TaxTMI 
TaxTMI 
2016 (12) TMI 123
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....Tax, hereafter "the revenue's petition"; WP 10145/2016 (preferred by Jaypee Sports International Limited, hereafter called "Jaypee") and WP 10307/2016 (Formula One World Championship Limited (FOWC) hereafter called "the F1 Championship Ltd" petition). Both Jaypee and FOWC had filed applications before the Authority for Advance Ruling ("AAR"). The AAR held one question in favour of the revenue and the other question in favour of the said two companies. All three parties have, thus approached this court, under Article 226 of the Constitution. 2. A brief background of the facts is necessary. FOWC is a UK tax resident company incorporated on 7 March 2001. Consequent to agreements entered into between the Federation Internationale de I'Automobile ("FIA" an international motor sports events regulating association), Formula One Asset Management Limited ("FOAM') and FOWC, FOAM licensed all commercial rights in the FIA Formula One World Championship (Championship') to FOWC for 100-year term effective from 1 January 2011. FOWC entered into a "Race Promotion Contract" ("RPC') dated 13 September 2011, by which it granted to Jaypee Sports the right ("Right') to host, stage and promote th....
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....nd by contract with FOWC are permitted participation. 5. Every F1 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 Contract Right Holder, which is in effect, FOWC), to the FIA for inclusion in the official F1 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 F1 racing team in every event is listed in the official racing calendar and it counts towards the Constructors 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 agreement,(which in the present instance, was latest in the series of Concorde agreements the last being the one of 2009) the prize money payable to the teams for their participation during the season. Grant of a right to host, stage and promote the F1 racing event therefore carries with it a covenant or representation that F1 racing teams with their cars, ....
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....parlance to reproduce the names (of sports events) in the same manner as they were known to the public at large. As a consequence, the Artwork License Agreement ('ALA') was executed solely to enable the Promoter for a limited use of F1 marks and to prevent it from using the marks for any commercial exploitation. Such grant was similar to sale of prepackaged or branded product; the main emphasis is sale of the product, the use of the mark was part of the sale. The applicants relied on Para 10.1 of the OECD commentary on Article 12 of the Model Convention which states that payments for the exclusive distribution rights of a product or a service do not constitute royalties. Furthermore, according to FOWC, the sporting event was known by the name F1 World Championship world over due to its fame and reputation. The applicants - Jaypee and FOWC relied on Dy Director of Income Tax v. Sheraton International Inc (2009) 313 ITR 276, of this Court. The court had held that as long as the main object of the agreement did not relate to the use of the trademark, the amount could not be characterized as royalty payment for use of trademark. The applicants also relied on a tribunal decision....
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....f their fame and reputation. Licensing of the mark gave Jaypee the right to hold the F1 championship or Grand Prix of India event. This position was also supported by the fact that the promoter's rights stipulated in the Concorde agreement clearly list out as being (i) right to promote the event. (ii) right to designate the event as Formula One Championship event. Given the relative lack of knowledge of the F1 sporting event, use of the mark became crucial and necessary. The crowds visiting the circuit or watching from home were drawn towards the name F1, which they were familiar with and not the car or circuit specifications that the event associates itself with. The revenue arising from the commercial rights, be it sale of tickets, advertisement rights or broadcasting rights are, therefore, all attributable to the name of the event more than anything else. 10. The revenue also urged that the definition of royalty both under the Indian Income-tax Act as well as the DTAA encompasses within its ambit the use of trademark among other things. It may be noted that there is no qualification to suggest that the use must be incidental, primary, permitted or registered. As regards t....
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....ramme covers, templates for posters, official stationery, media kits etc. and licenced marks including FORMULA ONE GRAND PRIX of INDIA which is the name of event organized (host, stage and promote) by Jaypee. 29. It may be mentioned that the consideration as per RPC is USD $ 40 m and consideration as per ALA is USD $ 1 , though both agreements were signed on the same date and relate to the same event promoted by Jaypee. It is only on the basis of ALA that Jaypee is able to organize the event which is called Formula One Grand Prix of India and is able to use all intellectual properties belonging to FOWC necessarily required to stage, host & promote the event. It is unthinkable that the event called Formula One Grand Prix of India can be organized in the absence of ALA. Use of this mark is sine qua non for organizing this event otherwise the event will not be known as 'event' in terms of RPC. 30. The above mentioned facts clearly establish that art work license agreement, though signed separately, is integral to RPC. It was not a standalone agreement. Clause 23.2 of RPC stipulated that Jaypee & FOWC shall enter into art work agreement permitting incidental use of certai....
