transvaal Associated Hide & Skin Merchants (Pty) Ltd.
(1967) 29 S.A.T.C. 97 (Court of Appeal, Botswana);
Georges Simenon (1965) 44 T.C. (US) 820 (US Tax
Court); Joseph Fowler v. M.N.R. (1990) 90 D-T.C.
1834; (1990) 2 C.T.C. 2351 (Tax Court of Canada);
Antwerp Court of Appeal, decision of February 6, 2001,
noted in 2001 WTD 106-11; Income Tax Appeals Nos.
FORMULA ONE WORLD CHAMPIONSHIP LTD. v.
COMMISSIONER OF INCOME TAX
759/KB to 761/KB of 1997-98 (Tarom SA), (1998)
PT.D (Trib.) 3749 (Income-tax Appellate Tribunal,
Pakistan); Commissioner of Internal Revenue v.
Consolidated Premium Iron Ores Ltd. (1959) 265 F 2d.
320; Lower Tax Court of the Hague, September 10,
1990, (1991) Tax Notes Intl. 161; William Dudney v. R
(1999) 99 DTC 147; Bundersfinanzhof. February 3,
1993, IR 80-81191, IStR 1993, p. 226 (1993) BSt Bl.,
II, 462; Decision of the Lower Tax Court of BadenWurttemberg, May 11, 1992, decision No. 3K 309/91,
RIW 1993, 81, IStR 1992, p.104; Decision ofNovember
10, 1998, (199) Revue deDroit Fiscal, No. 25, comm .. 503,
reported with translation in (1998) I ITLR 857; Cour de
Cassation of February 15, 1980 (1980) Jl. De Droit
Fiscal 321; Sepet v. Secretary of State for the Home
Department 2003 (3) All ER 304; Universal Furniture
Ind. AB v. Government of Norway (Stavan2er Court,
Case No. 99-00421, dated 19-12-1999 referred to in
Principles oflntemational Taxation byAnghard Miller and
· Lyn Oates, 2012); Joseph Fowler v. Her Majesty the
Queen 1990 (2) CTC 2351 - referred to.
'
Double Taxation Conventions by Klaus Vogel - referred
to.
Case Law Reference
(1998) 66 I.T.D. 296
referred to
Para28
[2003] 4 Suppl. SCR 222
referred to
Para 49
(1981) SCR 587
referred to
Para 51
11?69] 3 SCR 254
referred to
Para 55
[2Q12] 7 SCR 187
referred
Para55
(1996) 222 I.T.R. 551
approved
Para 76
(2010) 10 SCR 1142
relied on
Para 77, 7
CIVIL APPELLATE JURISDICTION : Civil Appeal No, 3849
of2017
From the Judgment and Order dated 30.11.2016 of the High Court
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of Delhi at New Delhi in Writ Petition (Civil)No. 9509 of2016.
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Mukul Rohatgi, AG, Dushant Dave, S. Ganesh Arvind P. Datar,
Sr. Advs, Percy Pardiwala, Ms. Anuradha Dutt, Ms. Fereshte D. Sethna,
Sachit Jolly, Gautam Swarup,Ameya Pant, Ms. B. Vijayalakshmi Menon,
Kamaldeep Dayal, Ankur Saigal, Tushar Bakshi, Ms. Diksha Rai,
D.L. Chidananda, Rupesh Kumar, H.R. Rao, G.C. Srivastava, Mrs. Anil
Katiyar, E. C. Agrawala Shikhil Suri, Shiv Kumar Suri, Ms. Vinati Bhola,
Advs. for the appearing parties.
The Judgment of the Court was delivered by
A. K. SIKRI, J.
INTRODUCTION
I. These appeals are filed by Formula One World Championship
Limited (hereinafter referred to as 'FOWC'), Jaypee Sports International
Limited (for short, 'Jaypee') and Union oflndia (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 Defhi whereby
three writ petitions preferred by FOWC, Jaypee and Revenue have been
decided.
2. The matter originated from filing of applications by FOWC
and Jaypee before the Authority for Advance Ruling (AA]l). FOWC
had entered into a 'Race Promotion Con tract' (RPC) dated September
13, 2011 with Jaypee, grantingJaypee the right to host, stage and promote
the Formula One Grand Prix oflndia event for a consideration of US$
40 million. Some other agreements were also entered into between FOWC
and Jaypee as well as group companies ofFOWC and Jaypee, particulars
whereby would be mentioned later at an appropriate stage. In the
applications filed by FOWC and Jaypee before theAAR, advance ruling
of AAR was solicited on two main questions/queries:
(i) 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 oflndia?; and
(ii) whether FOWC was having any
'Permanent
Establishment' (PE) in India in terms of Article 5 ofDTAA?
