Jaiprakash Associates (JAL) has moved the Delhi High Court, challenging the Authority for Advance Rulings’ findings that held that the consideration of $40 million per annum paid by the firm to Formula One World Championship (FOWC) for getting exclusive distribution rights to host ‘Formula 1 Grand Prix of India’ is royalty in nature, and thus chargeable to tax.
Further, the AAR in August had held that JAL was liable to deduct tax at source on payment of such consideration to FOWC. JAL had to pay $120 million for three years and so far, it has paid around $70 million.
A related petition filed by the income tax department (international taxation) against FOWC will come up for hearing before a division bench headed by Justice S Ravindra Bhatt on Monday. The HC, while seeking the company’s response on the Revenue’s (tax department) plea last month had restrained FOWC “from proceeding to draw upon the amounts payable under the standby letter of credit in question in respect of the amount secured during the pendency of proceedings before the authority culminating with the impugned order, till the next date of hearing”.
According to JAL, the erroneous reasoning adopted by the AAR is based on the misconceived view in law that since the mark ‘Formula 1’, which is a trademark, forms part of the name of the event, the consideration paid by the company to FOWC under the Race Promotion Contract (RPC) is royalty in nature.
“The impugned judgment proceeds erroneously at variance with settled international tax practice… applying settled international practice merely because the event is called Formula 1 Grand Prix does not mean that the consideration the JAL is paying FOWC is dependent on the ‘user’ of the trademark belonging to FOWC…the AAR virtually ignores the express stipulations contained in the Artwork Agreement (AA), which states that JAL had only permission to use the marks in the manner prescribed therein, i.e., solely and only for the purpose of hosting, staging and promoting the event,” JAL said in its petition filed through counsel Ankur Saigal.
JAL, the owner of the Buddh International Circuit in the NCR, had in September 2011 entered into an RPC to host the Formula 1 Grand Prix in India. JAL was allowed only incidental use of the intellectual property belonging to FOWC for the purpose of promoting the event and there was an express bar on the Indian partner from making commercial exploitation of the marks, Saigal said.
Both JAL and FOWC had sought opinion of the AAR, which rejected the Revenue’s contention that the RPC and the AA were sham transactions and devices to evade tax. However, it held that FOWC does not have a permanent establishment in India.
It also rejected JAL’s stand that the dominant portion of the consideration paid to FOWC was the business income for FOWC since it was earned by FOWC by exploiting the commercial rights it holds in the Formula 1 Grand Prix (which is its business).