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.... of organizing Formula Grand Prix of India event only and for no other event. Therefore, irrespective of other limitations imposed by clause 23.2 & 23.3 of RPC the licensed mark of Formula One Grand Prix of India and other intellectual property has been actually used by Jaypee. In these circumstances the creation of a separate agreement known as art work license agreement with a nominal and insignificant consideration of US $ 1 is purely artificial. Similarly, the use of words like 'incidental use' in these agreements will also not hide the dominant purpose. The definition of royalty in the lndo-UK DTAA covers 'payments of any kind received as a consideration for the use of .......... trade mark'. Section 9(1)(VI) of the Income-tax Act also covers use of trade mark under royalty. Therefore, the payments.made by Jaypee for use of trade mark called Formula One Grand Prix of India in the event hosted by them is in the nature of royalty." ***************** ******************** 37. We have given serious thought to the proposition formulated as above. The art work agreement also mentions that Formula One licensing BV, Netherlands, is the owner of trademarks as me....
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.... be extended to the provisions contained in section 9(1)(vi) for the reason that Explanation 5 to section 9(1)(vi) introduced by the Finance Act of 2012 provides that Royalty shall be deemed to arise whether the property is used directly or not. The implication of the Explanation would be that even if the property is deemed to be used by the proprietor and not by the licensee, it can still be regarded as indirect use of the property as the benefits of such use are flowing to the licensee and he has agreed to pay consideration to the licensor in lieu of the 'indirect' use of the property. If the interpretation of the applicant is accepted and the deeming fiction under section 48(2) is to be read in all circumstances and for the purposes of all existing laws irrespective of the context and purpose of enactment of this provision in the TM Act, the consequences would be that the use by the licensee would be of no consequence as the licensee, by the legal fiction so provided, would be deemed to have never used it, though in fact he may have actually used it. The definition of royalty under the Income Tax Act specifically includes the 'granting of a license' to use the IP....
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....here is no need to deal with other objections raised by the Department of Revenue i.e., the definition of royalty as given in Explanation 5 to section 9(1)(vi) of the Income Tax Act and the context in which 'any other law' came to be used in the Trademarks Act. The fact is that Jaypee is not the permitted user under the law and therefore, it is not entitled to take recourse to provisions relating to permitted user in section 48(2) of the Trademarks Act." 12. On the second question, i.e whether FOWC had a PE in India under any of the paragraphs of Article 5 of the DTAA, the applicants (FOWC and Jaypee) asserted that no such PE existed because the revenue had to first establish that under Article 5(1) of the lndia-UK DTAA, FOWC had a fixed place of business in India and that it carried on business in India through such fixed place. FOWC stated that its only place of business is its office in UK and it did not have any fixed place of business or office in India. By granting the right to host, stage and promote the race, to Jaypee it did 'business with a party that is a resident of India'. It did not undertake any business operations (or part thereof) in India. FOWC ....
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.... engaged FOM independently for the production of feed and data and other support services. For these reasons, FOWC urged that activities undertaken by each of the affiliates independently and on their own account and did not constitute its PE. It was also argued that even if they were dependent agents of FOWC their place of business could not be a PE of the principal i.e. FOWC. 14. The revenue argued that for deciding fixed place of business in terms of Article 5 it is adequate if the place is at the disposal of the enterprise to be used in business. He has referred to paragraph 4 of OECD commentary as under:- "4. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise.... Again the place of business may be situated in the business facilities of another enterprise. 4. 1 As noted above, the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal/legal right to use that place is therefore required." 15. It was further argued that a fixed place PE may also be constituted i....
