FORMULA ONE WORLD CHAMPIONSHIP LTD. v. COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION - 3, DELHI & ANR.

The Judgment of the Court was delivered by A. K. SIKRI, J. INTRODUCTION c I. These appeals are filed by Formula One World Championship Limited (hereinafter referred to as 'FOWC'), Jaypee Sports International Limited (for short, 'Jaypee') and Union oflndia (hereinafter referred to as the 'Revenue'). In all these appeals, challenge is laid to the judgment dated November 30, 2016 passed by the High Court of Defhi whereby D three writ petitions preferred by FOWC, Jaypee and Revenue have been decided.

2Copy pinpoint2. The matter originated from filing of applications by FOWC and Jaypee before the Authority for Advance Ruling (AA]l). FOWC had entered into a 'Race Promotion Con tract' (RPC) dated September E 13, 2011 with Jaypee, grantingJaypee the right to host, stage and promote the Formula One Grand Prix oflndia event for a consideration of US$ 40 million. Some other agreements were also entered into between FOWC and Jaypee as well as group companies ofFOWC and Jaypee, particulars whereby would be mentioned later at an appropriate stage. In the applications filed by FOWC and Jaypee before theAAR, advance ruling F of AAR was solicited on two main questions/queries: (i) whether the payment of consideration receivable by FOWC in terms of the said RPC from Jaypee was or was not royalty as defined in Article 13 of the 'Double Taxation Avoidance Agreement '(DTAA) entered into between the Government G of United-kingdom and the Republic oflndia?; and (ii) whether FOWC was having any 'Permanent Establishment' (PE) in India in terms of Article 5 ofDTAA? Ano.ther related question was also raised, viz., H

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(iii) whether any part of the consideration received or receivable A by FOWC from Jaypee outside India was subject to tax at source under Section 195 of the Indian Income Tax Act, 1961 (hereinafter after referred to as the 'Act').

3Copy pinpoint3. AAR answered the first question holding that the consideration paid or payable by Jaypee to FOWC amounted to 'Royalty' under the B DTAA. Second question was answered in favour of FOWC holding that it did 11ot have any PE in India. As far as the question of subjecting the payments to tax at source under Section 195 of the Act is concerned, AAR ruled that since the amount received/receivable by FOWC was income in the nature of Royalty and it was liable tQ pay tax there on to the Income Tax Department in India, it was incumbent upon Jaypee to c deduct the tax at source on the payments made to FOWC. FOWC and Jaypee challenged the ruling on the first issue by filing writ petitions in t.he High Court contending that the payment would not constitute Royalty under Article 13 of the DTAA. Revenue also filed the writ petition challenging ·the answer of the AAR on the second issue by taking the D stand that FOWC had PE in India in terms of Article 5 of the DTAA and, therefore, tax was payable accordingly.

4Copy pinpoint4. As mentioned above, all these three writ petitions have been decided by the High Court vide common judgment dated November 30,

2016. Interestingly, the High Court has reversed the findings of the AAR E on both the issues. Whereas it has held that the amount paid/payable under RPC by Jaypee to FOWC would not be treated as Royalty, as per the High Court FOWC had the PE in lndia and, therefore, taxable in India. While deciding this question, the High Court has not accepted the plea of the Revenue that it was not a dependent PE. The High Court has also held, as the sequitur, that Jaypee is bound to make appropriate deductions from the amount payable to FOWC under Section 195 of the Act. It is for this reason all the three parties are again before us.

5Copy pinpoint5. As per FOWC and Jaypee, no tax is payable in India on the consideration paid under RPC as it is neither Royalty nor FOWC has any PE in India. It is pertinent to mention that the Revenue has not challenged the findings of the High Court that the amount paid under RPC does not constitute royalty. Therefore, that aspect of the matter has attained finality. The main question in the appeals, therefore, pertains to PE. H

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A FACTUAL MATRIX

6Copy pinpoint6. In order to decide this question, following facts, having bearing on the matter, need a recapitulation:

7Copy pinpoint7. Federation Internationale de I' Automobile (for short, 'FIA'), a non-profit association, is established as the Associatio11 lnter11atio11ale B des Automobile Clubs Reconnus to represent the interests of motoring organizations and motor car users globally. FIA, as the federation of the world's leading motoring organizations and the governing body for motorsports worldwide, consists of2 l 3 national member organizations in 125 countries internationally. FIA is the principal body for establishing c the rules and regulations for all major international four-wheel moton;port events. FIA is a regulatory body; it regulates the FIA Formula One World Championship ('Championship') which has been the premier form of motor racing since its inception in 1950. This Championship is established and run every year subsequently since. The Championship is an annual series of motor races, conducted in the name and style of the Grand Prix over a three day duration at purpose-bui It circuits, and in some cases, across public roads, in different countries around the world. The Championship is considered the most prestigious motor sport series in the world. 'Formula One' (F-1) refers to the rules and regulations that define the characteristics of the race, as opposed to any other form of motor race. Thus, 'the formula', is with reference to a set of rules that all participants' cars must conform to. F-1 seasons consist of a series of races, known as Grand Prix (from French, meaning grand prizes), held across the world on specially designed and built F-1 circuits across 26 different locales. ·

8Copy pinpoint8. F-1 Grand Prix events are held under the aegis of the FIA Formula One World Championship's competition-in which F-1 racing cars, assembled and manufactured strictly in terms of the F-1 technical regulations, compete against each other, under Fl Sporting Regulations and the F-1 International Sporting Code framed and made effective by the FIA. F-1 drivers across the world have the ability, competence and G skill to drive an F-1 car and participate in F-1 racing events. About 12 to 15 teams typically compete in these Championship in any one annual racing season. Some celebrated and well-known participating teams are the Ferrari, McLaren, Red Bull etc. The teams assemble and construct their vehicles, which comply with defined technical H

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specifications, and engage drivers who can successfully manoeuvre the A F-1 cars in the racing events.

9Copy pinpoint9. FOWC is incorporated under the laws of the United Kingdom, and is a tax resident of the United Kingdom. It is the Commercial Rights Holder (CRH) in respect of the Championship with effect from January 0 I, 20 I I. FOWC has entered into an agreement with the FIA and B Formula One Asset Management Limited ('FOAM'). Under these agreements, FOAM licensed all commercial rights in the FIA Formula One World Championship (hereinafter referred to as 'Fl Championship') to FOWC for JOO year term effective from January 01, 2011. As mentioned above, the teams which participate in FI World Championship Competitions have to strictly comply with the terms and conditions set c out for such competitions as per Sporting Regulations and Sporting Code. For this purpose, all these 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 F-1 event included in the official annual F-1 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 F-1 racing teams exclusively participate in about 19 to 21 listed F-1 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. Thus, on the one hand, participating teams enter into Concorde Agreement. Likewise, promoters are also chosen for holding these F-1 racing events. Every F-1 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. Commercial Right Holder, which is in effect, FOWC) to the FIA for inclusion in the official F-1 racing calendar. In other words, FOWC is the exclusive nominating body at whose instance tlie event promoter is permitted participation. G The points scored by each F-1 racing team in every event is listed in the· official racing calendar and it counts towards the Constructor's Championship and the Driver's Championship for the racing season as a whole. Any team's position in these Championships at the end of the season determines, together with certain 'other factors which are H

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A elaborately dealt with in the Concorde Agreements (which in the present instance, was latest in the series of Concorde Agreements the last being the one of 2009 i.e. August 05, 2009), the prize money payable to the teams for their participation during the season. Grant of a right to host, stage and promote the F-1 racing event, therefore, carries with it a covenant or representation that F-1 racing teams with their cars, drivers B and other auxiliary and supporting staff will participate in the motor racing event hosted at the promoter's motor racing circuit displaying the highest levels of technical skill achievement etc. in the fields of construction of single seat motorcars to attain the highest levels of performance in the world. These teams and the FOWC also represent that the highest c levels of skill in racing management and maintenance of the cars would be on display in the event. All these are a part of the relevant contractual provisions, embodied in RPC 2011. In this manner, FOWC has acquired all commercial rights in respect of the F-1 Championship wherever such tournaments take place, i.e. with the permission of FOWC.

