Case Law Details
RELEVANT EXTRACT OF THE JUDGMENT
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 judgements referred to by Mr. Dave. Likewise, we have also microscopically
examined the judgement 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 way of an inclusion. Article 5(3), on the other hand, excludes certain places which would not be treated as PE, i.e. what is mentioned in clauses (a) to (f) as the ‘negative list’. A combined reading of sub-articles (1), (2) and (3) of Article 5 would clearly show that only certain forms of establishment are excluded as mentioned in Article 5(3), which would not be PEs. Otherwise, sub-article (2) uses the word ‘include’ which means that not only the places specified therein are to be treated as PEs, the list of such PEs is not exhaustive. In order to bring any other establishment which is not specifically mentioned, the requirements laid down in sub-article (1) are to be satisfied. Twin conditions which need to be satisfied are: (i) existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out.
67) We are of the firm opinion, and it cannot be denied, that Buddh International Circuit is a fixed place. From this circuit different races, including the Grand Prix is conducted, which is undoubtedly an economic/ business activity. The core question is as to whether this was put at the disposal of FOWC? Whether this was a fixed place of business of FOWC is the next question. We would like to start our discussion on a crucial parameter viz. the manner in which commercial rights, which are held by FOWC and its affiliates, have been exploited in the instant case. For this purpose entire arrangement between FOWC and its associates on the one hand and Jaypee on the other hand, is to be kept in mind. Various agreements cannot be looked into by isolating them from each other. Their wholesome reading would bring out the real transaction between the parties. Such an approach is essentially required to find out as to who is having real and dominant control over the Event, thereby providing an answer to the question as to whether Buddh International Circuit was at the disposal of FOWC and whether it carried out any business therefrom or not. There is an inalienable relevance of witnessing the wholesome arrangement in order to have complete picture of the relationship between FOWC and Jaypee. That would enable us to capture the real essence of FOWC’s role. 68) A mere running of the eye over the flowchart of these commercial rights, produced by the Revenue, bring about the following material factors, evidently discernible:
(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 All sports. FOAM is engaged to generate TV Feed. All the revenues from the aforesaid activities are to go to the said companies, namely, Beta Prema 2, All sports and FOAM respectively. These three companies are admittedly affiliates to FOWC.
Though Beta Prema 2 is given media rights, etc., on September 13, 2011, it had entered into title sponsorship agreement dated August 16, 2011 with Bharti Airtel (i.e. more than a month before getting these rights from Jaypee) whereby it transferred those rights to Bharti Airtel for a consideration of US$ 8 million.
Service agreement is signed between FOWC and FOAM on October 28, 2011 (i.e. on the date of the race) whereby FOAM engaged FOWC to provide various services like licensing and supervision of other parties at the event, travel and transport and data support services. The aforesaid arrangement clearly demonstrates that the entire event is taken over and controlled by FOWC and its affiliates. There cannot be any race without participating/ competing teams, a circuit and a paddock. All these are controlled by FOWC and its affiliates. Event has taken place by conduct of race physically in India. Entire income is generated from the conduct of this event in India. Thus, commercial rights are with FOWC which are exploited with actual conduct of race in India.
(iii) Even the physical control of the circuit was with FOWC and its affiliates from the inception, i.e. inclusion of event in a circuit till the conclusion of the event. Omnipresence of FOWC and its stamp over the event is loud, clear and firm. Mr. Rohatgi is right in his submission that the undisputed facts were that race was physically conducted in India and from this race income was generated in India. Therefore, a commonsense and plain thinking of the entire situation would lead to the conclusion that FOWC had made their earning in India through the said track over which they had complete control during the period of race. The appellants are trying to trivialise the issue by harping on the fact that duration of the event was three days and, therefore, control, if at all, would be for that period only. His reply was that the duration of the agreement was five years, which was extendable to another five years. The question of the PE has to be examined keeping in mind that the aforesaid race was to be conducted only for three days in a year and for the entire period of race the control was with 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 judgement 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 the FOWC and the FIA”.
(b) The inclusion of the event is through the FOWC’s actions. In terms of its arrangement with the FIA, it is the exclusive agency through which any particular circuit is introduced for an event in a given calendar year.
(c) The term of the RPC is 5 years according to Clauses 3.3 and 3.4.
(d) In terms of Clause 11, Jaypee is obliged to take all action necessary to ensure that the pit, paddock buildings and surrounding areas within the circuit and land are open to receive the competitors, FOWC, affiliates of FOWC, FOWC’s contractors and licensees, other personnel and equipment at all times during the period commencing 14 days before the race and ending 7 days after the race. It also has to assure security to these areas.
