Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2025 Supreme(Online)(Del) 46230

IN THE HIGH COURT OF DELHI AT NEW DELHI
Kameswar Rao, Vinod Kumar, JJ
LG Electronics India – Appellant
Versus
Director of Income Tax – Respondent
W.P.(C) 15181/2004

Advocates:
For the Appellants/Petitioners: Deepak Chopra, Ankul Goyal, Adwiteya Grover
For the Respondents: Indruj Singh Rai, Sanjeev Menon, Rahul Singh, Gaurav Kumar

Payments for sponsorship rights that include the license to use intellectual property across diverse media and territories are not merely incidental to advertising. Such consideration is properly classified as royalty because it involves the substantive right to exploit trademarks, making it subject to withholding tax requirements.

Headnote:(A) Income Tax Act, 1961 - Section 9(1)(vi) - Explanation 2 - Royalty definition - Payment for global partnership and commercial rights - Whether payments for advertising include royalty for trademark usage - “Royalty” means consideration for use or right to use any trademark, logo, or similar intellectual property for commercial exploitation. (Para 35)

(B) Double Taxation Avoidance Agreement - Article 12 - Taxation of royalties - Apportionment of consideration - Where an agreement confers rights to use intellectual property alongside advertising services, the consideration attributable to such usage is taxable as royalty. (Para 37)

(C) Appellate Jurisdiction - Scope of review under constitutional writ jurisdiction - Courts are not to sit as appellate authorities over the decisions of tax officials unless the process is afflicted by perversity, illegality, or violation of the principles of natural justice. (Para 29)

Facts of the case:
The petitioner entered into an agreement to obtain global partnership and sponsorship rights, allowing for advertisement and the use of intellectual property assets in connection with sporting events. The revenue authorities assessed a portion of the total payment as royalty for the use of specific trademarks and logos, while treating the remainder as business income for advertising space. The petitioner challenged this re-characterization, arguing that the use of logos was purely incidental to the primary purpose of advertising.

Findings of Court:
The court found that the rights granted under the agreement permitted the use of intellectual property on various packaging, labeling, and promotional materials across the globe, rather than strictly being restricted to the physical venue of the events. Therefore, the usage of such marks could not be dismissed as purely incidental and was properly characterized as royalty under the governing legislative provisions.

Issues: Whether the payment made for global sponsorship rights, which includes the license to use specific trademarks, should be categorized as business income or as royalty, and whether the tax authorities were justified in apportioning the consideration between advertising and trademark usage.

Ratio Decidendi: If an agreement effectively confers a right to exploit intellectual property, such as trademarks or logos, in a manner that extends beyond purely incidental usage for on-ground advertising, the consideration for such rights constitutes royalty. Consequently, such payments fall within the scope of taxable royalty income under relevant income tax laws and international tax treaties.

Result: Petition dismissed.

Table of Content
1. dispute over whether sponsorship payments are royalty or business income. (Para 1 , 2 , 3 , 4 , 5 , 6 , 7)
2. petitioner's contention that trademark use is incidental to advertising rights. (Para 8 , 9 , 10 , 11 , 12 , 13 , 14 , 15 , 16 , 17 , 18)
3. respondent's contention that substantial trademark licensing rights denote royalty. (Para 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 29)
4. court's analysis on apportionment and the definition of royalty under the act and dtaa. (Para 30 , 31 , 32 , 33 , 34 , 35 , 36 , 37 , 38 , 39 , 40 , 41 , 42)
5. distinction from established precedents like formula one and sheraton cases. (Para 43 , 44 , 45)

JUDGMENT

V. KAMESWAR RAO, J.

1. This writ petition has been filed by the petitioner No.1/LG Electronics India Pvt. Ltd. through its managing director/petitioner no.2 with the following prayers:-

“a. to issue a writ of certiorari quashing the impugned order dated 27.04.2004 u/s 264 of the Act passed by the respondent no.1 being perverse and bad in law;

b. to issue a writ of mandamus directing the respondents to grant permission to the petitioner no.1 u/s 195 of the Act to make remittances without deduction of tax;”

2. In effect, the petitioner is challenging the order dated 27.04.2004 passed by the respondents under Section 264 of the Income Tax Act, 1961 (“Act”) wherein they have decided the payment made by the petitioner to Global Cricket Corporation Pvt. Ltd. (GCC) as the elements for the booking of space and for the right of use of trademark of the International Cricket Council (ICC). Resultantly, the respondents have apportioned 2/3rd of the total payment made by the petitioner to GCC towards advertisement by way of booking of space and the balance 1/3rd towards the right to use the trademark of ICC transferred by GCC to the petitioner and as such, treated the payment as royalty within the meaning of Section 9(1)(vi) Explanation 2(i) of the Act, in conformity with the Singapore-India Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) was accordingly directed to modify the order under Section 195 of the Act taking 1/3rd of the payment made to GCC by the petitioner towards royalty of which 15% shall be taken as tax.

3. Mr. Deepak Chopra, learned counsel for the petitioner has stated that GCC is a company incorporated in Singapore, which entered into an agreement with ICC Development (International) Ltd. on 20.07.2000 to obtain commercial rights connected with the cricket match events owned by ICC. Under this agreement, GCC obtained the right to appoint third parties sponsors, suppliers, broadcasters and other licensees.

4. In exercise of the rights granted in the aforesaid agreement, the GCC signed an agreement dated 28.06.2002 with three LG group entities being LG Electronics Inc., Korea (LGEK), LG Electronics India Private Limited (petitioner) and LG AD Inc., appointing LG as a Global Partner for the event specified in the agreement. As a Global Partner, LG acquired the advertising and promotional rights before and at the event, which inter alia included rights to display the Global Partner Marks (LG Mark) on certain advertising sites like ground level pen meter boards; outfield mats; 3rd umpire traffic lights; sight screens; advertisement on electronic screens at stadium; on tickets; official website for the event; welcome board on the main entrance to the venue; flag at any designated flag court at the venue and at other places which can be subsequently agreed between parties.

5. According to Mr. Chopra, for the aforesaid advertisement and promotional rights, LG group agreed to pay an amount of USD 27,500,000 to GCC, of which an amount of USD 11,000,000 was borne by the petitioner and the balance USD 16,500,000 was borne by LGEK.

6. The petitioner moved an application dated 21.08.2002 under Section 195 of the Act requesting the Deputy Director of Income Tax, to issue a certificate allowing the petitioner to remit the aforesaid amount without de

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2025 Supreme(Online)(Del) 46230

IN THE HIGH COURT OF DELHI AT NEW DELHIKameswar Rao, Vinod Kumar, JJLG Electronics India – AppellantVersusDirector of Income Tax – RespondentW.P.(C) 15181/2004

Cases Referred (1)

IN THE HIGH COURT OF DELHI AT NEW DELHI
Kameswar Rao, Vinod Kumar, JJ
LG Electronics India – Appellant
Versus
Director of Income Tax – Respondent
W.P.(C) 15181/2004