No tax on offshore transfer if IP owner located abroad

By Atul Dua and Upvan Gupta, Seth Dua & Associates
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In the current era of globalization, it is quite common for a business as a whole to be transferred on an “as is where is” basis, without any modification in the prevailing business structure. Such a transfer includes the transfer of both tangible and intangible assets constituting a part of the business, even if the assets are widely located in different countries.

Atul Dua, Senior partner, Seth Dua & Associates
Atul Dua
Senior partner
Seth Dua & Associates

As per India’s tax laws, an offshore transfer of tangible or intangible assets located in India is liable for capital gains tax and withholding tax in India. The chargeability of these taxes in such a transaction arises irrespective of whether the transaction is taking place between two non-residents or between one resident and a non-resident.

The issue of offshore transfer of both tangible and intangible assets located in India or deriving their value substantially from Indian assets/activities – even though the tangible/intangible assets are physically located or registered outside India – has long been contentious and debated.

The Indian legislature, after the decision of the Supreme Court of India in Vodafone International Holdings BV v Union of India (2012), has been quite active in formulating legal provisions for taxability of offshore transfer of tangible assets deriving their value substantially from India.

However, the issue of taxability of intangible assets registered/born outside India, such as foreign brands, foreign copyrights, foreign trademarks, etc., which have been nurtured and developed in India due to Indian operations/activities is yet to be addressed by the Indian legislature.

In one of the first and only instances of this kind, the issue of offshore transfer of taxability of a foreign brand developed in India recently arose before Delhi High Court in the matter of CUB Pty Ltd (formerly known as Foster’s Australia Ltd) v Union of India.

Delhi High Court in the above case held that the situs of an intangible asset would be the situs of the owner of that asset, irrespective of the fact that the intangible asset under consideration is deriving its value through brand development and nurturing exercises in India.

In this case, the owner of the intangible assets under consideration was located in Australia, while the foreign brand under consideration, Fosters, was developed, nurtured and operated in India. Delhi High Court, considering the location of the brand owner, held that the intangible assets/foreign brand was also located in Australia only, i.e. outside India.

Upvan Gupta, Associate partner, Seth Dua & Associates
Upvan Gupta
Associate partner
Seth Dua & Associates

The court accepted the contentions of the taxpayer that an intangible asset does not exist in any physical form and therefore cannot be said to be located at any physical place, unlike a tangible capital asset. The court upheld the applicability of the internationally accepted rule/principle of mobilia sequuntur personam, whereby a fiction is created that situs of an intangible asset would be the situs of the owner of that asset.

Consequently, the court held that the Indian revenue authorities had no jurisdiction to tax the income arising on transfer of intellectual property rights in the intangible asset/foreign brand in question, since it constituted a capital asset located outside India.

The court while pronouncing the above order also observed that the provisions of the domestic tax laws of India were silent on the issue under consideration. It is worthwhile noting here that the provisions of the double taxation avoidance agreement entered into by India with Australia are also silent on determining location of an intangible asset owned outside India, but nurtured/developed in India.

The above decision by Delhi High Court on taxability of offshore transfer of intangible assets, which are developed and nurtured in India but owned outside India, is the first decision delivered by the Indian judiciary on this issue. The decision is expected to have long-lasting impact on non-resident taxation/transfer pricing matters on foreign intangible assets used in India.

Delhi High Court, in the above decision, duly considered the principle of legal ownership of the foreign brand, while the principle of economic ownership of the brand, which can be argued to be held in India, was not delved into.

In light of the above decision, it is essential for non-residents to structure their offshore/cross-border business transfer transactions involving transfer of tangible and/or intangible assets in a proper manner in order to optimize the tax liability arising in India on account of the transfer. This would also include clear and separate segregation/identification of the transfer price of both tangible and intangible assets within the terms of the contract, owing to differential tax treatment in respect of both classes of assets in India.

Atul Dua is a founder and senior partner and Upvan Gupta is an associate partner at Seth Dua & Associates. The firm represented CUB Pty Ltd in the above case.

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