TaxTMI 
TaxTMI 
TaxTMI 
2017 (4) TMI 1109
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....2016 passed by the High Court of Delhi 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 (AAR). FOWC had entered into a 'Race Promotion Contract' (RPC) dated September 13, 2011 with Jaypee, granting Jaypee the right to host, stage and promote the Formula One Grand Prix of India event for a consideration of US$ 40 million. Some other agreements were also entered into between FOWC and Jaypee as well as group companies of FOWC and Jaypee, particulars whereby would be mentioned later at an appropriate stage. In the applications filed by FOWC and Jaypee before the AAR, 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 of India?; and (ii) whether FOWC was having any 'Permanent Establishment' (PE) in India in terms of Article 5 of DTAA....
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....ed finality. The main question in the appeals, therefore, pertains to PE. FACTUAL MATRIX 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 Association Internationale 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 of 213 national member organizations in 125 countries internationally. FIA is the principal body for establishing the rules and regulations for all major international four-wheel motorsport 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-built circuits, ....
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....rticipate 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 the event promoter is permitted participation. The points scored by each F-1 racing team in ev....
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....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 was that 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 pl....
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...., 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 of a 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 profession 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....
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....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). Explanation (2) provides certain exceptions in respect of 'business connection' and reads as under: "Explanation 2. - For the 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 non-resident, - (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of gods or merchandise for the non-resident; or (b) has 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 n....
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.... 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; (f) premises used as a sales outlet or for receiving or soliciting orders; (g) a warehouse in relation to a person providing store facilities for others; (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 machinery or equipment, 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), with....
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....r 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 behalf of the enterprise, unless his activities are limited to the purchase of gods or merchandise for the enterprise; or (b) he habitually maintains in the first-mentioned Contracting State a stock of gods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and the enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their b....
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.... to have a PE in India. THE LEGAL COMMENTARIES AND CASE LAW 22) It is an undisputed fact that Article 5 of DTAA between India and the United Kingdom follows the Organisation for Economic Cooperation and Development's (OECD) Model of Double Taxation Convention. There are various commentaries on Double Taxation Conventions. Celebrated among those are: "A Manual on the OECD Model Tax Convention on Income and on Capital" by Philip Baker Q.C., and Klaus Vogel on "Double Taxation Conventions". OECD has also given its 'condensed version' on "Model Tax Convention on Income and on Capital". What constitutes PE under various circumstances has also been the subject matter of judicial verdicts in India as well as in other countries. For better understanding of what may constitute a PE, it would be imperative to refer to these commentaries and judicial decisions. This discussion would disclose the principles enunciated to determine the existence of a PE, application whereof to the given facts would facilitate in answering the surging debate. 23) Philip Baker explains that the concept of PE is important for several Articles of the Conventions; the concept, or its cognate, also appears in the....
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....ty and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on. 25) Some of the examples of fixed place of business given by Baker are the following: The place of business must be fixed and permanent. Thus, a shed which had been rented for thirteen years for storing and preparing hides was held to constitute a PE (Transvaal Associated Hide & Skin Merchants (Pty) Ltd. (1967) 29 S.A.T.C. 97 (Court of Appeal, Botswana). Similarly, a writer's study has been held to constitute a PE (Georges Simenon (1965) 44 T.C. (US) 820 (US Tax Court). A stand at a trade fair, occupied regularly for three weeks a year, through which the enterprise obtained contracts for a significant part of its annual sales, has also been held to constitute a PE (Joseph Fowler v. M.N.R. (1990) 90 D.T.C. 1834; (1990) 2 C.T.C. 2351 (Tax Court of Canada). A temporary restaurant operated in a mirror tent at a Dutch flower show for a period of seven months was held to constitute a PE (Antwerp Court of Appeal, decision of February 6, 2001, noted in 2001 WTD 106-11). An office, workshop and storeroom for the m....
