International Tax Panorama

The Delhi High Court has upheld the Income Tax Department’s decision to apply withholding tax to part of the sponsorship payments LG Electronics India made for advertising and promotional rights related to ICC Cricket World Cup events.

In 2002, LG Electronics India Pvt. Ltd. entered into a Global Partnership Agreement with Global Cricket Corporation Pvt. Ltd. (GCC), a Singapore-based company. The GCC Company held commercial rights granted by the ICC.

Under the agreement, LG was appointed as ‘Global Partner’ for ICC events, including the 2003 ICC Cricket World Cup in South Africa and the 2007 ICC Cricket World Cup. As a ‘Global Partner’, LG acquired wide-ranging sponsorship, advertising, and promotional rights in relation to ICC cricket events for a total consideration of USD 27.5 million. These included display of LG branding on perimeter boards, sight screens, tickets, official event websites, and other promotional material across multiple platforms.

Of the total USD 27.5 million payable by the LG group to GCC, LG Electronics India bore USD 11 million.

LG approached the tax authorities under Section 195 of the Income Tax Act, 1961, seeking permission to remit the amount without tax deduction.

However, the tax authorities rejected the request, holding that the payment was in the nature of a royalty.

In revision under Section 264, the Director of Income Tax held that while 2/3rd of the payment related to advertising rights, 1/3rd was attributable to the right to use ICC trademarks and constituted royalty. This royalty payment was subject to a 15% withholding tax under the Income Tax Act and the India-Singapore tax treaty.

LG challenged this apportionment before the High Court.

Issue Before the High Court:

Whether part of the payment made for global sponsorship and advertising rights could be treated as royalty for use of ICC trademarks under Section 9(1)(vi) and Article 12 of the India-Singapore DTAA.

Arguments by LG:

LG, in its plea before the High Court, argued that the dominant purpose of the agreement was advertising and brand visibility. Any use of the ICC mark was merely incidental as the sponsor incidentally associated itself with the event organiser’s brand.

Order by the High Court:

The High Court upheld the order under Section 264 and dismissed the writ petition.

The Court rejected LG’s contention that trademark use was merely incidental. It highlighted the wide scope of rights granted under the Global Partnership Agreement.

The Court held that the agreement granted LG substantive and independent rights to use ICC Marks and Event Marks worldwide, extending well beyond mere in-stadium advertising. It noted that the agreement defined the ‘licensed territory’ as extending to the entire world and described ‘advertising material’ in broad terms, covering packaging, labelling and promotional content “of whatever nature and in whatever media.” This demonstrates that the rights were not confined to in-stadium advertising or event venues, the bench said.

The apportionment of 2/3rd towards advertising and 1/3rd towards royalty was found reasonable and was not challenged on merits. Therefore, withholding tax at 15% on 1/3rd of the payment as royalty was upheld.