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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 3849 OF 2017

FORMULA ONE WORLD CHAMPIONSHIP LTD. …..APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX,  INTERNATIONAL TAXATION – 3,  DELHI & ANR. …..RESPONDENT(S)

W I T H CIVIL APPEAL NO. 3850 OF 2017

A N D CIVIL APPEAL NO. 3851 OF 2017

J U D G M E N T

A.K. SIKRI, J.

INTRODUCTION These  appeals  are  filed  by  Formula  One  World

Championship  Limited  (hereinafter  referred  to  as

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'FOWC'),  Jaypee  Sports  International  Limited  (for short,  'Jaypee')  and  Union  of  India  (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 Delhi 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  (AAR).   FOWC  had  entered  into  a  'Race Promotion Contract'  (RPC) dated September 13, 2011 with Jaypee, granting Jaypee the right to host, stage and promote the Formula One Grand Prix of India event for a consideration of US$ 40 million. Some other agreements were also entered into between FOWC and Jaypee as well as group companies of FOWC and Jaypee, particulars whereby would be mentioned later at an appropriate stage.  In the applications filed by FOWC and Jaypee before the AAR, advance ruling of AAR was solicited on two main questions/queries:

(i) whether the payment of consideration receivable

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by FOWC in terms of the said RPC from Jaypee was or was not royalty as defined in Article 13 of the 'Double Taxation Avoidance Agreement' (DTAA) entered  into  between  the  Government  of  United Kingdom and the Republic of India?; and

(ii)whether  FOWC  was  having  any  'Permanent Establishment' (PE) in India in terms of Article 5 of DTAA?

Another related question was also raised, viz.,  (iii)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  (hereinafter after referred to as the 'Act').   

3) AAR  answered  the  first  question  holding  that  the consideration  paid  or  payable  by  Jaypee  to  FOWC amounted  to  ‘Royalty’ under  the  DTAA.   Second question was answered in favour of FOWC holding that it did not have any PE in India.  As far as the question of subjecting the payments to tax at source under Section 195 of the Act is concerned, AAR ruled

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that since the amount received/receivable by FOWC was income in the nature of Royalty and it was liable to pay  tax  there  on  to  the  Income  Tax  Department  in India, it was incumbent upon Jaypee to deduct the tax at source on the payments made to FOWC.  FOWC and Jaypee challenged the ruling on the first issue by filing writ petitions in the High Court contending that the payment would not constitute Royalty under Article 13 of the DTAA.  Revenue also filed the writ petition challenging the answer of the AAR on the second issue by taking the stand that FOWC had PE in India  in  terms  of  Article  5  of  the  DTAA  and, therefore, tax was payable accordingly.

4) As mentioned above, all these three writ petitions have  been  decided  by  the  High  Court  vide  common judgment dated November 30, 2016.  Interestingly, the High Court has reversed the findings of the AAR on both the issues.  Whereas it has held that the amount paid/payable under RPC by Jaypee to FOWC would not be treated as Royalty, as per the High Court FOWC had the PE in India and, therefore, taxable in India. While deciding this question, the High Court has not

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accepted the plea of the Revenue that it was not a dependent PE.  The High Court has also held, as the sequitur, that Jaypee is bound to make appropriate deductions  from  the  amount  payable  to  FOWC  under Section 195 of the Act.  It is for this reason all the three parties are again before us.

5) As per FOWC and Jaypee, no tax is payable in India on the consideration paid under RPC as it is neither Royalty  nor  FOWC  has  any  PE  in  India.   It  is pertinent  to  mention  that  the  Revenue  has  not challenged the findings of the High Court that the amount paid under RPC does not constitute royalty. Therefore,  that  aspect  of  the  matter  has  attained finality.  The  main  question  in  the  appeals, therefore, pertains to PE.

FACTUAL MATRIX

6) In order to decide this question, following facts, having bearing on the matter, need a recapitulation:

7) Federation  Internationale  de  I'  Automobile  (for short,  'FIA'),  a  non-profit  association,  is

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established  as  the  Association  Internationale  des Automobile Clubs Reconnus to represent the interests of  motoring  organizations  and  motor  car  users globally.   FIA,  as  the  federation  of  the  world’s leading motoring organizations and the governing body for motorsports worldwide, consists of 213 national member  organizations  in  125  countries internationally.   FIA  is  the  principal  body  for establishing the rules and regulations for all major international four-wheel motorsport events.  FIA is a regulatory  body;  it  regulates  the  FIA  Formula  One World  Championship  ('Championship')  which  has  been the premier form of motor racing since its inception in 1950.  This Championship is established and run every year subsequently since.  The Championship is an annual series of motor races, conducted in the name and style of the Grand Prix over a three day duration  at  purpose-built  circuits,  and  in  some cases, across public roads, in different countries around the world.  The Championship is considered the most  prestigious  motor  sport  series  in  the  world. 'Formula  One' (F-1)  refers  to  the  rules  and regulations that define the characteristics of the

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race, as opposed to any other form of motor race. Thus,  'the formula', is with reference to a set of rules that all participants’ cars must conform to. F-1 seasons consist of a series of races, known as Grand Prix (from French, meaning grand prizes), held across the world on specially designed and built F-1 circuits across 26 different locales.

8) F-1 Grand Prix events are held under the aegis of the FIA Formula One World Championship’s competition – in which  F-1  racing  cars,  assembled  and  manufactured strictly in terms of the F-1 technical regulations, compete  against  each  other,  under  F1  Sporting Regulations and the F-1 International Sporting Code framed and made effective by the FIA.  F-1 drivers across  the  world  have  the  ability,  competence  and skill  to  drive  an  F-1  car  and  participate  in  F-1 racing  events.   About  12  to  15  teams  typically compete  in  these  Championship  in  any  one  annual racing  season.   Some  celebrated  and  well-known participating  teams  are  the  Ferrari,  McLaren,  Red Bull etc.  The teams assemble and construct their vehicles,  which  comply  with  defined  technical

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specifications,  and  engage  drivers  who  can successfully  manoeuvre  the  F-1  cars  in  the  racing events.

9) FOWC is incorporated under the laws of the United Kingdom, and is a tax resident of the United Kingdom. It is the Commercial Rights Holder (CRH) in respect of  the  Championship  with  effect  from  January  01, 2011.  FOWC has entered into an agreement with the FIA  and  Formula  One  Asset  Management  Limited (‘FOAM’).  Under these agreements, FOAM licensed all commercial  rights  in  the  FIA  Formula  One  World Championship  (hereinafter  referred  to  as  ‘F1 Championship’) to FOWC for 100 year term effective from January 01, 2011.  As mentioned above, the teams which  participate  in  F1  World  Championship Competitions have to strictly comply with the terms and conditions set out for such competitions as per Sporting  Regulations  and  Sporting  Code.   For  this purpose, all these teams, known as  ‘Constructors’, enter  into  a  contract,  known  as  the  'Concorde Agreement',  with  FOWC  and  the  FIA.  In  these agreements, they undertake to participate to the best

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of their ability, in every F-1 event included in the official annual F-1 racing calendar.  They also bind themselves to an unequivocal negative covenant with FOWC that they would not participate in any other similar motor racing event whatsoever nor would they promote in any manner any other rival event.  The F-1 racing teams exclusively participate in about 19 to 21 listed F-1 annual racing events on the official racing calendar, set by the FIA.  This is, in effect, a closed circuit event since no team other than those bound  by  contract  with  FOWC  are  permitted participation.   

Thus, on the one hand, participating teams enter into  Concorde  Agreement.   Likewise,  promoters  are also  chosen  for  holding  these  F-1  racing  events. Every F-1 racing event is hosted, promoted and staged by a promoter with whom FOWC as the right holder, enters into contract and whose event is nominated by the CRH (i.e. Commercial Right Holder, which is in effect,  FOWC)  to  the  FIA  for  inclusion  in  the official F-1 racing calendar.  In other words, FOWC is the exclusive nominating body at whose instance

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the event promoter is permitted participation.  The points scored by each F-1 racing team in every event is  listed  in  the  official  racing  calendar  and  it counts towards the Constructor's Championship and the Driver’s  Championship  for  the  racing  season  as  a whole.  Any team’s position in these Championships at the  end  of  the  season  determines,  together  with certain  other  factors  which  are  elaborately  dealt with in the Concorde Agreements (which in the present instance,  was  latest  in  the  series  of  Concorde Agreements the last being the one of 2009 i.e. August 05, 2009), the prize money payable to the teams for their participation during the season.  Grant of a right  to  host,  stage  and  promote  the  F-1  racing event,  therefore,  carries  with  it  a  covenant  or representation that F-1 racing teams with their cars, drivers and other auxiliary and supporting staff will participate in the motor racing event hosted at the promoter’s  motor  racing  circuit  displaying  the highest levels of technical skill achievement etc. in the fields of construction of single seat motorcars to attain the highest levels of performance in the world.  These teams and the FOWC also represent that

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the highest levels of skill in racing management and maintenance of the cars would be on display in the event.   All  these  are  a  part  of  the  relevant contractual  provisions,  embodied  in  RPC  2011.   In this manner, FOWC has acquired all commercial rights in  respect  of  the  F-1  Championship  wherever  such tournaments take place, i.e. with the permission of FOWC.  

10) Jaypee  was  interested  to  acquire  this  right  for hosting, staging and promoting the F-1 Grand Prix of India event.  In order to do so, it entered into agreement with FOWC dated September 13, 2011 which is known as  ‘Race Promotion Contract’  (RPC).  By this agreement,  FOWC  granted  Jaypee  the  right  to  host, stage and promote F-1 Grand Prix of India event for a consideration of US$ 40 millions.  Another agreement known  as  ‘Artwork  License  Agreement’ (‘ALA’)  was entered into between FOWC and Jaypee on the same day whereby FOWC permitted Jaypee to use certain marks and  intellectual  property  belonging  to  FOWC  for  a consideration of US$ 1 million.  Prior to this RPC of 2011,  another  RPC  of  October  25,  2007  had  been

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entered  into  between  FOA  and  Jaypee  which  was replaced  by  agreement  dated  September  13,  2011 between  FOWC  and  Jaypee.   Pursuant  thereto,  races were held in India in 2011, 2012 and 2013.   

11) After  entering  into  the  aforesaid  arrangement  for hosting F-1 Grand Prix in India, both FOWC and Jaypee approached AAR seeking its advance ruling on the two questions, the nature of which, including the opinion of AAR thereupon, is already mentioned above.

12) As  pointed  out  earlier,  first  question  was  as  to whether considerations received/receivable under the RPC by FOWC from Jaypee Sports was in the nature of business income and  ‘Royalty’ as defined under the Act as well as DTAA.  Plea of FOWC and Jaypee was that  what  was  granted  to  Jaypee  by  FOWC  was  a commercial right to use the event, i.e., a hosting right  and  the  consideration  received/receivable therefrom by FOWC was not for the use of trademark, copyright, equipment etc. and hence was not in the nature of ‘Royalty’.  It was also stated by them that there  was  a  limited  permitted  use  of  Formula  One (‘F-1’) Mark which was only to enable the promoter

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(Jaypee)  to  advertise  the  Indian  Grand  Prix  and reproduction  of  names  of  the  sports  events  was routine and customary in business parlance.  For this purpose, ALA was executed to enable Jaypee to use F-1 Marks in a limited way and to prevent it from using the Marks for any commercial exploitation.   

Revenue had opposed the aforesaid plea of FOWC and  Jaypee  on  the  ground  that  the  consideration comprised  not  only  of  hosting  rights  but  also permission to use F-1 Marks and, therefore, entire consideration of US$ 40 million was attributable to the usage of F-1 Marks in terms of ALA.  According to the Revenue, RPC and ALA had to be read together for a  comprehensive  view  of  the  matter,  particularly, whey they were executed on the same day.   

The  AAR  accepted  the  argument  of  the  Revenue holding  that  the  consideration  received  by  FOWC amounted to royalty and was to be, accordingly, taxed under the Indian Income Act.  However, this view is reversed by the High Court by the impugned judgment after detailed discussion on this issue and in the

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opinion of the High Court the consideration received under the Agreement cannot be termed as royalty.  As mentioned above, Revenue has accepted the judgment of the High Court on this issue and, therefore, it is not necessary to discuss in detail the reasons given by  the  High  Court  for  coming  to  the  aforesaid conclusion.  This fact is mentioned only for the sake of  completeness  of  the  issues  raised  and  their outcome.   

13) The bone of contention before this Court pertains to the issue of existence of a PE of FOWC in India.  We may say at the outset that the arguments advanced by both the parties before us were virtually the same arguments which were advanced before the High Court as well.  Therefore, spelling out the submissions of the  parties  before  the  High  Court  may  not  be necessary as it would be duplicating and repetitive. At  this  stage,  we  would,  therefore,  record  the arguments which were presented before us and in the process mention the basis of the conclusion arrived at by the High Court for the purpose of forming an opinion as to whether the view of the High Court is

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correct and justified in law.   

RELEVANT STATUTORY PROVISIONS & DTAA REGIME

14) Before adverting to the question at hand, it would be appropriate to take note of the scheme of the Act as well as relevant provisions of DTAA on this subject. The  Act  provides  two  modes  of  taxation,  namely, resident based and source based.  Any person who is a resident of India is subjected to the Act and liable to pay income tax on the  ‘total income’ earned by such  a  resident,  after  getting  various  deductions therefrom as admissible under different provisions of the Act.  Charging section is Section 4 which, inter alia, stipulates that income tax shall be charged for any Assessment Year in respect of total income of the previous year of every of such person.  Section 5 contains the scope of total income  of a resident and includes all income from whatever source derived by a person who is resident which is received or deemed to be received in India, accrues or arises or is deemed to accrue or arise to him in India or accrues or arises to him outside India during such year.  Thus,

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a  resident  is  supposed  to  pay  income  tax  on  all incomes so earned whether in India or outside India.

  On  the  other  hand,  those  persons  who  are  not

ordinarily residents of India (which term is defined under sub-section (6) of Section 6) are not liable to pay income tax on any income which accrues or arises to such non-resident outside India.  However, in the case  of  non-resident  persons,  if  the  income  is derived from a business controlled in or a profession set up in India, these non-residents are subjected to pay tax for such an income earned in India. In their case, all such incomes from whatever source derived which  is  received  or  is  deemed  to  be  received  in India in such a year by or on behalf of such person or accrues or arises or is deemed to accrue or arise to  them  in  India  during  that  year,  is  taxable  in India.  In this sense, the income tax on non-resident is source based, i.e., source of such income is India and, therefore, even a non-resident is liable to pay tax on incomes earned in India.  ‘Resident in India’ and ‘Not-ordinarily Resident in India’ are covered by the provisions contained in Section 6.