10Copy pinpoint10. Jaypee was interested to acquire this right for hosting, staging and promoting the F-1 Grand Prix oflndia event. In order to do so, it entered into agreement with FOWC dated September 13, 2011 which is known as 'Race Promotion Contract' (RPC). By this agreement, FOWC granted Jaypee the right to host, stage and promote F-1 Grand Prix of India event for a consideration of US$ 40 millions. Another E agreement known as 'Anwork License Agreement' ('ALA') was entered into between FOWC and Jaypee on the same day whereby FOWC permitted Jaypee to use certain marks and intellectual property belonging to FOWC for a consideration of US$ I million. Prior to this RPC of 2011, another RPC of October 25, 2007 had been entered into between FOA and Jaypee which was replaced by agreement dated September 13, 2011 between FOWC and Jaypee. Pursuant thereto, races were held in India in 201l,2012 and 2013.

11Copy pinpoint11. After entering into the aforesaid arrangement for hosting F-1 Grand Prix in India, both FOWC and Jaypee approached AAR seeking its advance ruling on the two questions, the nature of which, including the opinion of AAR thereupon, is already mentioned above.

12Copy pinpoint12. As pointed out earlier, first question was as to whether considerations received/receivable under the RPC by FOWC from Jaypee Sports was in the nature of business income and 'Royalty' as defined under the Act as well as DTAA. Plea of FOWC and Jaypee "as that H

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what was granted to Jaypee by FOWC was a commercial right to use the event, i.e., a hosting right and the consideration received/receivable therefrom by FOWC was not for the use of trademark, copyright, equipment etc. and hence was not in the nature of 'Royalty'. It was also stated by them that there was a limited permitted use of Formula One ('F-1 ')Mark which was only to enable the promoter (Jaypee) to advertise the Indian Grand Prix and reproduction of names of the sports events was routine and customary in business parlance. For this purpose, ALA was executed to enable Jaypee to use F-1 Marks in a limited way and to prevent it from using the Marks for any commercial exploitation. Revenue had opposed the aforesaid plea of FOWC and Jaypee on the ground that the consideration comprised not only of hosting rights c but also permission to use F-1 Marks and, therefore, entire consideration of US$ 40 million was attributable to the usage off-I Marks in terms of ALA. According to the Revenue, RPC and ALA had to be read together for a comprehensive view of the matter, particularly, whey they were executed on the same day. D The AAR accepted the argument of the Revenue holding that the consideration received by FOWC amounted to royalty and was to be, accordingly, taxed under the Indian Income Act. However, this view is reversed by the High Court by the impugned judgment after detailed discussion on this issue and in the opinion of the High Court the E consideration received under the Agreement cannot be termed as royalty. As mentioned above, Revenue has accepted the judgment of the High Court on this issue and, therefore, it is not necessary to discuss in detail the reasons given by the High Court for coming to the aforesaid conclusion. This fact is mentioned only for the sake of completeness of the issues raised and their outcome . F

. 13. The bone of contention before this Court pertains to the issue of existence of a PE ofFOWC in India. We may say at the outset that the arguments advanced by both the parties before us were virtually the same arguments which were advanced before the High Court as well. Therefore, spelling out the submissions of the parties before the High G Court may not be necessary as it would be duplicating and repetitive. At this stage, we would, therefore, record the arguments which were presented before us and in the process mention the basis of the conclusion arrived at by the High Court for the purpose of forming an opinion as to whether the view of the High Court is correct and justified in law. H

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A RELEVANT STATUTORY PROVISIONS & DTAA REGIME

14Copy pinpoint14. Before adverting to the question at hand, it would be appropriate to take note of the scheme of the Act as well as relevant provisions of DTAA on this subject. The Act provides two modes of taxation, namely, resident based and source based. Any person who is a resident oflndia B is subjected to the Act and liable to pay income tax on the 'total income' earned by such a resident, after getting various deductions therefrom as admissible under different provisions of the Act. Charging section is Section 4 which, inter a!ia, stipulates that income tax shall be charged for any Assessment Year in respect of total income of the previous year of every of such person. Section 5 contains the scope of total income c ofa resident and includes all income from whatever source derived by a. person who is resident which is received or deemed to be received in India, accrues or arises or is deemed to accrue or arise to him in India or accrues or arises to him outside India during such year. Thus, a resident is supposed to pay income tax on all incomes so earned whether in India· D or outside India. On the other hand, those persons who are not ordinarily residents of India (which term is defined under sub-section (6) of Section 6) are not liable to pay income tax on any income which accrues or arises to such non-resident outside India. However, in the case of non-resident persons, if the income is derived from a business controlled in or a profess;on set up in India, these non-residents are subjected to pay tax for such an income earned in India. In their case, all such incomes from whatever source derived which is received or is deemed to be received in India in such a year by or on behalf of such person or accrues or arises or is deemed to accrue or arise to them in India during that year, is taxable in India. In this sense, the income tax on non-resident is source based, i.e., source of such income is India and, therefore, even a non- resident is liable to pay tax on incomes earned in India. 'Resident in India' and 'Not-ordi11urily Resident in India' are covered by the provisions contai11cd in Section 6.

15Copy pinpoint15. In the present case, we are concerned with the consideration received by FOWC as a result of Agreement signed with Jaypee Sports. FOWC, being a UK Company, is admittedly the non-resident in India. Since the question is whether the aforesaid consideration/income earned by FOWC is subject to tax in India or not, it is to be decided as to whether that income accrued or arose in India. For this purpose, relevant H

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· provision is Section 9 of the Act. This section contains varied situations where income is deemed to accrue or arise in India and it is not necessary to spell out each of such contingencies. Insofar as income by way of royalty earned by a non-resident is concerned, that is mentioiied in clause (vi) of Section 9(1) of the Act. As the consideration of US$ 40 million received by FOWC from Jaypee is held as 'no income by way of royalty', we may conveniently skip that provision.

16Copy pinpoint16. Clause (i) of sub-section (I }of Section 9 of the Act mentions certain kinds of income which are deemed to accrue or arise in India. This clause is reproduced below: "(i) all income accruing or arising, whether directly or indirectly, c through or from any business connectioR in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India:"

17Copy pinpoint17. It is clear from the reading of the said clause that it includes D all those incomes, whether directly or indirectly, which are accruing or arising through or from any business connection in India. It is, thus, clear that an income which is earned directly or indirectly, i.e. even indirectly, is to be deemed to accrue or earned in India. Further, such an income should have some business connection in India. Explanation(\) for the purpose of this clause provides five explanations from clauses (a) to (e). E Clause (a) stipulates that where all the business operations are not carried in India and only some such operations of business are carried in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried in India. We are not concerned with clauses (b) F to (e). Explanati011 (2) provides certain exceptions in respect of 'business connection ' and reads as un~er: "Explanation 2. - Forthe removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non- G resident, - (a) has and habitually exercises in India, an authority to conclude contracts on behalfofthe non-resident, unless his activities are limited to the purchase of gods or merchandise for the non-resident; or H

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A (b) ha~ no such authority, but habitually maintains in India a stock of gods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the B non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission c agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business: Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a D non-resident (hereafter in th is proviso refer;ed to as the principal non-resident) or on behalf of such non-resident and other non- residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status."

