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TMI Blog2016 (12) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... lization 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... JJ. Respondent Through : Sh. S. Ganesh, Sr. Advocate with Ms. Anuradha Dutt, Ms. Fereshte Sethna, Sh. Sachit Jolly, Sh. Gautam Swarup, Sh. Siddhartha Singh and Sh. Amaya Pant, Advocates, for petitioner in W.P.(C) 10307/2016 and for Respondent No.1 in W.P.(C) 9509/2016 & W.P.(C) 10145/2016. Sh. Arvind Datar, Sr. Advocate with Sh. Kamal Deep Dayal, Sh. Ankur Saigal and Sh. Shayan, Advocates, for JAL. Sh. G.C. Shrivastava, Sr. Standing Counsel and Sh. Rahul Chaudhary, Sr. Standing Counsel, for Income Tax Department. MR. JUSTICE S. RAVINDRA BHAT 1. This judgment would dispose of three writ petitions: WP 9509/2016 (preferred by the Commissioner of Income Tax, hereafter "the revenue's petition"; WP 10145/2016 (preferred by Jaypee Sports International Limited, hereafter called "Jaypee") and WP 10307/2016 (Formula One World Championship Limited (FOWC) hereafter called "the F1 Championship Ltd" petition). Both Jaypee and FOWC had filed applications before the Authority for Advance Ruling ("AAR"). The AAR held one question in favour of the revenue and the other question in favour of the said two companies. All three parties have, thus approac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the racing events. All 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 of their ability, in every F1 event included in the official annual F1 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 F1 racing teams exclusively participate in about 19 to 21 listed F1 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. 5. Every F1 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 Contract Right Holder, which is in effect, FOWC), to the FIA for inclusion in the official F1 racing calendar. In other words FOWC is the exclusive nominating body at whose instance the event promoter is permitted participation. The points scored by each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of amounts received by the former were that the entire consideration received/ receivable under the RPC was in nature of business income and not 'royalty' as defined both under the Act and the DTAA because what was granted to Jaypee was a commercial right (i.e. hosting right) and the consideration received/ receivable by FOWC was not for use of trademark, copyright, equipment, etc and hence, was not in the nature of 'royalty'. It was contended, in this context that no separate consideration was payable by Jaypee for the limited permitted use of Formula One ('F1 ') Mark which was only to enable the Promoter to advertise the Indian Grand Prix. It was routine and customary in business parlance to reproduce the names (of sports events) in the same manner as they were known to the public at large. As a consequence, the Artwork License Agreement ('ALA') was executed solely to enable the Promoter for a limited use of F1 marks and to prevent it from using the marks for any commercial exploitation. Such grant was similar to sale of prepackaged or branded product; the main emphasis is sale of the product, the use of the mark was part of the sale. The applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quot;permitted use" is defined to mean incidental use of the licensed marks strictly for the purpose of hosting, staging and promoting the event. It was furthermore argued that from a combined reading of Concorde and other agreements what emerged was that Jaypee did not have to make any payment to FOWC for hosting, staging and promoting any motor racing event. The payment became necessary for one and the only reason that the mark of "Formula One World Championship" or "Grand Prix of India" was to be used to make the event a part of the calendar of F1 World Championship. It was also asserted that the marks were not used in a secondary manner, or incidentally, rather, Jaypee used the marks prominently because of their fame and reputation. Licensing of the mark gave Jaypee the right to hold the F1 championship or Grand Prix of India event. This position was also supported by the fact that the promoter's rights stipulated in the Concorde agreement clearly list out as being (i) right to promote the event. (ii) right to designate the event as Formula One Championship event. Given the relative lack of knowledge of the F1 sporting event, use of the mark became ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusive right to exploit the commercial right in the championship, including the exclusive right to propose the championship calendars and to award to promoters the right to host, stage and promote Formula One Grand Prix events ............ The RPC gives right to Jaypee to host, stage and promote the 'event' as per clause 4.1 of RPC. The event has been defined in clause 1 (t) of RPC saying that 'event shall mean the Formula One Grand Prix of India'. RPC itself envisages signing of a separate AlA for incidental use of certain of the marks and intellectual property belonging to FOWC in Clause 23.2. 28. It is relevant to point out that as per ALA, FOWC is providing Jaypee several of its intellectual property like event programme covers, templates for posters, official stationery, media kits etc. and licenced marks including FORMULA ONE GRAND PRIX of INDIA which is the name of event organized (host, stage and promote) by Jaypee. 