Delhi H.C : The entire consideration received/ receivable under the RPC was in nature of business income and not ‘royalty’ as defined both under the Act and the DTAA

High Court Of Delhi

Formula One World Championship Ltd. vs. CIT, International Taxation-3

Section : 9, 195

S. Ravindra Bhat And Najmi Waziri, JJ.

W.P.(C) Nos. 9509, 10307 & 10145 Of 2016

C.M. Appl. Nos. 38021, 40169, 40563, 40564, 41063, 41235 & 41236 Of 2016

November 30, 2016


S. Ravindra Bhat, J. – This judgment would dispose of three writ petitions: WP 9509/2016 (preferred by the Commissioner of Income Tax, hereafter “the revenue’s petition”; WP 10145/2016 (preferred by Jaypee Sports International Limited, hereafter called “Jaypee”) and WP 10307/2016 (Formula One World Championship Limited (FOWC) hereafter called “the F1 Championship Ltd” petition). Both Jaypee and FOWC had filed applications before the Authority for Advance Ruling (“AAR”). The AAR held one question in favour of the revenue and the other question in favour of the said two companies. All three parties have, thus approached this court, under Article 226 of the Constitution.

2. A brief background of the facts is necessary. FOWC is a UK tax resident company incorporated on 7 March 2001. Consequent to agreements entered into between the Federation Internationale de I’ Automobile (“FIA” an international motor sports events regulating association), Formula One Asset Management Limited (‘FOAM’) and FOWC, FOAM licensed all commercial rights in the FIA Formula One World Championship (Championship’) to FOWC for 100-year term effective from 1 January 2011. FOWC entered into a “Race Promotion Contract” (‘RPC’) dated 13 September 2011, by which it granted to Jaypee Sports the right (‘Right’) to host, stage and promote the Formula One Grand Prix of India event for a consideration of USD 40 millions. An Artworks License Agreement (ALA) contemplated in RPC was also entered into between FOWC and Jaypee the same day, i.e. 13.09.2011, permitting the use of certain marks and intellectual property belonging to FOWC for a consideration of USD 1. The RPC of 2011 was preceded by another RPC of 25-10-2007; FOWC and Jaypee signed it.

3. FIA is a regulatory body; it regulates the FIA Formula One World Championship which has been the premier form of motor racing since its inception in 1950. The formula, so called is with reference to a set of rules that all participants’ cars must conform to. F1 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 F1 circuits across 26 different locales.

4. F1 Grand Prix events are held under the aegis of the FIA F1World championship’s competition -in which F1 racing cars, assembled and manufactured strictly in terms of the F1 Technical regulations, compete against each other, under F1 Sporting Regulations and the F1 International Sporting Code framed and made effective by the FIA. F1 drivers across the world have the ability, competence and skill to drive an F1 car and participate in F1 racing events. About 12 to 15 teams typically compete in these championships in any one annual racing season. Some celebrated and well-known participants are the Ferrari, McLain, Red Bull teams etc. The teams assemble and construct their vehicles, which comply with defined technical specifications and engage drivers who can successfully maneuver the F1 cars in the racing events. All 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 F1 event included in the official annual F1 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 F1 racing teams exclusively participate in about 19 to 21 listed F1 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.

5. Every F1 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 Contract Right Holder, which is in effect, FOWC), to the FIA for inclusion in the official F1 racing calendar. In other words FOWC is the exclusive nominating body at whose instance the event promoter is permitted participation. The points scored by each F1 racing team in every event is listed in the official racing calendar and it counts towards the Constructors 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 elaborately dealt with in the Concorde agreement,(which in the present instance, was latest in the series of Concorde agreements the last being the one of 2009) the prize money payable to the teams for their participation during the season. Grant of a right to host, stage and promote the F1 racing event therefore carries with it a covenant or representation that F1 racing teams with their cars, drivers 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 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.

6. FOWC and Jaypee both approached the AAR as did other entities such as Beta Prema 2 (BP2); All Sports Management (Allsport); and Formula One Management (FOM) with other applications. This judgment is not concerned with the applications that sought advance ruling filed by other entities; the fate of those is apparently pending consideration. The queries made for consideration and decision by the authority by FOWC and Jaypee were firstly whether the payment of consideration receivable by FOWC outside India in terms of RPC from Jaypee was or was not royalty as defined in Article 13 of the Avoidance of Double taxation agreement entered into between the Government of UK and the Republic of India (“the DTAA”) and secondly whether FOWC was justified in its position that it did not have a permanent establishment (PE) in India in terms of Article 5 of the DTAA. A subsidiary question was whether any part of the consideration received or receivable from Jaypee by FOWC outside India was subject to tax at source under section 195 of the Indian income tax Act.

7. The submissions of FOWC and Jaypee on the question of amounts received by the former were that the entire consideration received/ receivable under the RPC was in nature of business income and not ‘royalty’ as defined both under the Act and the DTAA because what was granted to Jaypee was a commercial right (i.e. hosting right) and the consideration received/ receivable by FOWC was not for use of trademark, copyright, equipment, etc and hence, was not in the nature of ‘royalty’. It was contended, in this context that no separate consideration was payable by Jaypee for the limited permitted use of Formula One (‘F1 ‘) Mark which was only to enable the Promoter to advertise the Indian Grand Prix. It was routine and customary in business parlance to reproduce the names (of sports events) in the same manner as they were known to the public at large. As a consequence, the Artwork License Agreement (‘ALA’) was executed solely to enable the Promoter for a limited use of F1 marks and to prevent it from using the marks for any commercial exploitation. Such grant was similar to sale of prepackaged or branded product; the main emphasis is sale of the product, the use of the mark was part of the sale. The applicants relied on Para 10.1 of the OECD commentary on Article 12 of the Model Convention which states that payments for the exclusive distribution rights of a product or a service do not constitute royalties. Furthermore, according to FOWC, the sporting event was known by the name F1 World Championship world over due to its fame and reputation. The applicants – Jaypee and FOWC relied on DIT v. Sheraton International Inc. [2009] 313 ITR 267/178 Taxman 84 (Delhi), of this Court. The court had held that as long as the main object of the agreement did not relate to the use of the trademark, the amount could not be characterized as royalty payment for use of trademark. The applicants also relied on a tribunal decision in Jt. DIT v. Harvard Medical International USA [2011] 48 SOT 623/16 69 (Mum.). Apart from this, it was emphasized that the definition of royalty under the India-UK Tax Treaty is narrower than the definition under the Act. The transactions in question involve payment of a lump sum amount, which does not involve any payment dependent upon the use of the mark. As the consideration received by FOWC was a lump sum amount for granting to Jaypee the right to host, stage and promote the event, it did not qualify as ‘royalty’ under the provisions of the India-UK Tax Treaty. Reliance was placed on this court’s judgement in DIT v. Ericsson A.B. [2012] 343 ITR 470/204 Taxman 192/[2011] 16 371 (Delhi).