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15) In  the  present  case,  we  are  concerned  with  the consideration  received  by  FOWC  as  a  result  of Agreement signed with Jaypee Sports.  FOWC, being a UK Company, is admittedly the non-resident in India. Since  the  question  is  whether  the  aforesaid consideration/income earned by FOWC is subject to tax in India or not, it is to be decided as to whether that  income  accrued  or  arose  in  India.   For  this purpose, relevant provision is Section 9 of the Act. This section contains varied situations where income is deemed to accrue or arise in India and it is not necessary to spell out each of such contingencies. Insofar  as  income  by  way  of  royalty  earned  by  a non-resident  is  concerned,  that  is  mentioned  in clause (vi) of Section 9(1) of the Act.   As the consideration of US$ 40 million received by FOWC from Jaypee is held as ‘no income by way of royalty’, we may conveniently skip that provision.  

16) Clause (i) of sub-section (1) of Section 9 of the Act mentions certain kinds of income which are deemed to accrue or arise in India.  This clause is reproduced

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below:

“(i)  all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from  any  property  in  India,  or  through  or from any asset or source of income in India, or through the transfer of a capital asset situate in India:”

17) It is clear from the reading of the said clause that it includes all those incomes, whether directly or indirectly, which are accruing or arising through or from any business connection in India.  It is, thus, clear  that  an  income  which  is  earned  directly  or indirectly, i.e. even indirectly, is to be deemed to accrue or earned in India.  Further, such an income should  have  some  business  connection  in  India. Explanation  (1)  for  the  purpose  of  this  clause provides five explanations from clauses (a) to (e). Clause  (a)  stipulates  that  where  all  the  business operations are not carried in India and only some such operations of business are carried in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the  income  as  is  reasonably  attributable  to  the

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operations carried in India.  We are not concerned with clauses (b) to (e).  Explanation (2) provides certain  exceptions  in  respect  of  ‘business connection’ and reads as under:

“Explanation 2. – For the removal of doubts, it  is  hereby  declared  that  “business connection”  shall  include  any  business activity  carried  out  through  a  person  who, acting on behalf of the non-resident, – (a) has and habitually exercises in India,

an  authority  to  conclude  contracts  on behalf  of  the  non-resident,  unless  his activities are limited to the purchase of gods or merchandise for the non-resident; or  

(b) has no such authority, but habitually maintains in India a stock of gods or merchandise  from  which  he  regularly delivers goods or merchandise on behalf of the non-resident; or  

(c) habitually  secures  orders  in  India, mainly or wholly for the non-resident or for  that  non-resident  and  other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:

Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is  acting  in  the  ordinary  course  of  his business: Provided  further  that  where  such  broker, general commission agent or any other agent works  mainly  or  wholly  on  behalf  of  a non-resident  (hereafter  in  this  proviso

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referred to as the principal non-resident) or on  behalf  of  such  non-resident  and  other non-residents  which  are  controlled  by  the principal non-resident or have a controlling interest in the principal non-resident or are subject  to  the  same  common  control  as  the principal  non-resident,  he  shall  not  be deemed  to  be  a  broker,  general  commission agent or an agent of an independent status.”

18) This  exception,  thus,  clarifies  and  declares  that even when business activity is carried  'through'  a person who is acting on behalf of the non-resident (which means agent of the non-resident), it will be treated  that  the  non-resident  is  having  business connection in India.  The meaning of the expression ‘through’ is  again  clarified  in  Explanation  (4), which reads as under:

“Explanation 4. – For the removal of doubts, it  is  hereby  clarified  that  the  expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.”

19) If a non-resident has a PE in India, then business connection in India stands established.  Section 92F of  the  Act  contains  definitions  of  certain  terms, though  those  definitions  have  relevance  for  the purposes of computation of arms length price, etc.

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Clause (3) thereof defines  ‘enterprise’ and such an enterprise includes a PE of a person.  PE is defined in clause (iiia) in the following manner:

“(iiia)  “permanent establishment”, referred to in clause (iii), includes a fixed place of business  through  which  the  business  of  the enterprise is wholly or partly carried on;”

20) At this juncture, we would also like to point out that  Article  5  of  DTAA  between  India  and  United Kingdom lays down as to what would constitute a PE. It reads as under:

“ARTICLE 5 PERMANENT ESTABLISHMENT 1.  For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2.  The term “permanent establishment” shall include especially: (a) a place of management; (b) a branch;

(c) an office; (d) a factory; (e) a workshop; (f) premises used as a sales outlet or for

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receiving or soliciting orders; (g) a  warehouse  in  relation  to  a  person

providing store facilities for others; (h) a mine, an oil or gas well, quarry on

other  place  of  extraction  of  natural resources;

(i) an installation or structure used for the exploration or exploitation of natural resources;

(j) a  building  site  or  construction, installation  or  assembly  project  or supervisory  activities  in  connection therewith,  where  such  site,  project  or supervisory  activity  continues  for  a period of more than six months, or where such  project  or  supervisory  activity, being incidental to the sale or machinery or equipment, continues for a period not exceeding  six  months  and  the  charges payable  for  the  project  or  supervisory activity exceed 10 per cent of the sale price of the machinery and equipment;

(k) the  furnishing  of  services  including managerial  services,  other  than  those taxable  under  Article  13  (Royalties  and fees  for  technical  services),  within  a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities  of  that  nature

continue  within  that  State  for  a period or periods aggregating more than  90  days  within  any twelve-month period; or

(ii) services  are  performed  within that State for an enterprise within the  meaning  of  paragraph  1  of Article 10 (Associated enterprises) and  continue  for  a  period  or periods  aggregating  more  than  30 days  within  any  twelve-month period;

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Provided that for the purposes of this paragraph an enterprise shall be  deemed  to  have  a  permanent establishment  in  a  Contracting State  and  to  carry  on  business through  that  permanent establishment  if  it  provides services  or  facilities  in connection with, or supplies plant and machinery on hire used or to be used  in,  the  prospecting  for,  or extraction or production of mineral oils in that State.

3.  The term “permanent establishment” shall not be deemed to include: (a) the use of facilities solely for the

purpose of storage or display of gods or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely  for  the  purpose  of  storage  or display;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the  maintenance  of  a  fixed  place  of business  solely  for  the  purpose  of purchasing goods or merchandise, or for collecting  information,  for  the enterprise;

(e) the  maintenance  of  a  fixed  place  of business  solely  for  the  purpose  of advertising,  for  the  supply  of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade of business  of  the  enterprise.   However, this  provision  shall  not  be  applicable where the enterprise maintains any other fixed  place  of  business  in  the  other

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Contracting  State  for  any  purpose  or purposes  other  than  the  purposes specified in this paragraph;

(f) the  maintenance  of  a  fixed  place  of businesses solely for any combination of activities  mentioned  in  sub-paragraphs (a)  to  (e)  of  the  paragraph,  provided that the overall activity of the fixed place  of  business  resulting  from  this combination  is  of  a  preparatory  or auxiliary character.

4.  A person acting in a Contracting State for  or  on  behalf  of  an  enterprise  of  the other contracting State – other than an agent of  an  independent  status  to  whom  paragraph (5) of this Article applies, shall be deemed to  be  a  permanent  establishment  of  that enterprise in the first mentioned State if: (a) he  has,  and  habitually  exercises  in

that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited  to  the  purchase  of  gods  or merchandise for the enterprise; or  

(b) he  habitually  maintains  in  the first-mentioned Contracting State a stock of  gods  or  merchandise  from  which  he regularly delivers goods or merchandise for or on behalf of the enterprise; or  

(c) he  habitually  secures  orders  in  the first-mentioned State, wholly or almost wholly for the enterprise itself or for the  enterprise  and  the  enterprises controlling, controlled by, or subject to the  same  common  control,  as  that enterprise.

5.   An  enterprise  of  a  Contracting  State shall  not  be  deemed  to  have  a  permanent establishment in the other Contracting State merely because it carries on business in that other  State  through  a  broker,  general commission  agent  or  any  other  agent  of  an

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independent  status,  where  such  persons  are acting  in  the  ordinary  course  of  their business.  However, if the activities of such an  agent  are  carried  out  wholly  or  almost wholly  for  the  enterprise  (or  for  the enterprise  and  other  enterprises  which  are controlled  by  it  or  have  a  controlling interest in it or are subject to same common control) he shall not be considered to be an agent  of  an  independent  status  for  the purposes of this paragraph. 6.   The  fact  that  a  company  which  is  a resident of a Contracting State controls or is  controlled  by  a  company  which  is  a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise),  shall  not  of  itself  constitute either company a permanent establishment of the other. 7.  For the purposes of this Article the term “control”,  in  relation  to  a  company,  means the  ability  to  exercise  control  over  the company’s affairs by means of the direct or indirect holding of the greater part of the issued share capital or voting power in the company.”

21) As per sub-clause (1) of Article 5, a fixed place of business through which the business of an enterprise is  wholly  or  partly  carried  on,  is  known  as ‘permanent establishment’.  It requires that there has  to  be  a  fixed  place  of  business.   It  also requires  that  from  such  a  place  business  of  an enterprise (FOWC in the instant case) is carried on, whether wholly or partly.  Sub-clause (2) gives the

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illustrations of certain places which will be treated as PEs.  Likewise, sub-clause (3) excludes certain kinds of places from the term PE.  Sub-clause (4) enumerates the circumstances under which a person is to be treated as acting on behalf of non-resident enterprise.   Likewise,  sub-clause  (5)  excludes certain  kinds  of  agents  of  enterprise,  namely, broker,  general  commission  agent  or  agent  of  an independent  status,  by  clarifying  that  if  the business  is  carried  on  through  these  persons,  the enterprise shall not be deemed to be a PE.  However, one exception thereto is carved out, namely, if the activities of such an agent are carried out wholly or almost  wholly  for  the  enterprise,  or  for  the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control, then, such an agent will be treated as an agent of an independent status. It means that if the business is carried out with such a kind of agent, the enterprise will be deemed to have a PE in India.    

THE LEGAL COMMENTARIES AND CASE LAW

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22) It  is  an  undisputed  fact  that  Article  5  of  DTAA between  India  and  the  United  Kingdom  follows  the Organisation  for  Economic  Cooperation  and Development’s  (OECD)  Model  of  Double  Taxation Convention.  There are various commentaries on Double Taxation Conventions.  Celebrated among those are: “A Manual on the OECD Model Tax Convention on Income and

on Capital” by Philip Baker Q.C., and Klaus Vogel on "Double Taxation Conventions".  OECD has also given its  ‘condensed version’ on  "Model Tax Convention on Income and on Capital".  What constitutes PE under various  circumstances  has  also  been  the  subject matter of judicial verdicts in India as well as in other countries.  For better understanding of what may constitute a PE, it would be imperative to refer to these commentaries and judicial decisions.  This discussion would disclose the principles enunciated to  determine  the  existence  of  a  PE,  application whereof  to  the  given  facts  would  facilitate  in answering the surging debate.  

23) Philip  Baker  explains  that  the  concept  of  PE  is

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important for several Articles of the Conventions; the  concept,  or  its  cognate,  also  appears  in  the domestic law of some countries.  According to him, the concept marks the dividing line for businesses between merely trading with a country and trading in that country; if an enterprise has a PE, its presence in a country is sufficiently substantial that it is trading in the country.  He has quoted the following passage from the judgment of the Andhra Pradesh High Court, authored by Justice (Retd.) Jagannadha Rao (as His Lordship’s then was, later Judge of this Court) in  Commissioner  of  Income  Tax,  A.P.-I  v. Visakhapatnam Port Trust1:

“The  words  ‘permanent  establishment’ postulate  the  existence  of  a  substantial element of an enduring or permanent nature of a foreign enterprise in another country which can  be  attributed  to  a  fixed  place  of business in that country.  It should be of such  a  nature  that  it  would  amount  to  a virtual projection of the foreign enterprise of  one  country  into  the  soil  of  another country.”

24) Emphasising that as a creature of international tax law,  the  concept  of  PE  has  a  particularly  strong claim  to  a  uniform  international  meaning,  Philip

(1983) 144 ITR 146

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Baker discerns two types of PEs contemplated under Article 5 of OECD Model.  First, an establishment which is part of the same enterprise under common ownership and control – an office, branch, etc., to which he gives his own description as an ‘associated permanent  establishment’.   The  second  type  is  an agent, though legally separate from the enterprise, nevertheless who is dependent on the enterprise to the point of forming a PE.  Such PE is given the nomenclature  of  ‘unassociated  permanent establishment’ by Baker.  He, however, pointed out that there is a possibility of a third type of PE, i.e.  a  construction  or  installation  site  may  be regarded as PE under certain circumstances.  In the first  type  of  PE,  i.e.  associated  permanent establishments,  primary  requirement  is  that  there must be a fixed place of business through which the business of an enterprise is wholly or partly carried on.  It entails two requirements which need to be fulfilled:  (a)  there  must  be  a  business  of  an enterprise  of  a  Contracting  State  (FOWC  in  the instant case); and (b) PE must be a fixed place of business, i.e. a place which is at the disposal of

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the enterprise.  It is universally accepted that for ascertaining whether there is a fixed place or not, PE  must  have  three  characteristics:  stability, productivity and dependence.  Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on.   

25) Some of the examples of fixed place of business given by Baker are the following:  The place of business must be fixed and permanent.  Thus, a shed which had been  rented  for  thirteen  years  for  storing  and preparing  hides  was  held  to  constitute  a  PE2. Similarly,  a  writer’s  study  has  been  held  to constitute a PE3.  A stand at a trade fair, occupied regularly for three weeks a year, through which the enterprise obtained contracts for a significant part of its annual sales, has also been held to constitute a PE4.  A temporary restaurant operated in a mirror tent at a Dutch flower show for a period of seven months  was  held  to  constitute  a  PE5.   An  office,

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

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workshop  and  storeroom  for  the  maintenance  of aircraft, which were leased out by the enterprise, has been held to constitute a PE6.   

