ITAT on the Admissibility of Paying Formula One Drivers

Facts and Issue of the case

These are appeals by the assessee against the respective orders of Assessing Officer (AO) passed pursuant to the directions of the Dispute Resolution Panel (DRP).

Since common issues are raised court are referring to grounds of appeal for Assessment Year 2012-13 as under :-

Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income-tax, International Taxation, Noida [‘Learned AO’], under Section 144

r.w.s. 144C(13) of the Income-tax Act, 1961 (‘the Act’) (‘ Assessment order’), in pursuance of the directions issued by Dispute Resolution Panel- 2 (‘Hon’ble DRP’), New Delhi, on the following grounds:

The Learned AO/ Hon’ble DRP erred in determining the total income of the Appellant to be Rs 3,25,43,000 for AY 2012-13.
The Learned AO erred in not issuing a final assessment order under Section 144 of the Act; and thereby rendering the assessment order as null and void ab initio.
The Hon’ble DRP erred in noting that the Appellant did not furnish any relevant reply to show-cause why provisions of Article 17 of the India-Switzerland Tax Treaty (‘DTAA’) are not applicable to the facts of the Appellant’s case.
The Learned AO/ Hon’ble DRP erred in holding that the receipts of the Appellant are in the nature of receipts derived from personal activities of the athletes exercised in India and hence, taxable in India under Article 17 of the DTAA without considering the detailed submissions filed with Hon’ble DRP on non-applicability of Article 17 of the DTAA.
The Learned AO/ Hon’ble DRP erred in arriving at the taxable income of the Appellant based on the payments made to Formula FB Business Limited and Felipe Massa.
Even assuming (without admitting) that the Appellant’s receipts are taxable in India under Article 17 of the DTAA, the Learned AO/ Hon’ble DRP erred in not allowing payments made to Formula FB Business Limited and Felipe Massa as a deductible expense, inspite of the fact that tax has been deducted and deposited into the Indian Government treasury.
The Learned AO/ Hon’ble DRP erred in levying interest under Section 234A, 234B and 234C of the Act.
The Learned AO/ Hon’ble DRP erred in levying interest under Section 234D of the Act.
The Learned AO/ Hon’ble DRP erred in initiating penalty proceedings under Section 271 (1)( c) of the Act.

M/s. GSA Gestions Sportives Automobiles S.A. is incorporated in Switzerland. The company provides the rights to services of qualified motor racing drivers to teams participating in the Federation Internationale de’1 Automobile (FIA) Formula One 2011 Championship. For AY 2012-13, the AO referred to various letters/notes issued to the assessee which remained unresponded. The AO noted that the assessee is in receipt relating to Indian Grand Prix which was received in connection with business liable to tax @ 40%. He opined that the facts and material on record indicate to the existence of Permanent Establishment (PE) of assessee in terms of Article 5 of India- Switzerland Double Taxation Avoidance Agreement (Indo-Switzerland DTAA).

Upon assessee’s objection, ld. DRP agreed that the assessee cannot be said to have a PE in India. It observed that the assessee has submitted that it did not have any agent or representative in India who was involved in negotiating and entering into contracts for and on behalf of assessee in India. Further, the contract between Formula One World Championship and JSIL is a contract between two independent parties and the assessee is not a party to the contract. The contracts entered into by GSA with Formula FB Business Ltd. and Felipe Massa were executed outside India and Formula One World Championship and JSIL were not party to this contract. Ld. DRP noted certain other submissions and agreed that since the Grand Prix was held for three days in a year, there is no element of permanence in presence of assessee in India. It also agreed that assessee is not a team participating in FIA Championship races but it is a sports management company that provides drivers to teams participating in FIA Championship. Ld. DRP further noted that the AO has observed that the assessee is provided specific places of garages, pit stops and other sites where it sets up its equipment and other facilities, through which the assessee operates and carries out its operations related to the race and other commercial activities; that apart from using the main racing track for conducting its activity of racing, the assessee uses facilities provided at the track like the CCTV camera network, Medical Response facilities including Safety cars, etc.; that the AO has not alleged that the assessee has any permanent / fixed place in the form of office or otherwise in India. The DRP opined that use of facilities for 3 days in a year at the site of Formula One motor racing championship does not amount to having a fixed place of business in India. Ld. DRP further noted that the AO has also not identified which is the agent of the assessee in India who is habitually negotiating and signing contracts on behalf of the assessee in India. Therefore, it held that in facts and circumstances of the case, there does not exist any PE of the assessee in India.

After having held that the assessee does not have any existence of PE in India under Article 5 of Indo-Switzerland DTAA, the DRP observed that the same is not relevant for the purpose of taxability of receipt of assessee in India. It noted that it is undisputed that assessee is a sports management company that provides drivers to team participating in FIA Championship and, therefore, its receipts from drivers participating in Formula One Motor Championship are in the nature of receipts derived from personal activities of entertainers/athletes exercised in India; that as per OECD commentary on Article 17 of model tax treaty, Formula One racing driver is in the nature of athlete. Therefore, DRP held that applicable article in the case of assessee shall be Article 17 and not Article 7 of Tax Treaty. Referring to Article 7.

Thereafter, the DRP dealt with other aspects of the objections and held that the argument of the assessee that its receipts are not taxable in India as there is no PE in India, is not legally tenable For AY 2013-14, similar orders were passed by the Revenue authorities. Against the above order, the assessee is in appeal before us.

Observation of the court

Court has carefully considered the submissions of both the parties and gone through the record. As regards the decision of AAR referred to by the ld. counsel for the assessee in the case of AAR No.1430 of 2012, it will be gainful to refer to the concluding portion of the said ruling.

Referring to the above said decision, a question was put to ld. counsel for the assessee as to whether the racing car driver in the case before us is a driver simplicitor or is he a technical expert in this field. Ld. counsel could not give a cogent reply nor he could rebut the proposition that the racing car driver is not a technically expert person. Moreover the reference by DRP to OECD commentary in the context of model tax treaty that formula one driver is in the nature of athlete is also germane and has to be considered. Furthermore, as our following discussion would show certain other aspect of the present case need some factual examination. In this view of the matter, in our considered opinion, in the present case, the issue cannot be remitted to the AO to follow the said ruling as requested by the ld. counsel of the assessee.

Now coming to the order of the AO passed pursuant to the DRP order, we note that there are two limbs thereof. In the first limb, the DRP has accepted that assessee has no PE existence and the DRP has accepted that the racing car driver came and performed for only three days in India. In this connection, a query was raised as to the actual duration of the said drivers’ stay in India in connection with the aforesaid race, the time taken for preparation, finalization & conclusion and the certificate of the said drivers’ arrival in India and departure in relation to the event. Ld. counsel for the assessee was not in a position to provide any such detail. He submitted that these aspects are factual aspects and are not readily available and the matter can be remitted to the AO for examination in this regard. We find that the aforesaid is a crucial aspect and has not been examined by the Revenue authorities below, hence we deem it proper to remit the file to the AO to examine the issue in terms of our observation as above.

As regards the plank on which the DRP had rejected the assessee’s objection is by reference to Article 17 of the model tax treaty that the receipts are in the nature of income derived from service of personal activities of racing car drivers in India. We note that the aforesaid reference in the present case is coming under Article 16 of the DTAA between India and Switzerland which deals with the issue of artists and athletes dealt with by the DRP. Court note that this aspect of DRP’s direction refers that there was no response from the assessee. But the assessee in grounds has disputed the observation that it has not given any response in this regard.