8. The revenue had opposed the arguments of the applicants and urged that the principles enunciated in Sheraton International Inc.’s case (supra) were inapplicable because the consideration comprised of both, hosting rights and permitted use of F1 Marks and the entire consideration of US$ 40 million was attributable to the usage of F1 Marks in terms of the ALA. The revenue submitted that the RPC and Artwork License Agreement had to be read together for a comprehensive view of the matter. The applicants deliberately did not make reference to the ALA in question though it was also entered into between the parties on the same day i.e. 13.09.2011.

9. There was no agreement between FOWC and Formula One Licensing B.V., proprietor of the trade marks, for transfer or licensing of such rights in favour of FOWC. The license was given by FOWC to Jaypee for the permitted use, in the territory, of the licensed marks and materials. The licensed marks and materials are defined to include marks stated above. The “permitted use” is defined to mean incidental use of the licensed marks strictly for the purpose of hosting, staging and promoting the event. It was furthermore argued that from a combined reading of Concorde and other agreements what emerged was that Jaypee did not have to make any payment to FOWC for hosting, staging and promoting any motor racing event. The payment became necessary for one and the only reason that the mark of “Formula One World Championship” or “Grand Prix of India” was to be used to make the event a part of the calendar of F1 World Championship. It was also asserted that the marks were not used in a secondary manner, or incidentally, rather, Jaypee used the marks prominently because of their fame and reputation. Licensing of the mark gave Jaypee the right to hold the F1 championship or Grand Prix of India event. This position was also supported by the fact that the promoter’s rights stipulated in the Concorde agreement clearly list out as being (i) right to promote the event. (ii) right to designate the event as Formula One Championship event. Given the relative lack of knowledge of the F1 sporting event, use of the mark became crucial and necessary. The crowds visiting the circuit or watching from home were drawn towards the name F1, which they were familiar with and not the car or circuit specifications that the event associates itself with. The revenue arising from the commercial rights, be it sale of tickets, advertisement rights or broadcasting rights are, therefore, all attributable to the name of the event more than anything else.

10. The revenue also urged that the definition of royalty both under the Indian Income-tax Act as well as the DTAA encompasses within its ambit the use of trademark among other things. It may be noted that there is no qualification to suggest that the use must be incidental, primary, permitted or registered. As regards the issue of its taxability, it was submitted that the subject income is taxable in India under the Act under Section 9(1)(vi)(b) since it was paid by a resident (Jaypee) to a non-resident as a consideration for the utilization of the intellectual property for the purpose of carrying on business in India or for the purpose of earning any income from any source in India. The property here is a trademark of a sporting event. When the sporting event is held and the mark is used to attract people with that mark, it is nothing but the commercial exploitation leading to generation of revenue.

11. The AAR, after hearing the parties and considering the materials on record, concluded that the amounts paid were “royalty” on the basis of the following findings:

“27. The first question in both applications relate to characterization of consideration of USD 40 million received by FOWC in the first year under the terms of RPC from Jaypee, i.e. whether it is in the nature of royalty under Article 13 of India-UK Tax Treaty. Jaypee had constructed a racing circuit in Yamuna Expressway Industrial Development Authority. Jaypee signed the RPC on 13.9.2011 with FOWC and on the same day Jaypee also entered into an Art Work License (ALA) agreement with FOWC. We have reproduced some relevant clauses of RPC and ALA earlier and wherever necessary we will reproduce again the relevant clauses at appropriate place to understand the issue in proper perspective. The RPC mentions that FOWC has the exclusive right to enter into contracts solely for the ‘hosting, staging and promoting’ of ‘Formula One Grand Prix’ events. FOWC has the exclusive right to exploit the commercial right in the championship, including the exclusive right to propose the championship calendars and to award to promoters the right to host, stage and promote Formula One Grand Prix events……… The RPC gives right to Jaypee to host, stage and promote the ‘event’ as per clause 4.1 of RPC. The event has been defined in clause 1(t) of RPC saying that ‘event shall mean the Formula One Grand Prix of India’. RPC itself envisages signing of a separate AlA for incidental use of certain of the marks and intellectual property belonging to FOWC in Clause 23.2.

28. It is relevant to point out that as per ALA, FOWC is providing Jaypee several of its intellectual property like event programme covers, templates for posters, official stationery, media kits etc. and licenced marks including FORMULA ONE GRAND PRIX of INDIA which is the name of event organized (host, stage and promote) by Jaypee.

29. It may be mentioned that the consideration as per RPC is USD $40m and consideration as per ALA is USD $1, though both agreements were signed on the same date and relate to the same event promoted by Jaypee. It is only on the basis of ALA that Jaypee is able to organize the event which is called Formula One Grand Prix of India and is able to use all intellectual properties belonging to FOWC necessarily required to stage, host & promote the event. It is unthinkable that the event called Formula One Grand Prix of India can be organized in the absence of ALA. Use of this mark is sine qua non for organizing this event otherwise the event will not be known as ‘event’ in terms of RPC.

