Taxing the Formula One
The Formula One Championship Limited had given the rights to host, stage and promote Formula Grand Prix India to Jaypee Sports International Limited. The Income Tax department had raised the following issues on the agreement entered between the two companies, i.e., the Race Promotion Contract :-
1. Whether the payment of consideration under the Race Promotion Contract to be received by Formula One Championship Limited is a royalty as per Article 13 of the Double Taxation Avoidance Agreement between UK and India?
2. Whether Formula One Championship Limited has a ‘permanent establishment’ in India as per Article 5 of Double Taxation Avoidance Agreement?
3. Whether any payment received by Formula One Championship Limited from Jaypee International Limited outside India is taxable under Section 195 of the Indian Income Tax Act, 1961?
The court first held that the permanent establishment is a fixed place where the commercial/economic activity takes place. They substantiated their argument by referring to the test applied in the case of Commissioner of Income Tax, A.P.-I v. Visakhapatnam Port Trust. A permanent establishment requires a stability, productivity and dependence. The court stated that:-
“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”
Thus, the court held that Formula One Championship Limited was having a permanent establishment in India.
Now comes the other incidental questions. The first issue was regarding the question of royalty. The Revenue department had not challenged the High Court’s decision that it was not a royalty. Hence, the matter was not considered again by the High Court. It was established that the payment of consideration under the Race Promotion Contract to be received by Formula One Championship Limited is not a royalty as per Article 13 of the Double Taxation Avoidance Agreement.
With regarding to the third issue, the court held that all the income received by Jaypee International through the Permanent Establishment of the Formula One Championship Limited shall be liable to be deducted as tax to India under Section 195 of Income Tax Act.
This case is especially important for studying the definition of ‘permanent establishment.’ It had delved into the details regarding the relevant tests needed to treat an entity as a permanent establishment in India.