Formula One seeking to encash $15.45-million guarantee by Jaiprakash Associates

MUMBAI: Formula One is seeking to encash a $15.45-million guarantee by debt-laden Jaiprakash Associates on the ground that it hadn’t paid the sport’s organiser money that had been contractually agreed upon. The company said the amount is caught up in tax litigation and hence can’t be given. Bernie Ecclestone-led Formula One has moved the Bombay High Court in pursuit of the payment.

The contract between the two runs out this year with no visibility on whether the Indian Grand Prix, kicked off with much fanfare at the Jaiprakash-owned Buddh International Circuit in Greater Noida in 2011, will return to the Formula One calendar.

The UK-headquartered Formula One World Championship Ltd (FOWC) entered into a contract with a subsidiary of Jaiprakash Associates Ltd to organise the event between 2011 and 2015. The India GP has been held in 2011, 2012 and 2013.

Jaiprakash had furnished the guarantee, which is in the form of a standby letter of credit (SBLC), in order to set up the business. Formula One wants to invoke the guarantee and move the money to a designated bank in the UK.

Jaiprakash has opposed this saying that India’s income-tax department has issued an order to attach the SBLC. Until this attachment order is vacated, the SBLC cannot be invoked, it argued.

The court has allowed an extension of the guarantee, which was expiring on December 1, to March 31, 2016. This can be extended further by mutual consent in case the tax dispute is still unresolved, the court has said.

AXIS BANK ISSUED GUARANTEE

Axis Bank issued the guarantee on behalf of Jaiprakash while British bank RBS is the intermediary. If Formula One encashes the SBLC, Axis will have to pay RBS, which in turn will pay Formula One. Axis will then recover the money from Jaiprakash by invoking the latter’s corporate guarantee.

After the agreement was signed between Jaiprakash and Formula One, relief had been sought from the Indian tax authorities on the money that was supposed to be paid by Jaiprakash subsidiary, Jaypee Sports International Ltd (JSIL).

Formula One had argued before the Authority for Advance Rulings (AAR) that since the proceeds it received from the Indian firm as per the contract were “business income” and not “royalty”, it cannot be taxed in India under the India-UK double taxation avoidance agreement (DTAA). This was challenged by the tax department.

After the attachment order, JSIL was absorbed by the parent company. Jaiprakash Associates said the subject was sub judice but added that the term of the SLBC had been extended. Harish Salve, representing Formula One, suggested Lloyds Bank as the designated institution for holding the funds after SBLC encashment.

Fereshte Sethna, senior partner of law firm DMD, representing Formula One, and Chandubhai Mehta, managing partner of Dhruve Liladhar & Co, advising Axis, confirmed the development but refused to speak on the issue as it’s sub judice.

The division bench comprising Justices MS Sanklecha and GS Kulkarni will hear the matter further on November 27.