In a recent landmark judgment, the Hon'ble Supreme Court of India has held that Formula One World Championship Limited ('FOWC' or 'the taxpayer'), a UK resident, has a Fixed Place PE in India in the form of race circuit through which the Formula -1 racing events were conducted in India. While holding so, the Hon’ble Apex Court upheld the decision of the Hon’ble High Court of Delhi.

The facts of the case are as under:

• Federation Internationale de l'Automobile ('FIA'), a non-profit association, is the principal body for establishing rules and regulations for all major international four-wheeler motorsport events. FIA regulates FIA Formula One Championship (' F-1 Championship') which has been the premier form of motor racing since its inception in 1950.

• FOWC  had entered into an agreement with FIA and Formula One Asset Management Limited ('FOAM') under which FOAM licensed all commercial rights in the F-1 championship to FOWC for 100 years term effective from January 1, 2011.

• Being the exclusive Commercial Rights Holder ('CRH') in respect of the  F-1 Championship, FOWC entered into a Race Promotion Contract ('RPC')  dated September 13, 2011 with Jaypee Sports International Limited (‘Jaypee’) for USD 40 million, in terms of which, Jaypee acquired the right to host, stage and promote the race event in India. Additionally, an Artworks Licence Agreement ('ALA') amounting to USD 1 million was also entered into with Jaypee on the same date, to permit Jaypee to use certain trademarks and Intellectual Property belonging to the tax payer.

• On the same date, various other agreements were also entered into by Jaypee with other three Affiliates of FOWC under which various rights pertaining to the F-1 Championship were given back to such Affiliates by Jaypee.

• Upon an application to Authority for Advance Rulings ('AAR'), FOWC contended the consideration under RPC was of the nature of Business Profits, which in the absence of a PE was not liable to tax. The tax authorities regarded the same as Royalty in terms of Article 13 of the Indo-UK tax treaty and therefore liable to tax in India, which was upheld by the AAR of India.

• On subsequent appeal before the High Court of Delhi, it was held that although the consideration could not characterized as ‘Royalties’ under the Indo-UK tax treaty, incidence of a Fixed place PE under Article 5(1) does arise in the hands of the tax payer. As such, the Hon’ble High Court held that the consideration received was chargeable to tax as business profits to the extent attributable to the PE in India.

Both the tax payer and the tax authorities preferred an appeal to the Hon'ble Supreme Court, against the order of the High Court.

After  hearing both the parties, the Supreme Court held as under:

• The race circuit in India is a fixed place and is undoubtedly an economic / business activity and that it would be essential to examine whether such circuit was at the ‘disposal’ of the tax payer and who has the dominant control over such circuit;

• The key issue is to determine the manner in which the commercial rights have been exploited by FOWC and its affiliates. For the same, it is imperative to read all the agreements holistically so as to bring out the real transaction between the parties. 

• The Supreme Court, after examining the relevant terms of the various agreements observed that FIA assigned commercial rights in favour of FOAM vide agreement dated April 24, 2001 and on the same day FOAM transferred these rights to FOWC. Furthermore, vide the Concorde agreement among FIA FOWC and participating teams, FOWC was authorized to exploit the commercial rights directly or through affiliates only. Pursuant to the RPC, on the same day, circuit rights mainly media, title sponsorship and paddock rights were given back by Jaypee to affiliates of FOWC. Also it was observed that, FOWC was responsible for the licensing and supervision of other parties, teams, travel, transport and other data support services.

• The Supreme Court held that such arrangements clearly demonstrated that the entire event was taken over and controlled by the taxpayer and its affiliates. In view thereof, it was concluded that commercial rights of the events were held and exploited by the tax payer with actual conduct of race in India and income, being generated in India therefrom.

• The Apex Court also observed that for conducting a race, a circuit, a paddock and competing teams are must and all these were controlled by FOWC and its affiliates. Event took place by the conduct of race physically in India, the entire income from which was generated from the said event in India Thus, Supreme Court concluded that the commercial rights were with FOWC which were exploited with actual conduct of race in India.

• The Court also held that physical control of the circuit was also available with the tax payer and its affiliates two weeks prior and a week succeeding the event. Omnipresence of FOWC and its stamp over the event was loud and clear.