29. It may be mentioned that the consideration as per RPC is USD $ 40 m and consideration as per ALA is USD $ 1 , though both agreements were signed on the same date and relate to the same event promoted by Jaypee. It is only on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome out from the agreement and purpose of the agreement. FOWC has further submitted that the promoter is 'hosting, staging and promoting the 'Indian GP'. There is nothing like Indian GP. The only event as per the agreement is Formula One Grade Prix of India. We cannot accept any other name for the event. The use of words 'Indian GP' has been done by FOWC only to show that Jaypee's intention was to host various events. This does not come out from RPC or ALC. The fact remains that Jaypee is staging an event which is called Formula One Grand Prix of India which, in turn is the licensed mark of FOWC as per Art work license agreement. RPC clearly and conclusively show that FOWC granted licence to Jaypee for limited purpose of organizing Formula Grand Prix of India event only and for no other event. Therefore, irrespective of other limitations imposed by clause 23.2 & 23.3 of RPC the licensed mark of Formula One Grand Prix of India and other intellectual property has been actually used by Jaypee. In these circumstances the creation of a separate agreement known as art work license agreement with a nominal and insignificant consideration of US $ 1 is purely artific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself is a subject with JPSIL As a matter of fact, the applicant has submitted that Formula One Licensing BV has only entered into an oral arrangement with FOWC for the transfer of trademark. As per the above provisions, since the user (Jaypee) has not entered into any agreement with the registered proprietor, the condition of 'permitted use' is not met and consequently Jaypee cannot be regarded as a permitted user within the meaning of section 2 (r)(ii) of the TM Act. The provisions of section 48(2) cannot be invoked in the case of an entity which is not a permitted user within the meaning of that Act. The deeming fiction of section 48 (2) cannot be pressed into service into cases of this nature. b. The deeming fiction of section 48(2) can also not be extended to the provisions contained in section 9(1)(vi) for the reason that Explanation 5 to section 9(1)(vi) introduced by the Finance Act of 2012 provides that Royalty shall be deemed to arise whether the property is used directly or not. The implication of the Explanation would be that even if the property is deemed to be used by the proprietor and not by the licensee, it can still be regarded as indirect use of the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proprietor and during the course of hearing Mr. Pardiwala confirmed that there is no written agreement in respect of use of trademark between the proprietor and FOWC and/or between the proprietor and Jaypee. Therefore, in terms of provisions of the section Jaypee would not be a permitted user under the trademark Act. In view of this legal position we cannot agree with Mr. Datar that section 48(2) of the Trademark Act will apply only on the basis of artwork agreement where Jaypee has been mentioned as the permitted user. This cannot be accepted because if the benefit of section 48(2) of the Trade Marks Act is to be obtained, Jaypee has to be a permitted user as per the provisions of this Act and admittedly it is not. Once such a conclusion is reached, there is no need to deal with other objections raised by the Department of Revenue i.e., the definition of royalty as given in Explanation 5 to section 9(1)(vi) of the Income Tax Act and the context in which 'any other law' came to be used in the Trademarks Act. The fact is that Jaypee is not the permitted user under the law and therefore, it is not entitled to take recourse to provisions relating to permitted user in secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. Each affiliate entered into independent commercial arrangements with Jaypee and no rights flowed from FOWC to 'BP2' or Allsport either under the FIAFOAM-FOWC agreements or under the Concorde Agreement in relation to revenues earned by BP2 and Allsport with respect to the Indian GP. Circuit and other rights (which BP2 and Allsport exploited) arose by virtue of the ownership of the circuit, which was that of Jaypee; those rights could be exploited only when granted by it. They were neither Championship rights (emanating from the FIA) nor were they covered by the abovementioned Agreements. Jaypee's grant of rights to BP2 and Allsport was a legitimate independent transaction consistent with the legal ownership of those rights. Jaypee and FOWC engaged FOM independently for the production of feed and data and other support services. For these reasons, FOWC urged that activities undertaken by each of the affiliates independently and on their own account and did not constitute its PE. It was also argued that even if they were dependent agents of FOWC their place of business could not be a PE of the principal i.e. FOWC. 14. The revenue argued that for deciding fixed plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time." 17. According to the revenue, FOWC's business is to exploit commercial rights arising from races and this business is carried on through exploitation of these commercial rights either by itself or through any one or more members of CRH group as mentioned in the Concorde Agreement to say that FOWC is obligated to propose consolidated accounts incorporating profits of all entities forming part of CRH group. Reference was made to the fact that commercial rights