18Copy pinpoint18. This exception, thus, clarifies and declares that even when business activity is carried 'tllrougll' a person who is acting on behalf of the non-resident (which means agent of the non-resident), it will be treated that the non-resident is having business connection in India. The meaning of the expression 'through' is again clarified in Explanation ( 4), which reads as under: "Explanation 4. - For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", G "in consequence of' or "by reason of'."

19Copy pinpoint19. If a non-resident has a PE in India, then business connection in India stands established. Section 92F of the Act contains definitions of certain terms, though those definitions have relevance for the purposes of computation of arms length price, etc. Clause (3) thereof defines H

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'enterprise' and such an enterprise includes a PE of a person. PE is A defined in clause (iiia) in the following manner: "(iiia) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;"

20Copy pinpoint20. At th is juncture, we would also like to point out that Article 5 B of DTAA between India and United Kingdom lays· down as to what would constitute a PE. It reads as under: "ARTICLE 5 PERMANENT ESTABLISHMENT c I. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term "permanent establishment" shall include especially: D (a) a place of management; (b) a branch; (c) an office; (d) a factory; E (e) a workshop; (I) premises used as a sales outlet or for receiving or soliciting orders; (g) a warehouse in relation to a person providing store facilities for others; F (h) a mine, an oil or gas well, quarry on other place of extraction of natural resources; (i) an installation or structure used for the exploration or exploitation of natural resources; G (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale or ma~hinety. or equipment, H

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A continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment; (k) the furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for B technical services), within a Contracting State by an enterprise through erpployees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or c (ii) services are performed within that State for an enterprise within the meaning of paragraph 1 of Article 10 (Associated enterprises) and continue for a period or periods aggregating more than 30 days within any twelve-month period; Provided that for the purposes of this paragraph an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment ifit provides services or facilities in connection with, or supplies plant and machinery on hire used or to be used in, the prospecting for, or extraction or production of mineral oils in that State.

3. The term "permanent establishment" shall not be deemed to include: (a) the use of facilities solely for the purpose of storage or display of gods or merchandise belonging to the enterprise; F (b) the maintenance of a stock of goods or merchandise belonging to the enterprise. solely for the purpose of storage or display; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of G processing by another enterprise; (d) the maintenance ofa fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise;

H ( e) the maintenance of a fixed place of business solely for the :;

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purpose of advertising, for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade of business of the enterprise. However, this provision shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State for any purpose or purposes other than the purposes specified in this paragraph; (f) the maintenance of a fixed place of businesses solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of the paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. c

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: D

(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 gods or merchandise for the enterprise; or E (b) he habitually maintains in the first-mentioned Contracting State a stock of gods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, F wholly or almost wholly for the enterprise itself or for the enterprise and the enterprises controlling, controlled by, or subject to the same common control, as that enterprise.

5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State G merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, ifthe activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled H

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A by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph.

6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident B of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

7. For the purposes of this Article the term "control", in relation c to a company, means the ability to exercise control over the company's affairs by means of the direct or indirect holding of the greater part of the issued share capital or voting power in the company."

21Copy pinpoint21. As per sub-clause (I) of Article 5, a fixed place of business through which the business of an enterprise is wholly or partly carried on, is known as 'permanent establishment'. It requires that there has to be a fixed place of business. It also requires that from such a place business of an enterprise (FOWC in the instant case) is carried on, whether wholly or partly. Sub-clause (2) gives the illustrations of certain places which will be treated as PEs. Likewise, sub-clause (3) excludes certain kinds of places from the term PE. Sub-clause (4) enumerates the circumstances under which a person is to be treated as acting on behalf of non-resident enterprise. Likewise, sub-clause (5) excludes certain kinds of agents of enterprise, namely, broker, general commission agent or agent ofan independent status, by clarifying that ifthe business is carried on through these persons, the enterprise shall not be deemed to be a PE. However, one exception thereto is carved out, namely, ifthe activities of such an agent are carried out wholly or almost wholly for . the enterprise, or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control, then, such an agent will be treated as an agent of an independent status. It means that if the business is carried out with such a kind of agent, the enterprise will be deemed to have a PE in India. THE LEGAL COMMENTARIES AND CASE LAW

22Copy pinpoint22. It is an undisputed fact that Article 5 ofDTAA between India and the United Kingdom follows the Organisation for Economic H

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Cooperation and Development's (OECD) Model of Double Taxation A Convention. There are various commentaries on Double Taxation Conventions. Celebrated among those are: "A Manual on the OECD Model Tax Conve/1/ion on Income and on Capital" by Philip Baker Q.C., and Klaus Vogel on "Double Taxation Conventions". OECD has also given its 'condensed version ' on "Model Tax Convention on B Income. and on Capital". What constitutes PE under various circumstances has also been the subject matter of judicial verdicts in India as well as in other countries. For better understanding of what may constitute a PE, it would be imperative to refer to these commentaries and judicial decisions. This discussion would disclose the principles enunciated to determine the existence of a PE, application whereof to c the given facts would facilitate in answering the surging debate.

23Copy pinpoint23. Philip Baker explains that the concept of PE is important for several Articles of the Conventions; the concept, or its cognate, also appears in the domestic law of some countries. According to him, the concept marks the dividing line for businesses between merely trading D with a country and trading in that country; if an enterprise has a PE, its presence in a country is sufficiently substantial that it is trading in the country. He has quoted the following passage from the judgment of the Andhra Pradesh High Court, authored by Justice (Retd.) Jagannadha Rao (as His Lordship's then was, later Judge of this Court) in Commissioner of Income Tax, A.P.-I v. Vtsaklwpatnam Port Trust': E

"The words 'permanent establishment' postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country."

24Copy pinpoint24. Emphasising that as a creature of international tax law, the concept of PE has a particularly strong claim to a uniform international meaning, Philip Baker discerns two types of PEs contemplated under Article 5 ofOECD Model. First, an establishment which is part of the same enterprise under common ownership and control - an office, branch, etc., to which he gives his own description as an 'associated permanel1/ establishment'. The second type is an agent, though legally separate from the enterprise, nevertheless who is dependent on the enterprise to 1 (1983) 144 ITR 146 H

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A the point of forming a PE. Such PE is given the nomenclature of 'unassociated permanent establishment' by Baker. He, however, pointed out that there is a possibility of a third type of PE, i.e. a construction or installation site may be regarded as PE under certain circumstances. In the first type of PE, i.e. associaied permanent establishments, primary requirement is that there must be a fixed place B of business through which the business of an enterprise is wholly or partly carried on. It entails two requirements which need to be fulfilled: (a) there must be a business of an enterprise of a Contracting State (FOWC in the instant case); and (b) PE must be a fixed place of business, i.e. a place which is at the disposal of the enterprise. It is universally c accepted that for ascertaining whether there is a fixed place or not, PE must have three c_haracteristics: stability, productivity and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on.