• The Supreme Court, in its order discussed the decision of the High Court vis-a-vis the analysis of relevant terms of all the contracts by High Court, which clearly indicated that Jaypee's capacity to act was extremely restricted and that FOWC had exclusive access to the circuit and to all the places where teams were located and that it could also dictate who were authorized to enter the areas reserved. The conceptualization of the event and the right to include it in a particular circuit was that of FOWC.  Furthermore, Supreme Court also noted that although the circuit was built for other events but during the F-1 championship, no other event was possible.

• It is noteworthy to mention that the Supreme Court also upheld the important conclusion of High Court that the short duration of event, (which was three days) was immaterial. The Supreme Court reiterated  the decision of the High Court which stated that although the presence of the teams and the personnel  was up to six weeks but given the bundle of rights to FOWC as CRH, there was shifting and moving presence of FOWC with the conclusion of each event and given such exclusive nature of access and period for which it is accessed, makes the presence of a kind contemplated under Article 5(1) i.e. fixed place. RPC's tenure of five years meant that there was a repetition and as such, the circuit constitutes a fixed place of business.

• In view of the aforesaid, the Hon’ble Apex Court held that the race circuit in India was a Fixed place PE of the Taxpayer. The Supreme Court affirmed the finding of the High Court that having regard to the duration of the event, which was for limited days, and for the entire duration FOWC had full access through its personnel.  As such,  number of days for which the access was granted would be immaterial.   Supreme Court also reiterated various PE related jurisprudence from foreign courts that were relied upon by High Court.

• The Supreme Court also held that the tests laid down by Andhra Pradesh High Court in Visakhapatnam Port Trust and the characteristics laid down by Philip Baker (in his commentary) for constitution of fixed place PE, viz. stability, productivity and dependence, are all satisfied in the present case.

• Accordingly, the Supreme Court held that FOWC is liable to pay tax in India on the income earned from F-1 Championship which is attributable to the PE in India.

This degree of permanence required for constitution of Fixed Place PE has always been a contentious aspect. Certain decisions [Golf in Dubai LLC ([ 2008] 174 Taxman 480 [AAR]); DDIT Vs Subsea Offshore Limited ([1998] 66 ITD 296 [Mum.] have propounded the view that activities for a relatively shorter period of time do not result into a PE of the foreign entity in India as the elements of continuity, regularity and repetitiveness are absent.

At the same time, there does exist a school of thought [Fugro Engineers BV Vs ACIT ([2008] 26 SOT 78 [Delhi]) that presence of a foreign enterprise even for a short duration in India does lead to incidence of PE in India.

The instant decision of the Apex Court does give judicial sanction  to the latter school of thought. Be that as it may, the aspect of constitution of a PE where presence is of a relatively shorter duration would essentially hinge the facts of each case, especially keeping in mind the nature of activities. For instance while the ratio of  decision may be applicable to the events and fair business, the same may not hold water for the EPC business, where presence of personnel for a shorter duration is generally not regarded to constitute a Fixed Place PE.

This decision does give a deep insight on the 'disposal test' rule for the purpose of determination of existence of a Fixed Place PE.  While doing so, the Hon’ble Supreme Court has emphasized upon the physical control of the site for the satisfaction of the disposal test.

Although each case ought to be examined in light of the specific facts, nevertheless, the principles emanating from the judgment of the Apex Court would be of paramount significance while examining the taxability of non residents in India.

(Contributed by: Mr. Anuj Mathur/ Ms. Ritu Gyamlani)

The Delhi High Court has held that reimbursement of salary cost pursuant to secondment of employees would not be liable to withholding tax as the salary payments, made to the employees, had already been subjected to tax in India.

The assessee, Marks & Spencer Reliance Pvt. Ltd. (M&S India) is a Joint Venture entity between Marks & Spencer Plc (M&S UK) and Reliance Retail Limited. In terms of the secondment arrangement, M&S UK seconded certain employees to M&S India to carry out management activities and other activities in relation to setting up of business in India. The salaries which were initially paid by M&S UK were subsequently reimbursed by M&S India without any mark up. On this premise, the assessee contended that incidence of withholding tax u/s 195 of the Income-tax Act does not arise. The tax officer however held that the same ought to be regarded as FTS and therefore, liable for withholding tax in India. Both Commissioner (Appeals) and Appellate Tribunal affirmed the view of the assessee and reversed the order of the tax officer.