were originally owned by FIA, transferred in 2001 to SLEC Holding Company (parent company of FOWC) for a consideration, then given to FOAM and w.e.f. 1.1.2011 transferred to FOWC. It was pointed out that on the one hand, the organization Agreement between FINFMSCI was entered into on 20.01.2011, the RPC and the Artworks License Agreement are dated 13.09.2011 Going by RPC dated ·13.09.2011, it is evident that GP contract did not exist on the date of the signing of the Organization Agreement in January 2011. The recital (B) in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hts Holder group (CRH group), which included FOWC, its affiliates and other entities. These three group entities have acted for and on behalf of Jaypee, which did not get anything from these arrangements and these entities were not holders of commercial rights. Therefore, these entities acted for and on behalf of FOWC. According to the revenue, FOM was business manager of FOWC, it had a business management agreement with FOWC, 146 employees of FOM were in India for 40 days and based on these facts Revenue's counsel has concluded that FOM managed the entire business of FOWC in lndia. As regards All Sports too, which carried out sale of tickets it acted on behalf of FOWC because no commercial rights were transferred to it. A like inference had to be drawn in case of Beta Prema 2 because it exploited certain commercial rights available only with FOWC. The revenue submitted that a PE gets constituted under Article 5(4) of DTAA also for the reason that FOM is agent and business manager of FOWC and Beta Prema 2 and All Sports have no independent status. 15. The AAR's findings on the question of existence of a PE in India, of the FOWC, are as follows: "47. Determination of PE is que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the rulings given in the case of 'Golf in Dubai' wherein the observation was made that if a short term activity is carried out even once a year but on a regular basis if it is repeated, the same may constitute a PE provided the same place is kept at the disposal of the enterprise and there is certainty that the event will be repeated. Mere intention to repeat is not sufficient. We do not think this ruling is appropriate in this case because even if there is an event for a short period and there is intention to repeat it in future but not certainty, the main ingredient is missing, i.e., whether FOWC is carrying on any business activity through the circuit. The definition of PE presupposes that the business of the enterprise must be carried on through this fixed place of business. FOWC is not carrying on any business activity here unless we accept the theory of Revenue that all three entities Beta Prema, Allsports, FOM are acting on behalf of FOWC. Unfortunately, this is not true and we have rejected such presumption in the section on tax avoidance. Therefore, the business activity test also fails because we have already concluded in the section of issue of tax avoidance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C, then too Jaypee continued to be liable to pay the contracted amounts in the year of termination and in the next year; but the user of all I.P. rights ceased the moment the RPC was terminated. This clearly established that the amounts paid under the RPC were for the rights and privilege of hosting and staging the event and not for IP rights. 17. The relevant clauses of the RPC relied on by FOWC and Jaypee are discussed as follows. (a) Recital 'B', which states that the FOWC has the exclusive right to exploit the commercial rights in the championship and to award Jaypee the right to host, stage and promote Formula One Grand Prix events; (b) Recital 'D', which states that the RPC sets out the terms and conditions on which FOWC has granted to Jaypee the privilege of hosting, staging and promoting the event at the motor racing circuit owned by Jaypee situated in N.C.R (National Capital Region). Reliance is also placed on Clause l (t), which defines "Event" to mean the Formula One Grand Prix of India designated as a round of the FIA Formula One World Championship. (d) Clause 4, which set out the grant by FOWC to Jaypee of the right to host, stage and promote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a payment, which is based on either the number of tickets, sold or the total amount of revenue earned by Jaypee in each of the said years or indeed on any other measure. It is submitted that such a lumpsum payment is squarely covered by the Ericsson(supra) case. 19. It was next highlighted by Mr. Datar that recital (B) of the ALA specifically stated that FOWC wished to grant a license to Jaypee permitting only the incidental use of certain IP rights and artwork "solely for the limited purpose of facilitating the hosting, staging and promotion of the event". The definition of "permitted use" in clause 1.1 of the ALA again states that it means only the incidental use of the licensed marks and materials "for the purpose of hosting, staging or promoting the event, but for the avoidance of doubt, not to include use for any merchandising or other products or services whatsoever, whether distributed free of charge or for sale". It was argued that Clauses 2.2 and 6.2 of the ALA provide that the ALA will continue only until the RPC terminates or expires; Clause 2.3 of the ALA prohibit Jaypee from using any of the licensed marks, or as part of the name of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any independent purpose, then in such a case the payments made under