25Copy pinpoint25. Some of the examples of fixed place of business given by . Baker are the following: The place of business must be fixed and pennanent. Thus, a shed which had been rented for thirteen years for storing and preparing hides was held to constitute a PE'. Similarly, a writer's study has been held to constitute a PE'. A stand at a trade fair, occupied regularly for three weeks a year, through which the enterprise obtained contracts for a significant part of its annual sales, has also been held to constitute a PE". A temporary restaurant operated in a mirror tent at a Dutch flower show for a period of seven months was held to constitute a PP. An office, workshop and storeroom for the maintenance of aircraft, which were leased out by the enterprise, has been held to constitute a PE'.

26Copy pinpoint26. On the other hand, possession of a mailing address in a state - without an office, telephone listing or bank account - has been held not to constitute a PE'. The mere supply of skilled labour to work 'Transvaal Associated Hide & Skin Merchants (Ply) ltd. ( 1967) 29 S.A.T.C. 97 (Court G of Appeal, Botswana). 7 Georges Simenon ( 1965) 44 T.C. (US) 820 (US Tax Court)

•Joseph Fowler v. M.N.R. ( 1990) 90 D.T.C. 1834: ( 1990) 2 C.T.C. 2351 (Tax Court of Canada) 7 Antwerp Court of Appeal, decision ofFebruary 6, 200 I, noted in 200 I WTD 106-11 'Income Tax Appeals Nos. 759/KB to 761/KB of 1997-98 (Tarom SA). ( 1998) PTD (Trib.) 3749 (Income-tax Appellate Tribunal. Pakistan) 7 H Consolidated Premium Iron Ores Ltd ( 1959) 265 F 2d. 320

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in a country did not give rise to a PE of the company supplying the A labour'. A drilling rig which, although anchored while in operation, was moved to a new site every few months, has been held not to constitute a PE'. Similarly, a remotely operated vessel which was used to inspect and repair submarine pipelines was held not to constitute a PE because a moving vessel is not a fixed place of business"- B

27Copy pinpoint27. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be '"11/te dispos"l' of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a c place to' the enterprise for the purposes of the project would not suffice. The place would be treated as 'at tlte di>pasa/' of the enterprise when the enterprise has right to use the said place and has control thereupon.

28Copy pinpoint28. Some of the illustrative cases decided by courts of different jurisdictions given by Baker in his commentary are contained in the following passages from that book: (i) In the Canadian case of William Dudney v. R", the taxpayer was a resident of the United States who was contracted to supply training to employees of a Canadian company. For the purposes of the training contract, the taxpayer was given various offices at the premises of the Canadian company, which he was only allowed to enter at normal office hours. He was allowed to use the client's telephone only on client's business. He spent 300 days in one tax year and 40 in the subsequent year at the premises. F The Tax Court of Canada and the Federal Court of Appeal confirmed that he had no fixed base - which was treated as having the same meaning as PE - at the premises since he had no right to use the premises as the base for the operation of his own business. G 'Tekniskil (Sendirian) Bhd. v. Commissi01wr of Income Tax, (1996) 222 l.T.R. 551 (Authority for Advance Rulings, India) 9 Lower Tax Court oftheBaguc. September 10, 1990, noted in ( 1991) Tax Notes Intl. 161 10 Deputy Co1nmissioner of lncon1e Tax v: Subsea Offshore ltd. ( 1998) 66 I.T.D. 296 (Income Ta' Appellate Tribunal. Mumbai). noted in 17 Tax Notes Intl. 1795 II (1999) 99 DTC 147 H

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A (ii) In a case generally referred to as Hotel Manager", the Bundesfinanzhof held that a UK hotel management company had a PE in Germany when it entered into a 20 year contract with a limited partnership which owned a hotel. The agreement required the UK company to supply a general manager: the general manager's office constituted B the PE (and not the entire hotel) since the UK company had a secured right to use this office for the purposes of the agreement. (iii) A Swiss company was held not to have a PE when it contracted with a German company to produce salad c dressings in the name of and in accordance ~ith the recipe of the Swiss company. No employees of the Swiss company were present at the production facility to supervise production". The Bundestinanzhof has also held that a scene painter who was commissioned to carry out a work D in France for six weeks, and given special rooms for the purpose, did not have a fixed base at those premises. (iv) The Administrative Court of Appeal of Paris has held that a German travel agency did not have a PE in France". A travel agency in Paris had made an office available to the E German company from time to time, and the manager of the German company had a flat in Paris; the Court held that the German company had no PE at its disposal in France. (v) The Brussels Court of Appeal has held that a German F resident engaged in the transportation of vehicles had a PE in Belgium". The taxpayer had an office 3m by 6m at his disposal on the premises of his principal supplier in Belgium, together with telephone and telex, where the taxpayer and four of his staff worked.

G "Bundersfinanzhof. February 3, 1993, IR 80-81/91. IStR 1993, p. 226, ( 1993) BStBI., II, 462. 13 Decision of the Lo\\·er Tax Court of Baden~ Wurttemberg. May 11. 1992. decision No. 3K 309/91, RIW 1993, 81, !StR 1992, p. 104 " Decision of November Ip, 1998, ( 199) Revue de Droit Fiscal, No. 25, comm .. 503, reported with translation in (1998) I ITLR 857 H " Cour de Cassation offebruary 15, 1980 ( 1980) JI. De Droit Fiscal 321.

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. 175 CQMMISSIONER OF INCOME TAX [A. K. SIKRI, J.)

29Copy pinpoint29. According to Philip Baker, the aforesaid illustrations confirm A that the fixed place of business need not be owned or leased by the foreign enterprise, provided that is atthe disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises. B

30Copy pinpoint30. Interpreting the OECD Article 5 pertaining to PE, Klaus Vogel has remarked that insofar as the term 'business' is concerned, it is broad, vague and of little relevance for the PE definition. According to him, the crucial element is the term 'place'. Importance of the term 'place' is explained by him in the following manner: c "In conjunction with the attribute 'fixed', the requirement of a place reflects the strong link between the land and the taxing powers of the State. This territorial link serves as the basis not only for the distributive rules which are tied to the existence of PE but also for a considerable number of other distributive rules and, above all, for the assignment of a person to either Contracting D State on the basis of residence (Article 1, read in conjunction . with Article 4 OECD and UN MC)." 3 I. We would alsil"iike to extract below the definition to the expression 'place' by Vogel, which is as under: E "A place is a certain amount of space within the soil or on the soil. This understanding of place as a three-dimensional zone rather than a single point on the earth can be derived from the French Version ('installation fixe') as well as the term 'establishment', As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may quality as a PE only if they are fixed on the soil. This requirement, however, stems from the term 'fixed' rather than the term 'place', given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term 'establishment' makes clear that .it is not the soil as such which is the PE but that the,.PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5(1) OECD MC which uses the term 'installation' instead of 'place', The term 'place' is used to define the term 'establishment'. H

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A Therefore, 'place' includes all tangible assets used for carrying on the busines~, but one such tangible asset can be sufficient. The ~haracterization of such assets under private law as real property r~rthan personal property (in common law countries) or immovable ktherthan movable property (in civil law countries) is not authoritative. It is rather the context (including, above all, B the terms 'fixed'/'fixe'), as well as the object and purpose of Article 5 OECD and UN MC itself, in the light of which the term 'place' needs to be interpreted. This approach, which follows from the general rules on treaty interpretation, gives a certain leeway for including movable property in the understanding of c 'place' and, therefore, the assume a PE once such property has been 'fixed' to the soil. For example, a work bench in a caravan, restaurants on permanently anchored river boats, steady oil rigs, or a transformator or generator on board a former railway wagon qualify as places (and may also be 'fixed'). In contrast, purely intangible property cannot qualify in any case. In particular, rights such a participations in a corporation, claims, bundles of claims (like bank accounts), any other type ofintangible property .(patents, software, trademarks etc.) or intangible economic assets (a regular clientele or the goodwill of an enterprise) do not in themselves constitute a PE. They can only form part of PE .constituted otherwise. Likewise, an internet website (being a combination of software and other electronic data) does not constitute tangible property and, therefore, does not constitute a PE. F Neither does the mere incorporation of a company in a Contracting State in itself constitute a PE of the company in that State. Where a company has its seat, according to its by-laws and/or registration, in State A while the POEM is situated in State B, this company will usually be liable to tax on the basis of its worldwide income in both Contracting States under their G respective domestic tax law. Under the A-B treaty, however, the company will be regarded as a residen_t of.State B only (Article 4(3) OECD and UN MC). In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxable only in State B under the 1" sentence of Article 7( 1) H OECD and UN MC.

