The Hindu Business Line : A concrete ruling on intangible assets

Indian tax law brings to tax all income accruing or arising, directly or indirectly, through/from any property in India or from any asset or source of income in India or through the transfer of capital asset situate in India.

Income arising from the transfer of capital assets situate in India shall be deemed to be taxable by reason of Section 9 of the Income-Tax Act, 1961. The deeming friction brings within the tax net income arising from transfer of capital assets if they are situate in India.

Capital asset

This means any property of any kind held by an assessee whether or not connected with his business or profession. The term ‘capital asset’ has been assigned a wide meaning. It includes intellectual property which is but a species of intangible property. Trademarks, brand, goodwill, technical knowhow, etc., will all qualify to be treated as capital assets within the meaning of Section 2(14).

Acquisition of goodwill of business amounts to acquisition of a capital asset. Transfer of technology information in the form of dossier was considered a transfer of capital asset. This was in the Pfizer Corporation (2004 271 ITR 101 AAR) case.

A global multi-beverage group, Foster’s Group Ltd, owned a 100 per cent subsidiary in Australia. The Australian company owned various brands in relation to beer products comprising trademarks, logos, devices, brand guidelines, technology and knowhow.

It granted licences in respect of Foster’s brand to parties in three countries, including India. It had a certificate of registration pertaining to the Foster’s brand and was continuously using it since registration. In August 2006, the company executed a ‘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.

This was a composite agreement covering shares, trademarks, brands and the grant of exclusive and perpetual licence in relation to Foster’s brewing intellectual property confined to the territory of India. The consideration was a sum of US$ 120 million.

Brand licence

Before completing the transactions specified in the Agreement of August 4, 2006, the Australian company 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 beer and an exclusive right to use the trademarks in India.

The question arose whether the receipt arising to the Australian company from the transfer of its right, title and interest in and to the trademark, the Foster’s brand, intellectual property was taxable in India.

The Australian company contended that intellectual property, like trademarks etc., in this case was located outside India. Intangible assets, it was contended, had no geographical location and no situs apart from the domicile of the owner. The argument in this case was that the agreement having been terminated, the rights and interest in the trademarks got restored and vested with the Australian company as a result of which the situs of the intangible assets on the date of sale cannot be said to be within India.

Both the asset and the place of contract happened to be outside India and, therefore, beyond the reach of the Indian I-T Act. It was also argued that trademark does not come into existence merely by registration; it is usage that creates the trademark. It exists as an asset independent of registration and registration merely affords further protection under the law. It was submitted that the registration of the trademark had no bearing on the aspect of situs or location.

AAR view

The Authority for Advance Ruling (AAR) examined the issue exhaustively and referred to American and English law on the subject. It rejected all the arguments of the Australian company. It held that the intellectual property comprising Foster’s trademarks were located in India where the business of Foster’s India was being carried on in conjunction with the Australian company.

Goodwill did not perish in India and did not shift its location at the very moment at which the events of ‘completion’ and ‘assignment’ took place in Australia. Commercial exploitation of trademark in brand, aided by the marketing and advertising efforts of Foster’s India, resulted in the creation of valuable intangible assets in India.

These assets were situated in India when the transfer took place in 2006. They formed an integral part of the business of Foster’s India. On the date of transfer, they were very much present in India. Independent valuation could be relied on for assessing the income. At the same time, the AAR noted that brewing intellectual property could not be considered to be situate in India as it reverted to the Australian company by the effective date of transfer and the same was made over to the nominee of the purchaser.

This is the first case (302 ITR 289) where an authentic pronouncement has been made on the question of the situs of intangible assets.

(The author is a former Chief Commissioner of Income-Tax. Responses to blfeedback@thehindu.co.in)