the contract cannot be considered to be "royalty" either under the Act or the DTAA. In the Sheraton case (supra), this Court had used the said term "incidental" only in the sense of "ancillary to" or "connected with" the supply of goods and services under the Agreement. This Court did not use the term "incidental" to convey the idea that trademarks and IP rights were of reduced value or importance as compared to the supply of goods and services under the contract. In other words, the use of the word "incidental" by this Court in Sheraton (supra) is not based on any value judgment regarding the relative importance of the supply of goods and services as compared to permitting the use of the trademarks and I.P. rights. This used the term "incidental" only to connote the close and immediate connection between the supply of goods and services and the user of the trademarks/ I.P. rights that are inextricably interconnected with such supply. Thus, when no autonomous I.P. rights are created that are de hors or independent of the supply of the goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts if he works at the fixed place of business (see paragraph 35 below). But a permanent establishment may nevertheless exist if the business of the enterprise is carried on mainly through automatic equipment, the activities of the personnel being restricted to setting up, operating, controlling and maintaining such equipment. Whether or not gaming and vending machines and the like set up by an enterprise of a State in the other State constitute a permanent establishment thus depends on whether or not the enterprise carries on a business activity besides the initial setting up of the machines. A permanent establishment does not exist if the enterprise merely sets up the machines and then leases the machines to other enterprises. A permanent establishment may exist, however, if the enterprise, which sets up the machines also operates and maintains them for its own account. This also applies if the machines are operated and maintained by an agent dependent on the enterprise.' 22. Mr. Ganesh learned senior counsel argued that under Article 5.1 of the DTAA, a permanent establishment is said to exist in relation to a business and income is said to be earned in India, if it has a "fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing any significant stipulation conferring it with a right to set up office in India, in relation to the F1 event, ever entered in the country; it did not have or set up even a liaison office for the purpose of its F1 event work or transaction. Therefore, the question of FOWC having a fixed place of business, even for a transient place, did not arise. 24. It was next argued that the question of any PE existing through Articles 5 (4) or (5) also could not have arisen, in the circumstances of the case. It is highlighted by Mr. Ganesh that none of the three companies, which entered into agreements with Jaypee, has or had any office in India; though they were subsidiaries of FOWC, such status arose because of acquisition of their shares in 2006. The transactions by them with Jaypee were independent. Moreover, the three companies did not act on behalf of FOWC, nor could they ever be said to have acted "habitually' in that regard, because the contract with Jaypee was a "one off' transaction. Thus, none of the ingredients of Article 5(4) of the DTAA applied. Equally, provisions of Article 5 (5) of the DTAA had no application because, none of the subsidiaries' activities were "carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement makes it explicit that FIA is the sole and exclusive owner of the Formula One World Championship event 27. FIA entered into an agreement with FOAM (predecessor of FOWC) under which FOAM was given the right to exploit commercial rights and it became the Commercial Rights Holder (CRH). On the back of the above agreement, FOAM (CRH) entered into an RPC with JPSK (Jaypee's predecessor) in 2007. The promoter (JPSIL), entered into an 'Organization Agreement' with FIA and obtained the right to organize the FIA Formula One World Championship in India. In the meanwhile, by a new 'Concorde Agreement' of 2009, FOWC became the new commercial rights holder (CRH). As per the stipulation in the 'Concorde Agreement', the commercial rights could not be assigned/transferred by the commercial rights holder (CRH) to any entity other than its affiliates. Under the terms of such Concorde Agreement, FOWC could exploit such rights either directly or through its affiliates. 28. It is argued that the Buddh International Circuit (Noida), which includes not only the racing circuit but all the attached buildings in the complex, including vending areas, hosting and broadcasting f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights back to the group entities of FOWC (R I), namely:- Allsports Management SA and Beta Prema 2 Ltd. and to obtain the services of FOAM for executing certain obligations pertaining to the exploitation of media rights, which FOWC had undertaken directly. • The declaration in the RPC of 2007 that FOAM acted as a Business Manager and agent of FOWC was deliberately dropped, without the business model undergoing any change. • Clause 18.3 was introduced, casting an obligation on JPSIL to engage FOAM to carry out services for the origination of international television feed, to be provided to telecasting companies with which FOWC had already made agreements. 