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. 17.7 COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]

There is no minimum size of the piece of land. Where the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed forthe physical presence of these individuals is not sufficient (if it were sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent PEs were superfluous). This can be illustrated by the example ofa salesman who regularly visits a major customer to take orders, and conducts meetings in the purchasing director's office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of c the customer, and the office is not at the disposai of the enterprise for which the salesman is working." I

32Copy pinpoint32. Taking cue from the word 'through' in the Article, Vogel has also emphasised that the place of business qualifies only if the place is 'at the disposal' of the enterprise. According to him, the enterprise will D not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent; He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue. According to him, 'disposal' is the power (or a certain fraction thereot) to use the place of business directly. E Some of the instances given by Vogel in this behalf, of relative standards of control, are as under: "The degree of control depends on the type of business activity that the taxpayer carries on. It is therefore not necessary that the taxpayer is able to exclude others from entering or using the F POB. The painter example in the OECD MC Comm. (no. 4.5 OECD MC Comm. on Article 5) (however questionable it might be with regard to the functional integration test) suggests that the type and extent of control need not exceed the level of what' is required G for the specific type of activity which is determined by the concrete business. By contrast, in the case of a self-employed engineer who had free access to his customer's premises to perform the services required by his contract, the·Canadian Federal Court of Appeal H

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A ruled that the engineer had no control because he had access only· during the customer's regular office hours and was not entitled to carry on businesses of his own on the premises. Similarly, a Special Bench of Delhi's Income Tax Appellate Tribunal denied the existence of a PE in the case of Ericsson. B The Tribunal held that it was not sufficient that Ericsson's employees had access to the premises of Indian mobile phone providers to deliver the hardware, software and know-how required for operating a network. By contrast, in the case of a competing enterprise, the Bench did assume an Indian PE because the employees of that enterprise (unlike Ericsson's) had c exercised other businesses of their employer. The OECD view can hardly be reconciled with the two court cases. All three examples do indeed shed some light onto the method how the relative standards for the control threshold should be designed. While the OECD MC Comm. suggests that it is sufficient to require not more than the type and extent of control necessary for the specific business activity which the taxpayer wants to exercise in the source State, the Canadian and Indian decisions.advocate for stricter standards for the control threshold. The OECD MC shows a paramount tendency (though no strict rule) that PEs should be treated like subsidiaries (cf. Article 24(3) OECD and UN MC), and that facilities of a subsidiary would rarely been unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more cqnvincing. F Along these lines, a POB will usually exist only where the taxpayer is free to use the POB: - at any time of his own choice; for work relating to more than one customer; and for his internal administrative and bureaucratic work. In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are, and the more they allow a parallel use of the same POB by

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. 179 COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.)

other persons, the lower are the requirements under the control test. There are, however, a number of traditional PEs which by their nature require an exclusive use of the POB by only one taxpayer and/or his personnel. A small workshop (cf. Article 5(2)(e) OECD and UN MC) of 10 or 12 square meters can hardly be used by more than one person. The same holds true for a room where the taxpayer runs a noisy machine."

33Copy pinpoint33. OECD commentary on Model Tax Convention mentions that a general definition of the term 'PE' brings out its essential characteristics, i.e. a distinct ""situs", a 'fixed place of business", This definition, therefore, contains the following conditions: c the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment. this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence; D the carrying on of the business of the enterprise through this fixed place ofbusiness. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. E

34Copy pinpoint34. The term ''place of business" is explained as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. It is clarified that a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further, it is immaterial whether the premises, facilities or installations are owned or . rented by or are otherwise at the disposal of the enterprise. A certain amount of space atthe disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. Thus, where an enterprise illegally occupies a certain location where it carries on its business, that would also constitute a PE. _Some of the examples where premises are treated at the disposal of the enterprise and, therefore, constitute PE are: a place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the H

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A storage of dutiable goods). Again the place of 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 the other enterprise. At the same time, it is also clarified that the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the B disposal of that en.terprise.

35Copy pinpoint35. The OECD commentary gives as many as four examples where location will not be treated at the disposal of the enterprise. These are: (a) The first example is that ofa salesman who regularly visits a c major customer t.o take orders and meets the purchasing director in his office to do so. In that case, the customer's premises are not at the disposal of tqe enterprise for which the salesman is working and therefore do not c.<mstitute a fixed place of business through which the business of that enterprise is carried on (depending on the circumstances, however, paragraph 5 could apply to deem a permarent establishment to exist). (b) Second example is that of an employee of a company who, for a long period of time, is allowed to use an office in the headquarters of another company (e.g. a newly acquired subsidiary) in order to ensure that the latter company complies with its obligations under contracts concluded with the former company. In that case, the employee is carrying on activities related to the business of the former company and the office that is at his disposal at the headquarters ofthe other company will constitute a permanent establishment of his employer, provided that the office is at his disposal for a sufficiently long period of time so as to constitute a "fixed place of business" (see paragraphs 6 to 6.3) and that the activities that are performed there go beyond .the activities referred to· in paragraph 4 of the Article. ' G (c) The third example is that ofa road transportation enterprise which would use a delivery dock at a customer's warehouse every day for a number of years for the purpose of delivering goods purchased by that customer. In that case, the presence of the road tran~portation enterprise at the delivery dock H would be so limited that that enterprise could not consider

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. 181 COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.] ·

that place as being at its disposal so as to constitute a A permanent establishment of that enterprise. (d) Fourth example is that of a painter, who, for two years, spends three days a week in the large office building of its main client. In that case, the presence of the painter in that office building where he is performing the most important functions B of his business (i.e. painting) constitute a permanent establishment of that painter.

36Copy pinpoint36. It also states that the words 'through which' must be given a . wide meaning so as to apply to any situation where business activities are carried on at a particular location which is at the disposal of the c enterprise for that purpose. For this reason, an enterprise engaged in paving a road win be considered to be carrying on its business 'through' the location where this activity takes place; THE AGREEMENTS

37Copy pinpoint37. Having got a fair idea of what would constitute a PE, we may advert to the discussion in that part of the impugned judgment where the High Court has given its reasons to conclude that FOWC had a PE in India in the relevant Assessment Year. However, before that, it would be necessary to refer to the salient provisions of the relevant agreements between the parties, not only between FOWC and Jaypee, but some agreements which were entered into by the group companies ofFOWC with Jaypee.

