After 21 years, Delhi High Court upholds tax on LG’s 2003 Cricket World Cup sponsorship payments

The Delhi High Court has upheld Income Tax (IT) Department’s decision to levy 'withholding tax' on a portion of the sponsorship payments made by LG Electronics India for ICC Cricket World Cup advertising and promotional rights [LG Electronics Vs Department of Income Tax].A division bench of Justices V Kameswar Rao and Vinod Kumar held that one-third of the USD 11 million paid by LG constituted “royalty” for the right to use ICC trademarks, which is taxable in India under the Income Tax Act, 1961 and the India–Singapore Double Taxation Avoidance Agreement (DTAA)."When the petitioner itself conceded the use of the ICC Mark, the attempt to downplay such use as incidental is not convincing. In fact, the reliance placed by the petitioner on the letter of the GCC [Global Cricket Corporation] addressed to the petitioner, dated 12.05.2003, justifying the attribution of USD 1000 to use the ICC Mark out of the total consideration of USD 11 million shows the usage of the Mark as a trademark," the Court said.The judgment came 21 years after the dispute began in 2004..The controversy pertained to the Global Partnership Agreement dated June 28, 2002, entered into between LG group entities and Global Cricket Corporation Pvt. Ltd. (GCC), a Singapore-based company which had acquired commercial rights from the International Cricket Council (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, and obtained extensive advertising and promotional rights. These included display of LG branding on perimeter boards, sight screens, tickets, official event websites and other promotional material.Of the total USD 27.5 million payable by the LG group to GCC, LG Electronics India bore USD 11 million..LG sought permission under Section 195 of the Income Tax Act to remit the amount without tax deduction. However, the tax authorities rejected the request, holding that the payment was in the nature of royalty.On revision, the Director of Income Tax (International Taxation) partly modified the order, holding that the payment had “both the elements, one for the booking of space and the other for the right to use the trademark of ICC.”It ruled that while two-thirds of the payment was attributable to advertising, one-third was attributable to the right to use the ICC trademark and directed withholding tax at 15% on the royalty component..However, LG in its plea before the High Court argued that the dominant purpose of the agreement was advertising and brand visibility and that any use of the ICC mark was merely incidental.Relying on earlier precedents, LG contended that payments for sponsorship and advertising could not be re-characterized as royalty merely because the sponsor incidentally associated itself with the event organizer's brand..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. 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 Court further held that the agreement clearly created an independent and substantive right in favour of LG to use the ICC and Event Marks beyond the stadium context, stating that “a substantive right to use the marks was created by virtue of the agreement.”.The tax authorities’ reasoning was sound and the decision cannot be faulted with, the Court said while dismissing the writ petition filed by LG..LG Electronics was represented by Advocates Deepak Chopra, Ankul Goyal and Adwiteya Grover.The Income Tax Department was represented by Senior Standing Counsel Indruj Singh Rai along with Junior Standing Counsel Sanjeev Menon and Rahul Singh and advocate Gaurav Kumar..[Read Judgment].Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.