26) On the other hand, possession of a mailing address in a state – without an office, telephone listing or bank account – has been held not to constitute a PE7. The  mere  supply  of  skilled  labour  to  work  in  a country did not give rise to a PE of the company supplying the labour8.  A drilling rig which, although anchored while in operation, was moved to a new site every few months, has been held not to constitute a PE9.  Similarly, a remotely operated vessel which was used to inspect and repair submarine pipelines was held not to constitute a PE because a moving vessel is not a fixed place of business10.

27) The  principal  test,  in  order  to  ascertain  as  to whether  an  establishment  has  a  fixed  place  of business  or  not,  is  that  such  physically  located premises  have  to  be  ‘at  the  disposal’ of  the enterprise.  For this purpose, it is not necessary that the premises are owned or even rented by the

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enterprise.  It will be sufficient if the premises are put at the disposal of the enterprise.  However, merely  giving  access  to  such  a  place  to  the enterprise for the purposes of the project would not suffice.   The  place  would  be  treated  as  ‘at  the disposal’ of the enterprise when the enterprise has right  to  use  the  said  place  and  has  control thereupon.   

28) Some of the illustrative cases decided by courts of different  jurisdictions  given  by  Baker  in  his commentary are contained in the following passages from that book:

(i) In the Canadian case of William Dudney v. R11, the taxpayer was a resident of the United States who was contracted to supply training to employees of a  Canadian  company.   For  the  purposes  of  the training contract, the taxpayer was given various offices at the premises of the Canadian company, which  he  was  only  allowed  to  enter  at  normal office hours.  He was allowed to use the client’s telephone only on client’s business.  He spent

(1999) 99 DTC 147

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300 days in one tax year and 40 in the subsequent year at the premises.  The Tax Court of Canada and the Federal Court of Appeal confirmed that he had no fixed base – which was treated as having the same meaning as PE – at the premises since he had no right to use the premises as the base for the operation of his own business.  

(ii) In  a  case  generally  referred  to  as  Hotel Manager12,  the  Bundesfinanzhof  held  that  a  UK hotel management company had a PE in Germany when it entered into a 20 year contract with a limited partnership which owned a hotel.  The agreement required  the  UK  company  to  supply  a  general manager: the general manager’s office constituted the PE (and not the entire hotel) since the UK company had a secured right to use this office for the purposes of the agreement.

(iii) A Swiss company was held not to have a PE when it contracted with a German company to produce salad dressings in the name of and in accordance with the recipe of the Swiss company.  No employees of

Bundersfinanzhof, February 3, 1993, IR 80-81/91, IStR 1993, p. 226, (1993) BStBl., II, 462.

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the Swiss company were present at the production facility  to  supervise  production13.   The Bundestinanzhof  has  also  held  that  a  scene painter who was commissioned to carry out a work in France for six weeks, and given special rooms for the purpose, did not have a fixed base at those premises.

(iv) The Administrative Court of Appeal of Paris has held that a German travel agency did not have a PE in France14.  A travel agency in Paris had made an office available to the German company from time  to  time,  and  the  manager  of  the  German company had a flat in Paris; the Court held that the German company had no PE at its disposal in France.

(v) The  Brussels  Court  of  Appeal  has  held  that  a German resident engaged in the transportation of vehicles had a PE in Belgium15.  The taxpayer had an  office  3m  by  6m  at  his  disposal  on  the premises of his principal supplier in Belgium, together  with  telephone  and  telex,  where  the taxpayer and four of his staff worked.

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29) According  to  Philip  Baker,  the  aforesaid illustrations  confirm  that  the  fixed  place  of business need not be owned or leased by the foreign enterprise, provided that is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises.

30) Interpreting  the  OECD  Article  5  pertaining  to  PE, Klaus Vogel has remarked that insofar as the term ‘business’ is concerned, it is broad, vague and of little relevance for the PE definition.  According to him,  the  crucial  element  is  the  term  ‘place’. Importance of the term ‘place’ is explained by him in the following manner:

“In conjunction with the attribute ‘fixed’, the  requirement  of  a  place  reflects  the strong link between the land and the taxing powers of the State.  This territorial link serves  as  the  basis  not  only  for  the distributive  rules  which  are  tied  to  the existence of PE but also for a considerable number of other distributive rules and, above all, for the assignment of a person to either Contracting State on the basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC).”

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31) We would also like to extract below the definition to the expression ‘place’ by Vogel, which is as under:

“A place is a certain amount of space within the soil or on the soil.  This understanding of place as a three-dimensional zone rather than  a  single  point  on  the  earth  can  be derived  from  the  French  Version (‘installation  fixe’)  as  well  as  the  term ‘establishment’.   As  a  rule,  this  zone  is based on a certain area in, on, or above the surface  of  the  earth.   Rooms  or  technical equipment above the soil may quality as a PE only if they are fixed on the soil.  This requirement,  however,  stems  from  the  term ‘fixed’ rather than the term ‘place’, given that a place (or space) does not necessarily consist of a piece of land.  On the contrary, the term ‘establishment’ makes clear that it is not the soil as such which is the PE but that  the  PE  is  constituted  by  a  tangible facility as distinct from the soil.  This is particularly evident from the French version of Article 5(1) OECD MC which uses the term ‘installation’ instead of ‘place’.

The term ‘place’ is used to define the term ‘establishment’.  Therefore, ‘place’ includes all tangible assets used for carrying on the business, but one such tangible asset can be sufficient.   The  characterization  of  such assets  under  private  law  as  real  property rather than personal property (in common law countries) or immovable rather than movable property  (in  civil  law  countries)  is  not authoritative.   It  is  rather  the  context (including,  above  all,  the  terms ‘fixed’/’fixe’),  as  well  as  the  object  and purpose of Article 5 OECD and UN MC itself, in the light of which the term ‘place’ needs to  be  interpreted.   This  approach,  which follows  from  the  general  rules  on  treaty interpretation,  gives  a  certain  leeway  for including  movable  property  in  the understanding of ‘place’ and, therefore, the

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assume  a  PE  once  such  property  has  been ‘fixed’ to the soil.

For  example,  a  work  bench  in  a  caravan, restaurants  on  permanently  anchored  river boats, steady oil rigs, or a transformator or generator  on  board  a  former  railway  wagon qualify as places (and may also be ‘fixed’).

In  contrast,  purely  intangible  property cannot qualify in any case.  In particular, rights  such  a  participations  in  a corporation, claims, bundles of claims (like bank accounts), any other type of intangible property (patents, software, trademarks etc.) or  intangible  economic  assets  (a  regular clientele or the goodwill of an enterprise) do not in themselves constitute a PE.  They can  only  form  part  of  PE  constituted otherwise.   Likewise,  an  internet  website (being  a  combination  of  software  and  other electronic data) does not constitute tangible property and, therefore, does not constitute a PE.

Neither  does  the  mere  incorporation  of  a company  in  a  Contracting  State  in  itself constitute a PE of the company in that State. Where a company has its seat, according to its by-laws and/or registration, in State A while the POEM is situated in State B, this company will usually be liable to tax on the basis  of  its  worldwide  income  in  both Contracting  States  under  their  respective domestic  tax  law.   Under  the  A-B  treaty, however, the company will be regarded as a resident of State B only (Article 4(3) OECD and UN MC).  In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxable only in State B under the 1st sentence of Article 7(1) OECD and UN MC.

There is no minimum size of the piece of land.   Where  the  qualifying  business activities consist (in full or in part) of human  activities  by  the  taxpayer,  his employees or representatives, the mere space

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needed  for  the  physical  presence  of  these individuals  is  not  sufficient  (if  it  were sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent PEs were superfluous).  This can be illustrated by the example of a salesman who regularly visits a major customer to take orders, and conducts  meetings  in  the  purchasing director’s  office.   The  OECD  MC  Comm.  has convincingly  denied  the  existence  of  a  PE, based on the implicit understanding that the relevant  geographical  unit  is  not  just  the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working.”

32) Taking cue from the word  ‘through’ in the Article, Vogel has also emphasised that the place of business qualifies only if the place is ‘at the disposal’ of the  enterprise.   According  to  him,  the  enterprise will not be able to use the place of business as an instrument  for  carrying  on  its  business  unless  it controls  the  place  of  business  to  a  considerable extent.  He hastens to add that there are no absolute standards  for  the  modalities  and  intensity  of control.  Rather, the standards depend on the type of business  activity  at  issue.   According  to  him, ‘disposal’ is  the  power  (or  a  certain  fraction thereof) to use the place of business directly.  Some of the instances given by Vogel in this behalf, of

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relative standards of control, are as under:

“The degree of control depends on the type of business activity that the taxpayer carries on.  It is therefore not necessary that the taxpayer  is  able  to  exclude  others  from entering or using the POB.

The painter example in the OECD MC Comm. (no. 4.5 OECD MC Comm. on Article 5) (however questionable it might be with regard to the functional  integration  test)  suggests  that the  type  and  extent  of  control  need  not exceed the level of what is required for the specific type of activity which is determined by the concrete business.

By contrast, in the case of a self-employed engineer  who  had  free  access  to  his customer’s premises to perform the services required  by  his  contract,  the  Canadian Federal  Court  of  Appeal  ruled  that  the engineer had no control because he had access only  during  the  customer’s  regular  office hours  and  was  not  entitled  to  carry  on businesses of his own on the premises.

Similarly,  a  Special  Bench  of  Delhi’s Income  Tax  Appellate  Tribunal  denied  the existence of a PE in the case of Ericsson. The Tribunal held that it was not sufficient that Ericsson’s employees had access to the premises of Indian mobile phone providers to deliver the hardware, software and know-how required  for  operating  a  network.   By contrast,  in  the  case  of  a  competing enterprise, the Bench did assume an Indian PE because  the  employees  of  that  enterprise (unlike  Ericsson’s)  had  exercised  other businesses of their employer.

The OECD view can hardly be reconciled with the two court cases.  All three examples do indeed shed some light onto the method how the  relative  standards  for  the  control threshold should be designed.  While the OECD MC Comm. suggests that it is sufficient to

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require not more than the type and extent of control necessary for the specific business activity which the taxpayer wants to exercise in the source State, the Canadian and Indian decisions advocate for stricter standards for the control threshold.

The  OECD  MC  shows  a  paramount  tendency (though no strict rule) that PEs should be treated like subsidiaries (cf. Article 24(3) OECD and UN MC), and that facilities of a subsidiary would rarely been unusable outside the  office  hours  of  one  of  its  customers (i.e. a third person), the view of the two courts is still more convincing.

Along these lines, a POB will usually exist only where the taxpayer is free to use the POB: - at any time of his own choice; - for  work  relating  to  more  than  one

customer; and - for  his  internal  administrative  and

bureaucratic work. In all, the taxpayer will usually be regarded as  controlling  the  POB  only  where  he  can employ it at his discretion.  This does not imply that the standards of the control test should  not  be  flexible  and  adaptive. Generally, the less invasive the activities are, and the more they allow a parallel use of the same POB by other persons, the lower are the requirements under the control test. There are, however, a number of traditional PEs  which  by  their  nature  require  an exclusive use of the POB by only one taxpayer and/or his personnel.  A small workshop (cf. Article 5(2)(e) OECD and UN MC) of 10 or 12 square meters can hardly be used by more than one person.  The same holds true for a room where the taxpayer runs a noisy machine.”

 33) OECD commentary on Model Tax Convention mentions that

a general definition of the term ‘PE’ brings out its

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essential characteristics, i.e. a distinct “situs”, a “fixed  place  of  business”.   This  definition, therefore, contains the following conditions:

- the existence of a “place of business”, i.e. a facility such as premises or, in certain instances, machinery or equipment.

- this place of business must be “fixed”, i.e. it must be established at a distinct place with a certain degree of permanence;

- the  carrying  on  of  the  business  of  the enterprise  through  this  fixed  place  of business.  This means usually that persons who, in one way or another, are dependent on the  enterprise  (personnel)  conduct  the business of the enterprise in the State in which the fixed place is situated.

34) The term “place of business” is explained as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose.  It is clarified that a place of business may also exist where  no  premises  are  available  or  required  for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further,  it  is  immaterial  whether  the  premises, facilities or installations are owned or rented by or

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are otherwise at the disposal of the enterprise.  A certain  amount  of  space  at  the  disposal  of  the enterprise which is used for business activities is sufficient to constitute a place of business.  No formal legal right to use that place is required. Thus,  where  an  enterprise  illegally  occupies  a certain location where it carries on its business, that  would  also  constitute  a  PE.   Some  of  the examples where premises are treated at the disposal of the enterprise and, therefore, constitute PE are: a  place  of  business  may  thus  be  constituted  by  a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods).  Again the place of business may be situated  in  the  business  facilities  of  another enterprise.  This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise.  At the same time, it is also clarified that  the  mere  presence  of  an  enterprise  at  a particular location does not necessarily mean that the location is at the disposal of that enterprise.  

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35) The OECD commentary gives as many as four examples where location will not be treated at the disposal of the enterprise.  These are:

(a) The  first  example  is  that  of  a  salesman  who regularly visits a major customer to take orders and meets the purchasing director in his office to do so. In that case, the customer's premises are not at the disposal of the enterprise for which the salesman is working and therefore do not constitute a fixed place of business through which the business of that enterprise is carried on  (depending  on  the  circumstances,  however, paragraph  5  could  apply  to  deem  a  permanent establishment to exist).

(b) Second  example  is  that  of  an  employee  of  a company  who,  for  a  long  period  of  time,  is allowed to use an office in the headquarters of another  company  (e.g.  a  newly  acquired subsidiary) in order to ensure that the latter company  complies  with  its  obligations  under contracts concluded with the former company. In that case, the employee is carrying on activities

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related to the business of the former company and the  office  that  is  at  his  disposal  at  the headquarters of the other company will constitute a  permanent  establishment  of  his  employer, provided that the office is at his disposal for a sufficiently  long  period  of  time  so  as  to constitute  a  "fixed  place  of  business"  (see paragraphs 6 to 6.3) and that the activities that are  performed  there  go  beyond  the  activities referred to in paragraph 4 of the Article.

(c) The  third  example  is  that  of  a  road transportation  enterprise  which  would  use  a delivery dock at a customer's warehouse every day for  a  number  of  years  for  the  purpose  of delivering goods purchased by that customer. In that  case,  the  presence  of  the  road transportation  enterprise  at  the  delivery  dock would be so limited that that enterprise could not consider that place as being at its disposal so as to constitute a permanent establishment of that enterprise.

