Formula One liable to taxation for the business conducted though it’s permanent establishment i.e. Buddh International Circuit

Supreme Court: Holding that Formula One World Championship Limited (FOWC) is liable to taxation for organising the Formula One Grand Prix of India event for a consideration of US$ 40 million, the Court said that FOWC has a ‘permanent establishment’ (PE) in India i.e. a fixed place of business in the form of physical location, i.e. Buddh International Circuit, through which it conducted business.

The Court noticed that not only the Buddh 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.

The Court also rejected the arguments of the appellants that it is Jaypee who was responsible for conducting races and had complete control over the Event in question and held that FOWC is the Commercial Right Holder (CRH). Explaining further, the Court said that these rights can be exploited with the conduct of F-1 Championship, which is organised in various countries. 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 well. The Court noticed that it is FOWC and its affiliates which have been responsible for all the aforesaid activities, hence, mere construction of the track by Jaypee at its expense will be of no consequence.

The Bench of Dr. A.K. Sikri and Ashok Bhushan, JJ said that a PE must have three characteristics: stability, productivity and dependence and all characteristics are present in this case. Hence, aesthetics of law and taxation jurisprudence leave no doubt 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.

However, accepting the argument that the 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 Income Tax Act, 1961, the Court said that 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. [Formula One World Championship Ltd v. Commissioner of Income Tax, 2017 SCC OnLine SC 474, decided on 24.04.2017]

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