30. The above mentioned facts clearly establish that art work license agreement, though signed separately, is integral to RPC. It was not a standalone agreement. Clause 23.2 of RPC stipulated that Jaypee & FOWC shall enter into art work agreement permitting incidental use of certain of the marks and other intellectual property belonging to FOWC. Insufficiency of consideration in ALC cannot diminish its prime importance and relevance in the context of use of marks and intellectual property of Jaypee. In such a situation the stand of the applicants that the use of the marks permitted by the art works agreement is purely incidental to the RPC as mentioned in clause 23.2 is not a correct description of the facts. The nomenclature in the agreement cannot decide the main purpose of the contract. The settled position of law is that the dominant intention of the parties is to be seen as decided by the apex Court in the case of Sundaram Finance Ltd. v. State of Kerala 1977 13 SCC 17. The Court ruled in para 24 that “The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction whatever may be the form of the documents’. The important point is to ascertain the dominant intention of the parties to RPC and art work license agreement. FOWC has tried to project that the promoter’s intention is to host various sports events, as part of the sports city developed by it and to keep the circuit occupied by hosting various such events and attract people to buy real estate around the sports city. This is completely imaginary and is nowhere reflected in RPC or ALC. We cannot import such imagination in RPC or ALA in order to know the intention of the parties to the agreement. The intention has to come out from the agreement and purpose of the agreement. FOWC has further submitted that the promoter is ‘hosting, staging and promoting the ‘Indian GP’. There is nothing like Indian GP. The only event as per the agreement is Formula One Grade Prix of India. We cannot accept any other name for the event. The use of words ‘Indian GP’ has been done by FOWC only to show that Jaypee’s intention was to host various events. This does not come out from RPC or ALC. The fact remains that Jaypee is staging an event which is called Formula One Grand Prix of India which, in turn is the licensed mark of FOWC as per Art work license agreement. RPC clearly and conclusively show that FOWC granted licence to Jaypee for limited purpose of organizing Formula Grand Prix of India event only and for no other event. Therefore, irrespective of other limitations imposed by clause 23.2 & 23.3 of RPC the licensed mark of Formula One Grand Prix of India and other intellectual property has been actually used by Jaypee. In these circumstances the creation of a separate agreement known as art work license agreement with a nominal and insignificant consideration of US $ 1 is purely artificial. Similarly, the use of words like ‘incidental use’ in these agreements will also not hide the dominant purpose. The definition of royalty in the lndo-UK DTAA covers ‘payments of any kind received as a consideration for the use of ……trade mark’. Section 9(1)(VI) of the Income-tax Act also covers use of trade mark under royalty. Therefore, the payments.made by Jaypee for use of trade mark called Formula One Grand Prix of India in the event hosted by them is in the nature of royalty.”

37. We have given serious thought to the proposition formulated as above. The art work agreement also mentions that Formula One licensing BV, Netherlands, is the owner of trademarks as mentioned in clause 3.3. There is no written agreement between FOWC and Formula One licensing BV for transfer of such rights in favour of FOWC. It is also relevant to point out that there is no written agreement between Jaypee and the proprietor of trademarks i.e. Formula one licencing BV for use of trade marks. These facts were confirmed repeatedly by Shri Pardiwala, the counsel of FOWC during the course of hearing and confirmed by him in the letter dated 19.7.2016. Mr. Datar presumes that because the artwork agreement mentions the words “permitted use” in clause 2.1 and defines “permitted use” as incidental use of the licenced mark solely as part of the artwork and the licenced material in clause 1.1, Jaypee is a permitted user under section 48(2) of the trademarks Act, 1999. We are afraid this is not a correct proposition. The trademarks act defines ‘permitted use’ in section 2(1 )(r), reproduced earlier, and this definition must be read in conjunction with section 48(2). The definition of ‘permitted use’ in this Act of 1999 is different from the definition given in section 2(1)(m) of the 1958 Act. The 1999 Act enlarges the scope of permitted use to commercial use of a mark not only by the registered user, but also by an unregistered licencee who becomes entitled to use the mark by virtue of a written agreement with the registered proprietor. The law makes it clear that such use by a unregistered licencee should comply with the conditions or limitations to which such use is subject to in terms of the agreement, besides conditions or limitations to which the registration of a trademark itself is a subject with JPSIL As a matter of fact, the applicant has submitted that Formula One Licensing BV has only entered into an oral arrangement with FOWC for the transfer of trademark. As per the above provisions, since the user (Jaypee) has not entered into any agreement with the registered proprietor, the condition of ‘permitted use’ is not met and consequently Jaypee cannot be regarded as a permitted user within the meaning of section 2(r)(ii) of the TM Act. The provisions of section 48(2) cannot be invoked in the case of an entity which is not a permitted user within the meaning of that Act. The deeming fiction of section 48 (2) cannot be pressed into service into cases of this nature.

b. The deeming fiction of section 48(2) can also not be extended to the provisions contained in section 9(1)(vi) for the reason that Explanation 5 to section 9(1)(vi) introduced by the Finance Act of 2012 provides that Royalty shall be deemed to arise whether the property is used directly or not. The implication of the Explanation would be that even if the property is deemed to be used by the proprietor and not by the licensee, it can still be regarded as indirect use of the property as the benefits of such use are flowing to the licensee and he has agreed to pay consideration to the licensor in lieu of the ‘indirect’ use of the property. If the interpretation of the applicant is accepted and the deeming fiction under section 48(2) is to be read in all circumstances and for the purposes of all existing laws irrespective of the context and purpose of enactment of this provision in the TM Act, the consequences would be that the use by the licensee would be of no consequence as the licensee, by the legal fiction so provided , would be deemed to have never used it, though in fact he may have actually used it. The definition of royalty under the Income Tax Act specifically includes the ‘granting of a license’ to use the IPR. If the fiction is imported under the IT Act, it would mean that the use by the licensee is the use by the proprietor. Such an interpretation leads to manifestly absurd results. It hits at the very root of the relationship between the licensor and the licensee in the context of IPRs and destroys the very concept of Royalty in this context. Such an interpretation is impermissible.

c. The object of law relating to Trade Marks is to protect the intellectual properties and the rights of the owner/proprietor thereof. Section 48(2) also enacts the deeming fiction to protect such rights and to regulate the relationship between different parties in law The reference to ‘other law’ comes with the same object in the definition is in two parts. The first part is in respect of the use of a trademark by a registered user. The second part is in respect of the use of trademark by a person other than the registered proprietor and registered user by consent of such registered proprietor in a written agreement and complies with any conditions or limitations to which such user is subject and to which the registration of the trademark is subject. It is relevant to point out that the ‘consent’ envisaged in section 2(1)(r) signed is not oral, but by a written agreement. Against this backdrop we may consider the facts of this case. The proprietor of the trademark in this case is Formula One licensing BV which has admittedly not entered into any written agreement with Jaypee. In fact, it has not entered any kind of agreement with Jaypee, not even oral. Even FOWC has not entered into any written agreement with the proprietor and during the course of hearing Mr. Pardiwala confirmed that there is no written agreement in respect of use of trademark between the proprietor and FOWC and/or between the proprietor and Jaypee. Therefore, in terms of provisions of the section Jaypee would not be a permitted user under the trademark Act. In view of this legal position we cannot agree with Mr. Datar that section 48(2) of the Trademark Act will apply only on the basis of artwork agreement where Jaypee has been mentioned as the permitted user. This cannot be accepted because if the benefit of section 48(2) of the Trade Marks Act is to be obtained, Jaypee has to be a permitted user as per the provisions of this Act and admittedly it is not. Once such a conclusion is reached, there is no need to deal with other objections raised by the Department of Revenue i.e., the definition of royalty as given in Explanation 5 to section 9(1)(vi) of the Income Tax Act and the context in which ‘any other law’ came to be used in the Trademarks Act. The fact is that Jaypee is not the permitted user under the law and therefore, it is not entitled to take recourse to provisions relating to permitted user in section 48(2) of the Trademarks Act.”

