*Written by Keshav Agarwal.
Introduction
Back in 2011, India was the host of a Formula 1 event ‘Grand Prix' for the first time after heavy discussions about its feasibility and the general logistics of the event. The Indian subcontinent was introduced to the madness that is a Formula 1 ‘race weekend’ and with it came the glory, fame and money. However, such events are also accompanied by their fair share of problems like disputes with the local and central government over permissions and licenses etc. In the case of Buddh International Circuit (located in Greater Noida), which was the venue for the Indian Grand Prix (2011-2013), the promoter entity, Jaypee Sports Limited had signed a five-year deal with the FIA (Fédération Internationale de l'Automobile) and FOWC (Formula One World Championship). However, the deal was signed while the former Chief Minister Mayawati was in power and she granted an exemption to the event, to promote and provide more avenues for the sport in India. “F1 race promotion agreements state that the fees should be free of all taxes. And at the beginning, then-Uttar Pradesh Chief Minister Mayawati did so. The Jaypee group, which built the BIC and organised the GP, was exempt from paying a 25 per cent entertainment tax. But with the change of leadership in Uttar Pradesh, the new Chief Minister Akhilesh Yadav retrospectively withdrew that exemption. The Ministry of Sports then categorically stated Formula 1 was not a sport but entertainment and an F1 Grand Prix “added nothing to the development of sport in the country.”[1]
Tax and Sports Scenario in India: Let's Talk
The whole situation escalated and all the involved parties moved towards the legal system to get a definite answer to their dispute. The case was fought over several years and it first went to the Tribunal, after this the High court of Delhi and finally by the process of appeals, the Supreme Court of India also heard and delivered a decision on the matter. Issues so disputed in the case were basically two:
whether or not the payment made by Jaypee Sports Ltd. to FOWC in the amount of $40 million can be categorized as a royalty fee and thus charged tax.
whether the FOWC as an institution had a PE in India that would make all incomes arising out of activities in India taxable.
FOWC is a sporting event at the pinnacle of motor racing wherein teams compete for the world championship across races held in different parts of the world throughout the calendar year, governed and regulated by FIA. Places like Italy, Monaco and Abu Dhabi are a few places known for their racing tracks and see a huge crowd for the sport. This directly indicates the huge inflow of income for the FIA organisation and the stakeholders of the sport. As stated by Benjamin Franklin in 1789, ‘In this world, nothing is certain except death and taxes.’ Hence, here as well the FIA should be held liable to pay the appropriate taxes as per the country’s legislation and provisions. In India’s case, the dispute arose as described above.
To decide on both matters, the rule of residence under Taxation laws in India must be analysed. The AAR (Authority for Advance Ruling) decided on both matters upon the consultation sought by FIA and Jaypee. “AAR answered the first question holding that the consideration paid or payable by Jaypee to FOWC amounted to 'Royalty' under the DTAA. The second question was answered in favour of FOWC holding that it did not 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 to pay tax thereon to the Income Tax Department in India, it was incumbent upon Jaypee to deduct the tax at source on the payments made to FOWC”[2]. However, upon the appeal by Jaypee the decision with respect to the payment in nature of ‘royalty’ was overturned as the payment was not being made in return for a permit to use the Intellectual property of Formula One. It is also important to note that the agreement allowed Jaypee to organise and advertise the Formula One Grand Prix in India. This was the Race Promotion Agreement (RPC). Whereas, through another contract between the two parties, agreed on allowing Jaypee to use certain IPs of the FOWC for their endeavours as promoter party of F1 in India.
The AAR although decided in the favour of Revenue (i.e., the tax collecting authority), it was the High court of Delhi which overturned the decision that set the final say in terms of the consideration paid by Jaypee Sports Limited as not being a ‘royalty’.
The court mainly focused on the second subject matter as to whether or not FOWC was a PE in India and hence the income earned by them through the Indian Grand Prix was taxable in India or not. “The high court had also ruled that FOWC has a permanent establishment in India for conducting its business and set aside the finding of the Authority of Advance Ruling (AAR) on the issue. It had said the use of trademarks was “purely incidental" and as an event organiser and host of the F1 Grand Prix Championship, Jaypee was bound to use the F1 marks, logos and devices.”[3]
Furthermore, in this case, the nature of FOWC in terms of being a resident of India or not was heavily discussed by the court. It is an established fact as to FOWC is an organisation incorporated in the United Kingdom (UK) and a tax citizen of the UK. Hence, it cannot be an Indian resident under the definition of Section 6(3) of the Income Tax Act, 1961. [4] It is not an Indian company and neither is the POEM (place of effective management) in India for a significant duration in the year. Along with this, Section 9[5] of the Act defines the kinds of income which shall be considered to be accruing in India. Effectively this section lays down that any income that arises to any person (resident or non-resident) shall be taxable under Indian laws if the source of such income is assessed to be having accrued or arising in India. In the case, it was also held clearly that a third party acting as an agent or merely on behalf of a non-resident body, and thus conducting some revenue-generating activity shall be considered to be having a business connection in India. This indirect relation of conducting business shall qualify as having a business connection and thus income accruing in India for FOWC.
Conclusion
Finally, “In a big win for the Income Tax Department, the Supreme Court has held that Formula One World Championship in Motor Racing is liable to be taxed in India for the F1 Indian Grand Prix Championship”[6]. A major decision of the Indian Judiciary that had an impact on not only the future of a particular sport in India but also became a precedent for the other sporting events that take place in India. Whether this decision was for the better of Indian society is still to become clear, but this is how the situation stands today and how it is going to be for the foreseeable future.
*The author is a law scholar from Jindal Global Law School, OP Jindal Global University, India.
(The image used here is for representative purposes only)
References:
[1] Bhatnagar S, “Bring Indian GP Back. F1 Fans Are Hungry to Watch Vettel, Verstappen and Hamilton Live” (The Print, July 17, 2022) https://theprint.in/opinion/pov/bring-indian-gp-back-f1-fans-are-hungry-to-watch-vettel-verstappen-and-hamilton-live/1041487/ accessed September 19, 2022
[2] FOWC Ltd. v Commissioner of Income Tax, Delhi & Ors., MANU/SC/0503/2017.
[3] “No F1 Race in India since 2013, but Formula One Has to Pay Tax, Says SC” (Mint, April 24, 2017) https://www.livemint.com/Sports/DW1t0Kx9rZxiA8K3qeqTgI/No-F1-race-in-India-since-2013-but-Formula-One-has-to-pay-t.html accessed September 20, 2022.
[4] Income Tax Act 1961, s 6(3).
[5] Income Tax Act 1961, s 9.
[6] Nangia R, “SC Upholds HC View That Tax May Be Levied on F1 Event/Impact of GST on Homebuyers” (Andersen Global, May 23, 2017) https://nangia-andersen.com/sc-upholds-hc-view-that-tax-may-be-levied-on-f1-eventimpact-of-gst-on-homebuyers-rakesh-nangia/#:~:text=In%20a%20big%20win%20for,establishment%20(PE)%20in%20India. Accessed September 22, 2022