38Copy pinpoint38. We have already mentioned above that there is an Agreement between FIA and FOAM which is dated April 24, 2001 whereby FIA has parted with the commercial rights in favour of FOAM making FOAM F exclusive CRH. Thereafter, vide the aforesaid agreement FOAM transferred the commercial rights in favour ofFOWC with effect from 2011 for a period of 10 years. Insofar as Concorde Agreement which is signed between FIA, FOWC and team·s is concerned, that is of the year 2009. G

39Copy pinpoint39. It is relevant to mention that before RPC dated September 13, 2011 was entered into between FOWC and Jaypee, one Organisation Agreement (OA) dated January 20, 2011 was signed between FIA/ FM SCI and Jaypee. As per this agreement, Jaypee was to organise the event. Thereafter, another agreement known as 'Title Sponsorship Agreement' dated August 16, 2011 was signed between Beta Prema 2 H

182 SUPREME COURT REPORTS [2017] 2 S.C.R.

A (an associated company of FOWC) and Bharti Airtel, as per which Beta Prema 2 transferred title sponsorship rights to Bharti Airtel for US$ 8 million in respect of the race which was conducted on October 29, 2011. It is thereafter that RPC dated September 13, 2011 was signed by FOWC and Jaypee. That was one month before the scheduled date of race, which was fixed as October 29, 2011. Under this agreement, right to B host, stage and promote the event was given to Jaypee by FOWC. As per the Revenue, FOWC carried on business in India through a fixed place of business, namely, the Buddh International Circuit. Salient features of this Agreement, which is the most vital document, are as follows: "WHEREAS c (A) The Federation Internationale de I' Automobile (FIA) is the governing body of world motor sport. The FIA is responsible for the sporting organization and regulation of the FIA Formula One World Championship (the Championship), and has the right to supervise the sporting organization of individual rounds of the D Championship (B) Pursuant to various agreements between the FIA, POWC and its Affiliates (as defined in Clause l(p) etc. FOWC has the exclusive right to exploit the commercial rights in the Championship, including the exclusive right to propose the E Champion~hip calendar and to award, to promoters the right to host, stage and promote Formula One Grand Prix events that · count towards the Championship, exclusive media rights (including all use of audio-visual material and data in the media space). F (C) FOWC has the exclusive right to enter into contracts solely for the hosting, standing and promotion of Formula One Grand Prix events entered on the FIA International Sporting Calendar and counting towards the Championship, it being understood that such a contract will govern exclusively the commercial and G· financial management of the Event (as defined in Clause 3.1 (xx not legible)). (D) The Promoter is the owner of a motor racing circuit in the National Capital Region of India which is capable of hosting various motor racing events. The Promoter wishes to host various motor racing events at such circuit, to include the hosting of H

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. 183 COMMISSIONER OF INCOME TAX [A. K. SIKR!, J.]

Formula One Grand Prix events. The Promoter had secured the A privilege to host such events and is no executing this agreement with FOWCto set out the terms and conditions on which it will host; stage and promote Formula One Grand Prix events at such circuit. xxxxxxxxxxxxxxxxxx B Definitions 11ml lnterpret11tion · I. In this Agreement unless the context requires otherwise: xxxxxxxxxxxxxxxxxx ·(q) Circuit shall mean a motor racing' circuit suitable in eve!)' c respect for the staging of the Event (including permanent buildings, permanent infrastructure, track layout, amenities, spectator viewing facilities, the pit/paddock, building, media centre, car parks, helipads, garages, race control and administration, office administration, fuel and tyre storage, utilities D (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); xxxxxxxxxxxxxxxxxx E (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 F 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 xxxxxxxxxxxxxxxxxx G

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 H

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A shall use its best endeavour to satisfy the Conditions in accordance with this Clause 2. xxxxxxxxxxxxxxxxxx Term B 3.I This Agreement shall commence and become operative when it is signed by the parties and dated. 3.2 Subject to Clause 2 the rights granted to the Promoter under this Agreement shall be exercisable from the Unconditional Date. Accordingly, the initial term ofthisAgreement (the Initial Term) c shall begin on the Unconditional Date and shall expire on 31 December 2015 and shall apply to the Championship for the calendar years 2011 to 2015 (inclusive). 3.3 On or before 30 June 2015, FOWC shall in its absolute discretion be entitled to give notice to the Promoter which, if given, shall be effective to extend the Term for a further period of up to five calendar years (the Extended Term). The terms of this Agreement shall apply to the Extended Term save for this· Clause 3.3. 3.4 The term of this Agreement as prescribed in this Clause 3 shall be referred to as the Term and shall include the initial Term E and (if applicable) the Extended Term. 3.5 Subject to the performance by FOWC of its obligations contained in Clause 4, the Promoter agrees to host, stage and promote the Event as the FORMULA 1 GRAND PRIX OF INDIA or [Year] GRAND PRIX OF INDIA in accordance with F this Agreement once in every calendar year of the Term commencing 2011 at the Circuit on the date approved and announced by the FIA on and subject to the terms of the Regulations and the Sporting Code. FOWC's Obligations and Warranties G xxxxxxxxxxxxxxxxxx Promoter's Warranties (e) On the area of land, the outer perimeter of which is edged in red, depicted on the document attached to this Agreement as the H Annex and initialed by the Parties for identification, the Circuit

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. , 185 COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]

shall be constructed, laid out and prepared in accordance with A this Agreement, in a form and manner approved by both FOWC and the FIA, meeting all requirements of the Regulations (including as to timing of inspections) and completed in good. time for final inspection by the FIA not later than 12 October 2011; , B xXXXXXXXXXXXXXXXXX Access to Circuit Prior to Event

11. The Promoter shall take whatever action is necessary to ensure that the pit and paddock buildings and surrounding areas within Circuit and the Land are open to receive the competitors, c FOWC,Affiliates ofFOWC, FOWC's contractors and licensees and their respective personnel and equipment (ifany) at all times during the period commencing fourteen days before the day 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. D xxxxxx xxxxxx xxxxxx Compelitor/Media Facilities

13. l The Promoter will in so far as the same is practicable provide an entrance for the Competitor personnel and for Officials E 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 ofa round of the FIA Formula One World Championship at that Circuit and 140 metres by I 00 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 ofa World Championship) and to grant professional accredited journalists use of all facilities for the exercise of their profession as well as the organization of a Press Conference with the winner of the Race immediately after the Podium Ceremony. H

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A 13.4 Upon the arrival of the Formula One cars and their spares and ancillary equipment at nearest suitable International airport (as such is determined by FOWC) (the Landing) the Promoter will transport them free of charge from the Landing to the Circuit and from the Circuit back to the Landing. The Promoter shall procure that transportation from the Circuit to the Landing shall B take place on the day following the Race. All ancillary costs including airport taxes customs clearance handling, loading and unloading both at the Landing and at the Circuit shall be paid by the Promoter. The Parties agree to liaise with each other throughout the Term with a view to discussing and implementing c all reasonable measures which may reduce such ancillary cots. 13 .5 The Promoter undertakes to provide all such o_ther facilities as specified in the Circuit General Specifica.tions Manual. Access to Restricted Areas

