2016 (12) TMI 123 - HC - Income Tax

Royalty v/s business income - nature of income - whether FOWC had a fixed place permanent establishment (PE) under Article 5(1) of the DTAA - Held that - FOWC s participation and the undertakings given to it by each of these actors, who are responsible for the 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. 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. Nature of business - Did the FOWC carry on business through its agents under Article 5(4) or Article 5(5)? - Held that - 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. Nature of payment - Was the payment made by Jaypee to FOWC in the nature of royalty, under the DTAA, for the use of the latter s trademark? - Held that - As event promoter and host Jaypee had to publicize the F1 Grand Prix Championship. Therefore, it was bound to use the F1 marks, logos and devices; however, it was not authorized to use the marks on any merchandise or service offered by it. This condition, in the opinion of the court, places the matter beyond the pale of controversy; the use of the trademarks were purely incidental. The conclusion of the AAR is therefore, incorrect. The answer to the question is that the amounts paid to FOWC by Jaypee were not royalty within the meaning of Article 13 of the DTAA, as they were business income and could not be brought to tax under the head of royalty . Payment to non-residents and the obligation to deduct tax u/s 195 - Whether the AAR erred in its interpretation of Section 195 in Jaypee s application - Held that - As is evident, the object of the provision is to clarify what proportion of the payment made by the payer is liable to tax deduction. In the present case, Jaypee, no doubt, supported FOWC s argument that payments made to the latter were not by way of royalties; at the same time, because of the doubt entertained, it sought clarification through the application to the AAR. Having regard to the conclusions reached by us that FOWC carried on business in India through a PE, at the circuit, it is held that payments made to FOWC, under the RPC were business income and accordingly chargeable to tax, according to the rates applicable in India at that time.

Summary

Issues Involved:

1. Whether FOWC had a fixed place permanent establishment (PE) under Article 5(1) of the DTAA.
2. Whether FOWC carried on business through its agents under Article 5(4) or Article 5(5).
3. Whether the payment made by Jaypee to FOWC was in the nature of royalty under the DTAA for the use of the latter’s trademark.
4. Whether the AAR erred in its interpretation of Section 195 in Jaypee’s application.

Detailed Analysis:

1. Fixed Place Permanent Establishment (PE) under Article 5(1) of the DTAA:

The court examined the nature of the Buddh International Circuit and the terms of the Race Promotion Contract (RPC) between Jaypee and FOWC. The court noted that the circuit was constructed to FOWC's specifications and was exclusively available to FOWC and its affiliates for a significant period surrounding the event. The court concluded that the circuit constituted a fixed place of business for FOWC due to its exclusive access and control during the event, thus satisfying the conditions of Article 5(1) of the DTAA. The court emphasized that the presence was neither ephemeral nor sporadic, but rather a shifting or moving presence that was substantial in nature due to the repetitive and exclusive access for the F1 Championship season.

2. Business Through Agents under Article 5(4) or Article 5(5):

The court found that the question of dependent agents was rendered academic due to the finding of a fixed PE. However, it addressed the issue and concluded that the three affiliates (FOM, Allsports, and Beta Prema 2) did not act as dependent agents of FOWC. The court noted that the agreements independently entered into by these entities with Jaypee did not show that they acted on behalf of FOWC. Therefore, the court held that there was no dependent agent PE under Article 5(4) or Article 5(5).

3. Nature of Payment as Royalty under the DTAA:

The court analyzed the terms of the RPC and the Artwork License Agreement (ALA) and concluded that the payments made by Jaypee to FOWC were not for the use of trademarks or IP rights but for the privilege of hosting and staging the F1 event. The court noted that the use of trademarks was incidental and strictly limited to promoting the event. The court relied on the judgment in Director of Income Tax v. Ericsson A.B. and concluded that the lump-sum payments were not royalties under the DTAA. The court also referred to the OECD commentary and concluded that the payments were business income, not royalties.

4. Interpretation of Section 195:

The court referred to the Supreme Court's judgment in GE India Technology Centre (P) Ltd Vs. CIT & Anr and concluded that Jaypee was bound to deduct tax at source on payments made to FOWC if the sums were chargeable to tax in India. Since the court concluded that FOWC had a PE in India and the payments were business income, Jaypee was required to make appropriate deductions under Section 195 of the Income Tax Act.

Conclusion:

The court held that FOWC had a PE in India under Article 5(1) of the DTAA and carried on business in India. The payments made by Jaypee to FOWC were not royalties but business income. Jaypee was required to deduct tax at source under Section 195. The writ petitions of Jaypee and FOWC were partly allowed on the question of royalty and Section 195, while the writ petition of the revenue was allowed partly on the issue of FOWC’s PE under Article 5(1).