Taxability of intangible assets located in India

Transfer of intangible assets located in India

As per Indian Income-tax Act, all incomes accruing or arising, whether directly or indirectly, through the transfer of a capital asset situated in India is liable to Income-tax. Many a times, a controversy arises as to the situs of the asset in India. The controversy is more prominent in case of intangible assets like trademarks, brand-names, etc.
In the above context, recent case of Foster's Australia Ltd (170 Taxman 341) may be referred to. The brief facts of the case are that an Australian company is engaged in brewing, processing and selling of beer products. It owns trademarks, logos, technology and know-how, etc. On Oct, 13, 1997, the company entered into a Brand License (BL) Agreement with Foster's India, an Indian company whereby Foster's India was granted an exclusive license to brew, package, label and sell Foster's beer and an exclusive right of use of the trademarks within the territory of India. The Australian company was paying income-tax on such consideration, treating the same as royalty income.
On August, 4, 2006, the Australian company entered into a sale and purchase (S&P) agreement with SAB Miller, UK in Australia for transfer of shares of Foster India and other intangible assets in the nature of intellectual property.
In the instant case, the prime issue for consideration was as to whether the capital assets transferred through the S&P Agreement are ‘situated in India'. This issue arises since the income arising from the transfer of capital asset situated in India is deemed to be an income liable to be taxed in India as per the explicit mandate of section 9(1).
The Australian company approached the Authority for Advance Ruling for a ruling. It contended that the items of intellectual property covered by the S&P Agreement have no location in India and the situs in this case would be the place of fiscal residence of the owner. Therefore, both the asset and the place of contract being outside India, no income can be charged to tax under the Income-tax Act, 1961.
The department argued that Foster's India is held by Foster's Group, Australia, through the cobweb of its subsidiaries. Though the shares and trademarks and Foster's brand are shown to be sold by two different entities, in effect and in substance, Foster's group, Australia has transferred the ownership of its Indian company, i.e., Foster's India including its tangible as well as intangible assets.
The Authority however observed that: "The situs of these intellectual property assets, in our view, should not be traced and confined only to the place where the contract (India S&P Agreement) was entered into and acted upon by the parties. On the relevant date of transfer, they were very much present in India and the transfer of such assets took place concurrent with the transfer of controlling interest in Foster's India to SAB Miller. At best, their location in Australia is only notional or fictional. The fact that the trade-marks and names originated in Australia and initially registered there does not make material difference."
It was therefore held that the income arising to the Australian company from the transfer of its right, title and interest in the trade-marks and Foster's brand Intellectual Property is taxable in India under the Income-tax Act, 1961.
It is thus clear that intangible assets like trademarks, brand-names etc shall be taken as located in India if they are used in India. Their place of registration in this context is not material.

source-Business standard