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....n, then given to FOAM and w.e.f. 1.1.2011 transferred to FOWC. It was pointed out that on the one hand, the organization Agreement between FINFMSCI was entered into on 20.01.2011, the RPC and the Artworks License Agreement are dated 13.09.2011 Going by RPC dated *13.09.2011, it is evident that GP contract did not exist on the date of the signing of the Organization Agreement in January 2011. The recital (B) in the Organization Agreement reads as under: "The Promoter has entered into an agreement with the Commercial Rights Holder to promote the event.' 18. The revenue asserted that FOWC's stand that its agreement (RPC) was entered into with Jaypee on 13.09.2011 is inexplicable, having regard to the above Recital in the Organization Agreement in January 2011 by reference to the RPC of September 2011. Secondly, on lines similar to the RPC of September 2011, was an agreement dated 25.10.2007, between FOAL and JPSK Sports Pvt., Ltd. This agreement is in tune with the Format provided under Schedule 4 of the Concorde Agreement. It is plain that FIA could sign the Organization Agreement in January 2011 only on the basis that the Promoter had already entered into GP contract with FOAM....
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.... Beta Prema 2 because it exploited certain commercial rights available only with FOWC. The revenue submitted that a PE gets constituted under Article 5(4) of DTAA also for the reason that FOM is agent and business manager of FOWC and Beta Prema 2 and All Sports have no independent status. 15. The AAR's findings on the question of existence of a PE in India, of the FOWC, are as follows: "47. Determination of PE is question of fact and the provisions of Article 5 of DTAA lay down several tests. If an enterprise qualifies to be PE on these laid down tests then only it can be considered to have a PE and in that case only that portion of income will be taxable in the country of PE which is attributable to PE. Under Article 5(1) the first test is place of business test. Its concept in terms of PE can be seen as any substantial, physical object which is commercially suitable to serve as the basis of business activity. It also encompasses separate part of an enterprise, foreign branches or place of management or office etc. Revenue's contention that mere access to the racing circuit owned by JP amounts to place of business through which business activity of FOWC is carried out is....
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....this fixed place of business. FOWC is not carrying on any business activity here unless we accept the theory of Revenue that all three entities Beta Prema, Allsports, FOM are acting on behalf of FOWC. Unfortunately, this is not true and we have rejected such presumption in the section on tax avoidance. Therefore, the business activity test also fails because we have already concluded in the section of issue of tax avoidance that there is no evidence to suggest that Beta Prema 2, All Sports and FOM are acting on behalf of the FOWC and all arrangements and agreements in relation to activities performed by these 3 entities are sham. It is also relevant that USD 40 m has been paid for use of certain marks and intellectual property of FOWC and this use cannot be equated with business activity in India. 49. Article 5(5) has several pre-requisites 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 habitually exercises 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....
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.... privilege of hosting, staging and promoting the event at the motor racing circuit owned by Jaypee situated in N.C.R (National Capital Region). Reliance is also placed on Clause l (t), which defines "Event" to mean the Formula One Grand Prix of India designated as a round of the FIA Formula One World Championship. (d) Clause 4, which set out the grant by FOWC to Jaypee of the right to host, stage and promote the 'Event' and clarified that the right was limited to the event. (e) Clause 17, which stated that FOWC would use its reasonable endeavors to ensure that at least sixteen cars participate in the Event. (f) Clause 18, which forbids Jaypee from making any audio or visual image of the event. (g) Clause 23.2, permits FOWC to make incidental use of I.P. rights solely for the limited purpose of facilitating Jaypee to promote the event and (h) Clause 28.2 refers to termination of the RPC on the declaration by FOWC that an "event of default' has occurred, upon which the RPC stood terminated forthwith. However, it is of importance to note that Jaypee's liability to make payments under the RPC continues, not only in respect of the year in which the termination has taken plac....