D 14. The Promoter undertakes to ensure that: (a) only Passes and tabards issued by FOWC under the authorization of the FIA will authorize access to parts of the Circuit not open to the paying public; (b) notwithstanding Clause 14(a) above, the public do not have E access to the cars in any of the places where any Competitor's mechanics may be called upon to work on them and without prejudice to the generality of the foregoing there is at no time any obstruction to the free passage of the cars and Competitor personnel in the paddock or pit area; F (c) the validity ofany Passes and ta bards issued by FOWC under the authorization of the FIA is upheld; and (d) the necessary steps are taken to ensure that all police and Circuit officials are familiar with the Passes and tabards and uphold their validity. G Insurance 15.1 The Promoter shall provide at its expense third party liability insurance (in a fom1 approved by FOWC and the FIA insuring FOWC and all its Affiliates, Beta Prema 2 Limited and all its Affiliates, the Competitors, Drivers and guests of any of the H

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. 187 COMMISSIONER OF INCOME TAX (A. K. SIKRI, J.]

above mentioned parties (such parties to include where relevant all directors, officers, employees, agents and contractors) and such other persons involved in the organization of the Event (including officials, marshals, rescue and medical staff) as the FIA or FOWC may from time to time advise the Promoter (the Insured Parties) against all risks (including death ofor 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 c 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. xxxxxxxxxxxxxxxxxx Filmin1:/Recordin1: at tlle Event 18.1 Save with the prior written consent of the FOWC and save forthe Promoter's obligation i!! Clause.18.3, throughout the Term F during the Access Period (and any test session held at the Circuit in which more than one Competitor is participating (Non-Private FI Test Series) the Promoter shall not (nor shall the Promoter permit, enable, assist, procure or encourage others to) make, create, store, record or G transmit an kind of sound recording or visual or audio-visual footage (Recording) whatsoever, whether for broadcast or any other purpose. (a) of at or pertaining to the Event (including cars, Drivers, H

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A Competitors), any Non-Private Fl Test Session or any aspect of them; or (b) within the confines of the Circuit or the Land (or any other part of its surroundings over which the Promoter has control). 18.2 Without prejudice to the generality of Clause 18.1, the B Promoter shall ensure that the terms of sale of tickets giving . admittance to an Event include acceptance by a ticket holder: (a) that he shall not make, create, store, record or transmit any Recording of the Event (including cars, Drivers, Competitors) or any aspect of it, and shall not take into the Circuit any equipment c that may enable him to do the aforementioned acts (other than mobile telephones use of which is subject to this Clause 18 and Clause 19. I below); (b) that as a spectator he may be filmed and sound made by him may be recorded for broadcast (or similar transmission); and D (c) of such other terms and conditions as FOWC(acting reasonably) may request the Promoter to include from time to time provided that the Promoter is notified in due time and that such terms and conditions are compatible with applicable local laws. E 18.3 The Promoter shall engage a third party (the Identity of which shall be approved by FOWC in its sole discretion) to carry out and perform on behalf of the Promoter all services relating to the origination of the international television feed and host broadcasting for each Event during the Term as are specified in F guidelines published annually by FOWC and provided to the Promoter from time to time. Intellectual Property xxxxxxxxxxxx xxxxxx G 19.2 The Promoter hereby irrevocably and unconditionally:- (a) assigns to FOWC with full title guarantee all copyright and other intellectual property rights and all other rights, 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 H any media whether now known ot hereafter invented or c

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. 189 COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]

developed in, of or pertaining to the Event, any NonPrivate Fl A Test Session or any aspect ofthem (irrespective of who originated the same)for the duration of th-ose rights (including all renewals, extensions, reversions and revivals thereof); and (b) gives its con~ent (if such consent should be required) for FOWC to deal in such rights in any way it may see fit. B 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 c thfoughout 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. D 20.2 The Promoter undertakes to Notify FOWC of the dates of any test sessions which are proposed to be held at the Circuit. Circuit Advertising

21. The Promoter shall not cause, permit, enable, assist, procure E or encourage the display of any advertising (other than the advertising normally displayed on any Competitor's cars, Drivers or personnel) or other displays on, near or which can be seen from the Circuit and/or the Land which might (in the opinion of FOWC which shall be final and binding upon the Parties) Prevent the lawful transmission of Images or Recordings of the Events F or any part of it in any country." JUDGMENT OF THE HIGH COURT

40Copy pinpoint40. Taking note of this agreement, the High Court went ahead to decide the following aspects, which revolved around the question of PE: G (a) Whether FOWC had control over the Buddh International Circuit and that-the circuit could be constituted as a fixed place of business? (b) Whether FOWC carried on business? IF so, they did carry on business and commercial activity in India. H

190 SUPREME COURT REPORTS [2017) 2 S.C.R.

A (c) Whether FOWC carried on business through its agents unde.r Article 5(4) or i\rticle 5(5) of the DTAA?

41Copy pinpoint41. Answering the first question, the High Court discerned that for the duration of the event as well as two weeks prior to it and a week succeeding it. FOWC had full access through its personnel, the team B contracted to it, both racing as well as spectator teams to the said Buddh International Circuit. It could also dictate who was authorised to enter the areas reserved for it. As per the High Court, though Jaypee was designated as the promoter or the host of the event in terms of RPC, when the matter was to be examined in a correct perspective by seeking through the other terms contained in the agreement as well as terms of c agreements between JP and Allsports, Beta Prema 2 as well as FOA, it was clear that Jaypee's capacity to act was extremely restricted. At all material times, FOWC had exclusive access to the circuit and all the places where the teams were located. The High Court was also conscious of the fact that such an access or right to access was not permanent in the sense of its being everlasting. However, having regard to the model of commercial transactions, such an access for a period up to six weeks ata time during the F-1 Championship season was sufficient for the purposes of Article 5( I) of DTAA. Further, as the tenure ofRPC was five years, it meant that such an access for the period in question was of repetitive nature. Moreover, FOWC was entitled to two years payment of the assured consideration of US$ 40 million in the event of termination of RPC.

42Copy pinpoint42. While discussing the second question. the High Court took note of agreement between FIA and FOWC under which FOWC became CRH. It also pointed out that the Concorde Agreement assured the participating teams that the FIA had exclusive rights in the F-1 Championship and was entitled to the grant of CRH, the exclusive right to exploit the commercial rights in the F-1 Championship. Subject to these conditions, each team undertook to participate in the FIA F-1 · Championship each year for several events and make cars available. Jn fact, every team undertook to participate in each event with two cars. G Taking note of the aforesaid arrangement and other clauses of these agreements, the High Court concluded that FOWC carried on business in India within the meaning of expression under Article 5(1) of the DTAA.

43Copy pinpoint43. The High Court was conscious of the fact that after its finding to the effect that FOWC had PE in India, the issue as to whether FOWC H carried on business through its agents or not, became academic.