(d) Fourth example is that of a painter, who, for two years,  spends  three  days  a  week  in  the  large

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office building of its main client. In that case, the  presence  of  the  painter  in  that  office building  where  he  is  performing  the  most important  functions  of  his  business  (i.e. painting) constitute a permanent establishment of that painter.  

36) It also states that the words ‘through which’ must be given a wide meaning so as to apply to any situation where  business  activities  are  carried  on  at  a particular location which is at the disposal of the enterprise for that purpose.  For this reason, an enterprise  engaged  in  paving  a  road  will  be considered to be carrying on its business  ‘through’ the location where this activity takes place.   

THE AGREEMENTS

37) Having got a fair idea of what would constitute a PE, we may advert to the discussion in that part of the impugned judgment where the High Court has given its reasons to conclude that FOWC had a PE in India in the relevant Assessment Year.  However, before that, it  would  be  necessary  to  refer  to  the  salient

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provisions  of  the  relevant  agreements  between  the parties, not only between FOWC and Jaypee, but some agreements  which  were  entered  into  by  the  group companies of FOWC with Jaypee.

38) We  have  already  mentioned  above  that  there  is  an Agreement between FIA and FOAM which is dated April 24, 2001 whereby FIA has parted with the commercial rights in favour of FOAM making FOAM exclusive CRH. Thereafter,  vide  the  aforesaid  agreement  FOAM transferred the commercial rights in favour of FOWC with  effect  from  2011  for  a  period  of  10  years. Insofar as Concorde Agreement which is signed between FIA, FOWC and teams is concerned, that is of the year 2009.

39) It  is  relevant  to  mention  that  before  RPC  dated September 13, 2011 was entered into between FOWC and Jaypee, one Organisation Agreement (OA) dated January 20, 2011 was signed between FIA/FMSCI and Jaypee.  As per this agreement, Jaypee was to organise the event. Thereafter,  another  agreement  known  as  ‘Title Sponsorship  Agreement’  dated  August  16,  2011  was signed between Beta Prema 2 (an associated company of

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FOWC) and Bharti Airtel, as per which Beta Prema 2 transferred title sponsorship rights to Bharti Airtel for US$ 8 million in respect of the race which was conducted on October 29, 2011.  It is thereafter that RPC dated September 13, 2011 was signed by FOWC and Jaypee.  That was one month before the scheduled date of race, which was fixed as October 29, 2011.  Under this agreement, right to host, stage and promote the event  was  given  to  Jaypee  by  FOWC.   As  per  the Revenue, FOWC carried on business in India through a fixed  place  of  business,  namely,  the  Buddh International  Circuit.   Salient  features  of  this Agreement, which is the most vital document, are as follows:

"WHEREAS (A)  The  Federation  Internationale  de l’Automobile (FIA) is the governing body of world motor sport. The FIA is responsible for the sporting organization and regulation of the FIA Formula One World Championship (the Championship), and has the right to supervise the  sporting  organization  of  individual rounds of the Championship (B)  Pursuant  to  various  agreements  between the FIA, POWC and its Affiliates (as defined in Clause I(p) etc. FOWC has the exclusive right to exploit the commercial rights in the Championship,  including  the  exclusive  right

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to propose the Championship calendar and to award, to promoters the right to host, stage and  promote  Formula  One  Grand  Prix  events that  count  towards  the  Championship, exclusive media rights (including all use of audio-visual material and data in the media space). (C)  FOWC  has  the  exclusive  right  to  enter into  contracts  solely  for  the  hosting, standing and promotion of Formula One Grand Prix events entered on the FIA International Sporting  Calendar  and  counting  towards  the Championship, it being understood that such a contract  will  govern  exclusively  the commercial  and  financial  management  of  the Event  (as  defined  in  Clause  3.1  (xx  not legible)). (D)  The  Promoter  is  the  owner  of  a  motor racing circuit in the National Capital Region of India which is capable of hosting various motor racing events. The Promoter wishes to host  various  motor  racing  events  at  such circuit,  to  include  the  hosting  of  Formula One  Grand  Prix  events.  The  Promoter  had secured the privilege to host such events and is no executing this agreement with FOWC to set out the terms and conditions on which it will  host,  stage  and  promote  Formula  One Grand Prix events at such circuit.  

XXXXXX XXXXXX XXXXXX Definitions and Interpretation  

1.  In  this  Agreement  unless  the  context requires otherwise:  

XXXXXX XXXXXX XXXXXX (q) Circuit shall mean a motor racing circuit suitable in every respect for the staging of the  Event  (including  permanent  buildings, permanent  infrastructure,  track  layout, amenities, spectator viewing facilities, the pit/paddock,  building,  media  centre,  car parks,  helipads,  garages,  race  control  and

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administration,  office  administration,  fuel and tyre storage, utilities (including back up  power  supplies),  concrete  based  areas suitable  to  host  the  Competitors  and sponsors,  vending  and  exhibition  areas, international  TV  compounds,  host  and broadcast facilities and medical centre);

XXXXXX XXXXXX XXXXXX (t) Event shall mean the FORMULA 1 GRAND PRIX OF  INDIA  (including  all  support  events therein  and  peripheral  entertainment), designated and endorsed as a round of the FIA Formula One World Championship, which shall commence at the Circuit at the time scheduled by  the  FIA  for  Scrutinizing  and  Sporting Checks  and  including  all  Practice  and  the Race itself and ending at the later of the time for the lodging of a Protest under the terms of the Sporting Code and the time when a technical or sporting verification has been carried out under the terms of the Sporting Code; and  

XXXXXX XXXXXX XXXXXX Conditions Precedent

2.1  The  grant  of  rights  by  FOWC  to  the Promoter under this Agreement is conditional on  the  Conditions  having  been  fulfilled  or waived in accordance with this Agreement and the Promoter shall use its best endeavour to satisfy  the  Conditions  in  accordance  with this Clause 2.

XXXXXX XXXXXX XXXXXX Term

3.1 This Agreement shall commence and become operative when it is signed by the parties and dated.  3.2 Subject to Clause 2 the rights granted to the  Promoter  under  this  Agreement  shall  be exercisable  from  the  Unconditional  Date.

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Accordingly,  the  initial  term  of  this Agreement (the Initial Term) shall begin on the Unconditional Date and shall expire on 31 December  2015  and  shall  apply  to  the Championship for the calendar years 2011 to 2015 (inclusive).  3.3 On or before 30 June 2015, FOWC shall in its absolute discretion be entitled to give notice to the Promoter which, if given, shall be effective to extend the Term for a further period  of  up  to  five  calendar  years  (the Extended Term). The terms of this Agreement shall  apply  to  the  Extended  Term  save  for this Clause 3.3. 3.4 The term of this Agreement as prescribed in this Clause 3 shall be referred to as the Term and shall include the initial Term and (if applicable) the Extended Term. 3.5 Subject to the performance by FOWC of its obligations  contained  in  Clause  4,  the Promoter  agrees  to  host,  stage  and  promote the  Event  as  the  FORMULA  1  GRAND  PRIX  OF INDIA  or  [Year]  GRAND  PRIX  OF  INDIA  in accordance with this Agreement once in every calendar year of the Term commencing 2011 at the  Circuit  on  the  date  approved  and announced by the FIA on and subject to the terms  of  the  Regulations  and  the  Sporting Code. FOWC’s Obligations and Warranties  

XXXXXX XXXXXX XXXXXX Promoter’s Warranties  

(e) On the area of land, the outer perimeter of which is edged in red, depicted on the document  attached  to  this  Agreement  as  the Annex  and  initialed  by  the  Parties  for identification,  the  Circuit  shall  be constructed,  laid  out  and  prepared  in accordance with this Agreement, in a form and manner  approved  by  both  FOWC  and  the  FIA, meeting all requirements of the Regulations

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(including as to timing of inspections) and completed in good time for final inspection by the FIA not later than 12 October 2011;

XXXXXX XXXXXX XXXXXX

Access to Circuit Prior to Event  

11. The Promoter shall take whatever action is  necessary  to  ensure  that  the  pit  and paddock  buildings  and  surrounding  areas within  Circuit  and  the  Land  are  open  to receive the competitors, FOWC, Affiliates of FOWC,  FOWC’s  contractors  and  licensees  and their respective personnel and equipment (if any)  at  all  times  during  the  period commencing  fourteen  days  before  the  day  of the race and ending seven days after the Race (the Access Period) and the security of the paddock  and  garage  area  is  properly safeguarded  at  all  times  during  the  Access Period.

XXXXXX XXXXXX XXXXXX Competitor/Media Facilities  

13.1 The Promoter will in so far as the same is  practicable  provide  an  entrance  for  the Competitor  personnel  and  for  Officials separate  from  the  public  entrance  to  the Circuit. 13.2 The Promoter will provide free of charge a zone measuring whichever is the greater of that which has last been provided in respect of  a  round  of  the  FIA  Formula  One  World Championship at that Circuit and 140 metres by 100 metres or 15,0000 square metres within or adjoining the paddock for the promotional facilities  of  the  Competitors  and/or  their sponsors.  13.3  The  Promoter  undertakes  to  set  up  a media compound and telephones and facsimile equipment, Press Room plus the installations and  premises  necessary  for  national  and

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international  television  commentators  and journalists (such premises and installations to meet the prestige of a World Championship) and  to  grant  professional  accredited journalists  use  of  all  facilities  for  the exercise of their profession as well as the organization of a Press Conference with the winner  of  the  Race  immediately  after  the Podium Ceremony.  13.4 Upon the arrival of the Formula One cars and their spares and ancillary equipment at nearest  suitable  International  airport  (as such is determined by FOWC) (the Landing) the Promoter will transport them free of charge from the Landing to the Circuit and from the Circuit  back  to  the  Landing.  The  Promoter shall  procure  that  transportation  from  the Circuit to the Landing shall take place on the  day  following  the  Race.  All  ancillary costs  including  airport  taxes  customs clearance  handling,  loading  and  unloading both at the Landing and at the Circuit shall be paid by the Promoter. The Parties agree to liaise  with  each  other  throughout  the  Term with  a  view  to  discussing  and  implementing all reasonable measures which may reduce such ancillary cots.  13.5 The Promoter undertakes to provide all such  other  facilities  as  specified  in  the Circuit General Specifications Manual.  Access to Restricted Areas  

14. The Promoter undertakes to ensure that:  (a) only Passes and tabards issued by FOWC under  the  authorization  of  the  FIA  will authorize access to parts of the Circuit not open to the paying public;  (b) notwithstanding Clause 14(a) above, the public do not have access to the cars in any of  the  places  where  any  Competitor’s mechanics may be called upon to work on them and  without  prejudice  to  the  generality  of the  foregoing  there  is  at  no  time  any

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obstruction to the free passage of the cars and  Competitor  personnel  in  the  paddock  or pit area;  (c) the validity of any Passes and tabards issued by FOWC under the authorization of the FIA is upheld; and  (d) the necessary steps are taken to ensure that  all  police  and  Circuit  officials  are familiar  with  the  Passes  and  tabards  and uphold their validity.  Insurance

15.1  The  Promoter  shall  provide  at  its expense third party liability insurance (in a form approved by FOWC and the FIA insuring FOWC  and  all  its  Affiliates,  Beta  Prema  2 Limited  and  all  its  Affiliates,  the Competitors, Drivers and guests of any of the above  mentioned  parties  (such  parties  to include  where  relevant  all  directors, officers, employees, agents and contractors) and  such  other  persons  involved  in  the organization  of  the  Event  (including officials,  marshals,  rescue  and  medical staff) as the FIA or FOWC may from time to time  advise  the  Promoter  (the  Insured Parties) against all risks (including death of or bodily or mental injury to any person) relating to (i) the event (ii) support races and (iii) peripheral entertainment organized as part of the Event, for the Access Period. If such insurance is not permitted under the law of the country in which the Event takes place  or  the  FIA  is  satisfied  that  such insurance is not commercially viable then the insurance shall be the maximum permitted by that  law  or  the  market  conditions.  The insurers  must  be  a  company  recognized  by Standard and Poor’s and/or AM. Best and must be of first class international standing with sufficient resources to honour and discharge in full the insurance requirements prescribed in  this  agreement.  A  copy  of  the  relevant policy will be given to FOWC by the Promoter at  least  60  days  before  the  start  of  the

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first practice session (with the exception of the year 2011, when such copy will be given to FOWC at least 30 days before the start of the first Practice session of the Event in 2011). If the language of the relevant policy is  in  a  language  other  than  English,  FOWC shall obtain a translation of the policy at the expense of the Promoter.