12. On the second question, i.e whether FOWC had a PE in India under any of the paragraphs of Article 5 of the DTAA, the applicants (FOWC and Jaypee) asserted that no such PE existed because the revenue had to first establish that under Article 5(1) of the India-UK DTAA, FOWC had a fixed place of business in India and that it carried on business in India through such fixed place. FOWC stated that its only place of business is its office in UK and it did not have any fixed place of business or office in India. By granting the right to host, stage and promote the race, to Jaypee it did ‘business with a party that is a resident of India’. It did not undertake any business operations (or part thereof) in India. FOWC stated that its business was limited to a grant outside India of the right to Jaypee and after such grant of right, it could host, stage and promote the F1 event in accordance with the FIA regulations. Arguendo if the limited access at the circuit granted to FOWC by Jaypee amounted a fixed place it would come into existence only at the time when the race is held which is after grant of right by FOWC. In this context, it was argued that a mere provision in the RPC for Jaypee to allow access to FOWC and its affiliates to the circuit prior to and during the F1 event could not make the circuit (which belongs to the Promoter) as a place at the FOWC’S disposal. Added to this was the uncertainty as to the staging of the event on a regular basis, which could not result in bringing into existence, a fixed place PE of FOWC. The permanence test is with respect to both place of business (i.e. permanence of location) and duration (i.e. the business activities must be more than temporary in nature). FOWC also argued that it did not have any agent dependent or otherwise in India engaged in habitually concluding any contracts on its behalf in India. Therefore, Article 5(4) of the DTAA also did not apply. Likewise, the threshold conditions for applicability of Article 5(2)(i) of the DTAA were unmet and, hence, the ‘Service PE’ test too failed.

13. FOWC argued that merely because Jaypee entered into contractual arrangements with FOWC’s affiliates, which were conditions precedent to the RPC, it did not extend the scope of its role nor did it result in its possessing, or operating from a fixed place of business in India. Each affiliate entered into independent commercial arrangements with Jaypee and no rights flowed from FOWC to ‘BP2’ or Allsport either under the FIA-FOAM-FOWC agreements or under the Concorde Agreement in relation to revenues earned by BP2 and Allsport with respect to the Indian GP. Circuit and other rights (which BP2 and Allsport exploited) arose by virtue of the ownership of the circuit, which was that of Jaypee; those rights could be exploited only when granted by it. They were neither Championship rights (emanating from the FIA) nor were they covered by the above-mentioned Agreements. Jaypee’s grant of rights to BP2 and Allsport was a legitimate independent transaction consistent with the legal ownership of those rights. Jaypee and FOWC engaged FOM independently for the production of feed and data and other support services. For these reasons, FOWC urged that activities undertaken by each of the affiliates independently and on their own account and did not constitute its PE. It was also argued that even if they were dependent agents of FOWC their place of business could not be a PE of the principal i.e. FOWC.

14. The revenue argued that for deciding fixed place of business in terms of Article 5 it is adequate if the place is at the disposal of the enterprise to be used in business. He has referred to paragraph 4 of OECD commentary as under:—

“4. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise….Again the place of business may be situated in the business facilities of another enterprise.

4.1 As noted above, the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal/legal right to use that place is therefore required.”

15. It was further argued that a fixed place PE may also be constituted if dependant agents work for and on behalf of the enterprise from the place made available to the enterprise and in such a situation it may not be necessary to examine the PE under para 4 or 5 of Article 5 and to apply more stringent conditions of having authority to conclude contracts. Reference was made to para 10 of OECD commentary; it reads as follows:

‘The business of an enterprise is carried on mainly by the entrepreneur or persons who are in a paid-employment relationship with the enterprise personnel. This personnel includes employees and other persons receiving instructions from the enterprise (e.g. dependent agents). The powers of such personnel in its relationship with third parties are irrelevant. It makes no difference whether or not the dependent agent is authorised to conclude contracts if he works at the fixed place of business (see paragraph 35 below).

“35. Under paragraph 5, only those persons who meet the specific conditions may create a permanent establishment; all other persons are excluded. It should be borne in mind, however, that paragraph 5 simply provides an alternative test of whether an enterprise has a permanent establishment in a State. If it can be shown that the enterprise has a permanent establishment within the meaning of paragraphs 1 and 2 (subject to the provisions of paragraph 4), it is not necessary to show that the person in charge is one who would fall under paragraph 5.”‘

16. With regard to duration of the business reliance on Para 6 of the OECD commentary was placed; it reads as follows:

“A place of business may, however, constitute a permanent establishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time.”

17. According to the revenue, FOWC’s business is to exploit commercial rights arising from races and this business is carried on through exploitation of these commercial rights either by itself or through any one or more members of CRH group as mentioned in the Concorde Agreement to say that FOWC is obligated to propose consolidated accounts incorporating profits of all entities forming part of CRH group. Reference was made to the fact that commercial rights were originally owned by FIA, transferred in 2001 to SLEC Holding Company (parent company of FOWC) for a consideration, then given to FOAM and w.e.f. 1.1.2011 transferred to FOWC. It was pointed out that on the one hand, the organization Agreement between FINFMSCI was entered into on 20.01.2011, the RPC and the Artworks License Agreement are dated 13.09.2011 Going by RPC dated •13.09.2011, it is evident that GP contract did not exist on the date of the signing of the Organization Agreement in January 2011. The recital (B) in the Organization Agreement reads as under:

“The Promoter has entered into an agreement with the Commercial Rights Holder to promote the event.”

