Transfer of Foreign Owner’s Trademarks not Taxable in India

The Delhi High Court (HC) has held that the transfer of trademarks registered and used in India by the overseas owner is not taxable in India. The HC has passed this order in a writ petition filed by CUB Pty Ltd (formerly, Foster’s Australia Ltd) in 2008, against the order passed by the Authority for Advance Rulings (AAR), which adjudicates disputes relating to income tax liability in respect of non-residents/certain specified residents. The AAR’s decisions are binding on the concerned parties and the income tax department.

The HC’s decision has demystified a persistent confusion under Section 9 of the Income Tax Act, 1961 (the “IT Act“) regarding the situs for taxability of consideration, received in India for the transfer of intangible property by an overseas entity. Under Section 9(1) (i) of the IT Act, all income accruing or arising, directly or indirectly, inter alia, through the transfer of a capital asset situated in India, shall be deemed to have accrued or arisen in India. However, the IT Act does not have similar provision to determine the situs and tax liability of intangible assets, such as trademarks.

While allowing CUB’s writ petition, the HC has applied the common law principle of “˜mobilia sequuntur personam’ and held that the situs of an intangible capital asset, such as intellectual property, is deemed to be the same situs as that of its owner, and therefore, the trademarks owned by the Australian company, although registered and used in India will not be taxable in India under Section 9 of the IT Act.

Facts:

  • The case originated from an exclusive trademarks licence granted by CUB to its Indian subsidiary, Foster’s India Limited (FIL), in 1997 for the sale of FOSTER’s brand beer through a Brand Licensing Agreement.
  • Thereafter, in 2006, CUB sold its Indian assets to SABMiller, a British company, and had also transferred the ownership of FIL, and inter alia, the trademarks licensed to FIL. The total consideration was USD 120 million.
  • As part of this sale, CUB had terminated the Brand Licensing Agreement with FIL.
  • Subsequently, CUB had requested the AAR for an advance ruling on the taxability of the consideration received on the transfer of its trademarks to SABMiller. The AAR, in its 2008 order, had determined that the consideration for the sale of the trademarks to SABMiller was taxable under Section 9 of the IT Act as the intangible asset constituted a capital asset situated in India, more so because the intangible assets were used, nurtured and registered in India and had their reputation and goodwill in India. Therefore, the AAR regarded the intangible assets to be situated in India and having business connection in India.
  • CUB filed a writ petition in the HC against the AAR’s order.

Issue:

Whether the AAR was correct in holding that the intangible assets were registered and nurtured in India, had their reputation and goodwill in India, and therefore, they constituted a capital asset situated in India, taxable under the IT Act?

Ruling:

The HC decided against the AAR’s view and ruled that the consideration received from the trademarks’ transfer was not taxable in India based on the following:

  • The ruling should be based on the common law principle of “˜mobilia sequuntur personam’, whereby the situs of the owner of an intangible asset, like trademark, would be the closest approximation of the situs of the intangible asset, unless the tax laws of any country prescribe a specific provision to the contrary. In this case, as the IT Act does not have provisions to determine the situs of the intangible assets, the situs of the owner, Australia will be the intangible asset’s location for the purposes of the IT Act.
  • Therefore, the consideration received for the transfer of intangible assets such as trademarks in this case, although registered and used in India, would not be regarded as taxable income in India.

The HC’s decision is a much needed one, as the IT Act did not have a specific provision regarding the taxability of intellectual property transfers by overseas entities. The HC, by applying the common law principle “˜mobilia sequuntur personam’ in this instant case, provides clarity on the taxability of off-shore intellectual property transfers connected to/used in India.

The decision may alleviate the tax concerns regarding international trademark licensing with India, and subsequent sale of the licensed trademarks. In view of the foregoing, while entering into intellectual property transfer agreements, the overseas entities must contemplate the consequences of differential taxation treatment relating to tangible and intangible assets and also the double taxation avoidance agreements with India, if any.

Currently, the HC’s foregoing decision will be the acceptable legal position in India, until it is reversed by an appellate court.

Disclaimer: This update does not constitute legal advice, and is intended for information purposes only. The reader should always consult a suitably qualified lawyer on any legal issue.

Published: September 30, 2016