India: Delhi High Court Rules On Situs Of Intangibles

Last Updated: 15 August 2016
Article by Trilegal .

In its recent decision, the Delhi High Court has held that the situs of an intangible asset is the situs of the owner of that asset and therefore the transfer of such asset by a non resident would not be taxable in India even if the asset was being commercially exploited in India.


Under the Income Tax Act, 1961 (IT Act), all income arising (directly or indirectly) through the transfer of a capital asset situated in India, is deemed to accrue or arise in India and therefore, taxable in India. The Supreme Court, in its landmark judgement in the Vodafone case, had held that an off-shore transfer of shares of a foreign company having underlying assets in India is not taxable in India as the situs of shares of the foreign company is located outside India. Pursuant to this ruling, the government enacted the Finance Act 2012, retrospectively amending the law to clarify that the situs of shares of a foreign company will be deemed to be India if the shares derive their value substantially from assets located in India.

Though the position in the context of situs of shares of a foreign company now stands clarified, in the absence of a specific enactment clarifying the situs of intangible capital assets owned by a non-resident, the Delhi High Court has recently ruled on the issue in the case of CUB PTY Ltd. (formerly known as Foster's Australia Ltd) v. Union of India.

In this case, the Delhi High Court had to determine whether Foster's trademarks and brand owned by Foster's Australia but exploited in India (through a license arrangement), could be said to have a situs in India. The Delhi High Court, overruling the decision of the Authority of Advance Ruling (AAR) held that, the situs of an intangible property is where the owner of the property resides (in this case being Australia) and therefore income arising to Foster's Australia from the transfer of Foster's trademarks and brands to SAB Miller would not be taxable in India.

Brief Facts and AAR Ruling

Foster's Australia, the owner of the Foster's trademarks and brand had licensed the use of four trademarks to Foster's India for which it was receiving royalty from Foster's India. Foster's India was a subsidiary of a Mauritian company, FBG India Holdings Limited, Mauritius.

Pursuant to a composite agreement of sale with SAB Miller, the shares of FBG Mauritius were transferred along with the Foster's brand and trademarks. The primary issue that arose before the AAR was whether any consideration received for transfer of brands and trademarks owned by a transferor located outside India was taxable in India because of its commercial exploitation in India.

While Foster's Australia contended that the trademark was not an asset located in India, the AAR dismissed the arguments of Foster's Australia and concluded that the marketing intangibles comprising of Foster's trademarks and brand had their situs in India on the following grounds: (i) the trademark was registered in India; (ii) Foster's business was being carried on in India under the exclusive license granted by Foster's Australia (to Foster's India); (iii) co-ordinated efforts of Foster's Australia and Foster's India helped in nurturing goodwill of the brand; and (iv) intangible property belonging to Foster's Australia had its 'tangible presence' i.e. (Foster's India) in India at the time of the transfer of the intangible.

Based on the above reasoning, the AAR ruled that the situs of the Foster's trademarks and brand was in India and any consideration received for their transfer to SAB Miller was taxable in India.

Delhi High Court's Decision

Aggrieved by the decision of the AAR, Foster's Australia appealed before the Delhi High Court. The Delhi High Court while deciding the matter in favour of the taxpayer, held that the situs of an intangible property is where the owner of the property resides, and any income arising to the non resident owner from the transfer of such property would not be taxable in India (even if the property is being used in India).

By applying the common law principle of 'mobilia sequuntur personam' (movables follow the law of the person), the Court concluded that the situs of the Foster's brand was in Australia, where its owner, Foster's Australia, was located. Accordingly, the consideration received for the sale of the brand, to the extent it related to the Indian leg of the business, was not taxable in India, despite the brand being exploited in India by Foster's India under the license arrangement with Foster's Australia.

Further, the Delhi High Court observed that the principles of common law would prevail unless the tax laws of any country contain a specific provision to the contrary, for instance by way of a deeming fiction. In this context, the Delhi High Court referred to the retrospective amendment to the IT Act (brought in by the Finance Act 2012, pursuant to the landmark Supreme Court judgment in the case of Vodafone BV), where the legislature specifically introduced a deeming fiction (Explanation 5 to Section 9) to provide that a share of a foreign company, which derives its value substantially from assets located in India is a capital asset situated in India. The Delhi High Court noted that the legislature has not provided for a similar deeming fiction for location of intangible capital assets such as intellectual property rights- brands, trademarks, logos, etc. It therefore concluded that, in the absence of a specific provision in the tax laws of India, the situs of the owner of an intangible asset would be the closest approximation of the situs of an intangible asset.


This judgment puts to rest the controversy regarding the situs of an intangible asset owned by a non resident, by holding that even if the brand is substantially used and has a tangible presence in India, the situs of the brand cannot be held to be India. This ruling is a positive and welcome development, especially for multinationals that have a brand presence and registered intellectual property in India. However, we may have to wait and watch as to whether this relief is transient, as the legislature does have the power to reverse the application of this judgment by introducing a deeming fiction for location of intangibles by way of a retrospective amendment to the IT Act (such as the one introduced by the Finance Act 2012).

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.

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