30. It is argued that Beta Prema 2 had transferred title Sponsorship rights to Bharti Airtel Ltd. on 16.08.2011 for a consideration of USD $ 8 million, long before it acquired these rights from Jaypee on13.09.2011. On 16.08.2011, when such rights existed only with FOWC, Beta Prema 2 could have concluded an agreement with Bharti Airtel only on behalf of FOWC or as an agent of FOWC and not otherwise. It is argued thus by Mr. Srivastava that a holistic reading of these agreements particularly the five agreements executed s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guaranteed the participation of a minimum number of teams; the circuit itself constituted a fixed place of business for FOWC. No other event could or was staged for the duration the event was held; moreover, the RPC stipulated that the circuit had to be kept free only for the F1 racing event in which FOWC chosen and contracted teams participated. The promoter, Jaypee only had the privilege of being called "event promoter' in reality, the entire ownership of the event and the economic advantages, in the form of media and television rights, were exclusively owned by FOWC. Even though the promoter was obliged to get in equipment and infrastructure to enable feed creation and transmission, it could not avail any benefit from it: that belonged, in every sense of the term, to FOWC and none else. 33. FOWC's business is the exploitation of commercial rights arising from races which is carried on through exploitation of these commercial rights either by itself or through any one or more members of CRH group mentioned in the Concorde Agreement. Counsel urged that commercial rights were originally owned by FIA, transferred in 2001 to SLEC Holding Company (parent company of FOWC) for a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Buddha circuit located in Greater Noida and owned by Jaypee which was being designed and constructed in terms of RPC dated 25.10.2007 and RPC dated 13.9.2011 is only continuation of earlier arrangement. He further urges that clause 11 of the RPC dated 13.9.2011 makes available to FOWC and other entities access to circuit, clause 8.1 obliges the promoter to allocate promotional area in such a manner as FOWC shall specify, access to restricted area is regulated by passes and tickets issued by FOWC. He has also submitted that International Broadcast is one of the major commercial rights which vests in FOWC and because the promoter has set up a media compound and installations necessary for national and international commentators, such business is also made available to FOWC at the circuit. 35. The revenue further argued that that the three affiliates of FOWC, i.e. Formula One Management Ltd. ('FOM'), Allsports Management SA and Beta Prema 2 Ltd. are FOWC's agents who carried on its business and on its behalf, through the fixed place. It has submitted that that all commercial rights originally vested and were granted to only FOWC under the Concorde agreement, with a stip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mark to identify it as Formula One World Championship and/or Grand Prix of India. Jaypee could have entered into Artworks license Agreement with FOWC and the Organization Agreement with FIA and could have acquired the rights necessary for hosting, staging or promoting the event (Formula One World Championship). FOWC's attempt to show a consideration of US $ 1 was an attempt to show the consideration of USD $40 million for rights different from what it was actually paid. 38. The revenue resists the argument that there was an incidental use of the mark in these circumstances. The use was in fact, primary and the only use. The mark's licensing gave Jaypee the right to hold the F1 championship or Grand Prix of India event. This fact is supported by the circumstances that Jaypee's rights as stipulated in the Concorde agreement are clearly listed as (i) right to promote the event. (ii) right to designate the event as Formula One Championship event. 39. The revenue argues that the SLEC group (of which FOWC is a part)had acquired the 'Formula One' trademark for a substantial consideration from FlA. It is unrealistic that a mark acquired for a hefty consideration, wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the term under Article 5(1). It is emphasized that FOWC merely sought right to exploit commercial rights in the championship and is awarded the permission and right to hold and promote Formula One Grand Prix events and that the RPC sets out the terms and conditions for the grant of privilege of hosting, staging and promoting the event to Jaypee. FOWC only assures that it would use its reasonable endeavor to ensure that at least 16 cars participate in the event. It is stated that no part of the RPC or artwork license or indeed any contract between other entities which assures specific services to Jaypee (All Sports, Beta Prema 2 and FOM) ever mentioned that FOWC had any place at its disposal for any point of time. It neither had any office nor any place of business in the sense as is commercially understood, from where its personnel were allowed to operate. At all relevant and material times, the ownership and exclusive possession of the stadium and all the premises therein vested and continued with Jaypee. Since the concept of a fixed place PE is entirely dependent upon functioning of a company or commercial entity within a physical place provided for that purpose (not necessari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in reality, the teams were bound to honor the commitment of FOWC. This was the business model adopted by it and in any given year, FOWC's