18. The revenue asserted that FOWC’s stand that its agreement (RPC) was entered into with Jaypee on 13.09.2011 is inexplicable, having regard to the above Recital in the Organization Agreement in January 2011 by reference to the RPC of September 2011. Secondly, on lines similar to the RPC of September 2011, was an agreement dated 25.10.2007, between FOAL and JPSK Sports Pvt., Ltd. This agreement is in tune with the Format provided under Schedule 4 of the Concorde Agreement. It is plain that FIA could sign the Organization Agreement in January 2011 only on the basis that the Promoter had already entered into GP contract with FOAM (predecessor of FOWC) in 2007. Thirdly, discrepancies and omissions in the RPC of 2011 as opposed to the RPC of 2007 were pointed out. The revenue, to say that FOWC had a PE in India underlined all these facts. The fixed place- according to the revenue is the Buddha circuit in Greater Noida and owned by Jaypee which was designed and constructed in terms of RPC dated 25.10.2007 and RPC dated 13.9.2011 is only continuation of earlier arrangement. The revenue also stated that clause 11 of the RPC dated 13.9.2011 makes available to FOWC and other entities access to circuit, clause 8.1 obliges Jaypee to allocate promotional area in such a manner as FOWC shall specify, access to restricted area is regulated by passes and tabards issued by FOWC. He has also submitted that International Broadcast is one of the major commercial rights which vests in FOWC and because the promoter has set up a media compound and installations necessary for national and international commentators, such business is also made available to FOWC at the circuit.

19. The revenue further stated that that the three affiliates of FOWC, i.e. Formula One Management Ltd. (‘FOM’), All sports Management SA and Beta Prema 2 Ltd. are its three agents who had carried on business of FOWC on its behalf, through the fixed place. It was contended that that all commercial rights originally vested and were granted to only FOWC under the Concorde agreement, with a stipulation that FOWC may transfer or assign such rights only to other group entities. It has further said that the commercial rights could only stay within the Commercial Rights Holder group (CRH group), which included FOWC, its affiliates and other entities. These three group entities have acted for and on behalf of Jaypee, which did not get anything from these arrangements and these entities were not holders of commercial rights. Therefore, these entities acted for and on behalf of FOWC. According to the revenue, FOM was business manager of FOWC, it had a business management agreement with FOWC, 146 employees of FOM were in India for 40 days and based on these facts Revenue’s counsel has concluded that FOM managed the entire business of FOWC in India. As regards All Sports too, which carried out sale of tickets it acted on behalf of FOWC because no commercial rights were transferred to it. A like inference had to be drawn in case of Beta Prema 2 because it exploited certain commercial rights available only with FOWC. The revenue submitted that a PE gets constituted under Article 5(4) of DTAA also for the reason that FOM is agent and business manager of FOWC and Beta Prema 2 and All Sports have no independent status.

19.1 The AAR’s findings on the question of existence of a PE in India, of the FOWC, are as follows:

“47. Determination of PE is question of fact and the provisions of Article 5 of DTAA lay down several tests. If an enterprise qualifies to be PE on these laid down tests then only it can be considered to have a PE and in that case only that portion of income will be taxable in the country of PE which is attributable to PE. Under Article 5(1) the first test is place of business test. Its concept in terms of PE can be seen as any substantial, physical object which is commercially suitable to serve as the basis of business activity. It also encompasses separate part of an enterprise, foreign branches or place of management or office etc. Revenue’s contention that mere access to the racing circuit owned by JP amounts to place of business through which business activity of FOWC is carried out is completely misleading. FOWC is commercial rights holder and has to be necessarily involved in design of the circuit and other related activates from the beginning so that required specifications for Formula One Grand Prix events are maintained in design and build of the circuit. Equating such access with the place of business is not at all appropriate. Moreover, as per RPC the promoter is to ensure that the pit and paddock buildings and surrounding areas with circuit and land are open to receive competitors, FOWC, Affiliates of FOWC, FOWC’s contractors and licensees and their respective personnel and equipment. This is to facilitate the work relating to event. This does not mean that all entities getting access to the circuit have PE. Such an inference will be completely misleading.

48. The second test in respect of deciding PE is location test and a movable activity like a concert tour or circus or racing event meets this test if the activity is regularly repeated at the same spots, or the work is commercially integrated as one project performed for one client For example travelling circus. ice skating shows and similar business enterprises which carry on their business on a itinerant basis do not create a PE at the places where they perform for no more than a short period, as mentioned by Vogel K. in his authoritative book on Double Taxation Conventions, third edition. In the US also dancing and music groups who come to the source state only once in a year or a repeated entry of a horse in race within the source state have not been treated as PE. Both the applicant and the Department have cited the rulings given in the case of ‘Golf in Dubai’ wherein the observation was made that if a short term activity is carried out even once a year but on a regular basis if it is repeated, the same may constitute a PE provided the same place is kept at the disposal of the enterprise and there is certainty that the event will be repeated. Mere intention to repeat is not sufficient. We do not think this ruling is appropriate in this case because even if there is an event for a short period and there is intention to repeat it in future but not certainty, the main ingredient is missing, i.e., whether FOWC is carrying on any business activity through the circuit. The definition of PE presupposes that the business of the enterprise must be carried on through this fixed place of business. FOWC is not carrying on any business activity here unless we accept the theory of Revenue that all three entities Beta Prema, Allsports, FOM are acting on behalf of FOWC. Unfortunately, this is not true and we have rejected such presumption in the section on tax avoidance. Therefore, the business activity test also fails because we have already concluded in the section of issue of tax avoidance that there is no evidence to suggest that Beta Prema 2, All Sports and FOM are acting on behalf of the FOWC and all arrangements and agreements in relation to activities performed by these 3 entities are sham. It is also relevant that USD 40 m has been paid for use of certain marks and intellectual property of FOWC and this use cannot be equated with business activity in India.

49. Article 5(5) has several pre-requisites 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 habitually exercises 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. Here again Shri Srivastava has given same argument that because the 3 entities were acting on behalf of FOWC they become dependent agents. Such insinuations made by Revenue are based only on selective reading of some clauses in agreements and making facetious presumptions based on that. We are of the firm view that FOWC had no fixed place of business, is not doing any business activity in India and has not authorized any organization or entity to conclude contracts on their behalf and therefore has no PE in India.”

