CASE LAW

2016-TII-62-HC-DEL-INTL

FORMULA ONE WORLD CHAMPIONSHIP LTD Vs CIT: DELHI HIGH COURT (Dated: November 30, 2016)

Income tax - Writ - Sections 9 & 195 - India-UK DTAA - Articles 5(1) & 13.

Keywords - commercial right - fixed place PE - oral arrangement - permitted use - PE - transfer of trademark & TDS.

The assessee, a tax resident of UK, and a license holder of all commercial rights in Federation Internationale I' Automobile (FIA), entered into a Race Promotion Contract (RPC), whereby the right to host, stage and promote the Formula One Grand Prix of India event was granted to Jaypee Sports, for a consideration of USD 40 millions. In addition, an Artworks License Agreement (ALA) was also entered into between FOWC and Jaypee, permitting the use of certain marks and intellectual property belonging to FOWC for a consideration of USD 1. When FOWC and Jaypee approached the Authority for Advance Ruling seeking that the entire consideration receivable under the RPC was in nature of business income, and FOWC had no business connection in India, The AAR concluded that:

(i) The payments made by Jaypee for use of trade mark called Formula One Grand Prix of India in the event hosted by them was in the nature of royalty. The AAR observed that, 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 Trade Marks Act; (ii) As far as the question of existence of FOWC as PE in India, is concerned, the AAR concluded that that FOWC had no fixed place of business, is not doing any business activity in India and has not authorized any organization or entity to conclude contracts on their behalf and therefore has no PE in India.

On appeal, the HC held that,

Whether an exclusive circuit access to a pre-determined long duration event, in the presence of a physically defined geographical area, constitutes a fixed place of business - YES: HC

+ although the FOWC's access or right to access was not permanent, however, it cannot be ignored that the model of commercial transactions FOWC chose is such that its exclusive circuit access to the team and its personnel was for up-to six weeks at a time during the F1 Championship season. 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, makes the presence of a kind contemplated under Article 5(1), i.e. it is fixed. 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' payment of the assured consideration of US$ 40 million. Therefore, 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;

Whether when a non-resident entity in pursuence of the license granted to it, expolits its exclusive commercial right to host an event during a fixed period in India, then a presumption can be drawn that such entity has 'carried on business in India' within the meaning of Article 5(1) of the DTAA - YES: HC

+ FOWC is exclusive commercial rights holder of a host of rights and none else has the right to include a venue in any FIA annual calendar. Accordingly, FOWC is 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 also charged annually from Jaypee, a sum in relation to the race event or FIA F1 Championship event conducted on the circuit in India. Therefore, when FOWC is incharge of each and every event during such period, it can be concluded that the FOWC carried on business in India for the duration of the race. Consequently, the FOWC carried on business in India within the meaning of expression under Article 5(1) of the DTAA;

Whether the payment made to a foreign collaborator for rendering AMP services, would amount to royalty, in case rendering of such services includes only an incidental use of the trademark of the payer - NO: HC

+ It is clear that 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. It is also evidenced 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. Further, the ALA does not confer any additional rights, neither was a license nor any form of right to use the trademark given to Jaypee by FOWC which resulted in royalty payment within the meaning of Article 13 of the DTAA. The payments made under the RPC were also separate lump-sum amounts in respect of the three separate race events held in each of the three years from 2011 to 2013. Therefore, when the entire purpose of the agreement was not for the grant of trademark rights or privileges, but rather for the grant of the privilege of staging, hosting and promoting the Event at the promoter's racing circuit in Noida, then the payment made for such activity would not constitute royalty u/s 9 of I-T Act or Article 13 of the DTAA, and they better be construed as business income;

Whether the payments received by the PE of the foreign collaborater in India, would attract the provisions of Section 195 - YES: HC

+ When it is already made clear that FOWC has carried on business in India through a PE at the circuit, and the payments made to FOWC were business income, it cannot be doubted that such payments are accordingly chargeable to tax at the rates applicable in India.

Assessee's writ partly allowed