Introduction
We are pleased to present the latest edition of Tax Street – our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of May 2024.
- The 'Focus Point' explores the aspects surrounding the situs of an intangible asset and its subsequent tax ramifications.
- Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
- Our 'Tax Talk' provides key updates on the important tax-related news from India and across the globe.
- Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.
Focus Point
Situs of an Intangible Asset
In order for a jurisdiction to exercise its right to tax any income, there should be sufficient nexus between income and the said jurisdiction. The recent era has seen extensive discussion and legislative amendments over the taxation of shares by providing extensive clarification on the situs of shares. However, the taxation of intangible assets has long been a contentious issue. Historically, multinational companies have been developing, holding and registering their Intellectual Property Rights (IPRs) in developed countries, owing to their sophisticated intellectual property laws, while their core markets are in developing nations where they exploit the use of these IPRs. Thus, the company could be running its business in one jurisdiction, exploiting the consumers in another jurisdiction, using the IPRs of a third jurisdiction. The taxability of such IPRs would be the jurisdiction of the situs of its IPR. However, the involvement of multiple jurisdictions complicates the determination of its situs.
Factors arguable to justify the nexus of the situs of intangible assets
- Jurisdiction where the IPR is registered: The IPR may have been registered in a particular jurisdiction for its favorable tax and legal frameworks for the protection of intellectual property.
- Ownership and development location: The jurisdiction where the R&D team is deployed, considering the supply of necessary resources and available framework and ecosystem from the government of that jurisdiction.
- Relative economic activity: Jurisdictions where the economic benefits and exploitation of the IPR primarily occur.
Income tax's position
The current tax legislation does not provide a clear framework for determining the situs of an intangible asset. Unlike shares or interests in a company incorporated or registered outside India, where Explanation 5 to Section 9(1)(i) of the Income-tax Act, 1961 (the Act) offers guidance, no similar deeming fiction exists for intangible assets.
However, time after time, judicial precedents have tried to shed light on this issue.
The Delhi HC pronounced an important judgment in 2016 on this aspect, which involved the issue of taxability of transfer by a non-resident of trademarks originating outside India and licensed for use in India. The Delhi HC reversed the decision of the Authority for Advance Rulings (AAR), which had held that the situs of the assessee's trademarks were to be considered as located in India, and the gains on their transfer were taxable in India.
In the case of CUB Pty Limited v. UOI & Ors [2016] 71 taxmann. com 315 (Del), the taxpayer, an Australian company, was engaged in the business of brewing beer. The company owned various trademarks and intellectual property rights (IPRs) related to its business. Through Brand License Agreements (BLAs), the taxpayer licensed these trademarks and IPRs to its subsidiaries in various jurisdictions, including a step-down subsidiary in India (I Co). The trademarks and IPRs were also registered in India. In 2006, the taxpayer entered into a composite sale-purchase agreement (ISPA) with X Ltd. The ISPA involved the transfer of shares of one of the taxpayer's downstream subsidiaries, along with the associated trademarks and IPRs, including those licensed to I Co. The taxpayer approached the Authority of Advanced Ruling (AAR) to determine the taxability of the sale of licenses and IPRs in India. The AAR held that income from the transfer of rights, title, and interest in trademarks and IPRs was accrued in India. The basis of the same inter alia included:
- The IPRs had a tangible presence in India.
- The registration of these trademarks and IPRs in India further established their connection to the jurisdiction.
- The brands had generated goodwill in India due to I Co's nurturing.
The taxpayer challenged the ruling of the AAR before the Delhi HC.
It was held that in the absence of specific provisions for taxing IPRs, internationally accepted principles should be applied to determine the situs of the intangible asset. The principle of 'mobilia sequuntur personam' may be used to establish the situs of the IPRs, meaning that the situs of the owner of the intangible asset is considered the closest approximation of the situs of the asset itself. Since the situs of the IPRs is not located in India, the income derived from the transfer of rights, title, or interest in the IPRs is not subject to taxation in India.
In April 2024, the Mumbai Tribunal issued a ruling on a similar precedent, holding that the situs of the owner of an intangible asset is the closest approximation of the situs of the intangible asset itself. The pertinent facts of the case are covered as follows:
In the case of Star Television Entertainment Ltd vs DCIT [ITA No. 1814/Mum/2014] (Mumbai ITAT), the taxpayer, a Hong Kong resident, transferred a television channel (Channel) to another sister concern (A Co). The taxpayer did not offer the gain from such transactions to tax in India, as the transaction was between non-residents and the Channel was not an asset situated in India. However, the Assessing Officer (AO) observed the following:
- There was a strong business connection of the transferred asset to India due to its ability to continually and regularly generate income from India.
- The basic elements of the asset viz. brand name, logo, contents, permits & licenses, etc., were all located in India; therefore, the asset being a 'Channel' is located in India.
The Tribunal observed that in the instant case, the Channel was an intangible asset. On perusal of the down-linking license obtained from the Ministry of Information and Broadcasting of India to operate the Channel in India, it was established that the ownership of the Channel was outside India. Relying on the ruling of the Delhi HC of CUB (Supra), the Tribunal held that the Channel was not an asset situated in India since it was owned by a person outside India (i.e., the taxpayer) and, therefore, the situs of the asset was also outside India. Accordingly, the income arising out of the transfer of Channel, being an asset outside India, would not fall within the provisions of Section 9(1)(i) and, accordingly, is not taxable in India.
In light of the above judicial precedents, the current legal position is that the situs of the owner of an intangible asset is considered the situs of the intangible asset itself. Some further judicial precedents from the HCs as well as the Apex Court in due course of time should help in adding further perspective to this issue.
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