An important tax ruling by the Supreme Court (SC) made headlines last week, and the outcome elicited fair bit of scepticism amongst foreign companies undertaking business activities in India. The SC held, Buddh International circuit (BIC) at Greater Noida, constituted a fixed place permanent establishment (PE) of Formula One World Championship Ltd (FOWC), the UK entity which owns the license to host F1 race event across countries. The outcome is indeed a first for F1; and hence, more painful perhaps. The court has not ruled on the issue of income attribution and that itself will be another uncertain outcome for the petitioner in this case.
UK appellant’s chief arguments were to contend that the F1 race event was hosted and promoted by Jaypee, an Indian company and owner of the race circuit and that the event spanned over mere three days in each of the three years, ie between 2011 and 2013. Revenue’s contentions predominantly were to allege that the race circuit itself was the place of business of FOWC, the UK appellant, which was under complete control of the UK entity for carrying on its business of staging and promoting the race event. Before the above matter came up in an SLP before the SC, Delhi HC had ruled against the appellant and holding that the BIC was a fixed place available at FOWC’s disposal and thus, resulted in a fixed place PE.
In what is a comprehensive endorsement of Delhi HC’s ratio, SC has deployed ‘substance over form’ doctrine to test the essence of the contracting arrangement between FOWC and its affiliates on one hand, and Jaypee, which acquired the license from FOWC, on other. Although the application of ‘substance over form’ doctrine in judicial review is neither new nor unwarranted, what is rather concerning is the manner in which the ratio emerging from SÇ ruling could be interpreted, and applied indiscreetly by the revenue, particularly so in a case of multiple-contract structures amongst group companies.
It is this aspect of the SC decision which calls for a fresh reflection on basic tenets of determination of PE of foreign enterprise/business in India, considering particularly that most of the internationally advocated principles have long served the interpretation of PE concepts globally. In this context, it is extremely critical to appreciate that the SC ruling is premised on a set of unique facts and does not, therefore, carry universal applicability in the determination of fixed place PE dehors of specific circumstances and peculiarities of business.
Having said, three key themes stand out from F1 PE outcome. First, the SC has laid considerable emphasis on the element and degree of ‘control’ that a foreign enterprise has over the conduct of business from a fixed place in India, to determine whether or not such foreign enterprise could said to be carrying on business in India ‘through’ such fixed place.
Traditionally, this test has been understood as the foreign enterprise having a place of business to its constant ‘disposal’ through which it can be seen as carrying on business. The ruling, thus, widens the interpretation of the ‘disposal test’ for holding out a fixed place PE determination, by using substance over form doctrine to determine who has the effective control over the business.
Second, SC has reinstated that the tenure relevant for determination of permanence of given set of activities, is relative to the nature of business, and such determination doesn’t warrant an absolute threshold, such as of six months for a fixed place to be considered as permanent. This again is not a new principle, since international commentaries have stated that the test of ‘permanence’ is to be assessed with due regard to the nature of the business.
The ratio being pronounced by SC adds shades of subjectivity to such determination. But the concern is, will the revenue adopt a more indifferent approach to allege permanence in most cases, particularly with respect to businesses which do not necessarily benefit from explicit duration test (such as six months or more) under the relevant tax treaties.
Third, SC has comprehensively deliberated essence of contracting structures between Jaypee, FOWC and latter’s affiliates to arrive at the conclusion that in given circumstances, looking through the legal form to establish substance of the contracting structure was imperative for determination of the PE. The fact that majority of commercial rights connected with hosting of F1 event was exploited by FOWC and its overseas affiliates, played its part in a determination that the business was that of the FOWC, and not Jaypee. This is a significant outcome and is likely to escalate the risk of Indian Revenue seeking to apply the ratio of F1 ruling rather injudiciously in other cases of multiple contracts structures involving related/group entities, in particular.
That said, it is not prudent to believe that the ratio of F1 ruling could be applied invariably to all cases without due regard to nature of business, appropriate diligence on substance of contracting entities involved, and more important, without distinguishing a set of jurisprudence from the past wherein the courts—including the SC—have upheld bonafides of multi-contracts/multi-parties contractual structure in given set of circumstances. Nonetheless, the outcome certainly has upped the ante from the standpoint of the revenue’s zeal to litigate, despite a set of consistent jurisprudence to distinguish the outcome of F1 case.
To summarise, the ruling may not have necessarily brought forth any new maverick principle for determination of fixed place PE; yet it is appropriate to say, going forward, mitigation of potential tax dispute on PE determination shall require a more careful contracting documentation to bring forth underlying substance of contracting arrangement and respective independence of contracting entities.
– Sumit Singhania, Partner, BMR & Associates LLP