9.
TS-112-ITAT-2017(Del)
DCIT vs. Reebok India Company
A.Y. 2011-12, Date of Order: 20th March, 2017
Facts
The Taxpayer was an Indian company. It had entered into an
agreement with ICC, a tax resident of BVI for a composite consideration. The
agreement comprised a bundle of rights including association as official
partner and the manner in which the Taxpayer was allowed to advertise/market
its products during ICC events. Under the agreement, the Taxpayer acquired two
categories of rights – ‘promotional and advertising rights’ and ‘marketing
rights’. The Taxpayer was required to pay ‘Rights Fee’ and ‘Royalty’ to ICC.
The ‘Rights Fee’ was payable in respect of a bundle of twenty
one rights which, inter alia, included right to:
– display boards and signage on match grounds;
– use past videos and footage from matches for
internal and promotional/advertising purposes;
– use designations such as “official partner of
ICC”, “ICC official cricket equipment supplier”, etc.;
– promote itself on website of ICC and other
related websites as the official sponsor of ICC events;
– receive complimentary tickets for ICC events
and also to purchase tickets on preferential basis;
– display and sell licensed products at ICC
events through the existing concessionaires;
– identify backdrops for ICC events and other
official press conferences concerning major ICC events, commensurate with the
level of sponsorship rights of the Taxpayer;
– access specified zones at ICC events for brand
promotion;
– use ICC marks in connection with manufacture,
distribution, advertising, promotion and sale of the Taxpayer’s products.
The ‘Royalty’ was payable in respect of sale of licensed
products manufactured by the Taxpayer using ICC marks.
Thus, both the first and second categories included payments
for the right to use ICC marks in manufacture and sale of the Taxpayer’s
products.
While the Taxpayer contended that the payment in respect of
‘Rights Fee’ was not in the nature of royalty or fees for technical services
(FTS), the AO held it to be royalty and/or FTS. Since the Taxpayer had not
withheld taxes, the AO disallowed the same.
The DRP held that ‘Rights Fee’ was not in the nature of
royalty or FTS and, hence, it was not taxable under the Act.
Held 1
Taxability of rights other than rights in relation to use of
ICC marks in manufacture and sale of products of the Taxpayer
– Out of the bundle of twenty one rights in
respect of which the ‘Rights Fee’ was paid, twenty rights were exclusively for
advertisement and promotion of the Taxpayer in connection with ICC events. Only
part of one right involved use of ICC marks for advertisement and promotion and
the other part of the right was for manufacture and sale of products.
– In cases where the advertisement/promotion
rights did not involve the use of designation/ ICC marks, there was no question
of treating the payment as royalty and it would qualify as advertisement
expense.
– In Sheraton International Inc. (2012) 17 ITR
457 (Del), the High Court had held that consolidated payment for the use of
trademark, trade name etc., in rendering of advertisement, publicity and
sales promotion services was neither in the nature of royalty nor FTS. Since
‘Rights Fee’ was exclusively paid for use of ICC marks for advertisement and
promotion and not for manufacture and sale of licensed products, question of
treating as royalty cannot arise.
– The tax authority had contended that since
India did not have DTAA with BVI, income of ICC should be taxable u/s.9(1)(i)
of the Act. However, such contention could not be accepted as the Taxpayer had
established before the AO that ICC had no ‘business connection’ in India.
Held 2
Taxability of rights in relation to use of ICC marks in
manufacture and sale of products of the Taxpayer
– Generally, payment made for use of trademark,
patents etc., on goods manufactured and sold would qualify as royalty
under the Act.
– In the present case, the two categories of
payments – ‘Rights Fee’ and ‘Royalty’ – were overlapping. The right to use ICC
marks in manufacture and sale of products was covered by both the categories.
– While ‘Royalty’ was exclusively for the use of
ICC marks in manufacture and sale of products, ‘Rights Fee’ was for granting
rights to a bundle of twenty one rights which, inter alia, included the
right to use ICC marks in advertisement, promotion, marketing and sale of
products.
– In absence of any separate consideration for
the right to manufacture under the ‘Rights Fee’, and there being no mechanism
for apportioning ‘Rights Fee’ towards the use of ICC marks for manufacture and
sale of licensed products, no part of ‘Rights Fee’ was attributable to the use
of ICC marks for manufacture and sale of licensed products. Consideration for
such use was exclusively covered under the ‘Royalty’ clause of the agreement.
–Accordingly, only the payment made
by the Taxpayer under the second category (i.e., ‘Royalty’) which was for use
of ICC marks in manufacture and sale of products, qualified as royalty under
the Act.
