Payment for sponsorship rights cannot be termed as royalty

Facts

1. Sahara India Financial Corporation Ltd. (tax payer) had entered into an agreement with IMG Canada, a foreign company through IMC India for sponsorship of the international cricket tournament between India and Pakistan to be played in Canada.

2. The sponsorship benefits inter-alia included:

• the right of renaming of the tournament as “Sahara Cup”;
• incorporation of the Sahara logo as the official logo of the tournament; and
• “Sahara” logo to be prominently displayed at both ends of the cricket ground, stumps, score boards and clothing of the players.

3. The tax payer made a lump sum payment to the foreign company for the above sponsorship benefits.

4. The revenue authority was of the view that the payment for sponsorship right is in the nature of royalty payment. However, the Appellate Tribunal held that the payment to IMG Canada could not be called as royalty as contemplated under Article 13(3) of the India-Canada Tax Treaty.

Contentions of the Revenue

1. The payment made by the tax payer to the foreign company is in the nature of royalty under Article 1 3(3)(c) of the Tax Treaty between India and the Canada.
2. The expression “payment of any kind including rentals”, has a very wide meaning and, therefore, it includes the payment for “any” rights.

Ruling of the High Court

1. The view of the Revenue is not tenable since the payment, which may be of any kind and which may include rentals, has to be in connection with the right to use any of the rights specified in Article 13(3) of the India-Canada Tax Treaty.
2. The categories (a) and (b) of Article 13(3) does not arise in this case. For any consideration to be termed as “royalty” under article 1 3(3)(c) of the Tax Treaty, it is to be ascertained whether such consideration is for the copyright or for the right to use a copyright in any of the four categories of works, namely, (i) literary; (ii) artistic; (iii) scientific work; and (iv) cinematographic films and films or tapes for radio or television broadcasting.

3. There was no transfer of copyright or the right to use the copyright by the foreign company to the tax payer and therefore the payment would not fall within article 13(3)(c) of the Tax Treaty. The reference in Article 13(3)(c) is to “any copyright” and it is not a reference to “any right”. Hence, the payment cannot be said to be in the nature of royalty payment.

Conclusion

It was held that the payment for sponsorship of a tournament will not fall under the ambit of “royalties” since there is no transfer of copyright or right to use the copyright.

Source: Sahara India Financial Corporation Limited Vs. DIT- Delhi High Court- ITA No. 1064 / 2007 dated 19 February 2010.