2017 (4) TMI 1109 - SC - Income Tax

Supreme Court rules Formula-1 circuit creates Permanent Establishment under Section 195 requiring tax deduction on payments

Formula One World Championship Ltd. Versus Commissioner of Income Tax, International Taxation – 3, Delhi & Anr.

Formula One World Championship Ltd. Versus Commissioner of Income Tax, International Taxation – 3, Delhi & Anr. - [2017] 394 ITR 80 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.