Contentions of parties: FOWC and Jaypee

19.2 Arguing first on the issue of royalty, both FOWC and Jaypee contend, through their Senior Counsel, Mr. S. Ganesh and Mr. Arvind Datar, that AAR’s order is premised on a fallacious premise, i.e that FOWC’s grant to the promoter (Jaypee) under the RPC is a permission given to the latter to use F1 trademarks, logos and other intellectual property rights (“I.P. rights”). The AAR assumed that if Jaypee described or advertised any racing event as “Indian Formula One Grand Prix”, ipso facto that was sufficient to make the race an F1 event; the premise was unfounded. It was this erroneous assumption which prompted the AAR to record that “royalty” within the meaning of Article 12 of the DTAA comprehended the amounts paid by Jaypee. Here it is argued that the IP rights given to Jaypee were only for the purpose of facilitating the event that was to be held in terms of the RPC, and for no other purpose whatsoever. If the RPC were to be terminated under any of the circumstances set out in Clause 28.1 of the RPC, then too Jaypee continued to be liable to pay the contracted amounts in the year of termination and in the next year; but the user of all I.P. rights ceased the moment the RPC was terminated. This clearly established that the amounts paid under the RPC were for the rights and privilege of hosting and staging the event and not for IP rights.

19.3 The relevant clauses of the RPC relied on by FOWC and Jaypee are discussed as follows. (a) Recital ‘B’, which states that the FOWC has the exclusive right to exploit the commercial rights in the championship and to award Jaypee the right to host, stage and promote Formula One Grand Prix events; (b) Recital ‘D’, which states that the RPC sets out the terms and conditions on which FOWC has granted to Jaypee the privilege of hosting, staging and promoting the event at the motor racing circuit owned by Jaypee situated in N.C.R (National Capital Region). Reliance is also placed on Clause l (t), which defines “Event” to mean the Formula One Grand Prix of India designated as a round of the FIA Formula One World Championship. (d) Clause 4, which set out the grant by FOWC to Jaypee of the right to host, stage and promote the ‘Event’ and clarified that the right was limited to the event. (e) Clause 17, which stated that FOWC would use its reasonable endeavors to ensure that at least sixteen cars participate in the Event. (f) Clause 18, which forbids Jaypee from making any audio or visual image of the event. (g) Clause 23.2, permits FOWC to make incidental use of I.P. rights solely for the limited purpose of facilitating Jaypee to promote the event and (h) Clause 28.2 refers to termination of the RPC on the declaration by FOWC that an “event of default” has occurred, upon which the RPC stood terminated forthwith. However, it is of importance to note that Jaypee’s liability to make payments under the RPC continues, not only in respect of the year in which the termination has taken place but also in the immediate subsequent year. Therefore, even though FOWC remained liable to pay the full contractual amount in the year of termination and in the subsequent year, the right to use trademarks, logos and IP Rights ceases instantly, the moment the termination takes place. This was a clear indication that the amounts payable by Jaypee to FOWC under the RPC are really for the privilege of hosting and staging the championship race and not for the IP rights, which in any event, could be utilized by it only to promote the race and for no other purpose. It was also urged that by virtue of the Artwork License Agreement (ALA), clauses 23.3 and 23.4 of the RPC had to be read in conjunction with the ALA. Mr. Ganesh emphasized that the said Artwork agreement did not confer any additional rights, nor could too much significance be attached on its provisions beyond what was actually said and that in the circumstances of the case, neither was a license nor any form of right to use the trademark given to Jaypee by FOWC which resulted in royalty payment within the meaning of Article 13 of the DTAA.

19.4 It was argued on behalf of FOWC that the judgment in Ericsson A.B.’s case (supra) which held that a lump-sum payment which is not based on or connected with the extent of the user of the IP rights would not constitute “royalties” within the meaning of the DTAA. In the present case, the payments made under the RPC were separate lump-sum amounts in respect of the three separate race events held in each of the three (3) years 2011 to 2013. It is not a payment, which is based on either the number of tickets, sold or the total amount of revenue earned by Jaypee in each of the said years or indeed on any other measure. It is submitted that such a lump-sum payment is squarely covered by the Ericsson A.B.’s case(supra)

19.5 It was next highlighted by Mr. Datar that recital (B) of the ALA specifically stated that FOWC wished to grant a license to Jaypee permitting only the incidental use of certain IP rights and artwork “solely for the limited purpose of facilitating the hosting, staging and promotion of the event”. The definition of “permitted use” in clause 1.1 of the ALA again states that it means only the incidental use of the licensed marks and materials “for the purpose of hosting, staging or promoting the event, but for the avoidance of doubt, not to include use for any merchandising or other products or services whatsoever, whether distributed free of charge or for sale”. It was argued that Clauses 2.2 and 6.2 of the ALA provide that the ALA will continue only until the RPC terminates or expires; Clause 2.3 of the ALA prohibit Jaypee from using any of the licensed marks, or as part of the name of the circuit, any corporate name, any domain name, website address or other URL identification or equivalent used in association with Jaypee. Jaypee thus has no IP rights whatsoever independently of the staging and hosting of the Event. To the same effect are the undertakings given by Jaypee, set out in Clauses 3.1(e) and 3.6 of the ALA. Counsel also argued that the definition of “royalty” as set out in Explanation 2 to Section 9(1)(vi) of the Act, is significantly broader than the definition of “royalties” set out in Article 13(3) of the India-UK DTAA. The definition in the Act specifically covers and includes lumpsum payments, whereas Article 13(3) of the DTAA only refers to payments. The impugned order neither contains any discussion nor finding whatsoever on this crucial issue even though it goes to the root of the entire case. It is argued that the payments made to it under the RPC are not “royalty” either under the Act or the DTAA, these payments are in reality not for the use of trademarks or IP rights, but rather for the grant of the privilege of staging, hosting and promoting the Event at the promoter’s racing circuit in Noida(NCR). FOWC under the RPC, made available to Jaypee all of the elements which constitute the event. In particular, this includes nominating (to FIA) the promoter’s event for inclusion in the official Formula One racing calendar; after such inclusion the Formula One racing teams with their Formula One cars and drivers were bound to participate in Jaypee’s event held at the Promoter’s racing circuit, strictly in conformity with the requirements of the F1 Sporting and Technical Regulations and the FIA Sporting Code. Therefore, the grant of Formula One rights by the FOWC to Jaypee is merely incidental to the hosting and staging of the event by the Promoter, and this is clear from the fact that the use of rights by Jaypee has been strictly confined and limited to use only for the promotion of the event, and for no other purpose and in no other manner whatsoever.

