Buddh International Circuit is “Permanent Establishment”; Formula 1 liable to pay tax, rules Supreme Court

The Supreme Court has held that the Buddh International Circuit, which was used to hold the Grand Prix event is a “Permanent Establishment” of the Formula One World Championship Limited (FOWC). Consequently, the Court has held that FOWC/ Formula 1 is liable to pay tax in India for the income earned in India..The judgment was delivered by a Bench of Justices AK Sikri and Ashok Bhushan yesterday. Senior Advocate S Ganesh appeared for Formula 1/ FOWC while Senior Advocates Arvind Datar and Dushyant Dave appeared for Jaypee Sports International Limited (Jaypee). Attorney General Mukul Rohatgi appeared for the Income Tax Department..The matter has its genesis in a Race Promotion Contract entered into between FOWC and Jaypee. By this agreement, FOWC granted Jaypee the right to host, stage and promote Formula 1 Grand Prix of India for a consideration of US$ 40 million..The parties to the contract then approached the Authority for Advance Ruling (AAR) seeking its advance ruling on certain questions. One of the questions raised before the AAR, which then went to High Court and eventually became the subject matter of appeal before the Supreme Court was,.“whether FOWC was having any ‘Permanent Establishment’ (PE) in India in terms of Article 5 of DTAA?”.Another related question was also raised, viz. 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 Indian Income Tax Act, 1961..While the AAR ruled that the FOWC did not have any Permanent Establishment in India, the High Court reversed the said ruling..The Supreme Court in its judgment proceeded to consider the issue in detail..Analysing Article 5 of the DTAA, the Court concluded that the list of places mentioned therein is an inclusive list and not an exhaustive one..“A combined reading of sub-articles (1), (2) and (3) of Article 5 would clearly show that only certain 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.”.It then set out the requirements under the Article 5 for bringing an establishment within it scope..“In order to bring any other establishment which is not specifically 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.”.The Court held that Buddh International Circuit, where the Grand Prix was held, is a fixed placed and the race conducted there is undoubtedly an economic/business activity..“The core question is as to whether this was put at the disposal of FOWC? Whether this was a fixed place of business of FOWC is the next question.” .The Court then analysed the various agreements between the parties and the rights accruing to FOWC. Based on the same, it concluded that the entire event was taken over and controlled by FOWC and its affiliates..“There cannot be any race without participating/ competing teams, a circuit and a paddock. All these are controlled by FOWC and its affiliates. Event has taken place by conduct of race physically in India. Entire income is generated from the conduct of this event in India. Thus, commercial rights are with FOWC which are exploited with actual conduct of race in India.”.The Court also held that even the physical control of the circuit was with FOWC and its affiliates from the inception, i.e. inclusion of event in a circuit till the conclusion of the event..“Omnipresence of FOWC and its stamp over the event is loud, clear and firm. Mr. Rohatgi is right in his submission that the undisputed facts were that race was physically conducted in India and from this race income was generated in India. Therefore, a commonsense and plain thinking of the entire situation would lead to the conclusion that FOWC had made their earning in India through the said track over which they had complete control during the period of race.”.The Court categorically concluded that the FOWC was carrying on commercial and business activity in India..“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 aforesaid commercial activities in India…. Mere construction of the track by Jaypee at its expense will be of no consequence. Its ownership or organising other events by Jaypee is also immaterial. Our examination is limited to the conduct of the F-1 Championship and control over the track during that period…..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 Court also held that the fact the event was for a limited number of days will not make any difference..Read the judgment below..Image taken from here.