Wednesday, 19 July 2017

Supreme Court rules that racing event creates PE in India

In a significant win for the tax authorities, India’s Supreme Court issued a decision on 24 April 2017, concluding that a car racing championship held in India created a permanent establishment (PE) for the nonresident company that sponsored the event, with the result that the income attributable to the PE was taxable in India. In its decision, the Supreme Court set out the key principles for determining when a PE is created; taxpayers should take into consideration the principles set out by the court with respect to a fixed place of business PE in India.

Facts of the case
A UK resident company (Formula One World Championship Ltd., or FOWC); the Federation Internationale de l’automobile (FIA), an international body regulating motor sports events; and Formula One Asset Management Limited (FOAM) entered into agreements, under which FOAM licensed all commercial rights in the FIA Formula One World Championship to FOWC for a period of 100 years, with effect from 1 January 2011.
On 13 September 2011, FOWC entered into a race promotion contract with an Indian company, Jaypee Sports International Ltd. (Jaypee), under which FOWC granted Jaypee the rights to host, stage and promote the Formula One Grand Prix of India event at the Buddh International Circuit in Noida for consideration of USD 40 million. On the same day, the two parties also concluded an artwork license agreement, under which FOWC permitted Jaypee to use certain marks and intellectual property belonging to FOWC for consideration of USD 1 million. Various other agreements also
were concluded between the parties to give effect to their understanding relating to racing events in India.
FOWC and Jaypee asked India’s Authority for Advance Rulings (AAR) for a ruling on whether, based on the race promotion contract, the amounts received by FOWC outside India would be considered “royalties” under article 13 of the India-UK tax treaty and whether FOWC would constitute a PE in India under article 5 of the treaty. The AAR concluded that, based on the India-UK tax treaty, the consideration received by FOWC from Jaypee was in the nature of a royalty subject to withholding tax in India, and that FOWC did not have a fixed place of business PE in India.
FOWC, Jaypee and the Indian tax authorities disagreed with the AAR ruling (all for different reasons) and brought their arguments before the Delhi High Court. FOWC challenged the aspect of the ruling that the consideration received from Jaypee should be characterized as a royalty (if the amount was not a royalty, it would not be taxable in India in the absence of a PE of FOWC in India). The Indian tax authorities filed a writ challenging the aspect of the ruling regarding the existence of a PE. The Delhi High Court reversed the findings of the AAR on both issues and held that the amount
received by FOWC from Jaypee should not be treated as a royalty, but that FOWC did have a PE in India and, therefore, the consideration it received would be taxable in India.
FOWC then appealed to the Supreme Court, arguing that it did not have a PE in India. According to FOWC, the Buddh International Circuit was not at its disposal – Jaypee was responsible for conducting the event and had complete control over it. Further, FOWC had access to the race venue for only a three-week period (two weeks before the event and one week after), so it argued there was an insufficient period of time to create the degree of permanence necessary to establish a fixed place of business PE in India.

Decision of the Supreme Court
The Supreme Court concluded that, based on the agreements with Jaypee and FIA, the Indian Formula One race venue was under the control and at the disposal of FOWC and, therefore, FOWC had a taxable presence in India under the India-UK tax treaty. As a result, the income received through the PE constituted business income, which is subject to tax in India. Under India’s Income Tax Act, Jaypee was required to deduct the relevant tax from the payments it made to FOWC, but tax had to be withheld only on the portion of income attributable to the PE.
In reaching its decision, the Supreme Court relied extensively on the commentary to the OECD model treaty on what is needed to create a fixed place of business PE (and on which the India-UK tax treaty is based) and commentaries on the OECD model by international tax practitioners and luminaries, as well as leading domestic and foreign judicial precedent in adjudicating the PE issue.
The court noted that a PE must be a fixed place of business “through” which the business of an enterprise is wholly or partly carried out. The fixed place of business need not be owned or leased by the foreign enterprise, but it must be at the disposal of the foreign enterprise in the sense that the enterprise must have some right to use the premises for the purposes of its business.
Based on this analysis, the Supreme Court held that FOWC did have a PE in India:

  • Buddh International Circuit clearly is a fixed place of business, since various races (including the Formula One Championship) are held on the track. This is the place where the commercial/economic activity of holding the race was carried out – it was a “virtual projection” of FOWC in India.
  • The fixed place was at the disposal of FOWC, and it was through this place that FOWC conducted business by exploiting commercial rights in India. The court stated that it was necessary to look at the various agreements entered into by FOWC and its affiliates as a whole to determine the “real transaction” between the parties; based on this reading, the court concluded that the entire event was controlled by FOWC and its affiliates. FOWC exercised complete control over the Buddh track and derived income therefrom (the court noted that the fact that Jaypee constructed the track and Jaypee’s ownership and organization of other events were not relevant in determining who controlled the racing event).
  • Even though the race took place over the course of only three days in the year, FOWC had full access to the circuit for the entire duration of the event (i.e. two weeks before and one week after the race). As long as the place of business is fixed, the duration of the activities must be viewed in the context of the nature of the business. The actual duration of the activities is not decisive in determining whether a PE is created, as long as the nonresident has exclusive and ongoing access to the place of business. 

Source: Deloitte