Under the Indian domestic tax law, gains derived from transfer of a capital asset situated in India are taxable in India. The High Court has, in the case of Foster’s Australia, held that the income arising from transfer of intellectual property rights (IPRs), in particular, brands, trademarks and logos, is not taxable in India if the ownership of the IPRs is outside India. This decision has reversed the ruling of the AAR where such a transfer was held to be taxable in India.
Foster’s Australia Limited, a company incorporated in Australia (Foster’s Australia) was the owner of several brands, trademarks (including the global beer brand Foster’s) and related rights. By way of a brand license agreement dated 13 October 1997 (BLA), it had licensed four of its trademarks to Foster’s India Limited (Foster’s India) for use in India. As consideration for the license, Foster’s Australia received royalty, from which applicable taxes were withheld by Foster’s India.
Subsequently, for a consideration of USD 120 million, SABMiller (A & A2) Limited, a company incorporated in the United Kingdom (SABMiller), entered into an agreement dated 4 August 2006 (Acquisition Agreement) with Foster’s Australia (along with other group entities of both parties) to acquire, inter alia,
- 16 trademarks owned by Foster’s Australia (including the four trademarks which were licensed to Foster’s India) and “Foster’s” brand intellectual property (Brand IPRs); and
- exclusive and perpetual license in relation to Foster’s brewing intellectual property confined to India (Brewing IPRs).
As condition precedent to the Acquisition Agreement, the BLA was terminated in Australia. Thereafter, in terms of the Acquisition Agreement, the Brand IPRs were transferred by Foster’s Australia to an Indian nominee of SABMiller.
The question which required adjudication was whether the gains arising to Foster’s Australia from (a) the transfer of its right, title and interest in and to the Brand IPRs, and (b) grant of exclusive and perpetual licence of Brewing IPRs to SABMiller, are taxable in India. The moot factor which would determine the taxability was situs of the IPRs in question.
Initially, Foster’s Australia approached the AAR to seek an advance ruling in relation to its taxability of the gains. In relation to the Brewing IPRs, the AAR held that since the Brewing IPRs derive their value from the Brewing manual (which is also in the nature of goods), the situs of the Brewing IPRs (in the form of the Brewing manual) shifted to Australia with the termination of the BLA and the gains would not be taxable in India.
However, with respect to the Brand IPRs, the AAR was of the view that the Brand IPRs, though owned by Foster’s Australia (a non-resident), were used and nurtured in India and could be understood to have taken roots in India. Accordingly, the AAR ruled that the gains derived from the transfer of Brand IPRs would be taxable in India. Aggrieved by this ruling, Foster’s Australia filed a writ petition before the High Court.
High Court Decision
In the course of arguments before the High Court, the tax authorities raised the following contentions to demonstrate that the situs of Brand IPRs (which were registered in India) was in India:
- Since the Brand IPRs were registered in India, they had taken roots in India and had gained recognition in India;
- The Brand IPRs had generated appreciable goodwill in the Indian markets, owing to the coordinated efforts of Foster’s Australia and Foster’s India;
- The Brand IPRs had a ‘tangible presence’ in India, at the time of transfer to SABMiller; and
- Such Brand IPRs had no value when introduced in India but at the time of transfer, substantial proceeds were received from SABMiller as consideration. This was indicative of the value that the Brand IPRs had gained from their operations in India.
The High Court, while acknowledging that the issue arising with respect to the situs of intangible assets was complex, held that the gains derived from the transfer of such Brand IPRs would not be taxable in India because (a) there is no specific provision or deeming fiction dealing with location of intangible capital assets, and (b) thus, situs of the Brand IPRs would not be considered to be in India as the owner of the Brand IPRs was not located in India at the time of its transfer. The contentions of the tax authorities were rejected.
The High Court further observed that the legislature, if it intended to, could have provided for location of an intangible capital asset through a deeming fiction. In this regard, the High Court cited the example of Explanation 5 to Section 9(1)(i) of the Income Tax Act, 1961 which deals with indirect transfers of Indian assets and deems shares of a foreign company to be located in India where such shares derive ‘substantial value’ from India. In the absence of any such specific provision for IPRs, the High Court applied the principle of ‘mobilia sequuntur personam’ which means that movables follow the (law of the) person thereby implying that the personal property held by a person is governed by the same laws that govern such person. As intangible assets do not have any real situs and are under the immediate control of their owner, the domicile of the owner is the nearest approximation to their location.
This is a welcome ruling in one of the first cases dealing with situs of IPRs in the Indian context. The High Court has adopted the ‘look at’ approach and interpreted the provisions as they are. By doing so, the High Court has respected the principle that in the absence of a specific deeming fiction, the domestic tax law cannot deviate from the internationally recognised principle of ‘mobilia sequuntur personam’.
Given the stand taken by the tax authorities that the IPRs could be considered as an asset located in India based on the key fact that the IPRs attained value in India over a period of time, it seems that such transactions may be tested differently by the tax authorities once the General Anti Avoidance Rules are in place (under which ‘substance’ would be considered over ‘form’ of the transactions). The nexus approach advocated by BEPS (Base Erosion and Profit Shifting) may also lead to some part of the gains being regarded as taxable in India in similar situations. In view of this, one may not rule out a specific legislative amendment to clarify taxability in such cases. Such an amendment (if brought in) is expected to be prospective as the present Government has been reinforcing its commitment to not to introduce retrospective changes to the tax laws.