(e) Under Clause 14, the promoter is obliged to authorise access to parts of the circuit not open to the main public only through passes issued by the FOWC. Under Clause 14(b), the public cannot have access to the cars in any of the places where the competitor’s mechanics may be called upon to work on them and under Clause 14(c), the validity of passes issued by FOWC is unquestionable.
(f) Under Clause 18.1, throughout the term during the access period, from the test session held at the circuit till the end of the event, the promoter, i.e. Jaypee cannot permit, access, enable, procure or in any manner encourage others to make, create, store, record or transmit any sound recording or visual or audio-visual footage whatsoever, for broadcast or any other purpose, of any of at or pertaining to the event, including cars, drivers, competitors etc. and in fact cannot make 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 consent to FOWC to deal with such rights as it pleased.
(j) Clause 20.1 obliged Jaypee to ensure that those accredited and authorised 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 authorisation 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 on, near or which could be seen from the circuit or the land which, in the opinion of the FOWC, could prevent lawful transmission of images or recordings of the event. FOWC’s say in this regard was final.
(l) In the Director‟s report of FOWC, the company significantly mentioned that its current company had entered into an agreement with FIA as a result of which FOWC acquired commercial interests in the championship which became operative from 01.11.2011 and that in exploitation of such commercial rights in the championship, the total revenues generated was US$ 1205 million.There is an express advertence of the Indian part of the turn-over – inasmuch as the report said that the company paid US$ 127 million to FOM in return of provision of services.”
69) We are in agreement with the aforesaid analysis which correctly captures the substance of the relevant clauses of the agreement.
70) We are also of the opinion that the High Court has rightly concluded that having regard to the duration of the event, which was for limited days, and for the entire duration FOWC had full access through its personnel, number of days for which the access was there would not make any difference. This aspect is discussed by the High Court in the following manner, and rightly so:
“52. It is evident that for the duration of the event as well as two weeks prior to it and a week succeeding it, FOWC had full access through its personnel, the team contracted to it, both racing as well as spectator teams and could also dictate who were authorised to enter the areas reserved for it. No doubt, in terms of the agreement, i.e. RPC, Jaypee was designated as the promoter or the event host. A look at the RPC and its terms as well as the other terms contained in the agreement between the Jaypee on the one hand and All sports, Beta Prema 2 as well as FOAM show that Jaypee’s capacity to act – though it promoted the event, was extremely restricted. At all material times, FOWC had access – exclusively, to the circuit, and all the spaces where the teams were located. Jaypee created the circuit for the purposes of the event and other events; yet, during the 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 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 the OECD commentary and Klaus Vogel’s commentary on the general principles applicable that as long as the presence is in a physically defined geographical area, permanence in such fixed place could be relative having regard to the nature of the business, it is hereby held that the circuit itself constituted a fixed place of business.
71) A stand at a trade fair, occupied regularly for three weeks a year, through which an enterprise obtained contracts for a significant part of its annual sales, was held to constitute a PE23. Likewise, a temporary restaurant operated in a mirror tent at a Dutch flower show for a period of seven months was held to constitute a PE24.
72) The High Court has also referred to some of the judgements which are of relevance. We would like to take note of those judgements as we had agreed with the conclusions of the High Court on this issue:
In Universal Furniture Ind. AB v. Government of Norway, a Swedish company sold furniture abroad that was assembled in Sweden. It hired an individual tax resident of Norway to look after its sales in Norway, including sales to a Swedish company, which used to compensate him for use of a phone and other facilities. Later, the company discontinued such payments and increased his salary. The Norwegian tax authorities said that the Swedish company had its place of business in Norway. The Norwegian court agreed, holding that the salesman’s house amounted to a place of business: it was sufficient that the Swedish Company had a place at its disposal, i.e the Norwegian individual’s home, which could be regarded as ‘fixed’.