mandate bound each team to participate in a certain preordained manner, in events stipulated by it. Furthermore, even though the right to promote, host and endorse the event ostensibly was that of the Jaypee, it could not in real sense of the term exploit its rights. Under the RPC, it was bound to contract out those rights to three sport entities; what is even more important is that it did not even possess any copyright or intellectual property right in respect of the media and television recordings created of the event. The ownership and exploitation of those rights exclusively vested with the FOWC. Most crucially, the revenue argues that the entire ownership of the live feed and the right to exploit it through sport contracts for media, television network, gaming, rights etc. were exclusively that of FOWC. In the real sense of the term, therefore, FOWC was the commercial owner which yielded income - in the form of consideration for facilitating the event, its inclusion in the FIA calendar and the revenues derived from the contracts, especi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tration, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er (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 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 XXXX ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 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 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 other enterprise. 4.1 As noted above, the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is therefore required. Thus, for instance, a permanent establishment could exist where an enterprise illegally occupied a certain location where it carried on its business. 4.2 Whilst no formal legal right to use a particular place is required for that place to constitute a permanent establishment, the mere presence of an enterprise at a particular location does not necessarily mean that that location is at the disposal of that enterprise. These principles are illustrated by the following examples where representatives of one enterprise are present on the premises of another enterprise. A 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 5. According to the definition, the place of business has to be a "fixed" one. Thus in the normal way there has to be a link between the place of business and a specific geographical point. It is immaterial how long an enterprise of a Contracting State operates in the other Contracting State if it does not do so at a distinct place, but this does not mean that the equipment constituting the place of business has to be actually fixed to the soil on which it stands. It is enough that the equipment remains on a particular site (but see paragraph 20 below). XXXXXX XXXXXX XXXXXX 10. The business of an enterprise is carried on mainly by the entrepreneur or persons who are in a paid-employment relationship with the enterprise (personnel). This personnel includes employees and other persons receiving instructions from the enterprise (e.g. dependent agents). The powers of such personnel in its relationship with third parties are irrelevant. It makes no difference whether or not the dependent agent is authorized to conclude contracts if he works at the fixed place of business (see paragraph 35 below). But a permanent establishment may nevertheless exist if the business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place of business owned by an enterprise but placed at the disposal of a third party for the latter's own purposes (and hence not for the enterprise's), would not be a permanent establishment of the enterprise. It is sufficient if the entrepreneur has the power of disposition through an employee; even if he himself is forbidden to enter the State in question this does not preclude the existence of a permanent establishment in that State………." XXXXXX XXXXXX XXXXXX It is not necessary for the enterprise alone to have power of disposition; in fact, several parties may have such power, whether jointly or severally. If jointly, the fixed place of business may constitute a permanent establishment of each of the parties involved……' 46. In E-Funds(supra), though the court discussed what could constitute "fixed' place of business and did conclude that a physical presence in a geographical area is essential, the decision was more related to an interpretation of who is a dependent agent, so as to bring within the fold of domestic taxation an enterprise that has an overseas tax resident status. 47. For a better understanding, the court propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat any equipment could amount to a fixed place permanent establishment even if it functioned fully automatically without human intervention. In so holding the Court also took into account Art. 5(3)(a) of the Germany-Switzerland tax treaty (which was similar to Art. 5(4)(a) of the OECD MC 2010). As per that provision, the term "permanent establishment' did not include facilities used solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise. In that respect, the Court expressed that only the assets that could be "itemized' on the enterprise's balance sheet could be regarded as goods and merchandise. Therefore, in the Court's view, Art. 5(3)(a) of the tax treaty did not apply to the server used for storing the information that was supplied by D Co to its customers in Switzerland. 