Tax­ing the For­mula One

Libertatem Magazine - - Contents - by Jane Maria

Facts

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 :-

Is­sues

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?

Judg­ment

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.

Learn­ing Out­come

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.

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