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....nce of doubt, not to include use for any merchandising or other products or services whatsoever, whether distributed free of charge or for sale". It was argued that Clauses 2.2 and 6.2 of the ALA provide that the ALA will continue only until the RPC terminates or expires; Clause 2.3 of the ALA prohibit Jaypee from using any of the licensed marks, or as part of the name of the circuit, any corporate name, any domain name, website address or other URL identification or equivalent used in association with Jaypee. Jaypee thus has no IP rights whatsoever independently of the staging and hosting of the Event. To the same effect are the undertakings given by Jaypee, set out in Clauses 3.1(e) and 3.6 of the ALA. Counsel also argued that the definition of "royalty" as set out in Explanation 2 to Section 9(1)(vi) of the Act, is significantly broader than the definition of "royalties" set out in Article 13(3) of the India-UK DTAA. The definition in the Act specifically covers and includes lumpsum payments, whereas Article 13(3) of the DTAA only refers to payments. The impugned order neither contains any discussion nor finding whatsoever on this crucial issue even though it goes to the root of....
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....mediate connection between the supply of goods and services and the user of the trademarks/ I.P. rights that are inextricably interconnected with such supply. Thus, when no autonomous I.P. rights are created that are de hors or independent of the supply of the goods and services, then the payments under the contract cannot be regarded as consideration for the user of the trademarks / I.P. rights and, therefore, would only constitute 'business income' and not "royalty" in the hands of the recipient. It is argued that the judgment fully covers the present case in favor of FOWC, and the AAR committed an egregious and patent error of law in not following the binding principles of law laid down. It is further argued that the term "incidental "used by this court in Sheraton is in conformity with the sense in which the Supreme Court has understood the said term. Learned senior counsel relied on Works Manager Central Railway vs. Vishwanath & Ors. (1969) 3 SCC 95,State of Orissa vs. Chakobhai [1961] 1 SCR 719 and Shroff & Covs Municipal Corporation of Greater Bombay (1989) Supp. 1 SCC 347. It is urged that the AAR fell into error in interpreting the expression "incidental' in a comp....
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....ined by an agent dependent on the enterprise.' 22. Mr. Ganesh learned senior counsel argued that under Article 5.1 of the DTAA, a permanent establishment is said to exist in relation to a business and income is said to be earned in India, if it has a "fixed' place of business "through' which income is earned by means of an economic activity. It is argued that the limitation and framework within which tax incidence can be said to arise, if at all, is that of the need for an enterprise to have a fixed place. The OECD commentary states that the premises need not be owned or even rented by the enterprise. What is however, essential is that the premises or place should be at the disposal of the enterprise. Mr. Ganesh submitted that there was nothing in the RPC or any agreement with FOWC whereby a fixed place was ever placed at its exclusive disposal. Thus, a place of business, which houses the fixed "place' would not imply mere empty space, available for some such purpose, but existence of objects in that place, such as furniture, equipment, etc which facilitate business, needed for the concerned commercial activity. The place of management, though considered a PE, requires existence....
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....ause the contract with Jaypee was a "one off' transaction. Thus, none of the ingredients of Article 5(4) of the DTAA applied. Equally, provisions of Article 5 (5) of the DTAA had no application because, none of the subsidiaries' activities were "carried out wholly or almost wholly for' FOWC. It was submitted that there was, nor could there have been, any finding that the said subsidiaries (Allsports, Beta Prema2 or FOM) acted "wholly' in the course of their business for FOWC or for its benefit. There was no material or evidence shown by the revenue in support of its contention. It is submitted that the business contracts therefore, entered into between FOWC's subsidiaries were independent bargains and concluded on principal to principal basis. The benefit or amounts derived from those contracts did not flow back to FOWC. Lastly, learned counsel submitted that the reliance placed by the revenue on the AAR's ruling in the case of Re Golf in Dubai 2008 (306) ITR 374 is inappropriate, because in that case, the arrangement was such that the premises were in fact leased for a period for use. In the present case, no space for work or commercial activity was offered to or taken by FOWC. ....
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....loit such rights either directly or through its affiliates. 28. It is argued that the Buddh International Circuit (Noida), which includes not only the racing circuit but all the attached buildings in the complex, including vending areas, hosting and broadcasting facilities, media centres, administrative offices etc. as widely defined in the Race Promotion Contract itself was available to FOWC and its affiliates (including their employees and third party contractors appointed by them) for carrying on their business operations. This circuit along with all the facilities was constructed in a form and manner approved by both FOWC and FIA. (Clause 5(e) of RPC). FOWC and its affiliates have complete access to the circuit in all its dimensions for a period beginning 14 days prior to the event and ending 7 days after the event. The place is available not only to FOWC but to its contractors, licensees, FOWC's affiliates, their personnel etc. (Clause 11 of RPC). Further, access to the restricted area is regulated by passes and tickets issued by FOWC. In effect, FOWC had complete control over the entire area during the term of the event. (Clause 14 of RPC) The fixed place is available ....