49. The Court also examined Art. 5(3)(e) of the Germany-Switzerland tax treaty. That provision negated existence of a fixed place permanent establishment if a fixed place of business was maintained solely for the purpose of (i) advertising, (ii) for the supply of information, (iii) for scientific research, or (iv) for similar activities that were of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness can, however, constitute permanent establishment - relying upon para 6 of OECD commentary even though it exists in practice "only for a very short period of time because of the nature of the business.' Significantly, even though in the facts of the case, the AAR ruled that a fixed place of business existed, it acknowledged that, "even if the business was done for short duration with intermittent gaps, the existence of fixed place of business at a particular spot, i.e. golf course may not be ruled out.', no hard and fast rule can be laid down as to the number of days which can impart a degree of permanence to the place of business to make it a fixed place. 51. It would, for the purposes of deciding whether FOWC carried on business in India, through a fixed place of business (which the revenue argues is the Buddh international circuit) be necessary to consider the conditions and stipulations in the RPC. The following, in the opinion of the Court, are material conditions necessary for determination of whether FOWC had a PE in India: (a) The Budh International Circuit, is defined in Clause 1(q), as one suitable in every respect for the staging of the event, including permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 18.2, Jaypee has to ensure 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 autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 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' pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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. Regarding Question No.2, did the FOWC carry on business through its agents under Article 5(4) or Article 5(5) 59. The discussion on whether there was or were dependent agents which led to FOWC's PE is rendered academic, in view of this court's finding that there was a fixed PE. However, we are conscious that this judgment is subject to appeal; therefore we proceed to discuss the issue of existence of dependent PEs. 60. The relevant provisions of the DTAA- Articles 5 (4) and 5 (5) are extracted below: "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 goods or merchandise for the enterprise; or (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnel includes employees and other persons receiving instructions from the enterprise (e.g. dependent agents). The powers of such personnel in its relationship with third parties are irrelevant. It makes no difference whether or not the dependent agent is authorised to conclude contracts if he works at the fixed place of business (see paragraph 35 below). "35. Under paragraph 5, only those persons who meet the specific conditions may create a permanent establishment; all other persons are excluded. It should be borne in mind, however, that paragraph 5 simply provides an alternative test of whether an enterprise has a permanent establishment in a State. If it can be shown that the enterprise has a permanent establishment within the meaning of paragraphs 1 and 2 (subject to the provisions of paragraph (4), it is not necessary to show that the person in charge is one who would fall under paragraph 5." Since FOWC has to exploit commercial rights arising from races and this business is carried on through exploitation of these commercial rights either by itself or through any one or more members of the CRH group as mentioned in the Concorde Agreement, FOWC is obligated to prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity 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. Re Question No. 3: Was the payment made by Jaypee to FOWC in the nature of royalty, under the DTAA, for the use of the latter's trademark 65. FOWC and Jaypee argue that the rights given to the latter under the RPC was the grant of a bundle of rights the basic objective of which were to enable it, as the promoter to stage a motor racing e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of an agreement are not always determinative of the true nature of the transaction; in this case, it clearly was to permit the use of the F1 mark. The character of the event would have been different had the F1 marks not been used by Jaypee. It was held that the popularity of the event is a result only of the use of the Marks, and that without those marks it would not enjoy its popularity otherwise. 66. Under trademark law, particularly in India, trademark use even for advertisement purposes is to be preceded by prior consent of the proprietor and any unauthorized use of the trademark without such prior permission of the proprietor could lead to an infringement of the trademark (in India, under section 29 of the Trade Marks Act,1999). To secure registration for the marks in India from the Trademark Registry, FOWC and Jaypee entered into the ALA. The function of the ALA was (a) to provide for a strictly limited usage of the marks i.e. only for advertisement and promotion of the Indian Grand Prix Event; (b) to provide for restrictions on usage of such marks, i.e. not for any commercial purposes such as use on merchandise, etc. 67. The grant of a right, in the form of license ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship and to award Jaypee the right to host, stage and promote F1 Grand Prix events. Clause 17, states that FOWC would through reasonable endeavors ensure that at least sixteen cars participate in the Event. Clause 18 forbids Jaypee from making any audio or visual image of the event; likewise there are restrictions in clause 19 of the RPC. Clause 23.2 permits FOWC to make incidental use of I.P. rights solely for the limited purpose of facilitating Jaypee to promote the event. Under the RPC Jaypee remains liable to pay the full contractual amount in the year of termination and in the subsequent year, the right to use trademarks, logos and IP Rights ceases instantly, the moment termination takes place. This is a strong pointer to the fact that the amounts payable by Jaypee to FOWC under the RPC are really for the privilege of hosting and staging the championship race and not for the IP rights, which in any event, could be utilized by it only to promote the race and for no other purpose. 