Amount Received for Promotion of Formula One Event is Taxable in India: SC upholds Delhi HC Judgment [Read Judgment]

In a significant ruling, Supreme Court of India upheld the Delhi High Court Judgment that, the consideration received by the Formula One Asset Management Ltd (FOAM) as per the license agreement entered into with Jaypee Sports are taxable in India under the head “business income” not as “royalty”. Disposing the appeal filed against the High Court Order, the two-judge bench of the Apex Court had clarified that FOAM has constituted PE in India and therefore, the said income was rightly characterized as ‘business income’ assessable in india.

Earlier, the petitioners, Formula One Asset Management Limited and Jaypee Sports had contended before the High Court  that the entire consideration received/ receivable under an agreement between them are in nature of business income and not ‘royalty’ as defined both under the Act and the DTAA. It was also contended that the right granted to Jaypee under the agreement was a commercial right (i.e. hosting right) and therefore, the consideration received/ receivable by FOWC was not for use of trademark, copyright, equipment, etc and hence, was not in the nature of ‘royalty’.

While disposing the writ petition, the division bench of the Delhi High Court observed that the petitioner is doing business activity in India and the consideration received by the FOAM as per the license agreement entered into with jaypee sports are taxable in India under the head “business income” not as “royalty”. It was further held that Jaypee is bound to make appropriate deductions from the amounts payable to FOWC under section 195 of the Income Tax Act.

The petitioners knocked the door of the Apex Court against the High Court order contending that no tax is payable in India since the amount received under RCP is neither ‘royalty’ nor FOWC has any PE India.

Rebutting the above contention, the Revenue submitted that FOWC carried on business in India through a fixed place of business, namely, the Buddh International Circuit.

While dismissing the SLP, the bench comprising of Justice A.K Sikri and Justice Ashok Bhushan said that Buddh International Circuit is a fixed place. It was said that “From this circuit different races, including the Grand Prix is conducted, which is undoubtedly an economic/business activity.”

The bench also observed that no merit in the contention of the petitioners 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. It also rejected the argument of the appellants that the Buddh International Circuit was not under the control and at the disposal of FOWC.

“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 Baker27, 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”, the bench said.

“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 PE”, the bench also added.

With regard to the question of payment of TDS by Jaypee, the bench accepted the contention of the petitioners 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 Income Tax Act.

Read the full text of the Judgment below.

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