In Joseph Fowler v. Her Majesty the Queen, the issue was whether a United States tax resident individual who used to visit and sell his wares in a camper trailer, in fairs, for a number of years had a fixed place of business in Canada. The fairs used to be once a year, approximately for three weeks each. The court observed that the nature of the individual’s business was such that he held sales in similar fares, for duration of two or three weeks, in two other locales in the United States. The court held that conceptually, the place was one of business, notwithstanding the short duration, 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 FOWC became Commercial Rights Holder for 100 years, this agreement further enabled participation of the teams who agreed for such participation in the FIA Championship each year for every event and undertook to participate in each event with two cars. FIA undertook to ensure that events were held and FOWC, as CRH, undertook to enter into contracts with event promoters and host such events. All possible commercial rights, including advertisement, media rights, etc. and even right to sell paddock seats, were assumed by FOWC and its associates. Thus, as a part of its business, FOWC (as well as its affiliates) undertook the aforesaid commercial activities in India. Without explaining this aspect further, our purpose would be served by reproducing the following discussion, so starkly put in the judgement of the High Court:
“55. If the terms of the Concorde Agreement are read conjointly with the RPC-2011, it is apparent that the CRH, which is the FOWC, only and none else has the right to include a venue in any FIA annual calendar. FIA 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 transmission, and all other such commercially exploitable rights. In addition, FOWC charged, by Clause 24 of RPC-2011, a fee of US$ 40 million annually from Jaypee, 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 organised 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 event promoter, which owns the title to the circuit in the sense that it owns the land, FOWC is the commercial rights owner of the event, by virtue of the Concorde Agreement. FIA parted with all its rights over each commercial right it possessed to FOWC. The bulk of the revenue earned is through media, television and other related rights. The terms or the basis of those rights is the event. The conceptualisation of the event and the right to include it in any particular circuit, such as Buddh Circuit is that of the FOWC; it decides the venue and the participating teams are bound to it to compete in the race in the terms agreed with the FOWC. All these, in the opinion of the Court, unequivocally, show that the FOWC carried on business in India for the duration of the race (and for two weeks before the race and a week thereafter). Every right, which it possessed was monetised; the US$ 40 million which Jaypee paid was only a part of that commercial exploitation by the FOWC.
58. Consequently, the Court concludes that the FOWC carried 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.”
74) In view of the above, it is difficult to accept the arguments of the appellants that it is Jaypee who was responsible for conducting races and had complete control over the Event in question. Mere construction of the track by Jaypee at its expense will be of no consequence. Its ownership or organising other events by Jaypee is also immaterial. Our examination is limited to the conduct of the F-1 Championship and control over the track during that period. Specific arrangement between the parties relating to the aforesaid, which is elaborated above and which FOWC and Jaypee unsuccessfully endeavoured to ignore, has in fact turned the table against them. It is also difficult to accept their submission that FOWC had no role in the conduct of the Championship and its role came to an end with granting permission to host the Event as a round of the championship. We also reject the argument of the appellants that the Buddh International Circuit was not under the control and at the disposal of FOWC.
75) No doubt, FOWC, as CRH of these events, is in the business of exploiting these 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 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-resident FOWC is liable to pay tax in India on the income it has earned on this soil.
77) We are now left with two other incidental issues which were raised by Mr. Datar. First was on the interpretation of Section 195 of the Act. It cannot be disputed that a person who makes the payment to a non-resident is under an obligation to deduct tax under Section 195 of the Act on such payments. Mr. Rohatgi had submitted, and rightly so, that this issue is covered by the judgement in the case of GE India Technology Centre Private Limited. Precisely this very judgement is taken note of and relied upon by the High Court also in holding that since payments made by Jaypee to FOWC under the RPC were business income of the FOWC through PE at the Buddh International Circuit, and, therefore, chargeable to tax, Jaypee was bound to make appropriate deductions from the amounts paid under Section 195 of the Act.
78) We are, however, inclined to accept the submission of Mr. Datar that only that portion of the income of FOWC, which is attributable to the said PE, would be treated as business income of FOWC and only that part of income deduction was required to be made under Section 195 of the Act. In GE India Technology Centre Private Limited, this Court has clarified that though there is an obligation to deduct tax, the obligation is limited to the appropriate portion of income which is chargeable to tax in India and in respect of other payments where no tax is payable, recourse is to be made under Section 195(2) of the Act. It would be for the Assessing Officer to adjudicate upon the aforesaid aspects while passing the Assessment Order, namely, how much business income of FOWC is attributable to PE in India, which is chargeable to tax. At that stage, Jaypee can also press its argument that penalty etc. be not charged as the move on the part of Jaypee in not deducting tax at source was bona fide. We make it clear that we have not expressed any opinion either way.
79) In so far as the argument of Mr. Datar on the powers of the High Court under Article 226 of the Constitution of India is concerned, we are not impressed by the said argument. It is Jaypee itself which had filed the writ petition (and for that matter FOWC as well) and they had challenged the orders of AAR on certain aspects. The High Court has examined legal issues while delivering the impugned judgement, of course having regard to the facts which were culled out from the documents on record.
80) In view of the foregoing, the appeals preferred by the FOWC and Jaypee are dismissed, subject to observations as made above.
81) Insofar as the appeal filed by the Commissioner of Income Tax is concerned, it was submitted by Mr. Rohatgi himself that the issue of dependent PE had become academic. Therefore, we need not examine this issue and dispose of the appeal of the Revenue accordingly.
No costs.
