SC upholds HC view that tax may be levied on F1 event

Says FOWC has permanent establishment for business in India and income accruing from it is taxable

In a big win for the income tax department, the Supreme Court has held that the Formula One World Championship (FOWC) in motor racing is liable to be taxed in India for the F1 Grand Prix Championship.

The apex court has upheld the view of the high court (HC) here, that FOWC has a permanent establishment (PE) in India. In this case, the Buddh International Circuit constituted this, on account of the assessee's continued presence for two weeks prior and one week after the race. Hence, the payment to FOWC from the Jaiprakash Associates group is liable to be taxed in India, as business income.

This is, say tax experts, the first time that a car race circuit has been held to be the PE of an assessee. A PE is defined as a fixed place of business which generally gives rise to income or value-added tax liability in a particular jurisdiction.

The assessing officer will now determine the income attributable to India. The business income, according to tax department officials, will be a few hundred crore rupees, to be taxed at 40 per cent; interest will also be imposed.  “It will be a landmark ruling. We are hoping a law regarding fixed place of PE will be laid down with this ruling,” said the special counsel for the tax department. Details of the ruling are yet to be made public.

The dispute first went to Authority for Advance Ruling (AAR), where the matter was decided on the basis of the classic principle on PE. It was held that the assessee had no fixed place of business in India, was not doing any business activity in India, had not authorised any entity to conclude a contract on its behalf and, hence, had no PE.

The Delhi HC had in November reversed the AAR ruling. It decided that as long as the presence of a taxpayer was in a physically-defined area, permanence in such a place could be relative in the context of the nature of the business. 

“The taxpayer carried on business in India for the duration of the race, two weeks before it and a week after the race. Consequently, the Formula One championship circuit constitutes a fixed place of business under Article 5(1) of the India-UK tax treaty," went its verdict.

Also, it said, payment made by the Jaypee group to FOWC was business income and not royalty, as the logos used during the championship were not for intellectual property purposes but for hosting the event. 

“This (SC) ruling has dealt with the most litigated subject of tax, PE, which has evolved over time to be much more than the fixed structure of brick 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,” said Rakesh Nangia, managing partner, Nangia and Co.

Permanent circuit 

• Assessing officer to determine income attributable to India

• Business income expected to be a few hundred crore rupees

• Tax to be levied at 40%; interest too will be imposed

• Experts say landmark ruling may make way for rules on permanent establishment

• Payment made by Jaypee group is business income and not royalty, says court