Concept of Permanent establishment (‘PE’) is an important subject for any company operating or planning to operate in another country, in order to determine whether the company’s activities in a country are taxable in that country. Determining whether a company has triggered a PE is seldom clear cut, since it is highly facts driven. The laws and enforcement practices of the target or host country, applicable tax treaties and the company’s unique situation plays a pertinent role in this determination. PE laws are evolving at a faster pace than ever before, more so owing to the ever changing modalities of business operations. Seemingly, cases where companies are deemed to not have a PE despite substantial business activity, has become a key priority for revenue authorities to look deeper. PE is the new weapon of choice for tax authorities while attacking the multinationals and holding them accountable for perceived tax avoidance through profit shifting. Even those multinationals that comply with the tax laws of every jurisdiction in which they operate, are subjected to the widespread perception that they are not paying their “fair share” of taxes. Owing to this perception, cases where foreign payments are involved, tax authorities tend to look through the layers of all the arrangements in place amongst various parties involved, in order ascertain the entity that has control over the income generating activity in India.
Recently, the Apex Court of India has held that Formula One World Championship Ltd. (“the Assessee or FOWC”) has a fixed place PE in India by virtue of the Buddh International Circuit, and hence payments made by Jaypee Sports to the Assessee constitutes Assessee’s business income, liable to tax in India. In this case the Assessee was granted license to all commercial rights in the FIA Formula One World Championship for 100- year term and the Assessee further entered into a “Race Promotion Contract” (RPC) granting Jaypee Sports the right to host, stage and promote the Formula One Grand Prix of India. The Assessee contended that since the duration of the event was only 3 days, the total duration for which limited access was granted to it was not sufficient to constitute the degree of permanence necessary to establish a fixed place PE. The Assessee also contended that it was Jaypee who was responsible for conducting races and had complete control over the event.
While adjudicating on who had the actual control on the income generating activity in India i.e. the race, a pertinent observation was made that various agreements cannot be looked into by isolating them from each other and their wholesome reading was necessary to bring out the real transaction between the parties, essentially to find out as to who is having real and dominant control over the Event. On perusal of various arrangements in place it was observed that FOWC acquired all commercial rights in championship by way of an agreement with FIA according to which said rights could not be transferred to any party outside Formula One group and on the same day when the Assessee entered into RPC with Jaypee, another agreement was signed between Jaypee and three affiliates of FOWC whereby Jaypee gave back circuit rights, mainly media and title sponsorship, to Beta Prema 2 and paddock rights to Allsports.
A race cannot happen without the participating/ competing teams, a circuit and a paddock which were controlled by FOWC & its affiliates and since the commercial rights were with FOWC which were exploited with actual conduct of race in India and active participation of FOWC in the said races, with access and control over the circuit, practically FOWC conducted the Event i.e. the income generating event in India.
As far as the continued presence of the Assessee is concerned, a stark remark has been made that “Omnipresence of FOWC and its stamp over the event is loud, clear and firm”. In this landmark ruling the Apex Court has dealt with the most litigated subject of tax – PE, which has evolved over time to be much more than the fixed structure of bricks and mortar from where the business of the Assessee is conducted. In this case, for the first time in the history of tax litigation, a car race circuit has been held to be the fixed place PE of the Assessee. The times have changed and so has the historic principles guiding constitution or otherwise of PE.
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