M/S LG ELECTRONICS INDIA P.LTD & ANR vs. DIRECTOR OF INCOME TAX(INTERNATIONAL TAXATION) & ANR
W.P.(C) 15181/2004
KAMESWAR RAO and VINOD KUMAR, JJ
Overview
This writ petition, before the Delhi High Court, was directed against an attempt by the respondents to re-characterize, in part, payments made by LG Electronics India Pvt. Ltd. To a foreign entity for global sponsorship and advertising rights in ICC cricket events as “royalty” within the meaning of the Income Tax Act, 1961, thereby attracting withholding tax under Section 195. The central issue was whether the incidental use of the ICC trademark during advertising changes the character of the sponsorship fee to royalty taxable in India under Section 9(1)(vi) and the India–Singapore DTAA.
Facts
LG Electronics India Pvt. Ltd. (hereinafter referred to as ‘LG India’), along with its group companies, entered into a Global Partnership Agreement dated 28.06.2002 with Global Cricket Corporation Pvt. Ltd. (‘GCC’), a Singapore-based company. GCC had obtained commercial rights from ICC Development (International) Ltd. To appoint sponsors for ICC cricket events, including the Cricket World Cup.
Under the agreement, LG was designated a Global Partner with wide-ranging advertising and promotion rights, including the display of the LG logo on perimeter boards, electronic screens, tickets, official websites, and other designated locations at cricket venues. In consideration of these rights, the LG group agreed to pay USD 27.5 million, of which USD 11 million was paid by LG India.
LG India applied under Section 195 seeking permission to remit the amount without deduction of tax. The tax authorities rejected the same holding that the said payment, by which LG has acquired the right to use ICC trademarks, is in the nature of royalty. In revision under Section 264, partial relief was given by apportioning the payment—2/3rd as advertisement expense and 1/3rd as royalty, directing tax deduction at 15% on the royalty portion.
Aggrieved, LG India filed the present writ petition assailing the impugned order passed under Section 264.
Legal Issues
- Whether the payments made for the sponsorship and advertising rights in the international event of sports can be partly characterised as “royalty” due to incidental use of trademarks.
- Whether the rights for using ICC trademarks were ancillary to advertisement or constituted an independent transfer of trademark rights liable to tax under Section 9(1)(vi).
- Whether the apportionment of consideration into advertisement and royalty by the tax authorities was legally sustainable.
Decision
The Delhi High Court, therefore, allowed the said writ petition, holding that the dominant purpose of the agreement was advertising and brand visibility and not the exploitation of ICC trademarks. It was further observed by the Court that LG did not acquire any proprietary rights in the ICC trademarks; their use was strictly controlled, limited, and incidental to the sponsorship arrangement.
Relying on its earlier decisions in Formula One World Championship Ltd. And Sheraton International Inc., the Court held that incidental use of a trademark in the course of advertising does not amount to royalty. The Court rejected the artificial apportionment adopted by the tax authorities, ruling that the payment could not be dissected to tax a portion as royalty.
Hence, the impugned order under Section 264 was quashed and respondents were directed to permit remittance without deduction of tax under Section 195.
