Monday, May 22, 2017

Buddh Circuit a Permanent Establishment of Formula One: Supreme Court

[In the following post, Akash Santosh Loya, who is a IIIrd Year Student, 5-year B.A. LL.B. (Hons.) Course, National University of Advanced Legal Studies, Kochi, provides a summary of a recent Supreme Court decision that has implications for international taxation.]

In Formula One World Championship Ltd v. Commissioner of Income Tax, International Taxation – 3, Delhi,[1] the Supreme Court of India held that the Buddh Circuit in Noida was a Permanent Establishment (PE) of Formula One World Championship Ltd (FOWC) in India. Therefore, FOWC was liable to pay tax in India with respect to its income arising from the Formula One Race event on the Buddh Circuit.

Concept of Permanent Establishment

Before adverting to the concept of PE, it is necessary to set out the two basic rules of taxation, i.e., the residence rule and the source rule. The income of a person is taxable either because the person is the resident of the country as per the domestic laws of that country or because the person is carrying out certain business activities in that country, directly or through some other person, and derives income from that business activity. The former is referred to as the ‘residence rule’ of taxation and the latter is called the ‘source rule’ of taxation.

Article 5 of the OECD’s Model Tax Convention on Income and on Capital deals with the concept of PE. A PE is existence or presence of an entity/person in a foreign country which is of substantial nature. There are two kinds of PE. An establishment or existence in form of office, branch, installation, etc. is termed as ‘Associated PE’. The presence and carrying out of business activity by an entity through an agent is termed as ‘Unassociated PE’. With respect to the first type of PE i.e., Associated PE, the two-fold test for determination of PE  is: (a) firstly,  there should be a ‘fixed place of business’ and 2) Secondly, the business activity of the entity should be carried from the same place. The two-fold test for determination of ‘fixed place of business’ is: (a) firstly, there should be a fixed place and (b) secondly, that the place should be ‘at the disposal’ of the person.

A place is said to be ‘at the disposal’ of the enterprise when that enterprise has control over that place. It can use that place at any time of its own choice and for work relating to more than one customer and for its internal administrative and bureaucratic work. Ownership is not necessary for a place to constitute ‘fixed place of business’ of an enterprise. As long as an enterprise is able to use the premise for its own business as well, it can be said that the premise is ‘at the disposal’ of enterprise.

Background of the Case

Federation International L’ Automobile (FIA) is the body which governs and provides all the rules and regulations for all Formula One (F1) races. By virtue of an agreement between FIA and Formula One Asset Management Ltd (FOAM) in 2001, FOAM was made the Commercial Rights Holder (CRH) for the F1 Race events.  FOWC, the appellant in the present case, is a company incorporated by FIA in the United Kingdom (UK) to look into the promotion, hosting and organization of various racing and non-racing events. Under the Contract between FIA, FOAM and FOWC, FOAM transferred the commercial rights to FOWC. Thus, FOWC had been made the commercial rights Holder. Further, under the same contract FOWC was given the authority to choose promoters for various events. In order to organize the Formula One Race event in India, Jaypee Sports International Ltd (Jaypee) was chosen as the Promoter by FOWC. A ‘Race Promoter Contract’ (RPC) along with various other agreements were entered into between Jaypee on one hand and FOWC and its affiliates on the other hand. Further, a service agreement was also entered into between FOWC and FOAM during the same period.

The present matter originated from the filing of applications before the Authority for Advance Rulings (AAR) by FOWC and Jaypee. One of the queries posed by the parties was whether FOWC had a PE in India. The AAR granted a ruling in favor of FOWC and Jaypee holding that FOWC did not have any PE in India. In the appeal filed by the Revenue with respect to the aforesaid issue before the Delhi High Court, the appeal was allowed. The Delhi High Court held that FOWC has a PE in India.

Arguments Advanced

FOWC:

1.         The twin-test for determination of PE is not satisfied. Firstly, the circuit and its surrounding area are not ‘at the disposal’ of FOWC, as the premises was owned and constructed by the Jaypee at its own cost and the said premises is also used by Jaypee for hosting events other than the F1 race. Secondly, no business of FOWC was conducted from the aforesaid premises, as the business of FOWC was exploitation of commercial rights. The source of its income was through the grant of advertisement and television rights and consideration received from Jaypee. Therefore, it had no connection whatsoever in holding the race on Buddh Circuit. The business was not related to the physical circuit.

2.         There was no substantial presence of FOWC, as the event was organized for only three days during which FOWC had its presence.

3.         A comprehensive view should be taken while interpreting Article 5 of the India – U.K. Double Taxation Avoidance Agreement (DTAA).

