2017 (4) TMI 1109 - SC - Income Tax

Formula One circuit held fixed place PE; India can tax business income attributable under Article 5, Section 195 applies

SC held that the Buddh International Circuit constituted a fixed place PE in India of the non-resident enterprise exploiting Formula One commercial ... Permanent establishment - fixed place of business - business carried on through a place - business connection in India - interpretation of Article 5 (Permanent Establishment) of the DTAA - obligation to deduct tax at source under Section 195 of the Act - attribution of income to a permanent establishment - judicial review of an Authority for Advance Ruling under Article 226Permanent establishment - fixed place of business - business carried on through a place - interpretation of Article 5 (Permanent Establishment) of the DTAA - FOWC had a permanent establishment in India constituted by the Buddh International Circuit - HELD THAT: - The Court agreed with the High Court that the Buddh International Circuit qualified as a fixed place of business through which FOWC carried on part of its business. The conclusion rests on a holistic reading of the contractual matrix (Concorde Agreement, RPC 2011, Organisation Agreement and related agreements between Jaypee and FOWC affiliates) showing that FOWC and its affiliates controlled access, facilities (paddock, media compound, pit, passes), origination of the TV feed and exclusive commercial exploitation rights. Although the physical presence at the circuit was for limited periods around each event, the recurrence under a multi year term, the exclusive access and the manner in which commercial rights were exploited established the requisite stability, dependence and productivity required of a PE under Article 5. The Court held that the temporary nature of each event did not preclude finding a fixed place of business given the business model and repetitive access under the RPC and related arrangements. On these determinative facts and legal tests drawn from treaty commentary and precedent, the PE finding was sustained.FOWC is liable to be treated as carrying on business in India through a permanent establishment at the Buddh International Circuit.Obligation to deduct tax at source under Section 195 of the Act - attribution of income to a permanent establishment - business connection in India - Jaypee is required to make appropriate tax deductions under Section 195 but only in respect of that portion of FOWC's income attributable to the PE in India - HELD THAT: - The Court affirmed that where payments to a non resident are chargeable to tax in India by reason of a PE, the payer has an obligation under Section 195 to deduct tax at source. However, the obligation to deduct is limited to the part of the payment that is chargeable in India-i.e., the portion of FOWC's business income attributable to the PE. Determination of the appropriate attributable portion and any tax consequences (including interest or penalty) are matters for assessment by the Assessing Officer. The Court expressly accepted that recourse under Section 195(2) and related provisions is available in respect of amounts not chargeable in India and noted that bona fides of the payer may be relevant at assessment.Jaypee must deduct tax at source under Section 195 only on the portion of the consideration attributable to FOWC's PE in India; quantification is to be determined by the Assessing Officer.Judicial review of an Authority for Advance Ruling under Article 226 - The High Court acted within its jurisdiction under Article 226 in entertaining challenges to the AAR's rulings and deciding the questions presented - HELD THAT: - The Court rejected the contention that the High Court, in exercise of certiorari jurisdiction under Article 226, could not examine the AAR's findings on the existence of a PE. Given that the writ petitions were filed by the applicants themselves and raised substantial legal questions regarding treaty interpretation and the factual matrix, the High Court was entitled to review the AAR's rulings within the scope of judicial review. The Court therefore declined to fault the High Court's power to reassess the legal and documentary materials in arriving at its conclusions.High Court's exercise of jurisdiction under Article 226 to review the AAR's ruling was proper.Final Conclusion: The appeals of FOWC and Jaypee are dismissed. The Supreme Court upholds the High Court's finding that FOWC had a permanent establishment at the Buddh International Circuit and that Jaypee is obliged to deduct tax at source under Section 195 only in respect of the income attributable to that PE; the quantum and attribution are to be determined by the Assessing Officer. The Revenue's appeal on dependent agent PE was treated as academic and disposed accordingly. Issues Involved:1. Whether the payment of consideration to FOWC from Jaypee was royalty under Article 13 of the DTAA between the UK and India.2. Whether FOWC had a Permanent Establishment (PE) in India under Article 5 of the DTAA.3. Whether any part of the consideration received by FOWC from Jaypee outside India was subject to tax at source under Section 195 of the Indian Income Tax Act, 1961.Detailed Analysis:1. Whether the payment of consideration to FOWC from Jaypee was royalty under Article 13 of the DTAA:- The AAR initially ruled that the consideration paid by Jaypee to FOWC amounted to 'Royalty' under the DTAA.- The High Court reversed this finding, holding that the amount paid/payable under the RPC by Jaypee to FOWC would not be treated as Royalty.- The Revenue did not challenge the High Court's ruling on this issue, thus it attained finality.2. Whether FOWC had a Permanent Establishment (PE) in India under Article 5 of the DTAA:- The High Court concluded that FOWC had a PE in India, reversing the AAR's finding.- The High Court analyzed the agreements between FOWC and Jaypee, including the Race Promotion Contract (RPC), and found that FOWC had control over the Buddh International Circuit during the event.- The High Court noted that FOWC had full access to the circuit through its personnel, the team contracted to it, and could dictate who was authorized to enter the areas reserved for it.- FOWC's presence was considered sufficient for the purposes of Article 5(1) of the DTAA, given the repetitive nature of the access for the period in question.- The High Court found that FOWC carried on business in India through the exploitation of commercial rights, including media rights, hospitality rights, and title sponsorship.- The High Court also noted that the physical control of the circuit was with FOWC and its affiliates from the inception until the conclusion of the event.- The High Court's analysis included various clauses of the RPC, which showed that Jaypee's capacity to act was extremely restricted and FOWC had exclusive access to the circuit and all the places where the teams were located.3. Whether any part of the consideration received by FOWC from Jaypee outside India was subject to tax at source under Section 195 of the Indian Income Tax Act, 1961:- The High Court held that since payments made by Jaypee to FOWC under the RPC were business income of FOWC through PE at the Buddh International Circuit, they were chargeable to tax in India.- Jaypee was bound to make appropriate deductions from the amounts paid under Section 195 of the Act.- The Supreme Court acknowledged that only the portion of the income of FOWC attributable to the PE would be treated as business income of FOWC and subject to tax.- The determination of the appropriate portion of income chargeable to tax would be adjudicated by the Assessing Officer during the assessment process.Conclusion:- The appeals by FOWC and Jaypee were dismissed, with the Supreme Court upholding the High Court's findings that FOWC had a PE in India and the payments made were not royalty.- The appeal by the Commissioner of Income Tax was disposed of as the issue of dependent PE had become academic.- The Supreme Court emphasized that the income attributable to the PE in India would be subject to tax, and Jaypee was obligated to deduct tax at source on such payments.