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....s only allowed to enter at normal office hours. He was allowed to use the client's telephone only on client's business. He spent 300 days in one tax year and 40 in the subsequent year at the premises. The Tax Court of Canada and the Federal Court of Appeal confirmed that he had no fixed base - which was treated as having the same meaning as PE - at the premises since he had no right to use the premises as the base for the operation of his own business. (ii) In a case generally referred to as Hotel Manager (Bundersfinanzhof, February 3, 1993, IR 80-81/91, IStR 1993, p. 226, (1993) BStBl., II, 462.), the Bundesfinanzhof held that a UK hotel management company had a PE in Germany when it entered into a 20 year contract with a limited partnership which owned a hotel. The agreement required the UK company to supply a general manager: the general manager's office constituted the PE (and not the entire hotel) since the UK company had a secured right to use this office for the purposes of the agreement. (iii) A Swiss company was held not to have a PE when it contracted with a German company to produce salad dressings in the name of and in accordance with the recipe of the Swiss company....
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....n to either Contracting State on the basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC)." 31) We would also like to extract below the definition to the expression 'place' by Vogel, which is as under: "A place is a certain amount of space within the soil or on the soil. This understanding of place as a three-dimensional zone rather than a single point on the earth can be derived from the French Version ('installation fixe') as well as the term 'establishment'. As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may quality as a PE only if they are fixed on the soil. This requirement, however, stems from the term 'fixed' rather than the term 'place', given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term 'establishment' makes clear that it is not the soil as such which is the PE but that the PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5(1) OECD MC which uses the term 'installation' instead of 'place'. The term 'place' is used to de....
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....f land. Where the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed for the physical presence of these individuals is not sufficient (if it were sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent PEs were superfluous). This can be illustrated by the example of a salesman who regularly visits a major customer to take orders, and conducts meetings in the purchasing director's office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working." 32) Taking cue from the word 'through' in the Article, Vogel has also emphasised that the place of business qualifies only if the place is 'at the disposal' of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable exte....
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.... that PEs should be treated like subsidiaries (cf. Article 24(3) OECD and UN MC), and that facilities of a subsidiary would rarely been unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more convincing. Along these lines, a POB will usually exist only where the taxpayer is free to use the POB: - at any time of his own choice; - for work relating to more than one customer; and - for his internal administrative and bureaucratic work. In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are, and the more they allow a parallel use of the same POB by other persons, the lower are the requirements under the control test. There are, however, a number of traditional PEs which by their nature require an exclusive use of the POB by only one taxpayer and/or his personnel. A small workshop (cf. Article 5(2)(e) OECD and UN MC) of 10 or 12 square meters can hardly be used by more than one person. The same holds true for a....
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....ot necessarily mean that the location is at the disposal of that enterprise. 35) The OECD commentary gives as many as four examples where location will not be treated at the disposal of the enterprise. These are: (a) The 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). (b) 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 ot....
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....1 for a period of 10 years. Insofar as Concorde Agreement which is signed between FIA, FOWC and teams is concerned, that is of the year 2009. 39) It is relevant to mention that before RPC dated September 13, 2011 was entered into between FOWC and Jaypee, one Organisation Agreement (OA) dated January 20, 2011 was signed between FIA/FMSCI and Jaypee. As per this agreement, Jaypee was to organise the event. Thereafter, another agreement known as 'Title Sponsorship Agreement' dated August 16, 2011 was signed between Beta Prema 2 (an associated company of FOWC) and Bharti Airtel, as per which Beta Prema 2 transferred title sponsorship rights to Bharti Airtel for US$ 8 million in respect of the race which was conducted on October 29, 2011. It is thereafter that RPC dated September 13, 2011 was signed by FOWC and Jaypee. That was one month before the scheduled date of race, which was fixed as October 29, 2011. Under this agreement, right to host, stage and promote the event was given to Jaypee by FOWC. As per the Revenue, FOWC carried on business in India through a fixed place of business, namely, the Buddh International Circuit. Salient features of this Agreement, which is the most vita....
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....tion areas, international TV compounds, host and broadcast facilities and medical centre); 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 XXXXXX Conditions Precedent 2.1 The grant of rights by FOWC to the Promoter under this Agreement is conditional on the Conditions having been fulfilled or waived in accordance with this Agreement and the Promoter shall use its best endeavour to satisfy the Conditions in accordance with this Clause 2. XXXXXX XXXXXX XXXXXX Term 3.1 This Agreement shall commence and become operative when it is signed by the parties and dated. 3.2 Subject to Clause 2 the rights granted to the Promote....
