Interesting questions arise under different laws when intellectual property rights located in India are transferred by a foreign enterprise. In most cases, the documentation for the transfer takes place outside India and the transfer may take place between two entities, which are residenst of foreign countries.
The tax implications of such a transfer or assignment are complex and have resulted in litigation, which will snowball over the coming years as more and more such transactions are effected in international deals. Under section 2(14) of the Income-tax Act, 1961, the term ‘capital asset’ is defined to mean property of any kind held by an assessee whether or not connected with his business or profession.
The definition of ‘capital asset’ clearly states that this expression has been assigned a wide meaning. “Property of any kind” undoubtedly includes intellectual property, which is but a species of intangible property. Trade marks, brand, goodwill, technical know-how relating to the manufacture of goods would all qualify to be treated as capital assets within the meaning of section 2(14) of the Act.
As observed by the Division Bench of the Kerala High Court in the case of Haji Abdul Kader Sahib v CIT (42 ITR 296), the definition of capital asset is of wide amplitude as to take in any intangible asset. The Authority for Advance Rulings (AAR) ruled in Pfizer Corporation (271 ITR 101) that the transfer of technology information in the form of a dossier was the transfer of a capital asset.
The technology information therein related to the manufacture of certain nutritional products. Section 55(2) which deals with cost of acquisition of capital asset makes it clear that goodwill, trade marks or brand name associated with a business and other incorporeal rights mentioned therein are treated as capital assets under the Act for the purpose of capital gains.
“Transfer” in relation to a capital asset includes sale, relinquishment of the asset and the extinguishing of any rights therein. There is sufficient authority for the proposition that intangible assets or incorporeal property can have more than one situs. The decided cases in the US and the UK also point to the principle that goodwill is territorial in the sense that it exists at the place where the related business exists. As trademark and goodwill are intertwined, the same principle would apply to both.
The situs of intangible or incorporeal property, viz, trademark and goodwill was the subject-matter of disquisition in American courts, when the issue of territorial nexus of a particular state to tax the subject was to be tested on the anvil of due process clause of the US Constitution. The case of Geoffrey Inc v South Carolina Tax Commission (437 SE 2d 13); (313 SC 15) decided by the Supreme Court of South Carolina was one such.
The Supreme Court after citing decisions which laid down the proposition “intangibles may acquire a situs for taxation other than at the domicile of the owner if they have become integral parts of some local business”, rejected Geoffrey’s claim that its intangible assets were located exclusively at its corporate headquarters in Delaware.
This point has been considered by the Authority for Advance Rulings in Foster’s Australia Ltd, In re (302 ITR 289). In this case, the Australian company owned various brands in relation to beer products, which comprised of trademarks, logos, devices, brand guidelines, advertising material, technology and know-how. It granted licences in respect of Foster’s Brand to parties in three countries and until recently in India. It held certificates of registration pertaining to Foster’s Brand and it was continuously using it since registration. On August 4, 2006, the applicant executed a contract in Australia styled as India Sale and Purchase Agreement for the transfer of shares and other intangible assets in the nature of intellectual property to SAB Miller of the UK.
That was a composite agreement for the sale of shares and the sale by the applicant of trademarks, Foster’s brand intellectual property and the grant of exclusive and perpetual license in relation to Foster’s brewing intellectual property confined to the territory of India. For all these items a sum of $120 million was stipulated as total consideration. Before completion of the transactions specified in the agreement dated August 4, 2006, the applicant terminated the brand licence, which it had earlier entered into with Foster’s India Ltd, granting an exclusive licence to brew, package, label and sell Foster’s lager beer and an exclusive right to use trademarks in the territory of India.
The Authority for Advance Rulings held that the intellectual property comprising of Foster’s trademarks and brand intellectual property were located in India where the business of Foster’s India was being carried on in conjunction with the applicant. Goodwill could not be said to have shifted its location, lock, stock and barrel at the very moment at which the events of “completion” and “assignment” took place in Australia. The commercial exploitation of the trademarks and the brand by the applicant, aided by the marketing and advertising efforts of Foster’s India resulted in the creation of valuable intangible assets in India, and, therefore, the assets in the form of trademark and brand, together with the goodwill they generated were situated in India when the transfer took place in 2006.
The intellectual property in the form of Foster’s trademarks and brand were an integral part of the business of Foster’s India that was being carried on by the applicant together with the goodwill generated by reason of such user and could be said to be situated in India within the meaning of section 9(1). On the date of transfer they were present in India.
Since the brewing manual being intellectual property having physical identity was removed from India and handed over to the purchasers within Australia on the completion date of the S and P agreement, this capital asset in the form of the brewing manual and intellectual rights associated with it could not be said to be situated in India on the effective date of transfer and could not be subject to tax under the Income tax Act.
Though tax liability could only be with respect to two items, viz, trademarks and other brand intellectual property, there was no legal basis for apportionment on the ground that the situs of the property transferred was fictionally in another place. When once the income was deemed to accrue or arise in India on account of transfer of capital assets situated in India, the entirety of the consideration received in respect of such transfer had to be treated as the gross income.
This is a significant decision, which will undoubtedly be relied on extensively in future and in all probability will be considered by the Supreme Court, if the legality of the ruling is challenged.
The author is advocate, Supreme Court