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. 191 COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]

Notwithstanding the same, it chose to discuss that issue as well so that A . the judgment had the coverage of all the questions that had arisen before it. This aspect has been discussed in the light of sub-articles (4) and (5) of Article 5 of DTAA. It is pertinent to mention that argument of the Revenue was that since FOWC had to exploit commercial rights arising from races and this business is carried on through exploitation of these B commercial rights either by itself or through anyone or more members of CRH group, as mentioned in the ConordeAgreement, FOWC is obi iged to propose consolidated accounts incorporating profits of all entities forming part of CRH group. The Revenue had relied on the Events right from the time when commercial rights were originally owned by FIA and thereafter transferred to SLEC Holding Company (parent company c of FOWC) for a consideration, then given to FOAM and with effect from January 01, 2011 transferred to FOWC. It was also pointed out that FOWC's three affiliates, i.e. Formula One Management Ltd. · ('FOM'), Allsports Management SA and Beta Prema 2 Ltd. were its agents who carried on its business and on its behalf, through the fixed D place. AAR had rejected this submission of the Revenue holding that the theory of Revenue that all the three entities were acting on behalf of FOWC was unfounded as there was no evidence to this effect and all arrangements and agreements in relation to activ,ities performed by three entities were sham. The High Court approved the aforesaid approach E ofAAR in the following manner: "64. 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, 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 ofFOWC, 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 ofFOWC. Each of the three agreements independently entered into by them with Jaypee contains no pointers to this fact." H

192 SUPREME COURT REPORTS [20 I 7] 2 S.C.R.

A THE ARGUMENTS

44Copy pinpoint44. Mr. Ganesh, opened the case of FOWC, whereafter Mis. Arvind P. Datar and Dushant Dave, learned senior advocates, made their submissions on behalf of Jaypee. Mr. Mukul Rohatgi, learned Attorney General for India, argued on behalf of the Revenue and B countered those submissions. He also argued the appeal of Union of India insofar as it challenges the findings of the High Court interpreting Article 5(4) and (5) and holding that the other companies of FOWC group did not act as agents of FOWC in India. Mis. S. Ganesh and Arvind P. Datar made their submissions in rejoinder and also refuted the arguments of Mr. Mukul Rohatgi advanced in the appeal of Union of c India, to which Mr. Rohatgi made his submissions in rejoinder.

45Copy pinpoint45. After referring to the important dates and events, Article 5 of DTAA and the commentaries of OECD, Philip Baker and Klaus Vogel thereon, salient features whereof have already been reproduced by us, emphasis in the submission of Mr. Ganesh was that in order to constitute D a PE, condition which was necessary to satisfy was that the particular 'fixed place· is 'at the disposal' of FOWC and further that from the said 'fixed place 'FOWC was doing its business activity. Submission of Mr. Ganesh was that both the ingredients were missing in the instant case. For this purpose, he referred to the agreement of2009 which was entered into between FIA and Jaypee and pointed out that FOWC was not party to the said agreement and contended that this agreement clearly evinced that it is the FIA which had control over the manner in which the Championship was to be conducted. This agreement fu1ther reflected that it is Jaypee who was responsible for conducting races and had complete control of the Event in question. All obligations for conduct of the Championship were to be discharged by Jaypee as organisers. For this purpose, he referred to the counter affidavit filed by Jaypee in SLP(Civil) No. 3112 of2017 wherein the role of Jaypee in organising these Events is stated. From there, it was pointed out that the track was constructed by Jaypee; for this purpose they had their own engineers, architects etc.; entire expenditure for this purpose was borne by Jaypee. It was also stated that this circuit was owned by Jaypee and contr-01 thereon was that of Jaypee on which not only Championship in question was organised, but Jaypee was utilising this track for many other events which are organised on regular basis, all year round.

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. 193 COMMISSIONER OF INCOME TAX [A. K. SIKRI, J.]

46Copy pinpoint46. Mr. Ganesh also drew the attention of this Court to A Organisation Agreement dated January 20, 2011 signed between FIA, Jaypee and Federation of Motors Sports Clubs oflndia wherein Jaypee is described as the 'Organiser' and given the responsibility to organise the Event. It specifically delineates various responsibilities of Jaypee as organisers which have already been taken note of above. In nutshell, he B submitted that right from construction/laying down the contract for the motor races people till the conclusion of the Events/Championship, all acts and obligations were to be performed by Jaypee, with no role of. FOWC therein. According to him, in contrast, it could be seen from the Agreement dated September 13, 2011 between FOWC and Jaypee that FOWC had simply given permission to host the Event as a round of the c Championship, since it is the FOWC, who has the exclusive right to exploit the commercial rights in the Championship, including exclusive right to propose the Championship calendar. Condition precedent from entering into this Agreement, as mentioned in theAgreement itself, was that Jaypee (as promoter) had entered into a valid and binding agreement D with such third party in accordance with Clause 18.3 (Service Agreement). Referring to the clause pertaining to obligations and warranties of FOWC, Mr. Ganesh submitted that the role of FOWC was primarily that of advising, assisting and consulting with the promoter in relation to the Event in such manner as FOWC shall consider necessary and/or appropriate forthe staging and promotion of the Event E to the mutual benefit of the parties. On the other hand, Jaypee was given exclusive right to act as the promoter of the Event, to construct the circuit which was to be laid out and prepared in accordance with that agreement in a form and manner approved both by FOWC and FIA. Thus, construction was to be carried out by Jaypee; albeit, in the form and the manner approved by FOWC and FIA to ensure that the track meets all requirements of the Regulations. Otherwise, all those rights which were necessary for the purposes of hosting and staging the Event at the circuit were that of Jaypee exclusively.

47Copy pinpoint47. On the basis of the aforesaid documents and clauses and terms therein, Mr. Ganesh submitted that the circuit was not under the control or at the disposal of FOWC. As regards 4500 seats in paddock space given'to FOWC in that circuit is concerned, explanation of Mr. Ganesh was that it is Allsports which was in-charge of paddock and the same was taken from Allsports by FOWC in the year 2006 and, therefore, it would not make any difference. · H

194 SUPREME COURT REPORTS (2017] 2 S.C.R.

48Copy pinpoint48. His further submission was that no business was conducted by the FOWC from the said site as well. According to him, since FOWC was commercial rights holder of these events, main business ofFOWC was to exploit these rights. including intellectual property rights. According to him, the exploitation of these commercial rights yields two revenue streams-first, the consideration received from the Promoter/Organizer B of the Event, to whom FOWC has granted the necessary right to host, stage and promote the Event; secondly, FOWC exploits the TV feed in respect of the Event, which is made available to it by the Promoter/ Organiser, at his cost. FOWC grants screening, exhibition, telecasting and media rights arising out of and relating to this TV feed to a number c of parties around the world, by entering into contracts with them at London. It is for this reason that insofar as holding of the Event is concerned, FOWC was not responsible therefor and for this reason it was necessary for Jaypee as promoter to enter into a valid and binding agreement with a third party (FIA in the present case). He also pointed out that insofar as sale of advertisement rights during the Event is concerned that was also to be given to Beta Prema 2 Ltd. which was again an independent company and taken over by FOWC in the year 2006.

49Copy pinpoint49. Mr. Ganesh, extensively referred.to the findings of AAR on this issue wherein the case of FOWC and Jaypee on this aspect was accepted by AAR and pleaded that the aforesaid findings be accepted and restored by this Court. Referring to the judgment of the High Court, his submission was that the Organisation Agreement entered into between FIA and Jaypee was not even discuss.ed and the conclusions given in paragraphs 52 and 53 of the said judgment were erroneous. He also . F relied upon certain observations of this Court in Union ofIndia & Anr. Vs. Azadi BacliaoAndo/an &Anr.1' in respect of his submission that transactions could not be treated as sham.

50Copy pinpoint50. Mr. Datar, learned senior counsel appearing for Jaypee, supplemented the aforesaid submissions of Mr. Ganesh on the issue of G the PE. He argued that the judgment of the High Court was flawed in its approach as it had gone by inductive logic instead of deductive logic. According to him, the first question which has to be focused upon was as to what is the business of FOWC. His submission was that since in this case business ofFOWC was not to organise these races, the question

H "' 2004 (IO) sec I ~ 2003 (262) ITR 706

FORMULA ONE WORLD CHAMPIONSHIP LTD. v. 195 COMMISSIONER OF INCOME TAX [A. K. SIKRJ, J.]