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....times during the Access Period. XXXXXX XXXXXX XXXXXX Competitor/Media Facilities 13.1 The Promoter will in so far as the same is practicable provide an entrance for the Competitor personnel and for Officials separate from the public entrance to the Circuit. 13.2 The Promoter will provide free of charge a zone measuring whichever is the greater of that which has last been provided in respect of a round of the FIA Formula One World Championship at that Circuit and 140 metres by 100 metres or 15,0000 square metres within or adjoining the paddock for the promotional facilities of the Competitors and/or their sponsors. 13.3 The Promoter undertakes to set up a media compound and telephones and facsimile equipment, Press Room plus the installations and premises necessary for national and international television commentators and journalists (such premises and installations to meet the prestige of a World Championship) and to grant professional accredited journalists use of all facilities for the exercise of their profession as well as the organization of a Press Conference with the winner of the Race immediately after the Podium Ceremony. 13.4 Upon the arrival of the Formula O....
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....support races and (iii) peripheral entertainment organized as part of the Event, for the Access Period. If such insurance is not permitted under the law of the country in which the Event takes place or the FIA is satisfied that such insurance is not commercially viable then the insurance shall be the maximum permitted by that law or the market conditions. The insurers must be a company recognized by Standard and Poor's and/or AM. Best and must be of first class international standing with sufficient resources to honour and discharge in full the insurance requirements prescribed in this agreement. A copy of the relevant policy will be given to FOWC by the Promoter at least 60 days before the start of the first practice session (with the exception of the year 2011, when such copy will be given to FOWC at least 30 days before the start of the first Practice session of the Event in 2011). If the language of the relevant policy is in a language other than English, FOWC shall obtain a translation of the policy at the expense of the Promoter. XXXXXX XXXXXX XXXXXX Filming/Recording at the Event 18.1 Save with the prior written consent of the FOWC and save for the Promoter's obligatio....
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.... recording in any media whether now known or hereafter invented or developed in, of or pertaining to the Event, any NonPrivate F1 Test Session or any aspect of them (irrespective of who originated the same)for the duration of those rights (including all renewals, extensions, reversions and revivals thereof); and (b) gives its consent (if such consent should be required) for FOWC to deal in such rights in any way it may see fit. Accreditation for Filming/recording 20.1 The Promoter shall ensure that persons accredited and authorized by FOWC are permitted to enter upon the Circuit to make sound, television or other recordings or transmissions or to make films or other moving picture and use the facilities throughout the Access Period and the Promoter 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, ass....
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....on in the event of termination of RPC. 42) While discussing the second question, the High Court took note of agreement between FIA and FOWC under which FOWC became CRH. It also pointed out that the Concorde Agreement assured the participating teams that the FIA had exclusive rights in the F-1 Championship and was entitled to the grant of CRH, the exclusive right to exploit the commercial rights in the F-1 Championship. Subject to these conditions, each team undertook to participate in the FIA F-1 Championship each year for several events and make cars available. In fact, every team undertook to participate in each event with two cars. Taking note of the aforesaid arrangement and other clauses of these agreements, the High Court concluded that FOWC carried on business in India within the meaning of expression under Article 5(1) of the DTAA. 43) The High Court was conscious of the fact that after its finding to the effect that FOWC had PE in India, the issue as to whether FOWC carried on business through its agents or not, became academic. Notwithstanding the same, it chose to discuss that issue as well so that the judgment had the coverage of all the questions that had arisen befo....
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.... M/s. Arvind P. Datar and Dushant Dave, learned senior advocates, made their submissions on behalf of Jaypee. Mr. Mukul Rohatgi, learned Attorney General for India, argued on behalf of the Revenue and countered those submissions. He also argued the appeal of Union of India insofar as it challenges the findings of the High Court interpreting Article 5(4) and (5) and holding that the other companies of FOWC group did not act as agents of FOWC in India. M/s. S. Ganesh and Arvind P. Datar made their submissions in rejoinder and also refuted the arguments of Mr. Mukul Rohatgi advanced in the appeal of Union of India, to which Mr. Rohatgi made his submissions in rejoinder. 45) After referring to the important dates and events, Article 5 of DTAA and the commentaries of OECD, Philip Baker and Klaus Vogel thereon, salient features whereof have already been reproduced by us, emphasis in the submission of Mr. Ganesh was that in order to constitute a PE, condition which was necessary to satisfy was that the particular 'fixed place' is 'at the disposal' of FOWC and further that from the said 'fixed place' FOWC was doing its business activity. Submission of Mr. Ganesh was that both the ingredie....
