Overseas owner not bound to Income Tax for the Income from IPR Transfer: Delhi High Court [Read Judgment]

In a land mark Judgment, Delhi High Court ruled that, an owner who is settled abroad not bound to Income Tax for the Income from transfer of intellectual property rights such as logos, brands, trademarks etc.

The writ petition filed by Cub Pty Limited (formerly known as Foster’s Australia Ltd) pertains to the situs or location of intellectual property rights such as logos, brands, trademarks, which are capital assets, but intangible in nature. In terms of Section 9(1)(i) of the Income Tax Act, 1961, all income accruing or arising, directly or indirectly, inter alia, through the transfer of a capital asset situate in India, shall be deemed to have accrued or arisen in India.

The division bench of Delhi High Court invalidated the order of Authority for Advance Ruling (Income Tax), New Delhi that, the income ‘accrued’ to the applicant, from the transfer of its right, title and interest in and to the trademarks and Foster’s Brand Intellectual Property is taxable in India under the Income Tax Act, 1961.

The petitioner (CUB Pty. Limited, formerly known as Foster’s Australia Limited) had a 100% subsidiary – Dismin India Private Limited (Dismin). In turn, Dismin held 100% shares of FBG, Mauritius, which, in turn, held 100% shares of Foster’s India Limited. The latter company, namely, Foster’s India Limited was incorporated on 26.09.1995. On 13.10.1997, a brand licence agreement (BLA) was executed between the petitioner and Foster’s India Limited. By virtue of the BLA, Foster’s India Limited was licensed to use in India four of the trademarks owned by the petitioner.

In consideration of this licence, the petitioner received royalty and was subjected to withholding tax in India. It is pertinent to note that the BLA permitted Foster’s India Limited to use the said licensed trademarks in India. The BLA did not transfer any other right to Foster’s India Limited. In other words, the licensed trademarks continued to remain the absolute property of the petitioner. Foster’s India Limited was only permitted to use the said four licensed trademarks in India as a licensee.

The petitioners contended that the origin of the Forster’s mark was unquestionably in Australia. The petitioner was the owner of the said brand/mark and the petitioner is an Australian company. The petitioner has also granted licences to use the trademarks in various countries across the world (approximately between 70-100 countries), including India. It was submitted that a licence to use a trademark confers only a limited right for the use of the mark and there is no assignment of any proprietary interest therein.

The petitioner also submitted that the location of a trademark is governed by the common law maxim of ‘mobilia sequuntur personam’. According to this principle or doctrine, the personal property held by a person is governed by the same laws that govern that person. This principle has been applied to determine the situs of intangibles which entails that the situs of intangible assets are to be determined on the basis of the situs of the owner of such intangible assets. The principle behind this doctrine was that intangibles are subject to the immediate control of the owner and since the intangibles themselves do not have any real situs, the domicile of the owner is the nearest approximation to their location.

The bench comprising of Justice Badar Durrez Ahmed and Justice Sanjeev Sachdeva observed that, 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”.

“Since there is no such alteration in the Indian context, we would agree with the submissions made on behalf of the petitioner that the situs of the trademarks and intellectual property rights, which were assigned pursuant to the ISPA, would not be in India. This is so because the owner thereof was not located in India at the time of the transaction”, the bench also observed.

Read the full text of the Judgment below.