Section 9 of the Income Tax Act, 1961(for short ‘the Act’) deals with the income deemed to accrue or arise in India and as per section 9(1) “permanent establishment” shall have the meaning assigned to it in clause (iiia) of section 92F of the Act. Clause (iiia) of section 92F incorporates that “permanent establishment”(PE) referred to in clause(iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.
Recently, in Formula One World Championship Ltd. vs. CIT, International Taxation (Civil Appeal Nos. 3849 to 3851 of 2017, decided on 24.04.2017), the issue of permanent establishment was discussed and analysed in full length in regard to the above-mentioned appeals. Briefly, these appeals were filed by Formula One World Championship Limited (hereinafter referred to as ‘FOWC’), Jaypee Sports International Limited (for short, ‘Jaypee’) and Union of India (hereinafter referred to as the ‘Revenue’). In all these appeals, challenge is laid to the judgment dated November 30, 2016 passed by the High Court of Delhi whereby three writ petitions preferred by FOWC, Jaypee and Revenue have been decided. 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.
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? Another related question was also raised, viz.,
(iii)whether any part of the consideration received or receivable by FOWC from Jaypee outside India was subject to tax at source under Section 195 of the Act. AAR answered the first question holding that the consideration paid or payable by Jaypee to FOWC amounted to ‘Royalty’ under the DTAA. Second question was answered in favour of FOWC holding that it did not have any PE in India. As far as the question of subjecting the payments to tax at source under Section 195 of the Act is concerned, AAR ruled that since the amount received/receivable by FOWC was income in the nature of Royalty and it was liable to pay tax there on to the Income Tax Department in India, it was incumbent upon Jaypee to deduct the tax at source on the payments made to FOWC.
FOWC and Jaypee challenged the ruling on the first issue by filing writ petitions in the High Court contending that the payment would not constitute Royalty under Article 13 of the DTAA. Revenue also filed the writ petition challenging the answer of the AAR on the second issue by taking the stand that FOWC had PE in India in terms of Article 5 of the DTAA and, therefore, tax was payable accordingly. The three writ petitions had been decided by the High Court vide common judgment dated November 30, 2016. The High Court had reversed the findings of the AAR on both the issues. Whereas it had held that the amount paid/payable under RPC by Jaypee to FOWC would not be treated as Royalty, as per the High Court FOWC had the PE in India and, therefore, taxable in India. While deciding this question, the High Court had not accepted the plea of the Revenue that it was not a dependent PE.
The High Court had also held, as the sequitur, that Jaypee was bound to make appropriate deductions from the amount payable to FOWC under Section 195 of the Act. As per FOWC and Jaypee, no tax was payable in India on the consideration paid under RPC as it was neither Royalty nor FOWC has any PE in India. It is pertinent to mention that the Revenue had not challenged the findings of the High Court that the amount paid under RPC did not constitute royalty. Therefore, that aspect of the matter had attained finality. The main question in the appeals, therefore, pertained to PE.
Article 5 of DTAA between India and United Kingdom lays down as to what would constitute a PE.
The learned Attorney General 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. Referring to Section 9 of the Act, which specifies the circumstances under which income shall be deemed to accrue or arise in India, he pointed out that it covers all income, ‘whether directly or indirectly’, that accrues or arises, if it is through or from any ‘business connection in India’.
Therefore, if business connection is established, then all incomes, whether earned directly or indirectly, would come within the net of taxability of such incomes in India. Referring to explanation (2) to Section 9(1)(i), he laid stress on the submission that ‘business connection’ shall include any business activity ‘through’ a person who acts on behalf of the non-resident. The expression ‘through’ is clarified in explanation (4) thereof to mean and include and shall be deemed to have always meant and include ‘by means of’, ‘in consequence of’ or ‘by reason of’. He submitted that these deeming provisions are of very vide import and when the facts of this case are examined keeping in view the aforesaid provisions, the High Court rightly concluded that FOWC had PE in India.
In brief, the learned Judges of the Supreme Court held that FOWC carried on business in India for the duration of the race (and for two weeks before the race and a week thereafter). A PE must have three characteristics: stability, productivity and dependence. All characteristics were 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 have taken place in India and non-resident FOWC was liable to pay tax in India on the income it has earned on this soil.