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....h such third party in accordance with Clause 18.3 (Service Agreement). Referring to the clause pertaining to obligations and warranties of FOWC, Mr. Ganesh submitted that the role of FOWC was primarily that of advising, assisting and consulting with the promoter in relation to the Event in such manner as FOWC shall consider necessary and/or appropriate for the staging and promotion of the Event to the mutual benefit of the parties. On the other hand, Jaypee was given exclusive right to act as the promoter of the Event, to construct the circuit which was to be laid out and prepared in accordance with that agreement in a form and manner approved both by FOWC and FIA. Thus, construction was to be carried out by Jaypee; albeit, in the form and the manner approved by FOWC and FIA to ensure that the track meets all requirements of the Regulations. Otherwise, all those rights which were necessary for the purposes of hosting and staging the Event at the circuit were that of Jaypee exclusively. 47) On the basis of the aforesaid documents and clauses and terms therein, Mr. Ganesh submitted that the circuit was not under the control or at the disposal of FOWC. As regards 4500 seats in paddoc....
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....he PE. He argued that the judgment of the High Court was flawed in its approach as it had gone by inductive logic instead of deductive logic. According to him, the first question which has to be focused upon was as to what is the business of FOWC. His submission was that since in this case business of FOWC was not to organise these races, the question of its PE in India, that too in the form of circuit where the race is to be held, could not be PE of FOWC. He also submitted that even after going through all the clauses of the agreement between FOWC and Jaypee with a toothcomb, it would be found that FOWC had no physical control over the said circuit. In this behalf, he emphasised the test laid down by Andhra Pradesh High Court in Visakhapatnam Port Trust, which is recognised by Philip Baker in his commentary. He also argued that entire Formula One Event was a temporary model for three days in a year only and even if it is accepted that the FOWC had control over this place for those three days, possession of the site for three days in a year cannot be termed as PE. He also emphasised the fact that since FOWC was a UK resident company, it had been paying taxes in its own country. For....
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....art of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. [See CIT v. R.D. Aggarwal & Co. [AIR 1965 SC 1526 : (1964) 1 SCR 234, 247 : 56 ITR 20] and Carborandum Co. v. CIT[(1977) 2 SCC 862 : 1977 SCC (Tax) 391 : (1977) 3 SCR 475 : (1977) 108 ITR 335] which are decided on the basis of Section 42 of the Indian Income Tax Act, 1922, which corresponds to Section 9(1)(i) of the Act.]" 52) Another submission of Mr. Ganesh was that the High Court did not have jurisdiction, in exercise of its powers under Article 226 of the Constitution, to go into the 'findings' of AAR on the issue of 'fixed place'. He argued that under Article 226 of the Constitution, the High Court exercised Certiorari jurisdiction and in exercise of such a jurisdiction, findings of facts recorded by the Tribunal, which are the subject matter of judicial review, cannot be gone into. 53) Without prejudice to the aforesaid submissions, next argument of Mr. Datar was that having regard to th....
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....lion fee paid by Jaypee to FOWC could be attributed to PE, inasmuch as it is only that portion of income that is relatable to PE which is liable for tax in India. This has not happened so far. 55) Mr. Dushant Dave, learned senior counsel, again appearing for Jaypee, made an additional submission to the effect that international treaties which are signed between the two sovereign countries have to be given adequate and due respect which they command. He exhorted the Court to keep this fundamental principle in mind while interpreting clause 5 of DTAA and submitted that such an approach has been commanded by this Court time and again. By way of example, he cited the judgements in the cases of Azadi Bachao Andolan and Maganbhai Ishwarbhai Patel Etc. v. Union of India and Another 1970 (3) SCC 400. He also referred to paragraph 6 of the UK judgment in the case of Sepet v. Secretary of State for the Home Department 2003 (3) AllER 304 wherein it was pressed that single autonomous meaning was required to be given to the treaties which are living instruments whose meaning does not change over time but application will. 56) From Azadi Bachao Andolan following passages were relied upon: "1....
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....nion: Statutory Interpretation, p. 461 [Butterworths, 1992 (2nd Edn.)].]" xx xx xx 131. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief [David R. Davis: Principles of International Double Taxation Relief, p. 4 (London, Sweet & Maxwell, 1985)], points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. It is observed (vide paragraph 1.06): "The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty ma....
