A tax jam that shook India’s F1 circuit

If you’ve been keeping up with the news, you may have heard of MotoGP Bharat ― India’s motorcycling Grand Prix making some noise in the headlines. It’s going to be the first motorsport event with all the pomp and show in nearly a decade at Delhi’s Buddh International Circuit since the exit of Formula One racing in India.

So in today’s Finshots, we go back in time and find out what went wrong with India’s F1 Grand Prix.

The Story

In 2011 the Formula One Grand Prix (F1 GP) made a grand entry in India. The country said hello to the F1 madness with platforms like BookMyShow selling tickets worth ₹1.25 crores in just 3 hours of the ticket sale launch. And the hype was so intense that the inaugural GP even garnered 6 times the average television rating points than any other GP ever held, according to a TAM (Television Audience Measurement) Sports Survey.

And as you would expect all eyes were on Buddh International Circuit, the $400 million racing arena built by Jaypee Group, currently a crisis-hit conglomerate. A subsidiary of the Jaypee Group bagged the F1 hosting and promotional rights for 5 years starting in 2011. But the deal went sour after 3 seasons in 2013. And F1 said goodbye to India for good.

So, what went wrong?

Well, it all started with a contract between Jaypee Sports and Formula One World Championship Limited (FOWC), a UK-based company. Jaypee Sports was a Jaypee Group subsidiary interested in acquiring the hosting rights for the F1 Grand Prix from FOWC. So they signed two contracts. One, a $40 million Race Promotion Contract. And another, a $1 million contract that let Jaypee use FOWC’s logos, trademarks and other intellectual property.

The $40 million Race Promotion Contract granted Jaypee the right to host, stage and promote the F1 GP. The $1 million contract called the Artwork License Agreement (ALA) allowed Jaypee to use certain marks (intellectual property) owned by FOWC. Marks like the ones we’ve shown below.

Now you may wonder why hash out two separate contracts when you could have clubbed both contracts together. Well, the answer is actually quite simple. Both Jaypee and FOWC wanted to reduce their tax outgo. And to this end, they believed separating the two contracts could limit the total tax implication.

How so?

Well, before they paid the tax, they approached tax authorities  —  in this case, the Authority for Advance Rulings (AAR) and sought an advance ruling on the matter. They wanted to know how the authorities would tax these contracts. And they made a compelling pitch to voice their opinion. It went something like this.

The massive $40 million contract is neither royalty income nor business income. And therefore is not liable to be taxed in India. Now you would think that Jaypee paying a lot of money to host the race and use the intellectual marks owned by FOWC would amount to royalty. But as we noted earlier, there was a separate agreement totalling $1 million that dealt…