Receipt on Account of Granting License for the Promotion of Formula One event is Business Income, Taxable in India, rules Delhi High Court.
The division bench of the Delhi High Court has ruled that the consideration received by the Formula One Asset Management Ltd (FOAM) as per the license agreement entered into with jaypee sports are taxable in India under the head “business income” not as “royalty”. Further, Jaypee is bound to make appropriate deductions from the amounts payable to Formula One World Championship Ltd (FOWC) under section 195 of the Income Tax Act.
In the instant case, both the petitioners, FOAM and Jaypee Sports entered into an agreement as per which, the right to host, stage and promote the Formula One Grand Prix of India event was given to the latter for a consideration of USD 40 millions. One of the important question raised before the Court was that whether the consideration received/receivable under the agreement is business income or Royalty?
Before the Court, the petitioners submitted 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’.
The division bench comprising of Justice S. Ravindra Bhat and Justice Najimi Waziri noted that FIA being a motorsport regulatory authority, had a pre-existing arrangement with Formula One Administration Ltd. (FOA), which held all commercial rights. Under clause 10 of the Concorde Agreement, the FOWC had the right to draw the FIA F1 Championship for any season to be approved by FIA. Further, all commercial exploitation rights vest exclusively with FOWC. FOWC did accept them and was entitled to charge fees or such other consideration as it deemed appropriate for the recording, telecasting, broadcasting and creation of internet and media rights, including data transmission, and all other such commercially exploitable rights. It is apparent from the provisions of the agreement that the entire event, i.e. F1 FIA Championship in the circuit was organized and controlled in every sense of the term by FOWC.
“The peculiarity of this activity is such that FOWC’s dominant role is evident; it is the moving spirit with all pervasive presence and control through the teams, which are contracted to participate in the event. In fact, it creates the event, i.e. the race. Each actor, such the promoter/Jaypee, the racing teams, the constructing teams and the other affiliates, plays a part in the event. FOWC’s participation and the undertakings given to it by each of these actors, who are responsible for the event as a whole, brings out its central and dominant role. If Jaypee is the event promoter, which owns the title to the circuit in the sense that it owns the land, FOWC is the commercial rights owner of the event, by virtue of the Concorde Agreement. FIA parted with all its rights over each commercial right it possessed to FOWC. The bulk of the revenue earned is through media, television and other related rights. The terms or the basis of those rights is the event. The conceptualization of the event and the right to include it in any particular circuit, such as Buddh Circuit is that of the FOWC; it decides the venue and the participating teams are bound to it to compete in the race in the terms agreed with the FOWC. All these, in the opinion of the Court, unequivocally, show that the FOWC carried on business in India for the duration of the race (and for two weeks before the race and a week thereafter). Every right, which it possessed was monetized; the US$ 40 million which Jaypee paid was only a part of that commercial exploitation by the FOWC.”
Accordingly, the Court concluded that the petitioner is doing business activity in India.
Read the full text of the Judgment below.
