Race Promotion Contract Between Formula One World Championship And Jaypee Sports Is Not Franchise Agreement, No Service Tax Payable: CESTAT

The Allahabad Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that the race promotion contract between Formula One World Championship (FOWC) and Jaypee Sports (JSIL) is not a franchise agreement, and no service tax is payable.

The bench of P.K. Choudhary, Member (Judicial), and Sanjiv Srivastava (Technical Member), has observed that the agreement is for the transfer of the right to host, stage, and promote the event, wherein races shall be conducted by the Federation Internationale de L'Automobile (FIA) and its affiliates, and JSIL was required to provide necessary facilities and amenities for the same, including necessary licenses and permissions in its own name. The consideration paid by JSIL is also in lieu of the grant of such a right. There is no explicit or implied intention to grant representational rights in the agreement, whereby JSIL could represent FOWC in any capacity.

The petitioner/assessee has challenged the order passed by the Commissioner by which the transaction between the assessee, Jaypee Sports International Ltd., and Formula One World Championship Ltd. under the Race Promotion Contract was held to be a “franchise service, liable to service tax under Section 66A of the Finance Act, 1994. The services provided by Formula One Management Ltd. to M/s Jaypee Sports International Ltd. are also held to be “business auxiliary services, and since such services were provided from outside India, a demand for service tax has also been confirmed on the services.

The assessee contended that the Race Promotion Contract was executed between JSIL and FOWC, wherein JSIL was granted the right to host, stage, and promote the Formula 1 Grand Prix of India against consideration of US$ 40,124,120.26, subject to the execution of an artwork agreement with FOWC and a service agreement. Under the Artworks Agreement executed with FOM, JSIL was granted a non-exclusive, non-transferable royalty-free license to use the artwork and incorporate licensed marks in licensed materials approved by FOWC and under the Service Agreement. The FOM was appointed to carry out and perform all services relating to the organization of the international television feed and broadcasting of events against consideration of US$ 2,000,000.

The assessee argued that sine qua non for franchise service is a transfer of representational rights, and in the present case, JSIL merely had the right to host, stage, and promote the event and was not given any right to represent FOWC, so there is no transfer of representational rights. Various clauses of the Race Promotion Contract clearly show that JSIL retained its identity throughout the event, and the identity of JSIL never got subsumed in the identity of FOWC, as the entire event was conducted by FIA only.

The department contended that the race promotion contract involves the transfer of representational rights, and hence the demand has been rightly made after an extended period of limitation and penalties have been rightly imposed.

The issue raised was whether the Race Promotion Contract dated September 13, 2011 executed between JSIL and FOWC is covered by the expression “franchise as defined under Section 2(47) of the Finance Act, 1994, and therefore a taxable service under Section 65(105)(zze).

A taxable service under Section 65(105)(zze) of the Finance Act means a service provided or to be provided to a franchisee by the franchisor in relation to the franchise.

The tribunal noted that JSIL retained its individual identity and that its identity never got lost or subsumed in the identity of FOWC, as at no point in time, JSIL was known to the outside world as FOWC. The agreement required JSIL to obtain necessary licenses and permissions in its own name, enter into contracts with third parties in its own name, uphold the passes and tabards issued by FIA/FOWC, and act as an independent contract throughout the currency of the agreement.

The CESTAT quashed the demand for service tax to the extent of Rs. 20,36,32,619; the penalty imposed under Sections 78 and 77 and the demand for interest cannot be sustained, and the same are accordingly set aside.

Counsel For Appellant: Nishant Mishra

Counsel For Respondent: Sarweshwar T. Khairnar

Case Title: M/s Jaypee Sports International Ltd. Versus Commissioner of Central Excise & CGST, Noida

Case No.: Service Tax Appeal No.70547 of 2017

Click Here To Read The Order