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....ner in which such rights are ultimately exploited by FOWC and its other group companies in respect of the F-1 race organized in India. For this purpose, he referred to eleven agreements between different parties highlighting certain features and aspects in the following manner: Agreement between FIA and FOAM dated April 24, 2001 - FIA parts with commercial rights in favour of FOAM. FOAM becomes the exclusive Commercial Rights Holder (CRH). Agreement between FOAM and FOWC dated April 24, 2001 - FOAM transfers the commercial rights in favour of FOWC with effect from 2011 for a period of 100 years. RPC dated October 25, 2007 between FOWC and Jaypee: (1) Building of the circuit was started in terms of this RPC. (2) FOWC was granted only the right to promote the event (clause 4(1). (3) FOM was declared the business manager and agent of FOWC (Recital D). (4) This agreement was signed by FOM on behalf of FOWC. (5) No condition precedent clause obligating Jaypee to enter into any agreements with FOWC group entities. (6) No clause obligating Jaypee to enter into an agreement with FOM for generation of television feed. (7) Agreement in the same template as Schedule ....
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.... Agreement entered into on October 28, 2011, on the day of race. (2) FOM engaged by FOWC to provide various services - liaison and supervision of other parties at the event, travel, transport and data support services. Director's report of financial statements of FOWC for the year 2011: Defines the business of FOWC as 'The company's principal activity during the year was the organisation, management and administration of motorsport conducted principally through the exploitation of the commercial rights to the FIA Formula One World Championship". 58) From the features described above, it was submitted by the learned Attorney General that clear manifestation of the aforesaid agreements was that FOWC and its subsidiaries had taken total control over the event that took place in India which, according to him, was to be kept in mind for proper examination of the issues in their right perspective. Mr. Rohtagi argued that Section 5(2)(b) of the Act, which applies in the instant case, specifically includes 'income' of a non-resident from 'whatever source derived', if this income accrues or arises or is deemed to accrue or arise to him in India during such year. Referri....
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.... Prema 2 acquired circuit rights, mainly media and title sponsorship, whereas Allsports was given paddock rights. His submission was that business was carried from the circuit, paddock, etc. and, therefore, it cannot be said that no business activity was carried from this place. He also pointed out how FOWC granted rights to FOAM to provide various services in case FOWC had no control over the race. It also showed physical management of the business as well. 61) Coming to the issue of dependent PEs, submission of the learned Attorney General was that in view of the flowchart depicting commercial rights with FOWC and its affiliates, this issue was virtually an academic issue once it is found that FOWC and its affiliates are one conglomerate, the commercial rights of different nature, viz. the CRH bouquet was with the group companies under the control of same management which exploited all these rights. These companies had pooled all the profits and sharing thereof was in the ratio of 50:50 between the teams and CRH companies. 62) As far as power of the High Court under Article 226 of the Constitution of India to go into the issue is concerned, Mr. Rohatgi drew the attention of the....
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.... to tax." He, thus, submitted that if there was any breach of the said provision, the Income Tax Department was well within its right to charge interest and/or impose penalty. 64) In rejoinder, M/s. Ganesh and Datar gave their answers to the aforesaid submissions, but it may not be necessary to reproduce the same at this stage as we would like to take note of the same while dealing with the respective submissions. ANALYSIS, FINDINGS & CONCLUSION 65) We have pondered over the aforesaid submissions of the learned counsel for the parties with all seriousness and sincerity they deserve. We have also minutely gone through the material placed on record. We have kept in mind the governing law that has already been stated in detail. We are also conscious of the approach that is needed to examine these kinds of issues, as discussed in the judgments referred to by Mr. Dave. Likewise, we have also microscopically examined the judgment of the High Court which is under challenge. 66) As per Article 5 of the DTAA, the PE has to be a fixed place of business 'through' which business of an enterprise is wholly or partly carried on. Some examples of fixed place are given in Article 5(2), by wa....
