Objective
A reader should be able to come to his / her own conclusion by applying the legislative enactments and judicial pronouncements to the facts of the case. While re-producing any portion of legislative enactment or judicial pronouncement, it is para phrased and emphasis is supplied by way of underline.
Background
You would be aware that, recently Supreme Court upheld the decision of Delhi High Court in the case of Fomrula One [1] that it does have Permanent Establishment [PE] in India.
Both the Judgements i.e. Delhi HC and as upheld by SC are scholarly written. I have tried to bring out the facts, the impact on the assessee and or the revenue.
Citation of the case
Formula One World Championship Ltd. Resident of UK V CIT – by SC dated 24-April-2017 [running in 110 pages] arising out of appeal against the Delhi HC judgement dated 30-Nov-2016. [running in 67 pages]
Attachments
Take Away Points.
The assessee offered only USD $ 40 millians whicvh was upheld by AAR. [Authority on Advance Ruling]
Total revenue generated was around was USD$ 1205 million which came under tax net after the decision of Delhi HC and SC which set aside the order of AAR.
Elaborate and a scholarly written judgment on fixed place PE.
Issues and Answer
| Question | Answer by Legal forum | |||
| Whether on facts aqnd in law | AAR | favouring | HC / SC | favouring |
| The amount paid by Jaypee to FOWC was royalty ? | Yes | Assessee | No | Revenue |
| FOWC did have a permanent establishment in India | No | Assessee | Yes | Revenue |
| What is the obligation of Jaypee u/s 195 i.e. TDS ? | # | # | # | # |
# only on the portion that is exigible to tax in India.
Author’s conclusion
Without going into tax impact, it is important to recognise that, the tax base offered for taxation by the assessee was USD $ 40 millions whereas Hc and SC have concluded that the tax base should be an appropriate portion where the potential revenue can be USD $ 1205 millions.
This is an important case law elaborating the principles of fixed place PE. It will not be out of place to refer to a decision of AAR in the case of Re Golf in Dubai 2008 (306)
ITR 374 which still holds the field. In this 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. This decision has been referred to and distinguished by the Court.
Author Bio
SC directs Formula One World Championship Ltd. (‘FOWC’) to remit the amount which it received from Jaypee Sports under LCs, towards discharging its expected tax liability on payments received under the Race Promotion Contract (‘RPC’); SC notes in order to secure the consideration payable to FOWC under RPC, the Axis Bank (at Jaypee’s request) had opened four Standby Letters of Credit (LCs) in favour of FOWC which were confirmed by RBS and Lloyds Bank (‘Confirming Banks’) for 51.35 million US Dollars; Subsequently, in view of Delhi HC concluding that FOWC was liable to pay tax on payments received under the RPC, IT Department had attached the LCs u/s. 281B and had consequently restrained Axis Bank from remitting the amount to Confirming Banks as the tax dues were not honored and to that extent the amount had to be secured; However, SC notes that despite such attachment order, FOWC “tried to play smart” and invoked the LCs whereby Confirming Banks were legally bound to make payment, and who then pressed upon the Axis Bank to honor its commitment; SC further observes that though the order of Delhi HC was challenged in this Court, FOWC did not even wait for the decision of this Court (whereby ultimately the decision of HC was upheld); Firstly, SC upholds the validity of attachment order u/s. 281B (which provides for provisional attachment of any property belonging to an assessee), SC holds that since payments to be made to FOWC were secured through LCs, these LCs can be treated as assets of FOWC in India which can be attached u/s. 281B; However, with respect to securing the payments, SC acknowledges that since the confirming banks have transferred the funds to FOWC under a legal obligation, it may be difficult to restrain Axis Bank from reimbursing the Confirming Banks, notwithstanding attachment orders; SC remarks that “There is only one methodology which can be adopted in breaking this impasse or deadlock viz. to direct FOWC to secure the amount. After all, this stalemate is the creation of FOWC.”; Accordingly, SC directs FOWC to deposit 15.45 million USD with the HC within four weeks’ time, upon which the amount shall be released to Confirming Banks.:SC