Owners of intellectual property rights not based in India not exigible to tax under Income Tax Act, 1961 on income accruing from transfer of such right

Delhi High Court

Delhi High Court:  Dealing with the question of situs or location of intellectual property rights  in logos, trade marks and brands with reference to the income accruing in India from intangible assets, the Court held that income accruing from the transfer of intangible assets like intellectual property whose owners were not based in India cannot be taxed in India.

The issue related to the transfer of 16 trade marks and Foster’s brand intellectual property of the petitioner, Foster’s Australia Ltd. to SABMiller executed in Australia. By a brand licence agreement executed earlier, Foster’s India Ltd. had been permitted to use 4 trade marks in India. The licensed trade marks continued to remain the absolute property of the petitioner who received royalty and was subjected to withholding tax in India. The petitioner sought an advance ruling from the Authority for Advance Ruling (Income Tax) under Section 245-Q of the Income Tax Act regarding the issue of taxability in India having regard to the provisions of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement between India and Australia.

The AAR ruled that the income accruing to the applicant from the transfer of its right, title and interest in and to the trade marks and Foster’s brand intellectual property is taxable in India under the Income Tax Act, 1961 on the ground that the subject-matter of assignment/transfer were situate in India.

The petitioner’s plea was that in the case of intangible capital assets the situs thereof has to be determined by the situs of the owner. Because of the nature of an intangible capital asset, the common law principle ‘mobilia sequuntur personam’ had been evolved, whereby a fiction is created to the effect that the situs of an intangible capital asset would be the situs of the owner of that asset. In this backdrop, since the owner of the intangible assets in question was located in Australia, the petitioner, being an Australian company, the intangible assets, which include the intellectual property rights of the petitioner, were also located in Australia. Therefore, the transfer of those assets would not result in any income deemed to have accrued in India and would not be exigible to tax in India. The AAR was of the view that since the intellectual property rights pertain to India, as they were used and nurtured in India and some of them were registered in India, the same had taken roots in India and therefore, were completely situate in India.

Upholding the petitioner’s contention, the Division Bench of Badar Durrez Ahmed and Sanjeev Sachdeva, JJ. observed that in the absence of a specific provision regarding intangible assets, the well-accepted principle of ‘mobilia sequuntur personam’ would have to be followed. The situs of the owner of an intangible asset would be the closest  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, the situs of the trademarks and intellectual property rights, which were assigned pursuant to the ISPA, would not be in India. This is so because the owner thereof was not located in India at the time of the transaction.The Court held that the income accruing to the petitioner from the transfer of its right, title or interest in and to the trademarks in Foster’s brand intellectual property is not taxable in India. [CUB Pty Ltd. (formerly known as Foster’s Australia Ltd.)  v.  Union of India, 2016 SCC OnLine Del 4070, decided on July 25, 2016]

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