1. Court’s decision
The Delhi High Court dismissed a writ petition challenging a revision order passed under Section 264 of the Income Tax Act, 1961, which had directed withholding tax on part of a remittance made to a Singapore entity for global partnership and advertising rights linked to an international cricket event. The Court upheld the authorities’ approach of apportioning the consideration: two-thirds as payment for advertising/booking of space and one-third as payment for the right to use the trademark, taxable as royalty. The Court held that the right to use the event organizer’s marks was not a minor add-on, and therefore the royalty characterisation and withholding at the treaty rate could not be faulted.
2. Facts
The dispute arose from a global partnership agreement executed in June 2002, under which an Indian electronics company, along with group entities, obtained advertising and promotional rights in connection with specified cricket events. The agreement permitted display of the company’s branding at stadium sites and also granted a right to use the event marks and the organizer’s marks on advertising materials across a defined licensed territory. The Indian entity proposed to remit USD 11 million to the Singapore counterparty and applied for a certificate under Section 195 seeking permission to remit without tax deduction. The tax authority rejected the request and treated the remittance as royalty requiring withholding.
3. Issues
The High Court framed the short controversy as whether the tax authorities were justified in treating one-third of the USD 11 million payment as royalty attributable to the right to use the organizer’s trademark, and therefore requiring withholding tax. Put differently, the Court examined whether a payment described as sponsorship/advertising rights could be re-characterised partly as royalty when the underlying contract also granted trademark usage rights. A connected question was whether the “use of trademark” was merely incidental to advertising space booking, such that the entire payment should be treated as non-royalty business income, particularly at the certificate stage under Section 195.
4. Petitioner’s arguments
The petitioner argued that the core of the contract was advertising and promotional visibility at cricket venues, and that any permission to use the organizer’s marks was at best an “incidental” and limited add-on required to show association with the event. It contended that no separate consideration was charged for trademark usage and that the payment was essentially for booking premium space and on-ground promotional rights, which cannot be converted into royalty merely because a logo may appear on advertising materials. It relied heavily on prior decisions where courts treated trademark use as incidental to the main commercial objective, submitting that the present arrangement similarly involved a limited and restricted permission tied to event promotion rather than a true trademark license.
5. Respondent’s arguments
The Revenue argued that the agreement granted two distinct elements of value: advertising space/visibility and a license to use the organizer’s marks and event marks in a widely defined “licensed territory” and on broadly defined “advertising materials,” including packaging, labelling, and promotional materials across media. It emphasized that trademarks are expressly covered within the statutory and treaty definition of royalty, and that the treaty allowed India to tax such royalties at a capped rate. The Revenue also relied on the petitioner’s own communication acknowledging an element of trademark use, and asserted that the contract created substantial trademark usage rights beyond mere in-stadium display, justifying apportionment and withholding.
6. Analysis of the law
The judgment operates at the intersection of withholding tax (Section 195), royalty deeming provisions (Section 9(1)(vi)), and treaty treatment of royalties. The Court noted that royalty under domestic law includes consideration for transfer of rights or the right to use a trademark, and the treaty definition similarly covers payments for use or right to use a trademark, with India permitted to tax at the treaty rate. The Court also treated the Section 195 stage as a threshold determination aimed at ensuring appropriate withholding when the remittance contains a taxable element. On that framework, the key legal inquiry became whether the contract actually granted a trademark right of use of independent economic significance.
7. Precedent analysis
The petitioner relied on a Delhi High Court decision (later affirmed by the Supreme Court) involving a major motor racing event, where trademark use was held to be incidental because the event promoter had to publicise the event and was permitted only a narrowly confined “incidental use,” with an express bar on merchandising and broader exploitation. The petitioner also relied on a Delhi High Court ruling involving a hotel group’s arrangement where advertising services were central and trademark use was treated as incidental in the factual context of revenue sharing. The High Court distinguished both, reasoning that the present contract’s definitions and grant clauses created a broader, more substantive trademark usage license than the “incidental use” seen in those cases.