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....scernible: (i) FIA had assigned commercial rights in favour of FOAM vide agreement dated April 24, 2001 and on the same day another agreement was signed between FOAM and FOWC vide which these rights were transferred to FOWC. Vide another agreement of 2011, these rights stand transferred in favour of FOWC for a period of 100 years. Vide Concorde Agreement of 2009, FOWC is authorised to exploit the commercial rights directly or through its affiliates only. Significantly, this agreement defines 'F-1 Business' to mean exploitation of various rights, including media rights, hospitality rights, title sponsorship, etc. (ii) Armed with the aforesaid rights, FOWC signed first agreement with Jaypee on October 25, 2007 whereby it granted right to promote the event to Jaypee. This is replaced by RPC dated September 13, 2011. Under this agreement, right to host, stage and promote the event are given by FOWC to Jaypee for a consideration of US$ 40 million. On the same day, another agreement is signed between Jaypee and three affiliates of FOWC whereby Jaypee gives back circuit rights, mainly media and title sponsorship, to Beta Prema 2 and paddock rights to Allsports. FOAM is engaged to gene....
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....th FOWC. (iv) Even when we examine the matter by examining the RPC agreement itself, it points towards the same conclusion. The High Court in its judgment has reproduced relevant clauses of the agreement which we have already reproduced above. This agreement is analysed by the High Court. Therefore, we are spared of doing a diagnostic of sorts, which exercise is accomplished by the High Court itself in a flawless manner: "(a) The Buddh International Circuit, is defined in Clause 1(q), as one suitable in every respect for the staging of the event, including permanent buildings, permanent structure, track laid-out, amenities, spectator viewing facilities, paddock building, media centre, car parks, helipads, garages, race control and administration, office administration, fuel and storage, tyre store, utilities, including backup power supplies, concrete-based areas suitable to host competitors and sponsor, vending and exhibition areas, international TV compounds etc. These specifications are more elaborately spelt out in Clause 5(e) which states that a circuit shall be constructed, laid out and prepared in accordance with the agreement, i.e. RPC, "in a form and manner approved by....
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.... 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 consent to FOWC to deal with such rights as it pleased. (j) Clause 20.1 obliged Jaypee to ensure that those accredited and authorized by FOWC were permitted to enter upon the premises to make sound, television or recordings or transmissions or make films or other pictures and use the facilities throughout the access period and also undertook to accord to such personnel all help and facilities that FOWC would require, including assistance for consent, permission or authorization with any local authority. (k) Under Clause 21, Jaypee was prohibited from causing, permitting, enabling assisting or in any manner encouraging display of any advertisement (other than the normal advertisement displayed on any competitor's cars) or other displays....
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....ing 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 of five years, meant that there was a repetition; furthermore, FOWC was entitled even in the event of a termination, to two years' payment of the assured consideration of US$ 40 million (Clause 24 of the RPC). Having regard to ....
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....because it amounted to a place of management or a branch having regard to peculiarities of the business. 73) Coming to the second aspect of the issue, namely, whether FOWC carried on any business and commercial activity in India or not, substantial part of this aspect has already been discussed and taken care of above. Without being repetitive and pleonastic or tautologous, we may only add that 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 ....
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.... in relation to the race event or FIA F1 Championship event conducted on the circuit in India. 57. It is also noteworthy that by virtue of the Concorde Agreement, the teams have undertaken to engage in every race - with the added condition that each team would involve two cars for every race in any circuit chosen by FOWC. RPC-2011 also assured that the FOWC would ensure that such team did in fact participate in the event in the Budh Circuit. This is an important fact- which shows that the entire event, i.e. F1 FIA Championship in the circuit was organized and controlled in every sense of the term by FOWC. The peculiarity of this activity is such that FOWC's dominant role is evident; it is the moving spirit with all pervasive presence and control through the teams, which are contracted to participate in the event. In fact, it creates the event, i.e. the race. Each actor, such the promoter/Jaypee, the racing teams, the constructing teams and the other affiliates, plays a part in the event. FOWC's participation and the undertakings given to it by each of these actors, who are responsible for the event as a whole, brings out its central and dominant role. If Jaypee is the eve....
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....rights, including intellectual property rights. However, these became possible, in the instant case, only with the actual conduct of these races and active participation of FOWC in the said races, with access and control over the circuit. 76) We are of the opinion that the test laid down by the Andhra Pradesh High Court in Visakhapatnam Port Trust case fully stands satisfied. 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, Formula-1 (i.e. FOWC) on the soil of this country. It is already noted above that as per Philip Baker (A Manual on the OECD Model Tax Convention on Income and on Capital), a PE must have three characteristics: stability, productivity and dependence. All characteristics are present in this 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 in our mind that taxable event has taken place in India and non-resi....