Sec. 90

Chapter IX DOUBLE TAXATION RELIEF

sales is a PE.56 A liaison office engaged in downloading data and some financial transactions would not be a “permanent establishment”. A liaison office doing supervisory activity
will not constitute a PE.57 The AAR had earlier held that it would be a permanent establishment in view of a “business connection” but the High Court rightly held that the principles applicable to domestic law cannot be applied in deciding the scope of Article 5.58 An
independent third party engaged to conduct a golf tournament for a week’s duration did not
result in a permanent establishment because there was no stipulation that the golf tournament would be conducted every year.59 A moving vessel was, it is submitted, wrongly held
that to be PE.60 A leading commentator has rightly observed that a ship is not a PE since it
is not ‘fixed’.61 Dredging equipment given on lease on a bare-boat basis will not constitute a
PE as there is no control over the equipment with the lessor.62
In Formula One World Championship Ltd. v CIT,63 the Supreme Court held that Formula
One World Championship Ltd. (FOWC), a UK company, holding the commercial rights to the
Formula One Grand Prix races had a PE in India at the Buddh International Circuit. This circuit, where the F1 race was conducted between 2011 and 2013 in India, was owned by Jaypee,
an Indian Company. The Court held that the race circuit is a fixed place and conducting a race
is a business activity; the contract, that granted FOWC commercial rights, indicated that income generating activity was conducted in India by organising a race on the Indian circuit and
the agreement with Jaypee established that FOWC had complete control over the circuit for
the three days during the race. To arrive at this finding, the court only looked at the exploitation of commercial rights by FOWC. It failed to consider that mere exploitation of commercial rights is not a business activity under Article 5. Conducting a race at best can be a business activity which was conducted by Jaypee by entering into a race promotion contract. It is
unimaginable as to why Jaypee would pay FOWC 40 million USD, if the race was only to be
conducted by FOWC; in that event, indeed, FOWC should have paid Jaypee for hiring the
circuit. All these crucial aspects of the contract and the nature of this specialized sporting
event were not considered either by the Delhi High Court or the Supreme Court. The Supreme
Court merely, with due respect, confirmed the erroneous factual findings of the High Court.64
It is submitted that the Supreme Court and the Delhi High Court have taken a very narrow
view that is contrary to basic principles of a PE and contrary to international practice. It is
common knowledge that F1 races are conducted every year in different countries. F1 is more
than 70 years old and for the Supreme Court to hold that race circuit is a PE is incorrect. Indeed, no other country has treated the race circuit as a PE and sought to tax income, if any,
therefrom. The Supreme Court rejected the plea that the control, if any, of FOWC over the
circuit is only for three weeks and such a short duration will not constitute a PE. Instead of
giving reasons why a race circuit constitutes a PE in terms of art 5 of the DTAA, the Court
unfortunately rejected the plea by stating that the assessee is trying to trivialize the issue by
harping on the fact that the duration of race was three days. In fine, the Supreme Court has
lowered the threshold for constitution of a PE in India. This decision is likely to affect every
foreign company who may have insignificant or remote operations in India. Similarly, in another sporting event, a non-resident company providing lighting and search light services during opening and closing ceremonies of Commonwealth Games, Delhi, 2010, on a turnkey
basis was held to have a PE in India because it had been allocated exclusive space at the Stadium.65 With due respect, the decision of the AAR is not correct. The AAR completely failed
56. Brown and Sharpe Inc. v CIT 369 ITR 704.
57. CIT v Sumitomo Corporation 382 ITR 75.
58. UAE Exchange Centre Ltd. v UOI 313 ITR 94, (2009) 223 CTR (Del) – overruling UAE Exchange
Centre LLC, In re 268 ITR 9 (AAR), affirmed in UOI v UAE Exchange Centre C.A. No. 9775 of
2011, judgment dated April 24, 2020 (SC).
59. Golf In Dubai LLC., In re, 306 ITR 374 (AAR).
60. Poompuhar Shipping Corporation Ltd. v ITO 360 ITR 257. Distinguished in CIT v Van Oord ACZ
Equipment BV 373 ITR 133.
61. Klaus Vogel on Double Tax Conventions, 3rd ed, p. 286, para 24-24a.
62. CIT v Van Oord ACZ Equipment BV 373 ITR 133.
63. Formula One World Championship Ltd. v CIT 394 ITR 80 (SC).
64. Formula One World Championship Ltd. v CIT 390 ITR 199.
65. Production Resource Group, In Re, 401 ITR 256 (AAR).

2014