XXXXXX XXXXXX XXXXXX Filming/Recording at the Event

18.1 Save with the prior written consent of the  FOWC  and  save  for  the  Promoter’s obligation  in  Clause  18.3,  throughout  the Term during the Access Period (and any test session  held  at  the  Circuit  in  which  more than  one  Competitor  is  participating (Non-Private F1 Test Series) the  Promoter  shall  not  (nor  shall  the  Promoter permit, enable, assist, procure or encourage others  to)  make,  create,  store,  record  or transmit an kind of sound recording or visual or  audio-visual  footage  (Recording) whatsoever,  whether  for  broadcast  or  any other purpose.  (a)  of  at  or  pertaining  to  the  Event (including  cars,  Drivers,  Competitors),  any Non-Private F1 Test Session or any aspect of them; or  (b) within the confines of the Circuit or the Land (or any other part of its surroundings over which the Promoter has control).  18.2 Without prejudice to the generality of Clause 18.1, the Promoter shall ensure that the  terms  of  sale  of  tickets  giving admittance to an Event include acceptance by a ticket holder:  (a) that he shall not make, create, store, record or transmit any Recording of the Event (including cars, Drivers, Competitors) or any aspect of it, and shall not take into the Circuit any equipment that may enable him to

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do the aforementioned acts (other than mobile telephones use of which is subject to this Clause 18 and Clause 19.1 below);  (b) that as a spectator he may be filmed and sound  made  by  him  may  be  recorded  for broadcast (or similar transmission); and  (c)  of  such  other  terms  and  conditions  as FOWC(acting  reasonably)  may  request  the Promoter  to  include  from  time  to  time provided that the Promoter is notified in due time and that such terms and conditions are compatible with applicable local laws.  18.3 The Promoter shall engage a third party (the Identity of which shall be approved by FOWC in its sole discretion) to carry out and perform  on  behalf  of  the  Promoter  all services relating to the origination of the international  television  feed  and  host broadcasting for each Event during the Term as  are  specified  in  guidelines  published annually by FOWC and provided to the Promoter from time to time.  Intellectual Property  

XXXXXX XXXXXX XXXXXX 19.2  The  Promoter  hereby  irrevocably  and unconditionally:-  (a) assigns to FOWC with full title guarantee all copyright and other intellectual property rights  and  all  other  rights,  titles  and interests (if any) which it may now or in the future have in any Image or Recording or any other  representation  or  recording  in  any media whether now known or hereafter invented or  developed  in,  of  or  pertaining  to  the Event, any NonPrivate F1 Test Session or any aspect  of  them  (irrespective  of  who originated the same)for the duration of those rights  (including  all  renewals,  extensions, reversions and revivals thereof); and  (b) gives its consent (if such consent should

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be required) for FOWC to deal in such rights in any way it may see fit. Accreditation for Filming/recording  20.1 The Promoter shall ensure that persons accredited  and  authorized  by  FOWC  are permitted to enter upon the Circuit to make sound,  television  or  other  recordings  or transmissions  or  to  make  films  or  other moving  picture  and  use  the  facilities throughout the Access Period and the Promoter shall accord all such persons the help and facilities that they or FOWC may reasonably require  for  such  purposes,  including assistance  with  obtaining  any  necessary consents, permissions or authorizations with any local authority.  20.2 The Promoter undertakes to Notify FOWC of the dates of any test sessions which are proposed to be held at the Circuit.  Circuit Advertising  21.  The  Promoter  shall  not  cause,  permit, enable,  assist,  procure  or  encourage  the display  of  any  advertising  (other  than  the advertising  normally  displayed  on  any Competitor’s cars, Drivers or personnel) or other displays on, near or which can be seen from the Circuit and/or the Land which might (in the opinion of FOWC which shall be final and  binding  upon  the  Parties)  Prevent  the lawful transmission of Images or Recordings of  the  Events  or  any  part  of  it  in  any country."

JUDGMENT OF THE HIGH COURT 40) Taking note of this agreement, the High Court went

ahead to decide the following aspects, which revolved around the question of PE:

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(a) Whether  FOWC  had  control  over  the  Buddh International Circuit and that the circuit could be constituted as a fixed place of business?

(b) Whether FOWC carried on business?  IF so, they did carry on business and commercial activity in India.

(c) Whether  FOWC  carried  on  business  through  its agents under Article 5(4) or Article 5(5) of the DTAA?

41) Answering  the  first  question,  the  High  Court discerned that for the duration of the event as well as two weeks prior to it and a week succeeding it, FOWC had full access through its personnel, the team contracted to it, both racing as well as spectator teams to the said Buddh International Circuit.  It could also dictate who was authorised to enter the areas reserved for it.  As per the High Court, though Jaypee was designated as the promoter or the host of the event in terms of RPC, when the matter was to be examined in a correct perspective by seeking through the other terms contained in the agreement as well as terms of agreements between JP and Allsports, Beta

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Prema 2 as well as FOA, it was clear that Jaypee’s capacity to act was extremely restricted.  At all material  times,  FOWC  had  exclusive  access  to  the circuit  and  all  the  places  where  the  teams  were located.  The High Court was also conscious of the fact that such an access or right to access was not permanent  in  the  sense  of  its  being  everlasting. However,  having  regard  to  the  model  of  commercial transactions, such an access for a period up to six weeks at a time during the F-1 Championship season was sufficient for the purposes of Article 5(1) of DTAA.  Further, as the tenure of RPC was five years, it  meant  that  such  an  access  for  the  period  in question was of repetitive nature.  Moreover, FOWC was  entitled  to  two  years  payment  of  the  assured consideration  of  US$  40  million  in  the  event  of termination of RPC.

42) While discussing the second question, the High Court took note of agreement between FIA and FOWC under which FOWC became CRH.  It also pointed out that the Concorde  Agreement  assured  the  participating  teams that  the  FIA  had  exclusive  rights  in  the  F-1

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Championship and was entitled to the grant of CRH, the exclusive right to exploit the commercial rights in  the  F-1  Championship.   Subject  to  these conditions, each team undertook to participate in the FIA F-1 Championship each year for several events and make cars available.  In fact, every team undertook to participate in each event with two cars.  Taking note of the aforesaid arrangement and other clauses of these agreements, the High Court concluded that FOWC carried on business in India within the meaning of expression under Article 5(1) of the DTAA.

43) The High Court was conscious of the fact that after its finding to the effect that FOWC had PE in India, the  issue  as  to  whether  FOWC  carried  on  business through  its  agents  or  not,  became  academic. Notwithstanding the same, it chose to discuss that issue as well so that the judgment had the coverage of all the questions that had arisen before it.  This aspect  has  been  discussed  in  the  light  of sub-articles (4) and (5) of Article 5 of DTAA.  It is pertinent to mention that argument of the Revenue was that  since  FOWC  had  to  exploit  commercial  rights

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arising from races and this business is carried on through  exploitation  of  these  commercial  rights either by itself or through anyone or more members of CRH  group,  as  mentioned  in  the  Conorde  Agreement, FOWC  is  obliged  to  propose  consolidated  accounts incorporating profits of all entities forming part of CRH  group.   The  Revenue  had  relied  on  the  Events right  from  the  time  when  commercial  rights  were originally owned by FIA and thereafter transferred to SLEC Holding Company (parent company of FOWC) for a consideration,  then  given  to  FOAM  and  with  effect from January 01, 2011 transferred to FOWC.  It was also pointed out that FOWC’s three affiliates, i.e. Formula  One  Management  Ltd.  (‘FOM’),  Allsports Management SA and Beta Prema 2 Ltd. were its agents who  carried  on  its  business  and  on  its  behalf, through the fixed place.   

AAR had rejected this submission of the Revenue holding that the theory of Revenue that all the three entities were acting on behalf of FOWC was unfounded as  there  was  no  evidence  to  this  effect  and  all arrangements and agreements in relation to activities performed  by  three  entities  were  sham.   The  High

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Court approved the aforesaid approach of AAR in the following manner:

“64.  Article 5(5) has certain preconditions if an entity has to be treated as dependent agent.  The agent must have the authority to conclude  contracts,  which  bind  the represented  enterprise,  and  it  must habitually exercise such authority.  If these positive preconditions are met, then only an enterprise shall be deemed to have a PE in that  state  in  respect  of  any  activities, which  that  person  undertakes  for  the enterprise.  The contention that because the three  entities  were  subsidiaries  of  FOWC, they  acted  on  its  behalf  and  thus  become dependent agents is insubstantial.  The mere circumstance that the three subsidiaries had a connection with FOWC was not enough; what is to be shown is that the contracts they entered  into  and  the  businesses  they  were engaged in, was for and on behalf of FOWC. Each  of  the  three  agreements  independently entered into by them with Jaypee contains no pointers to this fact.”

THE ARGUMENTS 44) Mr. Ganesh, opened the case of FOWC, whereafter M/s.

Arvind  P.  Datar  and  Dushant  Dave,  learned  senior advocates,  made  their  submissions  on  behalf  of Jaypee.  Mr. Mukul Rohatgi, learned Attorney General for  India,  argued  on  behalf  of  the  Revenue  and countered  those  submissions.   He  also  argued  the appeal of Union of India insofar as it challenges the findings of the High Court interpreting Article 5(4) and (5) and holding that the other companies of FOWC

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group did not act as agents of FOWC in India.  M/s. S. Ganesh and Arvind P. Datar made their submissions in rejoinder and also refuted the arguments of Mr. Mukul  Rohatgi  advanced  in  the  appeal  of  Union  of India, to which Mr. Rohatgi made his submissions in rejoinder.

45) After referring to the important dates and events, Article  5  of  DTAA  and  the  commentaries  of  OECD, Philip  Baker  and  Klaus  Vogel  thereon,  salient features whereof have already been reproduced by us, emphasis in the submission of Mr. Ganesh was that in order  to  constitute  a  PE,  condition  which  was necessary to satisfy was that the particular  ‘fixed place’ is ‘at the disposal’ of FOWC and further that from  the  said  ‘fixed  place’  FOWC  was  doing  its business activity.  Submission of Mr. Ganesh was that both  the  ingredients  were  missing  in  the  instant case.  For this purpose, he referred to the agreement of 2009 which was entered into between FIA and Jaypee and pointed out that FOWC was not party to the said agreement and contended that this agreement clearly evinced that it is the FIA which had control over the

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manner in which the Championship was to be conducted. This agreement further reflected that it is Jaypee who  was  responsible  for  conducting  races  and  had complete  control  of  the  Event  in  question.   All obligations for conduct of the Championship were to be  discharged  by  Jaypee  as  organisers.   For  this purpose, he referred to the counter affidavit filed by Jaypee in SLP(Civil) No. 3112 of 2017 wherein the role of Jaypee in organising these Events is stated. From there, it was pointed out that the track was constructed  by  Jaypee;  for  this  purpose  they  had their  own  engineers,  architects  etc.;  entire expenditure for this purpose was borne by Jaypee.  It was also stated that this circuit was owned by Jaypee and control thereon was that of Jaypee on which not only  Championship  in  question  was  organised,  but Jaypee was utilising this track for many other events which are organised on regular basis, all year round.

46) Mr. Ganesh also drew the attention of this Court to Organisation Agreement dated January 20, 2011 signed between FIA, Jaypee and Federation of Motors Sports Clubs of India wherein Jaypee is described as the

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‘Organiser’ and given the responsibility to organise the  Event.   It  specifically  delineates  various responsibilities of Jaypee as organisers which have already been taken note of above.  In nutshell, he submitted  that  right  from  construction/laying  down the  contract  for  the  motor  races  people  till  the conclusion of the Events/Championship, all acts and obligations were to be performed by Jaypee, with no role of FOWC therein.  According to him, in contrast, it could be seen from the Agreement dated September 13, 2011 between FOWC and Jaypee that FOWC had simply given permission to host the Event as a round of the Championship,  since  it  is  the  FOWC,  who  has  the exclusive right to exploit the commercial rights in the  Championship,  including  exclusive  right  to propose  the  Championship  calendar.   Condition precedent  from  entering  into  this  Agreement,  as mentioned in the Agreement itself, was that Jaypee (as promoter) had entered into a valid and binding agreement with such third party in accordance with Clause 18.3 (Service Agreement).  Referring to the clause pertaining to obligations and warranties of FOWC, Mr. Ganesh submitted that the role of FOWC was

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primarily that of advising, assisting and consulting with the promoter in relation to the Event in such manner  as  FOWC  shall  consider  necessary  and/or appropriate  for  the  staging  and  promotion  of  the Event to the mutual benefit of the parties.  On the other hand, Jaypee was given exclusive right to act as  the  promoter  of  the  Event,  to  construct  the circuit  which  was  to  be  laid  out  and  prepared  in accordance with that agreement in a form and manner approved both by FOWC and FIA.  Thus, construction was to be carried out by Jaypee; albeit, in the form and the manner approved by FOWC and FIA to ensure that  the  track  meets  all  requirements  of  the Regulations.  Otherwise, all those rights which were necessary for the purposes of hosting and staging the Event at the circuit were that of Jaypee exclusively.

47) On the basis of the aforesaid documents and clauses and  terms  therein,  Mr.  Ganesh  submitted  that  the circuit was not under the control or at the disposal of  FOWC.   As  regards  4500  seats  in  paddock  space given  to  FOWC  in  that  circuit  is  concerned, explanation of Mr. Ganesh was that it is Allsports

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which was in-charge of paddock and the same was taken from  Allsports  by  FOWC  in  the  year  2006  and, therefore, it would not make any difference.

48) His  further  submission  was  that  no  business  was conducted by the FOWC from the said site as well. According to him, since FOWC was commercial rights holder of these events, main business of FOWC was to exploit these rights. including intellectual property rights.  According to him, the exploitation of these commercial rights yields two revenue streams – first, the  consideration  received  from  the Promoter/Organizer  of  the  Event,  to  whom  FOWC  has granted  the  necessary  right  to  host,  stage  and promote  the  Event;  secondly,  FOWC  exploits  the  TV feed in respect of the Event, which is made available to it by the Promoter/Organiser, at his cost.  FOWC grants screening, exhibition, telecasting and media rights arising out of and relating to this TV feed to a number of parties around the world, by entering into contracts with them at London.  It is for this reason  that  insofar  as  holding  of  the  Event  is concerned, FOWC was not responsible therefor and for

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this reason it was necessary for Jaypee as promoter to enter into a valid and binding agreement with a third  party  (FIA  in  the  present  case).   He  also pointed  out  that  insofar  as  sale  of  advertisement rights during the Event is concerned that was also to be given to Beta Prema 2 Ltd. which was again an independent company and taken over by FOWC in the year 2006.

49) Mr. Ganesh, extensively referred to the findings of AAR on this issue wherein the case of FOWC and Jaypee on this aspect was accepted by AAR and pleaded that the aforesaid findings be accepted and restored by this Court.  Referring to the judgment of the High Court,  his  submission  was  that  the  Organisation Agreement entered into between FIA and Jaypee was not even  discussed  and  the  conclusions  given  in paragraphs  52  and  53  of  the  said  judgment  were erroneous. He also relied upon certain observations of this Court in  Union of India & Anr. Vs.  Azadi Bachao Andolan & Anr.16 in respect of his submission that transactions could not be treated as sham.