Revenue:

1.         The twin test for determination of PE is satisfied. A comprehensive reading of all the agreements entered into between the parties clearly shows that FOWC has complete control over the event. Further, the circuit and paddock rights, which were granted to affiliates of FOWC, established that the business was conducted from the Buddh Circuit premises.

Decision

The Supreme Court addressed the following two issues to adjudicate and decide the matter

I.          Whether the premises are ‘at the disposal’ of FOWC?

II.        Whether the business of FOWC was conducted from that place?

I.          Whether the premises are ‘at the disposal’ of FOWC?

The flow of commercial rights was considered as follows:

Sr. No.
AGREEMENT

PARTICULARS
1.
Between FIA and FOAM (2001)
Transfer of Commercial Rights in relation to F1 event to FOAM

2.
‘Concorde Agreement’ between FIA, FOWC and Teams (2009)

1.     Made FOWC a Commercial Rights Holder (CRH) to exploit rights with respect to the F1 Business
2.     Granted the authority to FOWC to choose the promoter.
3.      All the teams should ensure participation and abide by the regulations prescribed.
4.     ‘F1 Business’ was defined as exploitation of various rights including media rights, hospitability rights and title sponsorship rights
3.
Between FOWC and Jaypee (September 2011)

1.     Grant of ‘hosting, conducting, promoting rights to Jaypee.
2.     Grant of circuit rights which include Title Sponsorship Rights and Paddock Rights to Jaypee

4.
Between Jaypee and FOWC’s Affiliates (September 2011)
Circuit rights (which includes Title Sponsorship as well)  and Paddock rights taken back from Jaypee (on the same day of the entering of agreement on Serial No. 3)

5.
Between FOWC Affiliates and Bharti Airtel (August 2011)

Title Sponsorship rights transferred to Bharti Airtel

6.
Service Agreement between FOAM and FOWC (2011)

FOWC to undertake liaison and supervision of other parties at the event, transport and other data services
                                                                                                             
After analyzing the aforesaid Agreements, the Supreme Court took into consideration the following factors. First, FOWC had a complete discretion to choose the Promoter. Secondly, FOWC and its affiliates had a complete control over the Circuit rights and the Paddock rights which formed a very integral part of the event. Thirdly, an Agreement for Title Sponsorship was entered into between FOWC’s Affiliates and Bharti Airtel in August 2011, which was even before the FOWC’s Affiliates acquired it from Jaypee. Fourthly, the Service Agreement between FOWC and FOAM granted FOWC the right to liaison and supervise other parties at the event. The Agreement also granted FOWC the power to exercise certain amount of control over transport and other data services.

On the basis of the aforesaid factors, it was held by the Supreme Court held that FOWC had control over all the essential elements of Race, i.e. Circuit, Paddock, Teams. Without these elements, it was difficult to imagine a F1 Race event taking place.    

In alternative, it also analyzed the ‘Race Promotion Contract’ entered into between FOWC and Jaypee. The following factors of the Race Promotion Contract were considered by the Supreme Court.  First, it was only through FOWC that any circuit was allowed to be introduced in the event. Secondly, Jaypee was obliged to ensure that Circuit, Paddock, Surroundings and building open to FOWC, its affiliates and participants. Thirdly, passes were to be issued by FOWC and the same were unquestionable. Certain areas of premises are not accessible to public and, further, access can be obtained only through the passes issued by FOWC. Fourthly, no photos, recordings, broadcast were to be taken by Jaypee within the confines of Circuit. Fifthly, Jaypee was to appoint International Television and Broadcasting feed during the term specified in the guideline published by FOWC. Sixthly, Jaypee was to provide all the present and future intellectual property rights  to FOWC and allow exploitation at its own risk. Lastly, Jaypee was to ensure that those accredited and authorized were permitted to enter upon premises, and all the necessary help should be provided by FOWC.

On the basis of the aforesaid factors, the Supreme Court held that by virtue of the terms of RPC, it can be inferred that the Buddh Circuit where the event was organized was ‘at the disposal’ of the FOWC.

II.        Whether business of FOWC was carried from the Buddh Circuit?

The Supreme Court held that FOWC was engaged in the event of promoting the F1 Race. It had acquired right to exploit the commercial rights of the event and ,therefore, the business in which it was involved was exploitation of commercial rights  of the event. The event involved Circuit, teams, media etc. FOWC had the right to exploit the commercial rights of the aforesaid elements of the event which it was doing so as it had actual control over the elements. Therefore, FOWC was carrying on its business through Buddh Circuit.

In light of the above, the Supreme Court held that since the Buddh Circuit was a fixed place which was under the control of  FOWC, and FOWC was carrying on its business through the said place, the Buddh Circuit constituted a Permanent Establishment of FOWC and therefore, FOWC was liable to pay tax on the income arising from the Buddh Circuit.

- Akash Santosh Loya



[1] [2017] 80 Taxmann 347 (SC).