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....OWC, Beta Prema 2 could have concluded an agreement with Bharti Airtel only on behalf of FOWC or as an agent of FOWC and not otherwise. It is argued thus by Mr. Srivastava that a holistic reading of these agreements particularly the five agreements executed simultaneously on 13.09.2011 leads to the following irresistible inferences: (i) FOWC alone was the commercial rights holder (CRH) for the championship under the Concorde Agreement. (ii) FOWC could exploit the commercial rights either itself or through its group entities only and the same could not have been transferred to a third party, outside the group, including JPSIL. (iii) The entire arrangement of showing that the rights moved from FOWC to JPSIL and then from Jaypee to Allsports and Beta Prema 2 is wholly artificial and far removed from the true state of affairs and intent of the parties. (iv) Jaypee was interposed in the above arrangement only to avoid the exposure of FOWC to a PE in India. The commercial rights, in effect and for all intent and purposes, remained only with FOWC or its affiliates. (v) The transfer of commercial rights to Jaypee on 13.09.2011 and its further transfer to the affiliates of FO....
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....on of these commercial rights either by itself or through any one or more members of CRH group mentioned in the Concorde Agreement. Counsel urged that commercial rights were originally owned by FIA, transferred in 2001 to SLEC Holding Company (parent company of FOWC) for a consideration, then given to FOAM and w.e.f. 1.1.2011 transferred to FOWC. He also pointed out certain inconsistencies as under:- (a) The Organization Agreement between FINFMSCI was entered into on 20.01.2011. The RPC and the Artworks License Agreement are dated 13.09.2011 Going by RPC dated *13.09.2011, it is evident that GP contract did not exist on the date of the signing of the Organisation Agreement in January 2011. It would be relevant to refer to recital (B) in the Organization Agreement which reads as under: "The Promoter has entered into an agreement with the Commercial Rights Holder to promote the event.' According to FOWC, its agreement with Jaypee was entered into on 13.09.2011. It would be difficult to explain the Recital in the Organization Agreement in January 2011 by reference to the RPC of September 2011. (b) The agreement, dated 25.10.2007, between FOAL and Jaypee, is on the same lines ....
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....Allsports Management SA and Beta Prema 2 Ltd. are FOWC's agents who carried on its business and on its behalf, through the fixed place. It has submitted that that all commercial rights originally vested and were granted to only FOWC under the Concorde agreement, with a stipulation that FOWC may transfer or assign such rights only to other group entities. It is argued that each of FOWC's affiliates acted on its behalf; the rights they exploited were ostensibly that of Jaypee; however, a close reading of the agreements with that concern showed that their own rights originated in effect from the arrangements entered into FOWC; the contracts with Jaypee were mandated by the RPC between FOWC and Jaypee, where the latter was bound to enter into agreements and contracts with these affiliates. Given the admitted relationship between FOWC and each affiliate and the fact that they collected huge sums of money through the contract, in lieu of which Jaypee was given US $ 1 million in each contract, the only inference that could reasonably be drawn was that they entered into contracts on behalf of FOWC. 36. On the issue of whether the payment by Jaypee was royalty, the revenue argued....
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....a One Championship event. 39. The revenue argues that the SLEC group (of which FOWC is a part)had acquired the 'Formula One' trademark for a substantial consideration from FlA. It is unrealistic that a mark acquired for a hefty consideration, would be licensed to a third party (Jaypee) without consideration. Counsel argues that the trademark's significance is evidenced by the fact that there are several other motor sport racing events held in India such as 'Honda 1 Make Race', 'JK National Tyre Racing Championship', 'MRF 1600 Championship', 'Maruti Suzuki National Superleague' etc. Yet these events hardly come in the public eye; and saying that the revenues from such events are miniscule as compared to that of FOWC would be an understatement. Given the relative ignorance of motor sports in India, crowds, visiting the circuit or watching from home are thus drawn towards the name 'Formula One', that they are familiar with and not the car or circuit specifications that the event associates itself with. The revenue arising from the commercial rights, be it sale of tickets, advertisement rights or broadcasting rights are, therefore,....
