Court affirms 1/3rd payment as royalty, subject to 15% tax under Indo-Singapore DTAA
In a significant ruling, the Delhi High Court has upheld the characterization of payments made by M/S LG Electronics India Pvt. Ltd. to Global Cricket Corporation Pvt. Ltd. (GCC) as partly constituting royalty under the Income Tax Act, 1961. The court ruled that 1/3rd of the payment, made for acquiring rights under a global partnership agreement, is to be treated as royalty for the right to use International Cricket Council (ICC) trademarks, and is subject to a 15% tax as per the Singapore-India Double Taxation Avoidance Agreement (DTAA).
The bench, comprising Justices V. Kameswar Rao and Vinod Kumar, dismissed LG Electronics' plea challenging the order dated April 27, 2004, which apportioned the payment made to GCC, a company incorporated in Singapore, towards the use of ICC trademarks. The court found the payment justified within the framework of Section 9(1)(vi) Explanation 2(i) of the Income Tax Act, stating that the use of ICC trademarks was substantial and not merely incidental to the advertising agreement.
The case revolved around LG Electronics' acquisition of global partnership rights for advertising and promotion at ICC events. The agreement allowed LG to display its marks along with ICC's on various advertising platforms, including stadiums and electronic media, leading to a payment of USD 11 million to GCC. The Deputy Director of Income Tax initially rejected LG's application for remittance without tax deduction, characterizing the payment as royalty. The Director of Income Tax subsequently revised this, attributing 1/3rd of the payment as royalty.
The court distinguished this case from the precedent set in the Formula One World Championship Ltd. case, where the use of trademarks was deemed incidental. It emphasized that in LG's case, the right to use the ICC trademark was a substantive and taxable right. The court also referenced the DTAA, affirming India's right to tax such royalties at 15%.
This judgment underscores the importance of carefully structuring international agreements involving intellectual property rights and highlights the implications of global partnership agreements under Indian tax laws. It reaffirms the jurisdiction's stance on taxing the commercial exploitation of trademarks as royalty, aligning with international tax treaties.
Bottom Line:
Income Tax Act, 1961 - Payments made by LG Electronics India Pvt. Ltd. to Global Cricket Corporation Pvt. Ltd. for acquiring rights under a global partnership agreement were partly characterized as royalty under Section 9(1)(vi) Explanation 2(i) of the Act, with 1/3rd of the payment apportioned towards royalty for the right to use ICC trademarks and subjected to tax at 15%.
Statutory provision(s): Income Tax Act, 1961 Section 264, Income Tax Act, 1961 Section 9(1)(vi) Explanation 2(i), Double Taxation Avoidance Agreement (DTAA) Article 12