2004 (10) SCC 1 = 2003 (262) ITR 706

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50) Mr.  Datar,  learned  senior  counsel  appearing  for Jaypee, supplemented the aforesaid submissions of Mr. Ganesh on the issue of the PE.  He argued that the judgment of the High Court was flawed in its approach as  it  had  gone  by  inductive  logic  instead  of deductive  logic.   According  to  him,  the  first question which has to be focused upon was as to what is the business of FOWC.  His submission was that since  in  this  case  business  of  FOWC  was  not  to organise  these  races,  the  question  of  its  PE  in India, that too in the form of circuit where the race is to be held, could not be PE of FOWC.  He also submitted  that  even  after  going  through  all  the clauses of the agreement between FOWC and Jaypee with a  toothcomb,  it  would  be  found  that  FOWC  had  no physical  control  over  the  said  circuit.   In  this behalf, he emphasised the test laid down by Andhra Pradesh High Court in Visakhapatnam Port Trust, which is recognised by Philip Baker in his commentary.  He also  argued  that  entire  Formula  One  Event  was  a temporary model for three days in a year only and even if it is accepted that the FOWC had control over this place for those three days, possession of the

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site for three days in a year cannot be termed as PE. He also emphasised the fact that since FOWC was a UK resident company, it had been paying taxes in its own country.  For a non-resident to pay taxes in other country, as in India in the instant case, threshold has to be very high and the issue of PE had to be examined with this focus in mind.  He submitted that this was precisely the reason that such sports events held  in  other  countries  are  never  taxed  in  those countries.

51) His alternate submission was that the agreement in question was signed in UK under which consideration of  US$  40  million  was  paid  and,  therefore,  this income accrued in UK.  Thus, such income was taxable in UK.  He argued that insofar as rights to hold the events are concerned they were granted in UK and it is the grant of rights which was the determinative test and implementation of those rights took place in India.  In support of this proposition, he relied on the  judgment  of  this  Court  in  the  case  of Commissioner of Income Tax, Andhra Pradesh  v.  M/s. Toshoku  Ltd.,  Guntur  &  Ors.17 where  the  law  is

(1980) Supp SCC 614 = 1981 AIR 148

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discussed in the following manner: “12. The second aspect of the same question is whether the commission amounts credited in the  books  of  the  statutory  agent  can  be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident  assessees  during  the  relevant year. This takes us to Section 9 of the Act. It  is  urged  that  the  commission  amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to  the  Department,  had  either  accrued  or arisen  through  and  from  the  business connection in India that existed between the non-resident  assessees  and  the  statutory agent. This contention overlooks the effect of clause (a) of the Explanation to clause (i) of sub-section (1) of Section 9 of the Act  which  provides  that  in  the  case  of business of which all the operations are not carried  out  in  India,  the  income  of  the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire  income  accruing  therefrom  shall  be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business  deemed  to  accrue  in  India  through and from business connection in India shall be  only  such  profits  and  gains  as  are reasonably attributable to that part of the operations  carried  out  in  the  taxable territories. If no operations of business are carried  out  in  the  taxable  territories,  it follows that the income accruing or arising abroad  through  or  from  any  business connection  in  India  cannot  be  deemed  to accrue  or  arise  in  India.  [See CIT v. R.D. Aggarwal & Co. [AIR 1965 SC 1526 : (1964) 1 SCR  234,  247  :  56  ITR  20]  and Carborandum Co. v. CIT[(1977) 2 SCC 862 : 1977 SCC (Tax) 391 : (1977) 3 SCR 475 : (1977) 108 ITR 335] which are decided on the basis of Section 42 of  the  Indian  Income  Tax  Act,  1922,  which

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corresponds to Section 9(1)(i) of the Act.]”   

52) Another submission of Mr. Ganesh was that the High Court did not have jurisdiction, in exercise of its powers under Article 226 of the Constitution, to go into the  'findings' of AAR on the issue of  ‘fixed place’.   He  argued  that  under  Article  226  of  the Constitution,  the  High  Court  exercised  Certiorari jurisdiction and in exercise of such a jurisdiction, findings of facts recorded by the Tribunal, which are the subject matter of judicial review, cannot be gone into.

53) Without prejudice to the aforesaid submissions, next argument of Mr. Datar was that having regard to the facts  of  this  case,  no  interest  should  be  held payable under Section 201 of the Act.  Referring to the  scheme  of  Chapter  XXIX-B  which  pertains  to advance rulings, he submitted that the parties had shown their bona fides in having the question raised before the AAR, and it was specifically agreed to between  FOWC  and  Jaypee  in  Clause  24.6  of  the Agreement that the parties should approach AAR for determination of the questions which were referred.

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He  pointed  out  that  once  an  application  was  made before  the  AAR,  procedure  that  is  contained  in Section 245R, on receipt of such applications, had to be followed by AAR and in that event Section 245 RR mandates  that  no  income  tax  authority  or  the appellate tribunal shall proceed to decide any issue in respect of which an application has been made by the applicant, being a resident,  under Section 245QQ for  advance  ruling.   Once  advance  ruling  is pronounced by AAR, it was binding on the applicant who had sought the same in respect of a particular transaction as well as on the Principal Commissioner and  Commissioner  of  Income  Tax  Authorities subordinate  to  him.   According  to  him,  in  such  a scenario, it should not be considered that Jaypee had failed to deduct tax at source from the amounts paid to FOWC and as a consequence of failure to deduct, it should be fastened with the liability to pay interest under Section 201.  In support,  paragraph 12 of GE India  Technology  Centre  Private  Limited  v. Commissioner of Income Tax & Anr.18 was pressed into service which reads as follows:

(2010) 10 SCC 29

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“12. Reference  to  ITO(TDS)  under  Section 195(2)  or  Section  195(3)  either  by  the non-resident or by the resident payer is to avoid  any  future  hassles  for  both  the resident as well as the non-resident. In our view,  Sections  195(2)  and  195(3)  are safeguards.  The  said  provisions  are  of practical importance. This reasoning of ours is  based  on  the  decision  of  this  Court in Transmission  Corpn.  [(1999)  7  SCC  266  : (1999) 239 ITR 587] in which this Court has observed that the provision of Section 195(2) is  a  safeguard.  From  this  it  follows  that where a person responsible for deduction is fairly  certain  then  he  can  make  his  own determination  as  to  whether  the  tax  was deductible at source and, if so, what should be the amount thereof.”

 54) Last submission of Mr. Datar was that in any case it

was yet to be determined as to how much of US$ 40 million  fee  paid  by  Jaypee  to  FOWC  could  be attributed to PE, inasmuch as it is only that portion of income that is relatable to PE which is liable for tax in India.  This has not happened so far.  

55) Mr.  Dushant  Dave,  learned  senior  counsel,  again appearing for Jaypee, made an additional submission to the effect that international treaties which are signed between the two sovereign countries have to be given adequate and due respect which they command. He  exhorted  the  Court  to  keep  this  fundamental principle in mind while interpreting clause 5 of DTAA

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and  submitted  that  such  an  approach  has  been commanded by this Court time and again.  By way of example,  he  cited  the  judgements  in  the  cases  of Azadi Bachao Andolan  and  Maganbhai Ishwarbhai Patel Etc.  v.  Union  of  India  and  Another19.   He  also referred to paragraph 6 of the UK judgment in the case of  Sepet  v. Secretary of State for the Home Department20 wherein  it  was  pressed  that  single autonomous meaning was required to be given to the treaties which are living instruments whose meaning does not change over time but application will.

56) From  Azadi  Bachao  Andolan following  passages  were relied upon:

“17.  Every country seeks to tax the income generated within its territory on the basis of  one  or  more  connecting  factors  such  as location  of  the  source,  residence  of  the taxable  entity,  maintenance  of  a  permanent establishment,  and  so  on.  A  country  might choose to emphasise one or the other of the aforesaid  factors  for  exercising  fiscal jurisdiction to tax the entity. Depending on which of the factors is considered to be the connecting factor in different countries, the same income of the same entity might become liable  to  taxation  in  different  countries. This  would  give  rise  to  harsh  consequences and impair economic development. In order to avoid  such  an  anomalous  and  incongruous situation,  the  Governments  of  different

1970 (3) SCC 400  2003 (3) AllER 304

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countries  enter  into  bilateral  treaties, conventions or agreements for granting relief against  double  taxation.  Such  treaties, conventions or agreements are called Double Taxation  Avoidance  Treaties,  Conventions  or Agreements.

xx xx xx 130.   The  principles  adopted  in interpretation of treaties are not the same as  those  in  interpretation  of  a  statutory legislation.  While  commenting  on  the interpretation  of  a  treaty  imported  into  a municipal law, Francis Bennion observes:

“With  indirect  enactment,  instead  of the substantive legislation taking the well-known  form  of  an  Act  of Parliament,  it  has  the  form  of  a treaty. In other words, the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language  of  a  municipal  legislative instrument. It is rather like saying that,  by  Act  of  Parliament,  a  woman shall  be  a  man.  Inconveniences  may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead  of  precision  drafting.  The drafting  of  treaties  is  notoriously sloppy usually for a very good reason. To get agreement, politic uncertainty is called for. …  The  interpretation  of  a  treaty imported  into  municipal  law  by indirect  enactment  was  described  by Lord  Wilberforce  as  being ‘unconstrained  by  technical  rules  of English  law,  or  by  English  legal precedent,  but  conducted  on  broad principles  of  general  acceptation. This echoes the optimistic dictum of Lord Widgery, C.J. that the words ‘are to  be  given  their  general  meaning,

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general to lawyer and layman alike … the  meaning  of  the  diplomat  rather than  the  lawyer’.  [Francis  Bennion: Statutory  Interpretation,  p.  461 [Butterworths, 1992 (2nd Edn.)].]”

xx xx xx 131. An important principle which needs to be kept  in  mind  in  the  interpretation  of  the provisions  of  an  international  treaty, including one for double taxation relief, is that treaties are negotiated and entered into at  a  political  level  and  have  several considerations as their bases. Commenting on this  aspect  of  the  matter,  David  R.  Davis in Principles  of  International  Double Taxation Relief  [David R. Davis: Principles of International Double Taxation Relief, p. 4 (London, Sweet & Maxwell, 1985)], points out that the main function of a Double Taxation Avoidance  Treaty  should  be  seen  in  the context  of  aiding  commercial  relations between  treaty  partners  and  as  being essentially  a  bargain  between  two  treaty countries as to the division of tax revenues between them in respect of income falling to be  taxed  in  both  jurisdictions.  It  is observed (vide paragraph 1.06):

“The  benefits  and  detriments  of  a double tax treaty will probably only be truly reciprocal where the flow of trade  and  investment  between  treaty partners  is  generally  in  balance. Where  this  is  not  the  case,  the benefits of the treaty may be weighed more in favour of one treaty partner than  the  other,  even  though  the provisions of the treaty are expressed in  reciprocal  terms.  This  has  been identified as occurring in relation to tax  treaties  between  developed  and developing  countries,  where  the  flow of  trade  and  investment  is  largely one-way. Because  treaty  negotiations  are

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largely a bargaining process with each side  seeking  concessions  from  the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full  and  sufficient quid  pro  quo is obtained by both sides.”

And, finally, in paragraph 1.08: “Apart  from  the  allocation  of  tax between  the  treaty  partners,  tax treaties  can  also  help  to  resolve problems and can obtain benefits which cannot be achieved unilaterally.”

xx xx xx 134. Developing  countries  need  foreign investments,  and  the  treaty-shopping opportunities can be an additional factor to attract them. The use of Cyprus as a treaty haven has helped capital inflows into eastern Europe. Madeira (Portugal) is attractive for investments  into  the  European  Union. Singapore is developing itself as a base for investments  in  South-East  Asia  and  China. Mauritius  today  provides  a  suitable  treaty conduit for South Asia and South Africa. In recent years, India has been the beneficiary of  significant  foreign  funds  through  the “Mauritius conduit”. Although Indian economic reforms  since  1991  permitted  such  capital transfers,  the  amount  would  have  been  much lower without the India-Mauritius Tax Treaty 135.  Overall, countries need to take, and do take, a holistic view. Developing countries allow  treaty  shopping  to  encourage  capital and  technology  inflows,  which  developed countries are keen to provide to them. The loss of tax revenues could be insignificant compared  to  the  other  non-tax  benefits  to their economy. Many of them do not appear to be  too  concerned  unless  the  revenue  losses are significant compared to the other tax and non-tax  benefits  from  the  treaty,  or  the treaty shopping leads to other tax abuses.”

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57) Mr. Mukul Rohtagi, learned Attorney General, came out with strong refutation to the aforesaid submissions. Responding  in  an  equally  salubrious  style,  he demonstrated  the  'flow  of  commercial  rights' in relation to these events, under various agreements executed between different stakeholders from time to time  and  the  manner  in  which  such  rights  are ultimately  exploited  by  FOWC  and  its  other  group companies in respect of the F-1 race organized in India.   For  this  purpose,  he  referred  to  eleven agreements  between  different  parties  highlighting certain features and aspects in the following manner: Agreement between FIA and FOAM dated April 24, 2001 –  FIA  parts  with  commercial  rights  in  favour  of FOAM.  FOAM becomes the exclusive Commercial Rights Holder (CRH).  Agreement  between  FOAM  and  FOWC  dated  April  24, 2001  –  FOAM  transfers  the  commercial  rights  in favour of FOWC with effect from 2011 for a period of 100 years. RPC dated October 25, 2007 between FOWC and Jaypee: (1) Building of the circuit was started in terms of

this RPC. (2) FOWC was granted only the right to promote the

event (clause 4(1). (3) FOM was declared the business manager and agent

of FOWC (Recital D). (4) This agreement was signed by FOM on behalf of

FOWC.

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(5) No condition precedent clause obligating Jaypee to enter into any agreements with FOWC group entities.

(6) No clause obligating Jaypee to enter into an agreement with FOM for generation of television feed.

(7) Agreement in the same template as Schedule IV to the Concorde Agreement.

Concorde  Agreement  (2009)  between  FIA,  FOWC  and teams: (1) FOWC becomes the exclusive CRH. (2) FOWC  could  exploit  the  commercial  rights

directly or through its affiliates only. (3) ‘F1 business’ defined to mean exploitation of

various  rights,  including  media  rights, hospitality rights, title sponsorship, etc.

(4) Revenue of FOWC and its affiliates to be taken for distributing the prize money to the teams under Schedule X

Organisation  Agreement  dated  January  20,  2011 between FIA/FMSCI and Jaypee: (1) Jaypee to organise the event. (2) As of this date, Jaypee has entered into an

agreement with the CRH (Recital B). (3) Template of the agreement contained in Schedule

VI of the Concorde Agreement. Title Sponsorship Agreement dated August 16, 2011 between Beta Prema 2 and Bharti Airtel:

(1) Transfer of title sponsorship rights by Beta to Bharti Airtel for US$ 8 million.

(2) This  agreement  is  one  month  before  the agreement  between  Beta  Prema  2  and  Jaypee through which Beta Prema 2 allegedly acquired this right.

