New Delhi: Will transactions other than share transactions attract indirect transfer provisions as per the income tax act in India?
If one goes by a recent high court judgment, the answer to this question is no.
The Delhi high court on Monday ruled that transfer of intangible assets like intellectual property whose owners were not based in India could not be taxed in the country.
It interpreted Section 9 of the Income-tax Act dealing with capital gains arising from indirect transfers to mean that only share transactions between two overseas entities will come under the ambit of the Act and that transfer of intangibles between two overseas entities will not be taxed in India.
Analysts point out that this judgment defines the scope of Section 9 of the Act and this interpretation could mean that only share transactions get covered under the Income-tax Act.
Jiger Saiya, partner-direct tax, BDO India, said this could revive the debate on the scope of Section 9 of the Income-tax Act, which deals with what constitutes indirect transfers and the levy of capital gains on such transactions.
“The high court has interpreted section 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,” he said. “It is likely to be settled in the Supreme Court,” he added.
Jayesh Sanghvi, national leader, international tax, Ernst and Young, said that this provision cannot be given an expanded understanding. In other words, intangible assets like intellectual property cannot be capital assets under the section.
“The high court has clarified and allayed the doubt over what will happen globally. A user right is actually just that, the right to use, it does not provide the Indian entity any right over the intellectual property itself. Transfer of such a right (to use) will not be taxable. The judgment is positive and gives clarity for global mergers and acquisitions,” Sanghvi added.
The ruling will benefit Foster’s Australia, the petitioner (now known as CUB Pty), as the high court overturned a decision of the Authority of Advance Ruling (AAR), which said that a transfer of such intangible asset would mean that income has accrued in India.
“The Delhi high court judgment is a landmark judgment, since it lays down the crucial principle that the location of an intangible asset would be the place of the owner of that asset i.e where the company is registered. Also, unlike in the case of shares, where the legislature has created an artificial taxing provision in the context of indirect transfers, that is not so in the case of intangible assets,” said Ketan Dalal, senior tax partner at PricewaterhouseCooper.
A two-judge bench comprising justices Badar Durrez Ahmed and Sanjeev Sachdeva said that the legislature under Section 9 clarifies what constitutes capital asset means—shares. The law does not expressly mention intellectual property as a capital asset.
“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,” the court noted in its ruling.
“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...would not be in India,” it added.
The case arose from a transfer of Foster’s Brand Intellectual Property and trademarks from Foster’s Australia to SABMiller. Foster’s India had the right to use the Foster’s brand in the country. Foster’s Australia asked the AAR to decide whether such transfer of the brand and trademarks would be taxable in India, as per the Income-tax Act and the double taxation avoidance agreement between India and Australia.
On 14 May 2008, the AAR ruled that transfer of Foster’s Australia’s right, title and interest in the trademarks and Foster’s Brand Intellectual Property to SABMiller would be taxable in India. The reason for this decision was that the intellectual property pertained to India, some were even registered here, so income would be deemed to accrue in India. Foster’s Australia then challenged the ruling before the high court.