The Delhi High Court in the matter of CUB Pty Limited (formerly known as Foster's Australia Ltd.) [WP(C) No. 6902/2008] has held that the situs of an intangible asset would be the situs of the owner of that asset, irrespective of the fact that the intangible asset under consideration is deriving its value through brand development and nurturing exercises in India.
In this case, the owner of intangible assets under consideration was located in Australia. Accordingly, the said intangible assets were held to be located in Australia, i.e., outside India. Consequently, the Delhi High Court held that the Indian Revenue Authorities had no jurisdiction to tax the income arising on transfer of the same.
IN THIS MATTER, THE PETITIONER WAS REPRESENTED BY OUR FIRM, SETH DUA & ASSOCIATES.
A detailed write up on the above judgment is as under:
Facts of the case
The Petitioner, Cub Pty Ltd., on 13.10.1997, had entered into a brand license agreement ('BLA') with Foster's India Limited ('Foster's India') for use of 4 trademarks of Petitioner by Foster's India within India. In consideration of grant of license, the Petitioner received royalty from Foster's India, which was liable for withholding tax in India. It is pertinent to point out that, by virtue of the BLA, only right to use the trademarks was received by Foster's India, while, the Petitioner continued to remain the owner of the said trademarks.
On 12.09.2006, a deed of termination of the BLA was executed in Australia.
On the very same day, i.e., on 12.09.2006, a deed of assignment was executed in Australia, whereby, the Petitioner assigned the trademarks owned by it (limited to Indian business) to Skol Breweries Limited, pursuant to a business transfer arrangement entered between Foster's Group Ltd. and SAB Miller.
Petitioner approached AAR
The Petitioner moved an application before the Authority for Advance Rulings ('AAR') seeking a ruling on whether the above transfer of trademarks (including rights therein) can be taxed in India as per the provisions of the Income-tax Act, 1961 ('the Act'), and the Double Taxation Avoidance Agreement between India and Australia.
Decision of AAR
The AAR held that income from transfer of trademarks is liable for tax in India, since, the intangible asset under consideration constituted a capital asset situated in India.
The decision of the AAR was based on the fact that the intangible asset was used, nurtured and registered in India and had its reputation and goodwill in India. Hence, the same was situated in India and had business connection in India.
Issue before the High Court
Whether AAR was correct in holding that just because the intangible asset was registered and nurtured in India and had its reputation and goodwill in India, the same constituted a capital asset situated in India?
The Petitioner argued that, in case of intangible assets, situs of the same has to be determined on the basis of situs of the owner. The Petitioner's said arguments was based on the fact that, the intangible assets do not exist in any physical form and therefore, cannot be said to be located at any physical place, unlike a tangible capital asset. In such circumstances, the common law principle 'mobilia sequuntur personam' need to be followed, whereby, a fiction is created that situs of an intangible asset would be the situs of the owner of that asset.
In the present case, the owner of the intangible asset under consideration was located in Australia, i.e., the Petitioner, being an Australian company. Therefore, the intangible assets, being trademarks in the present case, were located in Australia, i.e., outside India. Therefore, transfer of such assets would not result in any income liable for tax in India.
The Revenue's counsel, during the course of hearing before the Delhi High Court, supported the decision of the AAR and contended that the transfer of trademarks had a clear relation to use thereof in India (the trademarks gained value from business operations carried out in India) and accordingly, the same were located in India. Hence, income arising from transfer thereof would be liable for tax in India.
Delhi High Court's Judgment
The Delhi High Court accepting the contentions of the Petitioner upheld the applicability of the principle of 'mobilia sequuntur personam', by holding the same as an internationally accepted rule, unless it is altered by a local legislation.
The High Court also held that, the legislature, where it wanted to specifically deem the location of any asset in India, has provided for specific provisions in the legislation for doing so, as has been done in the case of indirect transfer of shares by virtue of the amendment made by the Finance Act, 2012.
In absence of any specific provisions in the legislation deeming situs of intangible assets in India, the globally accepted rule mentioned above need to be followed.
Consequently, the income arising from transfer of trademarks in the present case would not be liable for tax in India.
The above decision of the Delhi High Court is a landmark and welcome decision. This judgment is a one of its own kind and the first decision delivered by Indian judiciary on the issue of off-shore transaction of transfer of intangible assets, which would have long lasting impact on non-resident taxation/ transfer pricing matters on intangible assets used in India.
Generally, in global M&A transactions, covering many jurisdictions, brands used in such jurisdictions under license from the owner/parent entity are also transferred. This decision has established the internationally accepted principle that such brand transfers will only be taxable in the jurisdiction of the owner/parent entity and not where brands were used under license, prior to such transfer.
Accordingly, a cross border business transfer transaction involving transfer of both tangible and intangible assets needs to be structured and devised properly keeping in mind the differential tax treatment in India in respect of both types of assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.