RPC  dated  September  13,  2011  between  FOWC  and Jaypee: (1) Agreement entered one month before the race. (2) Fresh RPC entered without rescinding the RPC of

2007. (3) Right  to  host,  stage  and  promote  the  event

allegedly given to Jaypee by FOWC, unlike the previous  RPC  which  only  gave  the  right  to promote.

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(4) Conditions precedent binding Jaypee to transfer the rights back to the affiliates of FOWC.

(5) Clause 18.3 binding Jaypee to engage FOM for generating television feed introduced in this RPC.

(6) Recital D of the previous RPC which declared FOM the business manager and agent removed.

Agreements  between  JP  and  the  three  affiliates (September 13, 2011) (1) Agreements entered on the same day as RPC, i.e.

September 13, 2011. (2) Rights  allegedly  given  to  Jaypee  are

transferred back to the FOWC affiliates.  Beta Prema 2 acquires circuit rights (mainly media and  title  sponsorship)  and  Allsports  gets paddock rights.

(3) FOM engaged to generation television feed. (4) Agreement provides that all revenues from the

rights  would  flow  to  the  affiliates  and  not Jaypee (clause 11).

(5) Agreement provides that there does not exist an agency relationship between the affiliates and Jaypee (clause 26).

Service  Agreement  dated  October  28,  2011  between FOWC and FOM: (1) Agreement entered into on October 28, 2011, on

the day of race. (2) FOM engaged by FOWC to provide various services

– liaison and supervision of other parties at the event, travel, transport and data support services.

Director’s report of financial statements of FOWC for the year 2011: Defines  the  business  of  FOWC  as  ‘The  company’s principal  activity  during  the  year  was  the organisation,  management  and  administration  of motorsport  conducted  principally  through  the exploitation of the commercial rights to the FIA Formula One World Championship”.

58) From the features described above, it was submitted by  the  learned  Attorney  General  that  clear

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manifestation of the aforesaid agreements was that FOWC  and  its  subsidiaries  had  taken  total  control over  the  event  that  took  place  in  India  which, according to him, was to be kept in mind for proper examination of the issues in their right perspective. Mr. Rohtagi argued that Section 5(2)(b) of the Act, which  applies  in  the  instant  case,  specifically includes  ‘income’ of a non-resident from  ‘whatever source derived’, if this income accrues or arises or is deemed to accrue or arise to him in India during such year.  Referring to Section 9 of the Act, which specifies the circumstances under which income shall be deemed to accrue or arise in India, he pointed out that  it  covers  all  income,  ‘whether  directly  or indirectly’, that accrues or arises, if it is through or  from  any  ‘business  connection  in  India’. Therefore,  if  business  connection  is  established, then  all  incomes,  whether  earned  directly  or indirectly, would come within the net of taxability of such incomes in India.  Referring to explanation (2)  to  Section  9(1)(i),  he  laid  stress  on  the submission that  ‘business connection’ shall include any business activity ‘through’ a person who acts on

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behalf of the non-resident.  The expression ‘through’ is clarified in explanation (4) thereof to mean and include and shall be deemed to have always meant and include  ‘by means of’,  ‘in consequence of’ or  ‘by reason  of’.   He  submitted  that  these  deeming provisions are of very vide import and when the facts of  this  case  are  examined  keeping  in  view  the aforesaid  provisions,  the  High  Court  rightly concluded that FOWC had PE in India.      He also argued  that  Jaypee  was  only  to  host  the  event, whereas total access at the time of construction as well  as  at  the  time  of  event  was  that  of  FOWC. According to him, at the most, it was in the nature of Jaypee and FOWC as partners in the business.

59) Mr. Rohatgi also submitted that comparisons of first Agreement  of  2007  with  the  second  Agreement  dated September  13,  2011  clearly  demonstrates  that  the second  agreement  was  totally  subterfuge  to  avoid payment of tax in India.  He pointed out that in the Agreement dated October 25, 2007, FOWC was granted only the right to 'promote' the event (Clause 4(1)), whereas in the Agreement dated September 13, 2011,

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right  to  'host,  stage  and  promote' the  event  was allegedly given to Jaypee by FOWC.  According to him, right to host and stage the event was conferred upon Jaypee only on paper to give it a semblance as if Jaypee was in real control of the affairs, which was not actually so.  Therefore, in any case, it would not make any difference when in reality the rights of hosting and staging the competition were with FOWC.

60) Referring to the Agreement dated September 13, 2011 between  Jaypee  and  three  affiliates  of  FOWC,  the argument of Mr. Rohatgi was that the so-called rights given  to  Jaypee  were  transferred  back  to  FOWC affiliates inasmuch as Beta Prema 2 acquired circuit rights, mainly media and title sponsorship, whereas Allsports was given paddock rights.  His submission was  that  business  was  carried  from  the  circuit, paddock, etc. and, therefore, it cannot be said that no business activity was carried from this place.  He also pointed out how FOWC granted rights to FOAM to provide various services in case FOWC had no control over the race.  It also showed physical management of the business as well.

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61) Coming to the issue of dependent PEs, submission of the learned Attorney General was that in view of the flowchart depicting commercial rights with FOWC and its affiliates, this issue was virtually an academic issue once it is found that FOWC and its affiliates are  one  conglomerate,  the  commercial  rights  of different nature, viz. the CRH bouquet was with the group companies under the control of same management which exploited all these rights.  These companies had pooled all the profits and sharing thereof was in the  ratio  of  50:50  between  the  teams  and  CRH companies.   

62) As far as power of the High Court under Article 226 of the Constitution of India to go into the issue is concerned,  Mr.  Rohatgi  drew  the  attention  of  the Court to its earlier judgment in Columbia Sportswear Company v. Director of Income Tax, Bangalore21 wherein this Court had impressed that from the rulings of AAR the  aggrieved  person  was  required  to  approach  the High  Court  in  the  first  instance.   He,  thus, submitted that it was the first forum of judicial

(2012) 11 SCC 224

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review  of  the  opinion  given  by  the  AAR  and, therefore, the High Court was very well within its power to revisit the issue;  albeit  within the scope of jurisdiction of Article 226 of the Constitution of India, and decide the same.   According to him, the High Court had not exceeded its jurisdiction while deciding the aforesaid issues in the writ petitions filed by the appellants themselves.

63) Refuting  the  arguments  of  Mr.  Datar  predicated  on Section 195 of the Act, Mr. Rohatgi referred to the judgment of this Court in GE India Technology Centre Private Limited v. Commissioner of Income Tax & Anr.22

wherein following principle is laid down in paragraph 18:

“18. If the contention of the Department that any person making payment to a non-resident is  necessarily  required  to  deduct  TAS  then the consequence would be that the Department would be entitled to appropriate the monies deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the IT Act by which a payer can obtain refund. Section 237 read with Section 199 implies that only the recipient of the sum i.e. the payee could seek a refund. It must therefore follow, if the Department is right,  that  the  law  requires  tax  to  be deducted  on  all  payments.  The  payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own

(2010) 10 SCC 29

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pocket and he has no remedy whatsoever, even where  the  sum  paid  by  him  is  not  a  sum chargeable under the Act. The interpretation of  the  Department,  therefore,  not  only requires  the  words  “chargeable  under  the provisions of the Act” to be omitted, it also leads  to  an  absurd  consequence.  The interpretation placed by the Department would result  in  a  situation  where  even  when  the income has no territorial nexus with India or is  not  chargeable  in  India,  the  Government would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which a person  may  seek  a  determination  of  the “appropriate  proportion  of  such  sum  so chargeable” where a proportion of the sum so chargeable is liable to tax.”

He, thus, submitted that if there was any breach of the  said  provision,  the  Income  Tax  Department  was well  within  its  right  to  charge  interest  and/or impose penalty.

64) In  rejoinder,  M/s.  Ganesh  and  Datar  gave  their answers to the aforesaid submissions, but it may not be necessary to reproduce the same at this stage as we would like to take note of the same while dealing with the respective submissions.

ANALYSIS, FINDINGS & CONCLUSION 65) We have pondered over the aforesaid submissions of

the  learned  counsel  for  the  parties  with  all seriousness and sincerity they deserve.  We have also

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minutely gone through the material placed on record. We  have  kept  in  mind  the  governing  law  that  has already been stated in detail.  We are also conscious of the approach that is needed to examine these kinds of issues, as discussed in the judgments referred to by Mr. Dave.  Likewise, we have also microscopically examined  the  judgment  of  the  High  Court  which  is under challenge.

66) As per Article 5 of the DTAA, the PE has to be a fixed place of business  ‘through’ which business of an enterprise is wholly or partly carried on.  Some examples of fixed place are given in Article 5(2), by way  of  an  inclusion.   Article  5(3),  on  the  other hand,  excludes  certain  places  which  would  not  be treated as PE, i.e. what is mentioned in clauses (a) to (f) as the ‘negative list’.  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,

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the list of such PEs is not exhaustive.  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.

67) We are of the firm opinion, and it cannot be denied, that Buddh International Circuit is a fixed place. From  this  circuit  different  races,  including  the Grand  Prix  is  conducted,  which  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.   We  would  like  to  start  our discussion on a crucial parameter viz. the manner in which commercial rights, which are held by FOWC and its affiliates, have been exploited in the instant case.  For this purpose entire arrangement between FOWC and its associates on the one hand and Jaypee on the  other  hand,  is  to  be  kept  in  mind.   Various

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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 Jaypee.  That would enable us to capture the real essence of FOWC's role.   

68) A mere running of the eye over the flowchart of these commercial  rights,  produced  by  the  Revenue,  bring about  the  following  material  factors,  evidently discernible: (i) FIA had assigned commercial rights in favour of

FOAM vide agreement dated April 24, 2001 and on the same day another agreement was signed between FOAM  and  FOWC  vide  which  these  rights  were transferred to FOWC.  Vide another agreement of

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2011, these rights stand transferred in favour of FOWC for a period of 100 years.  Vide Concorde Agreement of 2009, FOWC is authorised to exploit the  commercial  rights  directly  or  through  its affiliates only.  Significantly, this agreement defines  ‘F-1 Business’ to mean exploitation of various  rights,  including  media  rights, hospitality rights, title sponsorship, etc.

(ii)Armed  with  the  aforesaid  rights,  FOWC  signed first agreement with Jaypee on October 25, 2007 whereby it granted right to promote the event to Jaypee.  This is replaced by RPC dated September 13, 2011.  Under this agreement, right to host, stage and promote the event are given by FOWC to Jaypee for a consideration of US$ 40 million.  On the same day, another agreement is signed between Jaypee  and  three  affiliates  of  FOWC  whereby Jaypee gives back circuit rights, mainly media and  title  sponsorship,  to  Beta  Prema  2  and paddock rights to Allsports.  FOAM is engaged to generate  TV  Feed.   All  the  revenues  from  the aforesaid  activities  are  to  go  to  the  said companies, namely, Beta Prema 2, Allsports and

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FOAM  respectively.   These  three  companies  are admittedly affiliates to FOWC.

Though Beta Prema 2 is given media rights, etc., on September 13, 2011, it had entered into title sponsorship agreement dated August 16, 2011 with Bharti Airtel (i.e. more than a month before getting  these  rights  from  Jaypee)  whereby  it transferred those rights to Bharti Airtel for a consideration of US$ 8 million.

Service agreement is signed between FOWC and FOAM on October 28, 2011 (i.e. on the date of the race)  whereby  FOAM  engaged  FOWC  to  provide various services like licensing and supervision of  other  parties  at  the  event,  travel  and transport  and  data  support  services.   The aforesaid arrangement clearly demonstrates that the entire event is 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

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this event in India.  Thus, commercial rights are with FOWC which are exploited with actual conduct of race in India.  

(iii) 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 appellants are trying to trivialize the issue by harping on the fact that duration  of  the  event  was  three  days  and, therefore, control, if at all, would be for that period only.  His reply was that the duration of the  agreement  was  five  years,  which  was extendable to another five years.  The question

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of the PE has to be examined keeping in mind that the aforesaid race was to be conducted only for three days in a year and for the entire period of race the control was with FOWC.   

(iv)Even when we examine the matter by examining the RPC agreement itself, it points towards the same conclusion.  The High Court in its judgment has reproduced  relevant  clauses  of  the  agreement which we have already reproduced above. This  agreement  is  analysed  by  the  High  Court.

Therefore, we are spared of doing a diagnostic of sorts,  which  exercise  is  accomplished  by  the  High Court itself in a flawless manner:  

“(a)   The  Buddh  International  Circuit,  is defined in Clause 1(q), as one suitable in every respect for the staging of the event, including  permanent  buildings,  permanent structure,  track  laid-out,  amenities, spectator  viewing  facilities,  paddock building, media centre, car parks, helipads, garages,  race  control  and  administration, office administration, fuel and storage, tyre store,  utilities,  including  backup  power supplies,  concrete-based  areas  suitable  to host  competitors  and  sponsor,  vending  and exhibition areas, international TV compounds etc.  These  specifications  are  more elaborately  spelt  out  in  Clause  5(e)  which states that a circuit shall be constructed, laid out and prepared in accordance with the agreement, i.e. RPC, "in a form and manner approved by the FOWC and the FIA".

