Facts of the Case

The petitioner, LG Electronics India Pvt. Ltd., entered into a Global Partnership Agreement dated 28.06.2002 with Global Cricket Corporation Pvt. Ltd. (GCC), a Singapore-based entity holding commercial rights of International Cricket Council (ICC) events. Under the agreement, LG acquired global partnership rights in relation to ICC cricket tournaments, including advertising and promotional rights at match venues as well as the right to use ICC Marks and Event Marks in advertising material. The total consideration agreed was USD 27.5 million, of which USD 11 million was borne by the petitioner.

The petitioner applied under Section 195 of the Income-tax Act seeking permission to remit the amount without deduction of tax. The Deputy Director of Income Tax rejected the application on 12.11.2002, holding that the payment constituted royalty. On revision under Section 264, the Director of Income Tax partly allowed the application by apportioning the consideration, treating two-thirds as payment for advertisement space and one-third as consideration for right to use ICC trademarks, taxable as royalty at 15% under the India–Singapore DTAA. Aggrieved, the petitioner approached the High Court.

Issues Involved

Whether part of the sponsorship payment made for advertising and promotional rights in an international cricket event could be characterized as royalty for use of trademark, whether the right to use ICC Marks was merely incidental to advertisement, and whether the apportionment of consideration between advertisement and royalty by the tax authorities was justified.

Petitioner’s Arguments

The petitioner contended that the dominant purpose of the agreement was advertisement by booking premium space at cricket venues and that the use of ICC Marks was merely incidental. It was argued that no independent right to commercially exploit ICC trademarks was granted and that any reference to ICC Marks was only to signify association with the event. Reliance was placed on the judgments in Formula One World Championship Ltd. and Sheraton International Inc. to submit that incidental trademark use in advertising arrangements does not amount to royalty.

Respondent’s Arguments

The Revenue argued that the agreement conferred substantive and independent rights on the petitioner to use ICC Marks and Event Marks across the licensed territory, defined as the entire world, including on packaging, websites and advertising material beyond the stadium. It was submitted that trademarks fall squarely within the definition of royalty under Section 9(1)(vi) and Article 12 of the DTAA. The petitioner had also conceded before the revisional authority that there was an element of trademark use, and therefore apportionment of consideration was justified.

Court Order / Findings

The Delhi High Court examined the Global Partnership Agreement in detail and noted that the petitioner had been granted a non-exclusive right to use ICC Marks and Event Marks throughout the licensed territory in or on advertising materials, as defined widely under the agreement. The Court held that the right to use ICC trademarks was not merely incidental but a substantive right forming part of the consideration.

The Court observed that the petitioner itself admitted the use of ICC Marks, though sought to downplay its value. The revisional authority’s apportionment of two-thirds of the payment towards advertisement space and one-third towards right to use trademark was found to be reasonable. The Court distinguished the judgments in Formula One World Championship Ltd. and Sheraton International Inc., holding that in those cases trademark use was strictly incidental and limited, whereas in the present case the agreement granted expansive rights to use ICC Marks globally.

Important Clarification

The Court clarified that where an agreement grants independent and substantive rights to use trademarks, such consideration falls within the definition of royalty under Section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA. Merely labeling trademark use as incidental does not alter its tax character if contractual terms indicate otherwise.

Final Outcome

The writ petition was dismissed. The Delhi High Court upheld the order passed under Section 264 of the Income-tax Act, confirming that one-third of the payment made by LG Electronics India Pvt. Ltd. to Global Cricket Corporation Pvt. Ltd. constituted royalty taxable in India, on which tax was required to be withheld at the rate of 15% under the India–Singapore DTAA.

Link to download the order -  https://www.mytaxexpert.co.in/uploads/1769503160_LGELECTRONICSINDIAP.LTDVsDIRECTOROFINCOMETAXORS.pdf

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