On appeal by the revenue, the High Court upheld the view of the Appellate Tribunal that since the said payment to the employees has already been subjected to tax in India, the question of treating the assessee as assessee in default, for non-deduction of tax at source, does not arise.

(Contributed by: Mr. Anuj Mathur/ Ms. Purnima Bajaj)

In the instant case, the Delhi High Court upheld the order of Appellate Tribunal directing exclusion of cost recharge by the assessee from its associated enterprise, for maintaining spare infrastructure capacity for associated enterprise, while computing operating margin of the assessee. The High Court observed that there were two kinds of reimbursements in the present case - one towards cost of services which had mark-up and other towards cost of infrastructure without mark-up. The High Court noted the finding of the Appellate Tribunal that reimbursement at costs should be excluded as they do not involve any functions to be performed so as to consider it for profitability purposes.

The High Court distinguished the decision in case of CIT vs. Cushman and Wakefield (India) P. Ltd. (2014) 367 ITR 730 (Del) as relied by the Income-tax  authorities stating that in the said case the reimbursement was by Indian entity whereas the situation in the present case is converse and also there was no categorization of reimbursements at cost or reimbursements with mark up.

In the instant case, the Appellate Tribunal Chennai Bench, amongst other issues, deleted transfer pricing adjustment in the case of the assessee, Hyundai Motor India Limited holding that accretion in the brand value of foreign associated enterprise is not a separate international transaction to be benchmarked.

In this case, the assessee was mandatorily required to use brand name of its holding company on cars manufactured and sold in India under the technology use agreement. During the transfer pricing assessment proceedings, the Transfer Pricing Officer referred to the Special Bench decision in the case of LG Electronics Pvt. Ltd. vs. ACIT [(2013) 22 ITR 1 (DEL) (Trib.)] and made transfer pricing addition on the premise that the assessee was neither getting any compensation from associated enterprise for brand development of associated enterprise nor was allowed to create its own brand.

Before the Appellate Tribunal, the assessee contended that there was no conscious brand development activity carried out by it in India and also there was no agreement with the associated enterprise for brand building services. The assessee highlighted that it had not incurred any expenses related to brand development and it also satisfied the bright line test as its Advertising, Marketing and Promotion expenses (AMP) expenses as percentage of net sales were not in excess of that incurred by comparable companies.

The Appellate Tribunal observed that the technology use agreement with the associated enterprise was accepted to be an arrangement at arm’s length price and that the basis of TP adjustment is not the expense incurred by the assessee but the mere fact of sale of cars by the assessee under the brand name of associated enterprise. The Appellate Tribunal stated that the incidental benefit accruing to associated enterprise is not a result of conscious brand development by the assessee. The Appellate Tribunal distinguished the impugned case from the Special Bench decision in the case of LG Electronics Pvt. Ltd. referred above.

The Appellate Tribunal held as under:

• So far as ‘Intangibles’ are concerned, the definition of ‘international transaction’ under the Income-tax Act covers only sale, purchase or leasing of intangibles.
• Brand value accretion due to use of associated enterprise’s brand on cars cannot be treated as ‘provision of services’ as included in the definition of ‘international transaction’.
• Service has to be conscious activity and cannot be a subliminal exercise. A passive exercise cannot be defined as a ‘service’.
• What is benchmarked is not the accrual of benefit to associated enterprise but the rendition of service and there was no rendition of service in the present case.
• As there was no impact on income, expenditure, assets of the assessee company, the present case was also not covered by the residuary component of definition of ‘international transaction’.
• Deemed brand development is not a separate international transaction to be benchmarked.

Accordingly, the Appellate Tribunal deleted the transfer pricing adjustment.

In a recent decision, the Hon’ble Supreme Court, while overruling the decision of Allahabad High Court in case of Vector Shipping [(2013) 357 ITR 642 (Del)] has held that the word ‘payable’ as appearing in section 40(a)(ia) of the Income-tax Act covers not only those cases where the amount is yet to be paid but also covers case where the amount is actually paid.