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(b)  The inclusion of the event is through the  FOWC's  actions.  In  terms  of  its arrangement with the FIA, it is the exclusive agency through which any particular circuit is  introduced  for  an  event  in  a  given calendar year.  (c)  The term of the RPC is 5 years according to Clauses 3.3 and 3.4. (d)  In terms of Clause 11, Jaypee is obliged to take all action necessary to ensure that the  pit,  paddock  buildings  and  surrounding areas within the circuit and land are open to receive the competitors, FOWC, affiliates of FOWC, FOWC's contractors and licensees, other personnel and equipment at all times during the period commencing 14 days before the race and ending 7 days after the race. It also has to assure security to these areas.  (e)  Under Clause 14, the promoter is obliged to authorize access to parts of the circuit not  open  to  the  main  public  only  through passes  issued  by  the  FOWC.  Under  Clause 14(b), the public cannot have access to the cars  in  any  of  the  places  where  the competitor's mechanics may be called upon to work  on  them  and  under  Clause  14(c),  the validity  of  passes  issued  by  FOWC  is unquestionable. (f)  Under Clause 18.1, throughout the term during  the  access  period,  from  the  test session held at the circuit till the end of the event, the promoter, i.e. Jaypee cannot permit,  access,  enable,  procure  or  in  any manner  encourage  others  to  make,  create, store, record or transmit any sound recording or visual or audio-visual footage whatsoever, for broadcast or any other purpose, of any of at  or  pertaining  to  the  event,  including cars, drivers, competitors etc. and in fact cannot  make  any  such  recording  etc.  within the confines of the circuit or the land over which Jaypee itself has control. (g) Under Clause 18.2, Jaypee has to ensure

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that  the  terms  of  the  ticket  sale,  giving admittance to the event include a condition imposed on the ticket holder not to make any kind  of  recording  or  take  any  recording device that can store or transmit any part of the event and that the ticket holder as a spectator could be filmed and a sound made by him could be recorded for broadcast or any other such item that the FOWC could impose on Jaypee. (h) Jaypee  is  obliged  to  engage  a  third party  approved  by  FOWC  to  carry  out  and perform on its behalf all service relating to the  origination  of  the  international television  feed  and  host  broadcasting  for each event during the term specified in the guidelines published by FOWC and provided to Jaypee.  (i) Jaypee unconditionally and irrevocably under  Clause  19.2  assigned  to  FOWC  all copyright  and  other  intellectual  property rights, titles and interest which it may now or may in future possess, in any image or recording or other presentation or recording in any image/form whatsoever for the duration of the rights and also give consent to FOWC to deal with such rights as it pleased. (j) Clause  20.1  obliged  Jaypee  to  ensure that those accredited and authorized by FOWC were permitted to enter upon the premises to make  sound,  television  or  recordings  or transmissions or make films or other pictures and use the facilities throughout the access period and also undertook to accord to such personnel all help and facilities that FOWC would  require,  including  assistance  for consent, permission or authorization with any local authority.  (k) Under  Clause  21,  Jaypee  was  prohibited from causing, permitting, enabling assisting or in any manner encouraging display of any advertisement  (other  than  the  normal advertisement  displayed  on  any  competitor's cars)  or  other  displays  on,  near  or  which

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could be seen from the circuit or the land which,  in  the  opinion  of  the  FOWC,  could prevent  lawful  transmission  of  images  or recordings of the event. FOWC's say in this regard was final. (l) In the Director s report of FOWC, the‟ company  significantly  mentioned  that  its current company had entered into an agreement with FIA as a result of which FOWC acquired commercial  interests  in  the  championship which  became  operative  from  01.11.2011  and that  in  exploitation  of  such  commercial rights  in  the  championship,  the  total revenues  generated  was  US$  1205  million. There is an express advertence of the Indian part  of  the  turn-over  –  inasmuch  as  the report  said  that  the  company  paid  US$  127 million  to  FOM  in  return  of  provision  of services.”

69) We are in agreement with the aforesaid analysis which correctly  captures  the  substance  of  the  relevant clauses of the agreement.  

70) We are also of the opinion that the High Court has rightly concluded that having regard to the duration of the event, which was for limited days, 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.  This aspect is discussed by the High Court in the following manner, and rightly so:

“52. It is evident that for the duration of

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the event as well as two weeks prior to it and  a  week  succeeding  it,  FOWC  had  full access  through  its  personnel,  the  team contracted  to  it,  both  racing  as  well  as spectator  teams  and  could  also  dictate  who were authorized to enter the areas reserved for it. No doubt, in terms of the agreement, i.e.  RPC,  Jaypee  was  designated  as  the promoter or the event host. A look at the RPC and  its  terms  as  well  as  the  other  terms contained in the agreement between the Jaypee on the one hand and Allsports, Beta Prema 2 as well as FOAM show that Jaypee's capacity to act - though it promoted the event, was extremely restricted. At all material times, FOWC  had  access  -  exclusively,  to  the circuit, and all the spaces where the teams were located. Jaypee created the circuit for the purposes of the event and other events; yet,  during  the  event,  i.e.  the  F1 Championship, no other event was possible. 53.  Having  regard  to  the  nature  of  the preceding  discussion,  it  is  evident  that though FOWC's access or right to access was not  permanent,  in  the  sense  of  its  being everlasting, at the same time, the model of commercial transactions it chose is such that its exclusive circuit access - to the team and its personnel or those contracted by it, was for up-to six weeks at a time during the F1  Championship  season.  This  nature  of activity, i.e racing and exploitation of all the bundle of rights the FOWC had as CRH, meant  that  it  was  a  shifting  or  moving presence: the teams competed in the race in a given place and after its conclusion, moved on to another locale where a similar race is conducted.  Now  with  this  kind  of  activity, although there may not be substantiality in an  absolute  sense  with  regard  to  the  time period,  both  the  exclusive  nature  of  the access  and  the  period  for  which  it  is accessed, in the opinion of the Court, makes the  presence  of  a  kind  contemplated  under Article  5(1),  i.e.  it  is  fixed.  In  other words, the presence is neither ephemeral or fleeting,  or  sporadic.  The  fact  that

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RPC-2011's  tenure  is  of  five  years,  meant that  there  was  a  repetition;  furthermore, FOWC  was  entitled  even  in  the  event  of  a termination,  to  two  years'  payment  of  the assured  consideration  of  US$  40  million (Clause 24 of the RPC). Having regard to the OECD commentary and  Klaus Vogel's commentary on the general principles applicable that as long  as  the  presence  is  in  a  physically defined geographical area, permanence in such fixed place could be relative having regard to the nature of the business, it is hereby held  that  the  circuit  itself  constituted  a fixed place of business.

71) 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 PE24.

72) The  High  Court  has  also  referred  to  some  of  the judgments which are of relevance.  We would like to take note of those judgments as we had agreed with the conclusions of the High Court on this issue:

In  Universal Furniture Ind. AB v.  Government of Norway25, a Swedish company sold furniture abroad that was assembled in Sweden.  It hired an individual tax

Refer Footnote 4  Refer Footnote 5  

(Stavanger  Court,  Case  No.  99-00421,  dated  19-12-1999  referred  to  in  Principles  of International Taxation by Anghard Miller and Lyn Oates, 2012)

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resident of Norway to look after its sales in Norway, including sales to a Swedish company, which used to compensate  him  for  use  of  a  phone  and  other facilities.  Later,  the  company  discontinued  such payments and increased his salary. The Norwegian tax authorities  said  that  the  Swedish  company  had  its place  of  business  in  Norway.  The  Norwegian  court agreed, holding that the salesman’s house amounted to a  place  of  business:  it  was  sufficient  that  the Swedish Company had a place at its disposal, i.e the Norwegian individual’s home, which could be regarded as ‘fixed’.

In Joseph Fowler v. Her Majesty the Queen26, the issue  was  whether  a  United  States  tax  resident individual who used to visit and sell his wares in a camper trailer, in fairs, for a number of years had a fixed place of business in Canada. The fairs used to be once a year, approximately for three weeks each. The  court  observed  that  the  nature  of  the individual’s business was such that he held sales in similar fares, for duration of two or three weeks, in two other locales in the United States. The court

1990 (2) CTC 2351

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held  that  conceptually,  the  place  was  one  of business, notwithstanding the short duration, because it  amounted  to  a  place  of  management  or  a  branch having regard to peculiarities of the business.

73) Coming to the second aspect of the issue, namely, whether FOWC carried on any business and commercial activity in India or not, substantial part of this aspect has already been discussed and taken care of above.  Without being repetitive and pleonastic or tautologous,  we  may  only  add  that  FOWC  is  the Commercial Right Holder (CRH).  These rights can be exploited with the conduct of F-1 Championship, 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 the places built around the track. Again, for augmenting the earnings in these events, there would be advertisements, media rights, etc. as

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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 not only FOWC became Commercial Rights Holder for 100 years, this agreement further enabled 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  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 aforesaid commercial activities in India.  Without explaining this aspect further, our purpose would be served by reproducing the following discussion, so starkly put in the judgment of the High Court:

“55. If the terms of the Concorde Agreement are read conjointly with the RPC-2011, it is apparent that the CRH, which is the FOWC, only and none else has the right to include a venue in any FIA annual  calendar.  FIA  is  bound  to  accord permission  for  such  inclusion;  FOWC  is  the

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exclusive commercial rights holder of a host of rights (evident from the recital in the Concorde Agreement that FIA, FOWC and other members of the CRH  group  had  entered  into  such  contracts  to enable commercial exploitation of the rights for a 100 year period). Under the RPC-2011, only FOWC has  exclusive  rights  towards  making  sound, television and other recordings and exploitation of  its  media  rights.  FOWC  has  copyright  over databases  and  all  related  information,  etc. generated, during the event, including practice sessions etc. (Clause 22, RPC-2011). Only those accredited  by  FOWC  can  enter  the  promoter's premises and circuit to make sound and television recordings, etc. 56.  It  is  quite  apparent  that  save  a  limited class of rights (those relating to paddock entry, ticketing,  hospitality  at  the  venue  and  a restricted class of advertising), all commercial exploitation rights vest exclusively with FOWC. FOWC did accept them and was entitled to charge fees  or  such  other  consideration  as  it  deemed appropriate  for  the  recording,  telecasting, broadcasting and creation of internet and media rights,  including  data  transmission,  and  all other  such  commercially  exploitable  rights.  In addition, FOWC charged, by Clause 24 of RPC-2011, a fee of US$ 40 million annually from Jaypee, in relation to the race event or FIA F1 Championship event conducted on the circuit in India.  57. It is also noteworthy that by virtue of the Concorde Agreement, the teams have undertaken to engage in every race - with the added condition that each team would involve two cars for every race in any circuit chosen by FOWC. RPC-2011 also assured that the FOWC would ensure that such team did in fact participate in the event in the Budh Circuit. This is an important fact- which shows that the entire event, i.e. F1 FIA Championship in the circuit was organized and controlled in every sense of the term by FOWC. The peculiarity of  this  activity  is  such  that  FOWC's  dominant role is evident; it is the moving spirit with all pervasive presence and control through the teams, which are contracted to participate in the event. In fact, it creates the event, i.e. the race. Each actor, such the promoter/Jaypee, the racing teams,  the  constructing  teams  and  the  other affiliates,  plays  a  part  in  the  event.  FOWC's participation and the undertakings given to it by each of these actors, who are responsible for the

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event  as  a  whole,  brings  out  its  central  and dominant role. If Jaypee is the event promoter, which owns the title to the circuit in the sense that it owns the land, FOWC is the commercial rights  owner  of  the  event,  by  virtue  of  the Concorde  Agreement.  FIA  parted  with  all  its rights over each commercial right it possessed to FOWC. The bulk of the revenue earned is through media, television and other related rights. The terms or the basis of those rights is the event. The conceptualization of the event and the right to include it in any particular circuit, such as Buddh Circuit is that of the FOWC; it decides the venue and the participating teams are bound to it to compete in the race in the terms agreed with the FOWC. All these, in the opinion of the Court, unequivocally,  show  that  the  FOWC  carried  on business in India for the duration of the race (and for two weeks before the race and a week thereafter). Every right, which it possessed was monetized; the US$ 40 million which Jaypee paid was only a part of that commercial exploitation by the FOWC.  58.  Consequently,  the  Court  concludes  that  the FOWC  carried  on  business  in  India  within  the meaning of expression under Article 5(1) of the DTAA. It is consequently held that the AAR fell into error of law in holding that FOWC did not function through a PE/carry on business through a fixed place of business in India.”

74) In view of the above, it is difficult to accept the arguments of the appellants 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 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

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Championship and control over the track during that period.   Specific  arrangement  between  the  parties relating to the aforesaid, which is elaborated above and which FOWC and Jaypee unsuccessfully endeavoured to ignore, has in fact turned the table against them. It is also difficult to accept their submission 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.  We also reject the argument of the appellants that the Buddh International Circuit was not under the control and at the disposal of FOWC.

75) No doubt, FOWC, as CRH of these events, is in the business  of  exploiting  these  rights,  including intellectual property rights.  However, these became possible, in the instant case, only with the actual conduct of these races and active participation of FOWC in the said races, with access and control over the circuit.

76) We are of the opinion that the test laid down by the Andhra Pradesh High Court in Visakhapatnam Port Trust case  fully  stands  satisfied.   Not  only  the  Buddh

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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.   

77) We  are  now  left  with  two  other  incidental  issues which were raised by Mr. Datar.  First was on 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

A Manual on the OECD Model Tax Convention on Income and on Capital

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under Section 195 of the Act on such payments.  Mr. Rohatgi  had  submitted,  and  rightly  so,  that  this issue is covered by the judgment in the case of  GE India Technology Centre Private Limited28.  Precisely this very judgment is taken note of and relied upon by the High Court also in holding that since payments made by Jaypee to FOWC under the RPC were business income  of  the  FOWC  through  PE  at  the  Buddh International Circuit, and, therefore, chargeable to tax, Jaypee was bound to make appropriate deductions from the amounts paid under Section 195 of the Act.   

78) We are, however, inclined to accept the submission of Mr. Datar 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  Act.   In  GE  India  Technology Centre  Private  Limited29,  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

Refer Footnote 23 Refer Footnote 23

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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  Assessing  Officer  to adjudicate upon the aforesaid aspects while passing the  Assessment  Order,  namely,  how  much  business income of FOWC is attributable to PE in India, which is chargeable to tax.  At that stage, Jaypee can also press its argument that penalty etc. be not charged as the move on the part of Jaypee in not deducting tax at source was bona fide.  We make it clear that we have not expressed any opinion either way.

79) Insofar as the argument of Mr. Datar on the powers of the High Court under Article 226 of the Constitution of India is concerned, we are not impressed by the said argument.  It is Jaypee itself which had filed the writ petition (and for that matter FOWC as well) and they had challenged the orders of AAR on certain aspects.  The High Court has examined legal issues while  delivering  the  impugned  judgment,  of  course having regard to the facts which were culled out from the documents on record.

80) In view of the foregoing, the appeals preferred by

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the  FOWC  and  Jaypee  are  dismissed,  subject  to observations as made above.

81) Insofar as the appeal filed by the Commissioner of Income  Tax  is  concerned,  it  was  submitted  by  Mr. Rohatgi himself that the issue of dependent PE had become academic.  Therefore, we need not examine this issue  and  dispose  of  the  appeal  of  the  Revenue accordingly.

No costs.  

.................J. (A.K. SIKRI)

................J. (ASHOK BHUSHAN)

NEW DELHI; APRIL 24, 2017.