Formula One World Championship Ltd v. Commissioner Of Income Tax, International Taxation - 3, Delhi & Anr

[2017] 2 S.C.R. 152 A FORMULA ONE WORLD CHAMPIONSHIP LTD. COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION - 3, DELHI & ANR. (Civil Appeal No. 3849 of2017) APRIL 24, 2017 [A. K. SIKRI AND ASHOK BHUSHAN, JJ.) Income Tax Act, 1961: c s. 1-95 - TDS on non-residents - Appellants-FOWC, UK Company (NRI), entered into Race Promotion Contract (RPC) with Jaypee Sports, Indian entity -: Grant of rights to Jaypee to host, stage and promote Formula One Grand Prix of India event at the Buddh International Circuit in India for a consideration of US$ 40 million - FOWC, if having any Permanent Establishment in India in D terms of Art. 5 - Consideration received or receivable by FOWC from Jaypee, if subject to tax at source u!s. 195 - Held: FOWC is the Commercial Right Holder (CRH) - Buddh International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Championship was carried out, and it was a virtual E projection of foreign enterprise-FOWC in India - Fixed place of business in the form of physical location-Buddh International Circuit, was at the disposal of FOWC through which it conducted business, though for a short duration - Thus, FOWC had a Permanent Establishment in India - Taxable event took place in India and non-resident FOWC is liable to pay tax in India on the F income it has earned in India - Since payments made by Jaypee to FOWC under RPC were business income of the FOWC through PE at Buddh International Circuit, and, thus, chargeable to tax, Jaypee bound to make appropriate deductions from the amounts paid u/s. 195 - Double Taxation Avoidance Agreement (between India and G United Kingdom) - Art. 5 Double Taxation Avoidance Agreement (between India and United Kingdom): Art. 5 - Permanent Establishment - What constitutes Permanent Establishment - Explained. H Art. 5 - Permanent Establishment - Conditions to be ··satisfied - Held: Twin conditions to be satisfied are existence of a fixed place of business; and through that place business of an enterprise is wholly or partly carried out. Dismissing the appeals by FOWC and Jaypee and disposing of the appeal by the Revenue, the Court HELD: 1.1 As per Article 5 of the Double Taxation Avoidance Agreement, the Permanent Establishment has to be a fixed place of business 'tftrougft' which business of an enterprise is wholly or partly carried on. A combined reading of sub-articles (1 ), (2) and (3) of Article 5 would clearly show that only certain . c 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 D 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. [Para 66] (207-C~F] 1.2 The Buddh International Circuit is a fixed place. From ( 2017 [ 20 this circ.uit different races, including the Grand Prix is conducted, which is undoubtedly an economic/business activity. The manner in which commercial rights, which are held by FOWC and its affiliates, have been exploited, the 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 A Jaypee, to capture the real essence of FOWC's role. [Para 67) [207-F-H; 208-A-B) 1.3 The agreement was analysed by the High Court in a flawless manner. The High Court rightly concluded that having regard to the duration of the event, which was for limited days, B 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. [Para 68, 70) [210-B; 212-E-F] 1.4 FOWC is the Commercial Right Holder (CRH). These rights can be exploited with the conduct of F-1 Championship, c 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 I) 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 E not only FOWC became Commercial Rights Holder for 100 years, this agreement further e.nabled 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 F 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 said commercial activities in India. [Para 73) [214-F-G; 215-G A-C] 1.5 It cannot be said 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 would be of no consequence; Its ownership or organising other H events by Jaypee is also immaterial. The examination is limited [ 20 [ 20 to the conduct of the }'-1 Championship and control over the track during that period. Specific arrangement between the parties relating to the aforesaid, and which FOWC and Jaypee nnsuccessfully endeavoured to ignore, has in fact turned the table against them. It cannot be said 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. Also it cannot be said that the Buddh International Circuit was not under the control and at the disposal of FOWC. No doubt, FOWC, as CRH of these events, is in the business of exploiting these rights, including intellectual property rights. However, these became possible, only with the actual conduct of these races and active participation of FOWC in the said races, with access and control over the circuit. [Para 74, 75] [217-B-E] 1.6 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 (FOWC) on the soil of this .country. PE must have three characteristics: stability, productivity and dependence. All characteristics are present in the instant 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 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. [Para 76] [217-F-H; 218-A] Commissioner of Income Tax, A.P.