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....s therein vested and continued with Jaypee. Since the concept of a fixed place PE is entirely dependent upon functioning of a company or commercial entity within a physical place provided for that purpose (not necessarily for whole year but at least a substantial period thereof), the question of FOWC ever having functioned in any premises or even licensed to do by Jaypee did not arise. It is furthermore urged that the revenue's argument that the AAR fell into error is baseless because the impugned order correctly concluded that there was no fixed place of business from where FOWC operated. Furthermore, it was argued that each participating team was under a contract and none of its members were engaged as employees of FOWC in the sense that they were performers whom the FOWC assured, would participate. Moreover, there was no activity on part of the FOWC within such fixed place that yielded income in India. It is emphasized that the relationship between the fixed place and the business carried on through it has to be established in any case to say that income arising from such activity is taxable in India. Reliance is placed upon the OECD Model Convention on Income and Capital, 2....
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....of the term, therefore, FOWC was the commercial owner which yielded income - in the form of consideration for facilitating the event, its inclusion in the FIA calendar and the revenues derived from the contracts, especially media, television network contracts. 42. Since both the parties relied on the provisions of the RPC, it would be useful to extract some of its relevant conditions. They are reproduced below: "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 a....
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.... 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 &....
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....bsp; 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 ta....
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....ke 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 FI....
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....WC 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....
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....ter 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." 43. The OECD Model Tax Convention on Income and on Capital, (Condensed Version- July 2010) contains a useful commentary on what could be said to constitute fixed place of business. The relevant extracts of the same are reproduced below: "3. It could perhaps be argued that in the general definition some mention should also be ma....
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....e. These principles are illustrated by the following examples where representatives of one enterprise are present on the premises of another enterprise. A 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). 4.3 A 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 emplo....
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.... XXXXXX 10. The business of an enterprise is carried on mainly by the entrepreneur or persons who are in a paid-employment relationship with the enterprise (personnel). This personnel includes employees and other persons receiving instructions from the enterprise (e.g. dependent agents). The powers of such personnel in its relationship with third parties are irrelevant. It makes no difference whether or not the dependent agent is authorized to conclude contracts if he works at the fixed place of business (see paragraph 35 below). But a permanent establishment may nevertheless exist if the business of the enterprise is carried on mainly through automatic equipment, the activities of the personnel being restricted to setting up, operating, controlling and maintaining such equipment. Whether or not gaming and vending machines and the like set up by an enterprise of a State in the other State constitute a permanent establishment thus depends on whether or not the enterprise carries on a busin....
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....nce of a permanent establishment in that State.........." XXXXXX XXXXXX XXXXXX It is not necessary for the enterprise alone to have power of disposition; in fact, several parties may have such power, whether jointly or severally. If jointly, the fixed place of business may constitute a permanent establishment of each of the parties involved......' 46. In E-Funds(supra), though the court discussed what could constitute "fixed' place of business and did conclude that a physical presence in a geographical area is essential, the decision was more related to an interpretation of who is a dependent agent, so as to bring within the fold of domestic taxatio....
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....perated by human beings (i.e. employees of D Co, a contractor or any other enterprise). The Court pointed out that any equipment could amount to a fixed place permanent establishment even if it functioned fully automatically without human intervention. In so holding the Court also took into account Art. 5(3)(a) of the Germany-Switzerland tax treaty (which was similar to Art. 5(4)(a) of the OECD MC 2010). As per that provision, the term "permanent establishment' did not include facilities used solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise. In that respect, the Court expressed that only the assets that could be "itemized' on the enterprise's balance sheet could be regarded as goods and merchandise. Therefore, in the Court's view, Art. 5(3)(a) of the tax treaty did not apply to the server used for storing the information that was supplied by D Co to its customers in Switzerland. 49. The Court also examined Art. 5(3)(e) of the Germany-Switzerland tax treaty. That provision negated existence of a fixed place permanent establishment if a fixed place of business was maintained solely for the purpose of (i) advertising....