70. Clauses 23.3 and 23.4 of the RPC are to be read in conjunction with the ALA. The ALA does not confer any additional rights, neither was a license nor any form of right to use the trademark given t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of "royalties" set out in Article 13(3) of the India-UK DTAA. The definition in the Act specifically covers and includes lump-sum payments, whereas Article 13(3) of the DTAA only refers to payments. 72. The impugned order neither contains any discussion nor finding whatsoever on this crucial issue even though it goes to the root of the entire case. The entire tenor of the agreement- even the main purpose of the RPC, is not for the grant of trademark rights or privilege or license to use. The payments made to it under the RPC are not "royalty" either under the Act or the DTAA, they most certainly are not for the use of trademarks or IP rights, but rather for the grant of the privilege of staging, hosting and promoting the Event at the promoter's racing circuit in Noida(NCR). FOWC under the RPC, made available to Jaypee all of the elements which constitute the event. In particular, this includes nominating (to FIA) the promoter's event for inclusion in the official F1 racing calendar; after such inclusion the F1 racing teams with their F1 cars and drivers were bound to participate in Jaypee's event held at the Promoter's racing circuit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of royalty under Section 9(1)(vi) read with explanation 2 or in the nature of fee for technical services under Section 9(1)(vii) read with explanation 2 or taxable under Article 12 of the DTAA. The payments received were thus, rightly held by the Tribunal, to be in the nature of business income. And since the assessee admittedly does not have a permanent establishment under the Article 7 of the DTAA "business income' received by the assessee cannot be brought to tax in India. The findings of the Tribunal on this account cannot be faulted. The Tribunal pointedly observed that there was no evidence brought on record by the Revenue to enable them to hold that the agreement was a colourable device, in particular, that the payments received were for use of trade mark, brand name and stylized mark "S". We agree with reasoning adopted by the Tribunal.' There is no doubt that the main object of the RPC and the relevant provisions of the ALA was not the permission to use the trademarks, but granting and designating Jaypee as the promoter of the event and laying out the rights of the parties, particularly FOWC as regards the event, the spaces to be made available to it excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. Explanation.- For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called" Interest Payable Account" or" Suspense Account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities, and salary) to a non- resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application 1 to the 2 Assessing] Officer to determine, 3 by general or special order], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub- section (1) only on that proportion of the sum which is so chargeable: ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other words, according to the Department, section 195 (2) is a provision by which the payer is required to inform the Department of the remittances he makes to non-residents by which the Department is able to keep track of the remittances being made to nonresidents outside India. We find no merit in these contentions. As stated hereinabove, section 195 (2) uses the expression "sum chargeable under the provisions of the Act." We need to give weightage to those words. Further, section 195 uses the word "payer" and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The abovementioned contention of the Department is based on an apprehension which is ill-founded. The payer is also an assessee under the ordinary provisions of the Income-tax Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income- tax Act for the said sum as an "expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case [1999] 239 ITR 587 (SC) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented "income chargeable to tax in India", then it was necessary for him to make an application under section 195 (2) of the Act to the Income-tax Officer (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the Income-tax Officer (TDS) to compute the amount which was liable to be deducted at source. In our view, section 195 (2) is based on the "principle of proportionality". The said subsection gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of "income" char ..... X X X X Extracts X X X X X X X X Extracts X X X X
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