-I v. Visakhapatnam Port Trust (1983) 144 ITR 146 - approYed. A Manual on the OECD Model Tax Convention on Income and on Capital by Philip Baker Q.C. - referred to. 1. 7 As regards 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. The High Court rightly held that since payments made by Jaypee to }'OWC under the RPC were bnsiness income of the }'OWC through PE at the Buddh A International Circuit, and, therefore, chargeable to tax, Jaypee was bound to make appropriate deductions from the amounts paid under Section 195 of the Act. However, it is accepted 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 B Section 195 of the Act. 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 c Assessing Officer to adjudicate upon the said aspects while passing the Assessment Order, namely, how much business income ofFOWC is attributable to PE in India, which is chargeable to tax. [Para 77, 78] [218-C-F] GE India Technology Centre Private Limited v. Commissioner ()f Income Tax & Anr. [2010] 10 SCR 1142 : (2010) 10 sec 29 - relied on. Tekniskil (Sendirian) Bhd. v. Commissioner of Income Tax. (1996) 222 l.T.R. 551 (Authority for Advance Rulings, India); Deputy Commissioner of Income Tax v. Subsea Offshore Ltd. (1998) 66 l.T.D. 296 (Income Tax Appellate Tribunal, Mumbai); Union of India & Anr. v. Azadi Bachao Ando/an & Anr. [2003] 4 Suppl. SCR 222 : 2004 (lO) sec 1: 2003 (262) ITR 706; Commissioner of Income Tax. Andhra Pradesh v. fvt!s. Toshoku Ltd., Guntar & Ors. [1981] SCR 587: (1980) Supp SCC 614 : 1981AIR148; Maganbhai Ishwarbhai Patel Etc. v. Union of India and Another [1969] 3 SCR 254; Columbia Sportswear Company v. Director of Income Tax, Bangalore [2012] 7 SCR 187 - referred to. Transvaal Associated Hide & Skin Merchants (Pty) Ltd. (1967) 29 S.A.T.C. 97 (Court of Appeal, Botswana); Georges Simenon (1965) 44 T.C. (US) 820 (US Tax Court); Joseph Fowler v. M.N.R. (1990) 90 D-T.C. 1834; (1990) 2 C.T.C. 2351 (Tax Court of Canada); Antwerp Court of Appeal, decision of February 6, 2001, noted in 2001 WTD 106-11; Income Tax Appeals Nos. 759/KB to 761/KB of 1997-98 (Tarom SA), (1998) A PT.D (Trib.) 3749 (Income-tax Appellate Tribunal, Pakistan); Commissioner of Internal Revenue v. Consolidated Premium Iron Ores Ltd. (1959) 265 F 2d. 320; Lower Tax Court of the Hague, September 10, 1990, (1991) Tax Notes Intl. 161; William Dudney v. R B (1999) 99 DTC 147; Bundersfinanzhof. February 3, 1993, IR 80-81191, IStR 1993, p. 226 (1993) BSt Bl., II, 462; Decision of the Lower Tax Court of Baden-Wurttemberg, May 11, 1992, decision No. 3K 309/91, RIW 1993, 81, IStR 1992, p.104; Decision ofNovember 10, 1998, (199) Revue deDroit Fiscal, No. 25, comm .. 503, c reported with translation in (1998) I ITLR 857; Cour de Cassation of February 15, 1980 (1980) Jl. De Droit Fiscal 321; Sepet v. Secretary of State for the Home Department 2003 (3) All ER 304; Universal Furniture Ind. AB v. Government of Norway (Stavan2er Court, D Case No. 99-00421, dated 19-12-1999 referred to in Principles oflntemational Taxation byAnghard Miller and · Lyn Oates, 2012); Joseph Fowler v. Her Majesty the Queen 1990 (2) CTC 2351 - referred to. Double Taxation Conventions by Klaus Vogel - referred to. From the Judgment and Order dated 30.11.2016 of the High Court of Delhi at New Delhi in Writ Petition (Civil)No. 9509 of2016. A Mukul Rohatgi, AG, Dushant Dave, S. Ganesh Arvind P. Datar, Sr. Advs, Percy Pardiwala, Ms. Anuradha Dutt, Ms. Fereshte D. Sethna, Sachit Jolly, Gautam Swarup,Ameya Pant, Ms. B. Vijayalakshmi Menon, Kamaldeep Dayal, Ankur Saigal, Tushar Bakshi, Ms. Diksha Rai, D.L. Chidananda, Rupesh Kumar, H.R. Rao, G.C. Srivastava, Mrs. Anil Katiyar, E. C. Agrawala Shikhil Suri, Shiv Kumar Suri, Ms. Vinati Bhola, B Advs. for the appearing parties. The Judgment of the Court was delivered by A. K. SIKRI, J. INTRODUCTION I. These appeals are filed by Formula One World Championship Limited (hereinafter referred to as 'FOWC'), Jaypee Sports International Limited (for short, 'Jaypee') and Union oflndia (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 Defhi whereby three writ petitions preferred by FOWC, Jaypee and Revenue have been decided. 2. The matter originated from filing of applications by FOWC and Jaypee before the Authority for Advance Ruling (AA]l). F