Ano.ther related question was also raised, viz.,
FORMULA ONE WORLD CHAMPIONSHIP LTD. v.
COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]
(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').
3. AAR answered the first question holding that the consideration
paid or payable by Jaypee to FOWC amounted to 'Royalty' under the
DTAA. Second question was answered in favour of FOWC holding
that it did 11ot 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 tQ 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
t.he High Court contending that the payment would not constitute Royalty
under Article 13 of the DTAA. Revenue also filed the writ petition
challenging ·the answer of the AAR on the second issue by taking the
stand that FOWC had PE in India in terms of Article 5 of the DTAA
and, therefore, tax was payable accordingly.
4. As mentioned above, all these three writ petitions 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 lndia 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.
5. As per FOWC and Jaypee, no tax is payable in India on the
consideration paid under RPC as it is neither Royalty nor FOWC has
any PE in India. It is pertinent to mention that the Revenue has not
challenged the findings of the High Court that the amount paid under
RPC does not constitute royalty. Therefore, that aspect of the matter
has attained finality. The main question in the appeals, therefore, pertains
to PE.
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6. In order to decide this question, following facts, having bearing
on the matter, need a recapitulation:
7.
Federation Internationale de I' Automobile (for short, 'FIA'),
a non-profit association, is established as the Associatio11 lnter11atio11ale
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 of2 l 3 national member organizations
in 125 countries internationally. FIA is the principal body for establishing
the rules and regulations for all major international four-wheel moton;port
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-bui It 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.
·
8. F-1 Grand Prix events are held under the aegis of the FIA
Formula One World Championship's competition-in which F-1 racing
cars, assembled and manufactured strictly in terms of the F-1 technical
regulations, compete against each other, under Fl 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
FORMULA ONE WORLD CHAMPIONSHIP LTD. v.
COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]
specifications, and engage drivers who can successfully manoeuvre the
F-1 cars in the racing events.
9. FOWC is incorporated under the laws of the United Kingdom,
and is a tax resident of the United Kingdom. It is the Commercial Rights
Holder (CRH) in respect of the Championship with effect from January
0 I, 20 I I. 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 'Fl Championship')
to FOWC for JOO year term effective from January 01, 2011. As
mentioned above, the teams which participate in FI 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 tlie 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
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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.
10. Jaypee was interested to acquire this right for hosting, staging
and promoting the F-1 Grand Prix oflndia 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 'Anwork 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$ I 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 201l,2012 and 2013.
11. After entering into the aforesaid arrangement for hosting F-1
Grand Prix in India, both FOWC and Jaypee approached AAR seeking
its advance ruling on the two questions, the nature of which, including
the opinion of AAR thereupon, is already mentioned above.
12. As pointed out earlier, first question was as to whether
considerations received/receivable under the RPC by FOWC from Jaypee
Sports was in the nature of business income and 'Royalty' as defined
under the Act as well as DTAA. Plea of FOWC and Jaypee "as that
FORMULA ONE WORLD CHAMPIONSHIP LTD. v.
COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]
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 off-I 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 .
. 13. The bone of contention before this Court pertains to the issue
of existence of a PE ofFOWC 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.
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RELEVANT STATUTORY PROVISIONS & DTAA REGIME
14. Before adverting to the question at hand, it would be appropriate
to take note of the scheme of the Act as well as relevant provisions of
DTAA on this subject. The Act provides two modes of taxation, namely,
resident based and source based. Any person who is a resident oflndia
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 a!ia, 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
ofa 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
profess;on 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 nonresident is liable to pay tax on incomes earned in India. 'Resident in
India' and 'Not-ordi11urily Resident in India' are covered by the
provisions contai11cd in Section 6.
15. In the present case, we are concerned with the consideration
received by FOWC as a result of Agreement signed with Jaypee Sports.
FOWC, being a UK Company, is admittedly the non-resident in India.
Since the question is whether the aforesaid consideration/income earned
by FOWC is subject to tax in India or not, it is to be decided as to
whether that income accrued or arose in India. For this purpose, relevant
FORMULA ONE WORLD CHAMPIONSHIP LTD. v.
COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]
· 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 mentioiied 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.
16. Clause (i) of sub-section (I }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 connectioR in India, or through or
from any property in India, or through or from any asset or source
of income in India, or through the transfer of a capital asset
situate in India:"
17. It is clear from the reading of the said clause that it includes
all those incomes, whether directly or indirectly, which are accruing or
arising through or from any business connection in India. It is, thus, clear
that an income which is earned directly or indirectly, i.e. even indirectly,
is to be deemed to accrue or earned in India. Further, such an income
should have some business connection in India. Explanation(\) 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). Explanati011 (2) provides certain exceptions in respect of 'business
connection ' and reads as un~er:
"Explanation 2. - Forthe 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 nonresident, -
(a) has and habitually exercises in India, an authority to conclude
contracts on behalfofthe non-resident, unless his activities
are limited to the purchase of gods or merchandise for the
non-resident; or
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(b) ha~ no such authority, but habitually maintains in India a
stock of gods or merchandise from which he regularly
delivers goods or merchandise on behalf of the non-resident;
or
( c) habitually secures orders in India, mainly or wholly for the
non-resident or for that non-resident and other non-residents
controlling, controlled by, or subject to the same common
control, as that non-resident:
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 th is proviso refer;ed to as the principal
non-resident) or on behalf of such non-resident and other nonresidents which are controlled by the principal non-resident or
have a controlling interest in the principal non-resident or are
subject to the same common control as the principal non-resident,
he shall not be deemed to be a broker, general commission agent
or an agent of an independent status."
18. This exception, thus, clarifies and declares that even when
business activity is carried 'tllrougll' 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'."
19. If a non-resident has a PE in India, then business connection
in India stands established. Section 92F of the Act contains definitions
of certain terms, though those definitions have relevance for the purposes
of computation of arms length price, etc. Clause (3) thereof defines
FORMULA ONE WORLD CHAMPIONSHIP LTD. v.
COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]
'enterprise' and such an enterprise includes a PE of a person. PE is
defined in clause (iiia) in the following manner:
"(iiia) "permanent establishment", referred to in clause (iii),
includes a fixed place of business through which the business of
the enterprise is wholly or partly carried on;"
20. At th is 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
I. 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) a place of management;
(b) a branch;
(c) an office;
( d) a factory;
(e) a workshop;
(I) premises used as a sales outlet or for receiving or soliciting
orders;
(g) a warehouse in relation to a person providing store facilities
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for others;
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(h) a mine, an oil or gas well, quarry on other place of extraction
of natural resources;
(i) an installation or structure used for the exploration or
exploitation of natural resources;
(j) a building site or construction, installation or assembly project
or supervisory activities in connection therewith, where such
site, project or supervisory activity continues for a period of
more than six months, or where such project or supervisory
activity, being incidental to the sale or ma~hinety. or equipment,
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continues for a period not exceeding six months and the
charges payable for the project or supervisory activity exceed
10 per cent of the sale price of the machinery and equipment;
(k) the furnishing of services including managerial services, other
than those taxable under Article 13 (Royalties and fees for
technical services), within a Contracting State by an enterprise
through erpployees or other personnel, but only if:
(i) activities of that nature continue within that State for a
period or periods aggregating more than 90 days within any
twelve-month period; or
(ii) services are performed within that State for an enterprise
within the meaning of paragraph 1 of Article 10 (Associated
enterprises) and continue for a period or periods aggregating
more than 30 days within any twelve-month period;
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 ifit provides services or facilities in
connection with, or supplies plant and machinery on hire used
or to be used in, the prospecting for, or extraction or production
of mineral oils in that State.
3. The term "permanent establishment" shall not be deemed to
include:
(a) the use of facilities solely for the purpose of storage or
display of gods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise
belonging to the enterprise. solely for the purpose of storage
or display;
(c) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
processing by another enterprise;
(d) the maintenance ofa fixed place of business solely for the
purpose of purchasing goods or merchandise, or for
collecting information, for the enterprise;
( e) the maintenance of a fixed place of business solely for the
:;
...
FORMULA ONE WORLD CHAMPIONSHIP LTD. v.
COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]
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;
(f) the maintenance of a fixed place of businesses solely for
any combination of activities mentioned in sub-paragraphs
(a) to ( e) of the paragraph, provided that the overall activity
of the fixed place of business resulting from this combination
is of a preparatory or auxiliary character.
4.