No (Indian) tax on transfer of foreign intangible assets rules Delhi HC

This past Monday, the Delhi High Court’s BD Ahmed and Sanjeev Sachdeva JJ delivered a significant ruling regarding the taxation on the transfer of intangible intellectual property. 

ruled on the scope of S. 9 of the Income Tax Act to state that transfer of intangible assets like intellectual property in the form of logos, brands and trademarks, which are capital assets but are intangible in nature, whose owners were based out of India could not be taxed in India.

The bench stated that while referring to intangible assets, the situs of the owner of the asset would be the closest approximation of the situs of the intangible asset itself. According to Justice Ahmed, this is an internationally accepted rule unless altered by local legislation.

The case arose from a transfer of Foster’s Brand Intellectual Property and trademarks from Foster’s Australia to SABMiller. Since Foster’s India had the right to use “Foster’s” in India, the question that arose before the Authority for Advance Ruling (Income Tax), New Delhi (AAR) was –

“Whether the receipt arising to the applicant from the transfer of its right, title and interest in and to the trademarks, Foster’s Brand Intellectual Property and grant of exclusive perpetual license of Foster Brewing Intellectual Property is taxable in India, having regard to the provisions of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement between India and Australia.”

In May, 2008, the AAR ruled that the transfer would be taxable in India because the intellectual property in question pertained to India and some were even registered in India which makes the income deemed to be accrued in India in accordance with the Income Tax Act, 1961.

This order of the AAR was challenged by Foster’s Australia before the said division bench of the Delhi High Court.

The bench went on to state that if the ownership of the intellectual property was outside India, the mere licensing of these rights prior to the transfer, would not attract taxes in India. SABMiller had acquired the Indian assets of Foster’s for $120 million over a decade ago.

Jiger Saiya, Partner – Direct Tax, BDO India said that the landmark decision could revive the debate on the scope of S. 9 of the Income Tax Act which deals with indirect transfers and the levy of capital gains on these transactions. 

“The High Court has interpreted S. 9 of the Income Tax Act to say shares, which derive their value from a capital asset, have to be transferred for the Income Tax Act provisions to come into effect.

This means that other transactions like business purchase agreements and asset purchase agreements where businesses or assets are transferred for a consideration without share transfers will not be liable to pay capital gains tax in India.”

Read the full judgment below.

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