During the year under consideration, the assessee had made certain payments without deduction of tax at source. The Income Tax Authorities  held that such payments were liable to TDS u/s 194C & hence, disallowed the amounts u/s 40(a)(ia) of the Income-tax Act.

Before the CIT(A), the assessee contended that the provision of section 40(a)(ia) are applicable only when the amount is due and payable and not when it is actually paid. However the CIT(A) sustained the addition made by the ITA. The Tribunal and High Court also affirmed the view of the Income Tax Authorities. 

Thereafter, the matter travelled to the Hon’ble Supreme Court. The Supreme Court took note of the fact that there are divergent views of High Courts on this issue. While the Allahabad High Court has held that section 40(a)(ia) covers only those cases where amount is payable; High Court of Madras, Calcutta, Gujarat and Punjab & Haryana have taken the view that the aforesaid provision would cover even those cases where the amount stands paid. The Supreme Court examined all such decisions and held as under:

• Provisions of section 194C, section 200 read with Rule 30(2) of the Income Tax Rules, 1962 (‘the Rules’) clearly suggest that tax has to be deducted at source at the time of credit of such sum to the account of the payee or at the time of payment whichever is earlier and the same needs to be deposited within the prescribed timelines.
• The Punjab & Haryana High Court in the case of PMS Diesels & Ors [(2015) 374 ITR 562] has held that the aforesaid provisions are mandatory in nature. Similar view have also been taken by the Calcutta and Madras High Court in the case of Crescent Export Syndicate [(2013) 216 Taxman 258(Cal)] and Tube investments [(2010) 325 ITR 610 (Mad)]. Such aspect was, however, not dealt with by Allahabad High Court in case of Vector Shipping (supra).
• When the entire scheme of obligation to deduct tax at source is read holistically, it cannot be held that it covers only those cases where the amount is yet to be paid as such an interpretation would lead to the taxpayers going scot free, even when they fail to adhere to the provisions of section 194C and section 200 of the Income-tax Act.
• The Apex Couty further held that even though the Special Leave Petition against the decision of Allahabad High Court in case of Vector Shipping (supra) was dismissed by the Supreme Court, it would not amount to confirming the view of the Allahabad High Court.

With this judgement, Supreme Court has put to rest, the controversy with respect to the applicability of section 40(a)(ia) of the Act vis-a-vis amounts paid & payable at the end of the year. It is apt to mention that Central Board of Direct Taxes had already issued a circular no. 10/DV/2013 dated December  06, 2013, to clarify that disallowance under section 40(a)(ia) would include within its scope, both the amounts ‘paid’ as well as ‘payable’.

(Contributed by: Ms. Ritu Gyamlani)

Under the scheme of the Income-tax Act, Industrial Parks/Special Economic zones (SEZ) are eligible for tax holiday in respect of their business income in terms of section 80IA of the Income-tax Act.

In respect of such Industrial Parks/Special Economic zone (SEZ), characterization of income from letting out buildings along with amenities was a contentious aspect. While tax payers contended that such income ought to be characterized as business income, the Income Tax Authorities have held it to be chargeable under the head ‘Income from House Property’. In this regard, the Karnataka High Court in certain decisions, i.e. Velankani Information Systems Pvt Ltd., [2013] 35 taxmann.com 1 and CIT v. Information Technology Park Ltd[2014]46 taxmann.com 239 has held that such income should be regarded as Business Income. Also, the special leave petitions filed by the Income Tax Authorities with the Supreme Court against the aforesaid judgements have been dismissed.

The CBDT vide the instant circular, has conveyed its acceptance of the ratio of the aforesaid judgements. The CBDT has also clarified that henceforth, no appeal would be filed by the tax authorities on this issue to Appellate Tribunal. The existing appeals shall be withdrawn or would not be pressed upon.