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....oes not connote "everlasting' and that the question is one of fact and degree. The AAR also noted that a place of business can, however, constitute permanent establishment - relying upon para 6 of OECD commentary even though it exists in practice "only for a very short period of time because of the nature of the business.' Significantly, even though in the facts of the case, the AAR ruled that a fixed place of business existed, it acknowledged that, "even if the business was done for short duration with intermittent gaps, the existence of fixed place of business at a particular spot, i.e. golf course may not be ruled out.', no hard and fast rule can be laid down as to the number of days which can impart a degree of permanence to the place of business to make it a fixed place. 51. It would, for the purposes of deciding whether FOWC carried on business in India, through a fixed place of business (which the revenue argues is the Buddh international circuit) be necessary to consider the conditions and stipulations in the RPC. The following, in the opinion of the Court, are material conditions necessary for determination of whether FOWC had a PE in India: (a) The Budh Internationa....
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....e any such recording etc. within the confines of the circuit or the land over which Jaypee itself has control. (g) 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. (h) 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. (i) 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 co....
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.... 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 ....
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....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 transmiss....
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....d 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. Regarding Question No.2, did the FOWC carry on business through its agents under Article 5(4) or Article 5(5) 59. The discussion on whether there was or were dependent agents which led to FOWC's PE is rendered academic, in view of this court's finding that there was a fixed PE. However, we are conscious that this judgment is subject to appeal; therefore we proceed to discuss the issue of existence of dependent PEs. 60. The relevant provisions of the DTAA- Articles 5 (4) and 5 (5) are extracted below: "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: (a) he has and habitually exercises in that State, an authority to negotiate and enter into contracts for or on beha....
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....ainly by the entrepreneur or persons who are in a paid-employment relationship with the enterprise personnel. This personnel includes employees and other persons receiving instructions from the enterprise (e.g. dependent agents). The powers of such personnel in its relationship with third parties are irrelevant. It makes no difference whether or not the dependent agent is authorised to conclude contracts if he works at the fixed place of business (see paragraph 35 below). "35. Under paragraph 5, only those persons who meet the specific conditions may create a permanent establishment; all other persons are excluded. It should be borne in mind, however, that paragraph 5 simply provides an alternative test of whether an enterprise has a permanent establishment in a State. If it can be shown that the enterprise has a permanent establishment within the meaning of paragraphs 1 and 2 (subject to the provisions of paragraph (4), it is not necessary to show that the person in charge is one who would fall under paragraph 5." Since FOWC has to exploit commercial rights arising from races and this business is carried on through exploitation of these commercial rights either by itself or ....
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....relation to activities performed by these 3 entities are sham. 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. Re Question No. 3: Was the payment made by Jaypee to FOWC in the nature of royalty, under the DTAA, for the use of the latter's trademark 65. FOWC and Jaypee argue that the rights given to the latter under the RPC was....
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....re printed. The use of the logo, to promote the event, therefore meant use of the F1 marks. The nomenclature or terms of an agreement are not always determinative of the true nature of the transaction; in this case, it clearly was to permit the use of the F1 mark. The character of the event would have been different had the F1 marks not been used by Jaypee. It was held that the popularity of the event is a result only of the use of the Marks, and that without those marks it would not enjoy its popularity otherwise. 66. Under trademark law, particularly in India, trademark use even for advertisement purposes is to be preceded by prior consent of the proprietor and any unauthorized use of the trademark without such prior permission of the proprietor could lead to an infringement of the trademark (in India, under section 29 of the Trade Marks Act,1999). To secure registration for the marks in India from the Trademark Registry, FOWC and Jaypee entered into the ALA. The function of the ALA was (a) to provide for a strictly limited usage of the marks i.e. only for advertisement and promotion of the Indian Grand Prix Event; (b) to provide for restrictions on usage of such marks, i.e. n....
