No tax on cross-border transfer of intangible assets, rules Delhi High Court

The Delhi High Court has recently ruled on the scope of the Income Tax Act, 1961 with respect to cross-border transfers of intangible capital assets such as logos and trademarks..On Monday, a division bench of Badar Durrez Ahmed and Sanjeev Sachdeva JJ delivered a judgment in CUB PTY Ltd (Formerly known as Foster’s Australia) v Union of India..The matter deals with a transfer of intellectual property from Foster’s Australia to SABMiller following SABMiller’s acquisition of Foster’s Indian assets. These assets included 16 trademarks, and “Foster’s Brand Intellectual Property”. In May of 2008, the Authority for Advance Ruling (Income Tax), ruled that the transfer would be taxable in India because the intellectual property in question pertained to India and in some cases, was also registered in India..This decision was challenged before the Delhi High Court, with Seth Dua and Associates briefing senior counsel S Ganesh for the petitioner. The Dua team included Atul Dua, Amar Dave, Gautam Chopra and Taru Gupta. The Union of India was represented by N. P. Sahni, Nitin Gulati and Judy James..The question that arose before the Court was whether the transfer of assets which were intangible in nature can be included within the scope of ‘income deemed to be accrued in India’ in accordance with the Income Tax Act, 1961..Overruling the decision of the AAR, the High Court held that intellectual property in the form of logos, brands and trademarks whose owners were based out of India could not be taxed in India by virtue of the provisions of the Income Tax Act and the Double Taxation Avoidance Agreement between India and Australia..The court held that,.“Thus, the legislature, where it wanted to specifically provide for a particular situation, as in the case of shares, where the share derives, directly or indirectly, its value substantially from assets located in India, it did so. There is no such provision with regard to intangible assets, such as trademarks, brands, logos, i.e., intellectual property rights. .Therefore, the well accepted principle of ‘mobilia sequuntur personam’ would have to be followed. The situs of the owner of an intangible asset would be the closest approximation of the situs of an intangible asset. This is an internationally accepted rule, unless it is altered by local legislation.”.Additionally, mere licensing of these rights prior to the transfer could not attract taxes..According to Atul Dua, the judgment is a landmark one, and will have an impact on the future structuring of off-shore transactions..“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.”.Read the judgment below.