Big blow to F1 racing in India as Supreme Court taxes the event

The Supreme Court of India has ruled that since Formula 1 World Championship Ltd (FOWC) has a permanent establishment in India any event that it conducts in India should be seen as a business and any income that it receives through conducting the event should be taxable. The Supreme Court has in fact upheld the earlier ruling by the Delhi High Court taxing the Formula 1 event in what could be termed as a death knell for the forthcoming conduct of the event in India. Also, since the F1 racing events which had been held between 2011 and 2013 had not been taxed, the same needs to be done immediately, it added.

The Supreme Court bench comprising Justices AK Sikri and Ashok Bhushan said, “We have held that FOWC has PE in India and income that is attributable in India will be taxed. The amount that is to be taxed is to be assessed by an assessing officer.”

The law states that, any establishment which has a fixed place of business is considered as a “permanent establishment” giving rise to income or value added tax (VAT) liability in its place of jurisdiction and since the Jaypee Group owned Buddh International Circuit (BIC) is seen as a “permanent establishment” for doing the business of hosting formula one events, the same needs to be taxed as observed by the judiciary.

The Supreme Court of India has also ruled that the payments made by the Jaypee Group to the Formula One management for the use of logos and symbols will be seen not as a royalty but as a business income and needs to be taxed. The purpose of using the symbols was to derive business out of the event and not for any other means. Though the percentage of taxation is yet to be finalized, the Highest Court of the Land has suggested around 40% taxation out of the total business income.

The Buddh International Circuit (BIC) was built by the Jaypee Group at a cost of USD 400 million and had signed a five-year contract with F1 management to conduct the racing event from 2011 to 2015. But the taxation issues and the impending tax compliance issues has forced the group to withdraw the conduct of the event from 2014 onwards. The future of the event in India is now very bleak with even the Delhi Government jumping into the scene and calling for levying entertainment tax for the conduct of the event. As far as we can see, the fans of the motorsport can be left with only disappointment.