20. Reliance is placed on the decision in Sheraton International Inc’s case (supra) which held that if a contract for the supply of goods and services also permits “incidental use” of trademarks, logos and other I.P. rights, only in connection with such supply of goods and services and not for any independent purpose, then in such a case the payments made under the contract cannot be considered to be “royalty” either under the Act or the DTAA. In the Sheraton International Inc’s case (supra), this Court had used the said term “incidental” only in the sense of “ancillary to” or “connected with” the supply of goods and services under the Agreement. This Court did not use the term “incidental” to convey the idea that trademarks and IP rights were of reduced value or importance as compared to the supply of goods and services under the contract. In other words, the use of the word “incidental” by this Court in Sheraton International Inc’s case (supra) is not based on any value judgment regarding the relative importance of the supply of goods and services as compared to permitting the use of the trademarks and I.P. rights. This used the term “incidental” only to connote the close and immediate connection between the supply of goods and services and the user of the trademarks/ I.P. rights that are inextricably interconnected with such supply. Thus, when no autonomous I.P. rights are created that are de hors or independent of the supply of the goods and services, then the payments under the contract cannot be regarded as consideration for the user of the trademarks / I.P. rights and, therefore, would only constitute ‘business income’ and not “royalty” in the hands of the recipient. It is argued that the judgment fully covers the present case in favor of FOWC, and the AAR committed an egregious and patent error of law in not following the binding principles of law laid down. It is further argued that the term “incidental “used by this court in Sheraton is in conformity with the sense in which the Supreme Court has understood the said term. Learned senior counsel relied on Works Manager Central Railway v. Vishwanath [1969] 3 SCC 95 , State of Orissa v. Chakobhai [1961] 1 SCR 719 and Shroff & Co. v. Municipal Corpn. of Greater Bombay [1989] Supp. 1 SCC 347 . It is urged that the AAR fell into error in interpreting the expression “incidental” in a completely different sense than what was held in Sheraton International Inc.’s case (supra) thereby in effect re-writing it. Furthermore, the impugned order is flawed because it holds that the dominant purpose of the RPC is to grant I.P. rights because the Promoter has been given the right to use the F1 name and marks, overlooking that this was exclusively so that the F1 racing event could be staged and hosted by the Promoter in full accordance with the F1 rules and regulations. Mr. Datar lastly relied on Section 48 of the Trademarks Act and said that use of the mark by a permitted user is not considered to be grant of any property right and in fact, such use inures to the benefit of the I.P proprietor.

21. It is argued, next, on the issue of existence of PE in India, that the preconditions for creation of a permanent establishment where, or through which business is earned in India, have not been proved. Learned counsel relied on the OECD Model Tax Convention on Income and on Capital, Para 10, which reads as follows:

“10. The business of an enterprise is carried on mainly by the entrepreneur or persons who are in a paid-employment relationship with the enterprise (personnel). This personnel includes employees and other persons receiving instructions from the enterprise (e.g. dependent agents). The powers of such personnel in its relationship with third parties are irrelevant. It makes no difference whether or not the dependent agent is authorized to conclude contracts if he works at the fixed place of business (see paragraph 35 below). But a permanent establishment may nevertheless exist if the business of the enterprise is carried on mainly through automatic equipment, the activities of the personnel being restricted to setting up, operating, controlling and maintaining such equipment. Whether or not gaming and vending machines and the like set up by an enterprise of a State in the other State constitute a permanent establishment thus depends on whether or not the enterprise carries on a business activity besides the initial setting up of the machines. A permanent establishment does not exist if the enterprise merely sets up the machines and then leases the machines to other enterprises. A permanent establishment may exist, however, if the enterprise, which sets up the machines also operates and maintains them for its own account. This also applies if the machines are operated and maintained by an agent dependent on the enterprise.”

22. Mr. Ganesh learned senior counsel argued that under Article 5.1 of the DTAA, a permanent establishment is said to exist in relation to a business and income is said to be earned in India, if it has a “fixed” place of business “through” which income is earned by means of an economic activity. It is argued that the limitation and framework within which tax incidence can be said to arise, if at all, is that of the need for an enterprise to have a fixed place. The OECD commentary states that the premises need not be owned or even rented by the enterprise. What is however, essential is that the premises or place should be at the disposal of the enterprise. Mr. Ganesh submitted that there was nothing in the RPC or any agreement with FOWC whereby a fixed place was ever placed at its exclusive disposal. Thus, a place of business, which houses the fixed “place” would not imply mere empty space, available for some such purpose, but existence of objects in that place, such as furniture, equipment, etc which facilitate business, needed for the concerned commercial activity. The place of management, though considered a PE, requires existence of an office or similar facility in order to constitute a PE and the management activities should be conducted through such fixed place. Counsel relied on the decision reported as DIT v. E-Funds IT Solution [2014] 364 ITR 256/226 Taxman 44/42 50 (Delhi) which, after quoting from various authors, states that “The term ‘through’ postulates that the taxpayer should have the power or liberty to control the place and, hence, the right to determine the conditions according to its needs”. It is urged that Jaypee neither leased the stadium, or its premises or any part thereof to FOWC or granted license to FOWC. That FOWC facilitated the drivers and constructors to use them did not further the revenue’s case in any manner, because they were professionals, and had independent contracts. The access provided to them, or that provided to All sports, or FOM, or Beta Prema2 did not mean that they, or FOWC had a fixed place of business. No part of the income generating activity of FOWC actually arose in India.

23. It is submitted that the entire right to promote, stage, host and endorse the event, i.e the F1 Grand Prix race, vested with Jaypee; FOWC only got the fee for assuring participation of the teams and constructors, in the agreed manner. That it was entitled to the live feed from the event, which it used, did not mean that any part of its business was transacted in India. The agreement, i.e. the RPC, nor any other agreement containing any significant stipulation conferring it with a right to set up office in India, in relation to the F1 event, ever entered in the country; it did not have or set up even a liaison office for the purpose of its F1 event work or transaction. Therefore, the question of FOWC having a fixed place of business, even for a transient place, did not arise.