8. Court’s reasoning
The Court found that the petitioner’s attempt to downplay trademark use as incidental was unpersuasive, especially because the record contained a communication acknowledging an element of trademark use under identified schedule clauses. It examined the agreement and noted that the license to use the organizer’s marks and event marks extended throughout a licensed territory defined as the world, and the concept of advertising material was defined widely, covering multiple forms and media beyond the physical stadium venue. The Court also noted that the stadium advertising sites were under the counterparty’s control, which undercut the claim that the trademark license was merely a technical necessity for on-ground display. On these terms, the Court concluded that a substantive right to use the marks existed.
9. Conclusion
On the core question, the Delhi High Court held that apportioning one-third of the payment as royalty for the right to use the organizer’s trademark and event marks was justified, and the treaty-rate withholding direction could not be faulted. The Court also observed that no substantial challenge had been mounted to the 2/3 and 1/3 split as such, or to the rate applied to the royalty portion. Having found the key precedents distinguishable and the contract terms supportive of the Revenue’s characterisation, the Court dismissed the writ petition as without merit.
10. Implications
This ruling is significant for Indian companies remitting large sponsorship and event-partnership fees to non-residents. It underscores that sponsorship and advertising contracts can contain embedded trademark licenses, and tax authorities may dissect composite consideration to identify a royalty component triggering withholding. The judgment also signals that courts will look beyond labels like “incidental” and examine the breadth of license language—especially definitions of territory and permitted materials—to decide whether trademark rights are economically substantive. For cross-border sports and entertainment deals, careful drafting of trademark clauses, territorial scope, and permitted uses becomes crucial, because expansive rights beyond venue-based display can make royalty characterisation more likely at the withholding stage.
Case law references
1) Delhi High Court: Formula One World Championship ruling (affirmed by Supreme Court)
- What it held: Trademark use by the event promoter was treated as purely incidental to the main contract of hosting, staging, and promoting the event, with restricted permitted use and no merchandising rights.
- How applied/distinguished: The High Court distinguished it because the present contract granted wider trademark and event mark usage rights across a globally defined territory and broadly defined advertising materials, making the license substantive rather than narrowly incidental.
2) Delhi High Court: Director of Income Tax v. Sheraton International
- What it held: Receipts primarily for advertising and related services were not treated as royalty merely because trademark use was an incidental part of the arrangement in that factual setting.
- How applied/distinguished: The Court held the factual structure there was different (including how the arrangement was structured and analysed at fact-finding stage) and did not displace the present finding that the contract here created a substantive right to use marks.
3) Delhi High Court: J K Synthetics Limited v. Commissioner of Income Tax
- What it held (as relied upon by Revenue): In writ jurisdiction, the Court is not an appellate forum over tax authorities’ factual determinations, and focuses on legality and process unless perversity is shown.
- How applied: Supported judicial restraint in interfering with a reasoned apportionment decision under the statutory withholding framework.
SEO-friendly FAQs
1) Can sponsorship payments for international sports events be treated as royalty under Indian tax law?
Yes, if the sponsorship or partnership agreement also grants a right to use trademarks or event marks in a manner that is economically substantive. The Delhi High Court upheld splitting the consideration and taxing the trademark-use portion as royalty.
2) When is trademark use considered “incidental” and not royalty for withholding purposes?
Trademark use may be treated as incidental when the permission is narrowly confined to event promotion with strict limitations and no broader exploitation rights. The Court distinguished prior “incidental use” cases because the present agreement permitted mark use across a globally defined territory and broad advertising materials.
3) Can tax authorities apportion a single sponsorship fee into advertising and royalty components?
Yes. The High Court upheld an apportionment where two-thirds of the payment was attributed to advertising/space booking and one-third to trademark-use rights, requiring treaty-rate withholding on the royalty portion.