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....aypee. Under recital B to the RPC, FOWC clearly has the exclusive right to exploit the commercial rights in the championship and to award Jaypee the right to host, stage and promote F1 Grand Prix events. Clause 17, states that FOWC would through reasonable endeavors ensure that at least sixteen cars participate in the Event. Clause 18 forbids Jaypee from making any audio or visual image of the event; likewise there are restrictions in clause 19 of the RPC. Clause 23.2 permits FOWC to make incidental use of I.P. rights solely for the limited purpose of facilitating Jaypee to promote the event. Under the RPC Jaypee remains liable to pay the full contractual amount in the year of termination and in the subsequent year, the right to use trademarks, logos and IP Rights ceases instantly, the moment termination takes place. This is a strong pointer to the fact that the amounts payable by Jaypee to FOWC under the RPC are really for the privilege of hosting and staging the championship race and not for the IP rights, which in any event, could be utilized by it only to promote the race and for no other purpose. 70. Clauses 23.3 and 23.4 of the RPC are to be read in conjunction with the AL....
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....ond Explanation to Section 9(1)(vi) of the Act; it is significantly broader than the definition of "royalties" set out in Article 13(3) of the India-UK DTAA. The definition in the Act specifically covers and includes lump-sum payments, whereas Article 13(3) of the DTAA only refers to payments. 72. The impugned order neither contains any discussion nor finding whatsoever on this crucial issue even though it goes to the root of the entire case. The entire tenor of the agreement- even the main purpose of the RPC, is not for the grant of trademark rights or privilege or license to use. The payments made to it under the RPC are not "royalty" either under the Act or the DTAA, they most certainly are not for the use of trademarks or IP rights, but rather for the grant of the privilege of staging, hosting and promoting the Event at the promoter's racing circuit in Noida(NCR). FOWC under the RPC, made available to Jaypee all of the elements which constitute the event. In particular, this includes nominating (to FIA) the promoter's event for inclusion in the official F1 racing calendar; after such inclusion the F1 racing teams with their F1 cars and drivers were bound to participa....
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....ed, in our view, that the payments received were neither in the nature of royalty under Section 9(1)(vi) read with explanation 2 or in the nature of fee for technical services under Section 9(1)(vii) read with explanation 2 or taxable under Article 12 of the DTAA. The payments received were thus, rightly held by the Tribunal, to be in the nature of business income. And since the assessee admittedly does not have a permanent establishment under the Article 7 of the DTAA "business income' received by the assessee cannot be brought to tax in India. The findings of the Tribunal on this account cannot be faulted. The Tribunal pointedly observed that there was no evidence brought on record by the Revenue to enable them to hold that the agreement was a colourable device, in particular, that the payments received were for use of trade mark, brand name and stylized mark "S". We agree with reasoning adopted by the Tribunal.' There is no doubt that the main object of the RPC and the relevant provisions of the ALA was not the permission to use the trademarks, but granting and designating Jaypee as the promoter of the event and laying out the rights of the parties, particularly FOWC as regar....
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....vernment or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. Explanation.- For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called" Interest Payable Account" or" Suspense Account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities, and salary) to a non- resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application 1 to the 2 Assessing] Officer to determine, 3 by general or special order], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub- section (1) only on tha....
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....er (TDS) of payments made to non-residents. In other words, according to the Department, section 195 (2) is a provision by which the payer is required to inform the Department of the remittances he makes to non-residents by which the Department is able to keep track of the remittances being made to nonresidents outside India. We find no merit in these contentions. As stated hereinabove, section 195 (2) uses the expression "sum chargeable under the provisions of the Act." We need to give weightage to those words. Further, section 195 uses the word "payer" and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The abovementioned contention of the Department is based on an apprehension which is ill-founded. The payer is also an assessee under the ordinary provisions of the Income-tax Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income- tax Act for the said sum as....
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....f income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case [1999] 239 ITR 587 (SC) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented "income chargeable to tax in India", then it was necessary for him to make an application under section 195 (2) of the Act to the Income-tax Officer (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the Income-tax Officer (TDS) to compute the amount which was liable to be deducted at source. In our view, section 195 (2) is based on the "principle of proportionality". The said subsection gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in Ind....