Till date, all the States and Union Territories (except 7 States) have passed the State Goods and Services Tax Bill, 2017 or UT Goods & Service Tax Bill, 2017 during the special session of the Legislative Assembly. Accordingly, list of states not passed States Goods & Services Tax Bill are as under:-

• West Bengal (Kolkata)
• Meghalaya (Shillong)
• Punjab (Chandigarh)
• Tamil Nadu (Chennai)
• Karnataka (Bangalore)
• Kerala (Thiruvananthapuram)
• Jammu & Kashmir

(Contributed by: Mr.Shashank Goel/ Mr.Karan Chandna)

A meeting of the GST Council was held on 18th & 19th May and 3rd June, 2017, wherein 9 out of 14 available draft rules namely, Composition Rules, Invoice, Credit and Debit Notes Rules, Input Tax Credit Rules, Payment of Tax Rules, Refund Rules, Registration Rules, Return Rules and Transition Rules were approved and put up to public domain.

GST Council also finalised the tax rate structure of goods and services. The goods and services will fall under different rates such as Nil, 5%, 12%, 18% & 28%. The Council has kept a large number of goods and services in the 18% slab and has categorized 1211 items of goods under various tax rates and the same has been made available on public domain.

Council has also issued list of 83 services which would be exempted under GST, services which would be liable to GST under reverse charge mechanism. Further, the council has proposed new scheme for classification of service. Also, the Council has clarified that two key social elements healthcare and education would be exempt from any tax under the GST.

The Appellant, M/s McDonald’s India Private Limited (hereafter “McDonald’s India”), is a wholly owned subsidiary of McDonald’s corporation, Delaware. McDonalds India entered into franchise agreements with various franchisees to allow them to adopt and use the “McDonald’s system”, for the purpose of operating its restaurants in India. It receives a fixed amount as location fee from the franchisees at the time of opening of the restaurants. Further, it collects royalty of approximately 5% of the gross sales from the restaurants operated by the franchisees.

For assessment year 2005-2006, DVAT authorities stated and took the position that the royalty payment was liable to levy on the ground that it constituted consideration for the transfer of rights to use the trade mark “McDonald’s” and on 9th October 2006, McDonald’s India was asked to show cause why it should not be assessed to tax under Section 23 (6) of the Delhi Sales Tax Act, 1975, read with Section 9 of the Delhi Sales Tax on Right to use Goods Act, 2002 (“DSTRTUG Act”) for the AY 2004-05 and why a penalty should not be imposed upon the appellant for the same. Further, The Value Added Tax Officer, Special Zone, vide an order, dated 16.01.2007, treated the “McDonald’s system” as goods and invoked a demand of Rs. 13, 44, 684/-.

Against the said order McDonald’s India filed an appeal to Joint Commissioner and the Joint Commissioner by an order held that transaction entered into by the appellant involved the transfer of the right to use “McDonald’s system”, which constitute goods under Article 366(29A) of the Constitution and Section 1(n) of the DSTRTUG Act, thereby upholding the order of Assessing Authority.

Being aggrieved with the above order, McDonald’s appealed to the Appellate Tribunal on September 01, 2008.The Tribunal, however, dismissed the appeal, and upheld the orders of the Joint Commissioner- Vs and Special Commissioner- III. Aggrieved from the impugned order, McDonald India appealed to the High Court.

Similarly, Sagar Ratna Restaurants Pvt. Ltd. was directed to pay VAT on fee received by it as franchisors by an order passed by VATO, Delhi. Also, Bikanerwala Foods Pvt. Ltd. and GlaxoSmithKline Asia Pvt. Ltd.(GSK) were directed by assessment orders to pay VAT upon the transactions of granting the right to use their respective trade mark and grant of non-exclusive license to their respective franchisees. All three petitioners likewise, filed writ petitions against default assessment notices.

The petitioners urged that the VAT authorities claim that tax can be levied on the royalty and franchise fees charged by them (i.e. the Petitioners) based on the franchise agreements entered into by them. The petitioners submit that this interpretation is in disregard of the dominant intention that arose from the franchise agreements, and that the service tax that was already being paid by the Petitioners, and further, that the non- exclusive transfer of the right to use goods was not tantamount to transfer under the DSTRTUG Act.

As the appeal and writ petitions were concerned with the same question of law, resultantly, they were heard together by the Delhi High Court.

After analyzing the facts of the case, the High Court stated, what irrefutably follows is that the franchise agreements in the three cases (and trade mark licensing agreement in GSK’s petition) permit a limited right to use the composite system of the respective businesses of the Appellant and the Petitioners to the franchisors/licensee, and the dominant intention, as well as the specific provisions arising from the franchise agreements are not of a transfer of the right to use goods.

