In a significant ruling, the Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that the Race Promotion Contract (RPC) fee is an additional income by Formula One and is taxable.
Formula One World Championship Ltd, the assessee is a non-resident corporate entity incorporated in the United Kingdom (UK) and a tax resident of the UK. The assessee is eligible to claim benefits under India – UK Double Taxation Avoidance Agreement (DTAA). The assessee is the commercial rights holder of the Formula One World Championship.
The assessee is exclusively entitled to award event promoters with the right to host, stage and promote Grand Prix on various Circuits worldwide and in that capacity entered into an RPC with Jaypee Sports International Ltd. [now merged with Jaiprakash Associates Limited (JAL)] granting right to host the Indian Grand Prix.
As a consequence of granting the Indian Grand Prix the right to JAL, the assessee earned the RPC fee. To ascertain the nature and character of the RPC fee and its taxability in India, the assessee applied to the Authority of Advance Ruling (‘AAR’) under section 254Q of the Act.
The AAR held that the RPC fee received by the assessee is like royalty in terms of Article 13 of India – UK DTAA. Further, it was held that the assessee had no fixed place Permanent Establishment (PE) or agency PE in India and the JAL was obliged to deduct tax at source while paying the RPC fee to the assessee.
The Delhi High Court held that the assessee had a fixed place PE in India and JAL was bound to make a deduction of tax at source under section 195 of the Act on the RPC paid to the assessee. In the meanwhile, the Assessing Officer framed a draft assessment order bringing to tax the profit taxable in India by dividing global operating profit by several races conducted during the year.
In the final assessment orders, the Assessing Officer held that the consideration received by the assessee with the Indian Grand Prix represented its profit with 56% of the said profit being attributable to the PE in India.
It was observed that the RPC fee received by the assessee was the full amount without suffering any withholding of tax at source and that’s why the assessee did not claim credit for TDS in return for income.
It was evident that the TDS credit claimed by the assessee is not a part of the income offered to tax in the returns of income. The TDS credit claimed by the assessee is over and above the actual RPC fee paid to the assessee by JAL and is essentially the TDS credit now claimed by the assessee is like an additional income over and above the RPC fee the assessee was entitled to receive under the contract. It was an additional item of income which has not suffered tax at the hands of the assessee.
A Coram comprising of Shri G S Pannu, President and Shri Saktijit Dey, Judicial Member observed that the TDS credit partakes the character of original income, i.e., the RPC fee and has to be taxed in the same manner in which the Assessing Officer taxed the RPC fee.
The ITAT directed the Assessing Officer to factually verify the actual amount of TDS credit by matching figures in Form 26AS and TDS certificates issued in Form 16A and thereafter treat the TDS credit as income of the assessee partaking the character of RPC fee and tax it in the same manner in which RPC fee was brought to tax in the final assessment order and partly allowed the appeal.
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