Income from IPR transfer can’t be taxed in India if ownership outside country: HC

By: | Published: July 27, 2016 8:12 AM

The Delhi High Court has held that the income arising from transfer of intangible assets like intellectual property rights (IPR), including brands...

A division bench headed by Justice BD Ahmed set aside the Authority of Advance Ruling (AAR). A division bench headed by Justice BD Ahmed set aside the Authority of Advance Ruling (AAR).

The Delhi High Court has held that the income arising from transfer of intangible assets like intellectual property rights (IPR), including brands, as part of a transaction cannot be taxed in India if the ownership of the IPR is outside the country.

A division bench headed by Justice BD Ahmed set aside the Authority of Advance Ruling (AAR). The AAR in 2008 had held that the income arising from the transaction of the transfer of the 16 trademarks should be deemed income accruing in India as the IPRs were capital assets situated in India.

It said the income accruing to Foster’s Australia, (now known as CUB Pty) from “the transfer of its right, title or interest in and of the trademarks in Foster’s brand intellectual property is not taxable in India under the Income Tax Act, 1961”.

“The situs of the owner of an intangible asset would be the closet approximation of the situs of an intangible asset. This is an internationally accepted rule, unless it is altered by local legislation…Since there is no such alteration in the Indian context, we would agree with the submissions made on behalf of the petitioner that the situs of the trademarks and intellectual property rights, which were assigned …, would not be in India. This is so because the owner thereof was not located in India at the time of the transaction,” the high court (HC) said.

The bench further said the legislature, while clarifying what would mean capital assets, refers to shares and derivatives, but excludes IPR.

Senior counsel S Ganesh argued that the right to use a trademark only generates royalty,which is paid to the owner, but the situs of the trademark remains that of the owner of the trademark. He also contended that if the contention that the grant of licence results in transfer of the situs of the trademark to the licensee countries were to be accepted, serious and major consequences involving multiple taxation would result. Besides, registration of trademarks in India did not imply the migration of the IPR to India.

Global beer major SABMiller had taken over Foster’s India from its parent company Foster’s Australia. The deal included the sale of the brand as well as assets of Foster’s India, including its brewery in Maharashtra. In addition, SABMiller was also granted an exclusive, perpetual and irrevocable licence of Foster’s brewing intellectual property in India by virtue of the S&P agreement. The S&P agreement was executed in Australia. The income tax department had demanded $39.5-million tax on the $120-million deal.

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