Accordingly, allowing the appeal and petitions the High Court held that the Appellate Tribunal erred in holding that consideration received under the franchise agreement (in McDonald’s case) was for transfer of right to use the goods, i.e., the trade mark, under the DSTRTUG Act and under the Delhi Value Added Tax Act, 2004; its findings are set aside. For the same reasons, it is held that the franchise agreements in the case of Bikanerwala and Sagar Ratna are not subject to DVAT levy; in the case of GSK, it is held that the trade mark licensing agreement cannot result in fastening DVAT liability upon such transaction. The assessment orders and notices impugned in all the cases, and the orders of the DVAT Tribunal are hereby quashed. The appeals and writ petitions are, therefore, allowed in these terms.

[McDonalds India Pvt. Ltd., Glaxo Smith Kline Asia P. Ltd., Assess. Auth. Special Zone Trade, Bikanerwala Foods Pvt. Ltd., Sagar Ratna Restaurants Pvt. Ltd. Vs. Commissioner of Trade And Taxes, New Delhi & Others] - [2017 (5) TMI 999 - DELHI HIGH COURT]

A. The law governing winding-up/ liquidation:-

Under the Companies Act, 2013 (hereinafter referred to as the "2013 Act"), as in the earlier 1956 Act, the provisions relating to all modes of winding-up of Companies were initially incorporated in the Companies Act, 2013. Accordingly, Section 270 as originally enacted on winding-up incorporated the provisions that winding-up of a company may be either by the Tribunal or voluntary. This section was amended by The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "The Code"), with effect from November 15, 2016.

By virtue of this amendment, the voluntary mode of winding-up was deleted from the provisions of the 2013 Act and it is now to be dealt with under Section 59 of The Code. It may be noted that the deletion of the mode of voluntary winding up from the 2013 Act was made with effect from November 15, 2016 and such mode of winding-up was to be covered under Section 59 of The Code.

It may be noted that the actual amendment to Section 270 was made only from December 15, 2016 i.e. the provision for voluntary winding- up was no longer available in the 2013 Act, with effect from December 15, 2016. However, it may be noted that the corresponding provision in The Code, which is Section 59 of The Code, has come into effect only from April 01, 2017.

The above situation had resulted in a temporary vacuum from December 15, 2016 to March 31, 2017 regarding voluntary winding-up. During this period, no provision was in force relating to voluntary winding-up.

In any case, with effect from April 01, 2017, voluntary liquidation of a company is covered under the provisions of The Code as stated before.

In terms of the above, the only mode of winding up covered under the 2013 Act is the mode of winding up of a company by the Tribunal.

While the 2013 Act has incorporated detailed provisions on voluntary winding-up by the Tribunal. Section 271 of the said Act enumerated the circumstances in which a company can be wound up by the Tribunal under the said Act. Section 271 as originally incorporated six circumstances in which a company can be wound up by the Tribunal. One such circumstance related to the company "which is unable to pay its debts". This particular "circumstance" has since been deleted from Section 271 of the said Act with effect from December 15, 2016 and the liquidation of a company for default in payment of debts will now be covered under the provisions of The Code.

Further, in terms of the amendment to Section 272 of the 2013 Act, the creditors of a company can no longer file a petition to the Tribunal for winding-up of a company and the creditors can now proceed against a corporate debtor in terms of the provisions contained in The Code, for insolvency resolution first failing which the liquidation.

The above would indicate that for winding up of a company, the provisions under two enactments would be applicable. For certain circumstances of winding up, 2013 Act would be applicable and for certain circumstances of liquidation, The Code would be applicable.

B. Authority for winding-up/ liquidation:-

It may, however, be noted that the Adjudicating Authority for winding-up/liquidation, both under the 2013 Act and The Code, is the NCLT. In other words, NCLT will apply the relevant provisions to a given case according as a petition is filed under the 2013 Act or under The Code, as the case may be.

Similarly, the Appellate Authority under both the Acts, is the National Company Law Appellate Tribunal (NCLAT).

(Contributed by: Mr. N.V. Raman)