24. It was next argued that the question of any PE existing through Articles 5 (4) or (5) also could not have arisen, in the circumstances of the case. It is highlighted by Mr. Ganesh that none of the three companies, which entered into agreements with Jaypee, has or had any office in India; though they were subsidiaries of FOWC, such status arose because of acquisition of their shares in 2006. The transactions by them with Jaypee were independent. Moreover, the three companies did not act on behalf of FOWC, nor could they ever be said to have acted “habitually” in that regard, because the contract with Jaypee was a “one off” transaction. Thus, none of the ingredients of Article 5(4) of the DTAA applied. Equally, provisions of Article 5 (5) of the DTAA had no application because, none of the subsidiaries’ activities were “carried out wholly or almost wholly for” FOWC. It was submitted that there was, nor could there have been, any finding that the said subsidiaries (All sports, Beta Prema2 or FOM) acted “wholly” in the course of their business for FOWC or for its benefit. There was no material or evidence shown by the revenue in support of its contention. It is submitted that the business contracts therefore, entered into between FOWC’s subsidiaries were independent bargains and concluded on principal to principal basis. The benefit or amounts derived from those contracts did not flow back to FOWC. Lastly, learned counsel submitted that the reliance placed by the revenue on the AAR’s ruling in the case of Golf in Dubai, In re [2008] 306 ITR 374/174 Taxman 480 (AAR) is inappropriate, because in that case, the arrangement was such that the premises were in fact leased for a period for use. In the present case, no space for work or commercial activity was offered to or taken by FOWC.

Revenue’s contentions

25. The revenue argues that a (PE) defined under Article 5 of the may exist under Para (1) of Article 5, if there is a fixed place of business available to the enterprise through which its business is wholly or partly earned on. A PE may also get constituted under Para (4) of the said Article, if the enterprise carries on its business functions through a dependent agent who has an authority to conclude contracts on behalf of the enterprise. If the agent works wholly or almost wholly for the enterprise, he shall be deemed to be a dependent agent under Para (5) of Article 5, subject to other conditions. Relying on its Director’s report, Mr. Srivastava, learned counsel argues that FOWC’s business is to exploit commercial rights arising from the conduct of FIA Formula One World Championships in various parts of the world, including India in the relevant years.

26. It is argued that FIA, the international regulatory body, organizes and controls motor races in various parts of the world. For the F-1 championship, it enters into an ‘Organization Agreement’ with the local Promoter. The format of such ‘Organization Agreement’ is contained in Schedule 6 to the Concorde Agreement (the mother agreement). The Concorde Agreement provides that the ‘Organization Agreement’ would be entered into only after the Promoter has entered into an agreement with the Commercial Rights Holder. The Organization Agreement makes it explicit that FIA is the sole and exclusive owner of the Formula One World Championship event

27. FIA entered into an agreement with FOAM (predecessor of FOWC) under which FOAM was given the right to exploit commercial rights and it became the Commercial Rights Holder (CRH). On the back of the above agreement, FOAM (CRH) entered into an RPC with JPSK (Jaypee’s predecessor) in 2007. The promoter (JPSIL), entered into an ‘Organization Agreement’ with FIA and obtained the right to organize the FIA Formula One World Championship in India. In the meanwhile, by a new ‘Concorde Agreement’ of 2009, FOWC became the new commercial rights holder (CRH). As per the stipulation in the ‘Concorde Agreement’, the commercial rights could not be assigned/transferred by the commercial rights holder (CRH) to any entity other than its affiliates. Under the terms of such Concorde Agreement, FOWC could exploit such rights either directly or through its affiliates.

28. It is argued that the Buddh International Circuit (Noida), which includes not only the racing circuit but all the attached buildings in the complex, including vending areas, hosting and broadcasting facilities, media centres, administrative offices etc. as widely defined in the Race Promotion Contract itself was available to FOWC and its affiliates (including their employees and third party contractors appointed by them) for carrying on their business operations. This circuit along with all the facilities was constructed in a form and manner approved by both FOWC and FIA. (Clause 5(e) of RPC). FOWC and its affiliates have complete access to the circuit in all its dimensions for a period beginning 14 days prior to the event and ending 7 days after the event. The place is available not only to FOWC but to its contractors, licensees, FOWC’s affiliates, their personnel etc. (Clause 11 of RPC). Further, access to the restricted area is regulated by passes and tickets issued by FOWC. In effect, FOWC had complete control over the entire area during the term of the event. (Clause 14 of RPC) The fixed place is available to FOWC under the terms of the RPC for carrying out its business functions for a period of 5 years, extendable by another 5 years.

29. It is argued that consistent with the stipulations of the Concorde Agreement, FOWC exploited certain commercial rights directly (such as media rights) and certain other commercial rights indirectly through other group entities, namely All sports Management SA (‘All sports’) and Beta Prema 2 Ltd. The business functions were given to the affiliates by interposing the promoter, Jaypee being oblivious of the fact that under the Concorde Agreement, FOWC could not have transferred such rights to JPSIL. The effect of such interposition was that while the terms of Concorde Agreement were not violated, the exposure of FOWC to a PE in India was sought to be avoided. Despite the fact that the RPC of 2007 was not rescinded, FOWC entered into a fresh Race Promotion Contract with JPSIL (successor of Jaypee) in departure from the RPC of 2007 on 13.09.2011. (both agreements were signed by Mr. B. Eccelstone for EGA and FOWC). Some of the changes made in the latter agreement were:

Under RPC of 2007, the promoter was given only the right to ‘promote’ the event but in the RPC. of 2011, the words ‘host’ and ‘stage’ were inserted before the word ‘promote’ solely with a view to escape the tax incidence.

As a condition precedent, JPSIL (R 2) was mandated to transfer the commercial rights back to the group entities of FOWC (R I), namelyAll sports Management SA and Beta Prema 2 Ltd. and to obtain the services of FOAM for executing certain obligations pertaining to the exploitation of media rights, which FOWC had undertaken directly.

The declaration in the RPC of 2007 that FOAM acted as a Business Manager and agent of FOWC was deliberately dropped, without the business model undergoing any change.

Clause 18.3 was introduced, casting an obligation on JPSIL to engage FOAM to carry out services for the origination of international television feed, to be provided to telecasting companies with which FOWC had already made agreements.

30. It is argued that Beta Prema 2 had transferred title Sponsorship rights to Bharti Airtel Ltd. on 16.08.2011 for a consideration of USD $ 8 million, long before it acquired these rights from Jaypee on13.09.2011. On 16.08.2011, when such rights existed only with FOWC, Beta Prema 2 could have concluded an agreement with Bharti Airtel only on behalf of FOWC or as an agent of FOWC and not otherwise. It is argued thus by Mr. Srivastava that a holistic reading of these agreements particularly the five agreements executed simultaneously on 13.09.2011 leads to the following irresistible inferences:

(i) FOWC alone was the commercial rights holder (CRH) for the championship under the Concorde Agreement.

(ii) FOWC could exploit the commercial rights either itself or through its group entities only and the same could not have been transferred to a third party, outside the group, including JPSIL.

[Citation : 390 ITR 199]

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