Taxation of Income from Transfer of Intangible Assets between Non-Residents

[The following guest
post is contributed by Shailendera Singh,
who is a lawyer practising in Delhi. He can be reached at shailenderasngh@gmail.com]
A
judgment of the Delhi High Court rendered on July 25, 2016 in CUB
Pty Limited (Formerly Known as Foster’s Australia Ltd) v. Union of India

has held that the situs of an intangible property is where the owner of
the property resides, and a transfer of such property by a non-resident owner
to another non-resident would not be taxable in India. This poses interesting
questions following the arguably settled controversy around the retroactive
amendments to Section 9 of the Income Tax Act, 1961 (“ITA, 1961”).
Facts of the case and arguments presented:
In
1997, the parent company (Foster’s Australia Limited) entered into a brand
licence agreement with its subsidiary two levels below (i.e., Foster’s India
Limited) granting it the right to use its trademarks. The trademarks were
registered in India. In 2006, Foster’s Australia Limited executed a composite
agreement with SAB Miller for sale of shares of the holding company of Foster’s
India Limited, and sale of its trademarks and brand intellectual property. The
matter was on appeal before the High Court against the ruling of the Authority
for Advance Ruling, which had ruled that Foster’s Australia Limited’s income
which accrued from transfer of the intellectual property was taxable in India.
Foster’s
Australia argued before the High Court that the situs of an intangible
property is where the owner of the property resides (mobilia sequuntur
personam –
a common law principle) and therefore the income from the
transfer of the capital asset cannot be deemed to accrue or arise in India
(fourth limb of Section 9(1)(i) of the ITA, 1961).
The
Union of India, in response, submitted that the trademarks were registered in
India with no value at its time of registration, gaining appreciable goodwill
and value over time through the concerted efforts of the appellant and Foster’s
India Limited. Therefore, the principle of mobilia sequuntur personam must
be discarded to hold the situs of the property in India.
Decision and analysis:
The
Court allowed the appeal solely on the basis that the legislature while
introducing Explanation 5 to Section 9(1) of the ITA, 1961 (a retrospective
amendment pursuant to the Finance Act, 2012) has chosen to not provide for the
location of intangible capital assets, in the absence of which the common law
principle shall apply.
It
is interesting to note that while the Union did adopt the argument that the
property (capital asset) derives its value from India, it did not argue that Explanation
5 being a mere clarification, the principle of source based taxation, inherent
in Sections 5 and 9 of ITA, 1961, should prevail over a principle laid down by
English Courts – as it did in the case of Vodafone v Union of India ((2012) 6 SCC 613). Readers may remember
that the arguments in Vodafone by the
Union was precisely this in order to get over another judicial principle
(shares are situated where the company is incorporated), where it was argued
that since the share is only a mode and derives its value from the assets in
India, it must be held to be situated in India. A question also arises: would a
transfer of any capital asset between non-residents – other than share or
interest in a company – not be taxable in India as long as its situs can
be argued to be located outside India? A question, most likely, to be answered
by the addition of another Explanation!


Shailendera Singh

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • "It is interesting to note……A question also arises: would a transfer of any capital asset between non-residents – other than share or interest in a company – not be taxable in India as long as its situs can be argued to be located outside India? A question, most likely, to be answered by the addition of another Explanation!"

    The line of reasoning canvassed and accepted, and the view taken by the HC, in one's independent long standing conviction, – which, in fact, if remember right, was tried to be addressed /canvassed on certain earlier occasions, but by and large happened to escape judicial recognition and in-depth consideration, cannot be faulted to be illogical and unsound. On the contrary , it quite well fits into the basic concepts, such as 'source' and 'rule of attraction' , so on, considered for long as finally settled. To be precise , all the more so, the given subject matter of dispute, being an 'intangible property' within its common sense and legal meaning as well.

    With the same breath, one may wish to add and stress, that the purport or relevance of the closing observations in the concluding paragraph of the write-up is not at all understood; but , to say the least, calls for a critical study and incisive review.
    And to be done so, bearing in mind and keeping in focus that the controversy (as in Vodafone case)referred to therein came to surface because of the stance taken by the Revenue , preferring to ignore 'FORM' and adopt the convoluted reasoning and concept of "SUBSTANCE'.

    (May be contd.)

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