The last few years have witnessed substantial buoyancy in economic growth in emerging markets, especially India. A number of multinational companies, eyeing a piece of the India growth story, have undertaken transactions/ acquisitions which could directly or indirectly involve India-related assets.
Media reports in the past have indicated that the revenue authorities are closely examining such transactions to ascertain whether appropriate Indian taxes have been paid on such transactions/acquisitions.
In the context of a transaction executed by Foster’s Australia—a part of Foster’s Group Ltd—with SABMiller Plc., Foster’s Australia had approached the Authority for Advance Rulings (AAR) to seek determination of its tax liabilities in India owing to the transfer of Foster’s brand intellectual property, Foster’s trademarks and Foster’s brewing intellectual property.
The relevant facts of the case before AAR are summarized below:
Foster’s Australia, a leading international company engaged in brewing and marketing beer products, held a certificate of registration in India with respect to trademarks pertaining to the Foster’s brand. It had entered into a brewing licence agreement with Foster’s India Ltd, a Foster’s Group company. It had also granted Foster’s India an exclusive right to use the Foster’s trademarks in the territory of India.
Subsequently, Foster’s and SABMiller executed an India sale and purchase (S&P) agreement which, inter alia, included the transfer of Foster’s brand intellectual property and trademarks to SABMiller in India.
In addition, SABMiller was also granted an exclusive, perpetual and irrevocable licence of Foster’s brewing intellectual property in India by virtue of the S&P agreement. The S&P agreement was executed in Australia.
The Income-tax Act, 1961, contains a deeming provision whereby certain income streams arising to non-residents (including foreign companies), directly or indirectly from a business connection, from any property in India, or transfer of a capital asset situated in India, would be subject to tax in India.
The Act does not explain the circumstances under which capital assets such as trademarks, brands, etc., can be said to be situated in India. Hence, in what circumstances a property or an asset could be considered to be situated in India remained a vexed issue, especially in the case of trademarks and the like.
The contention raised by Foster’s before AAR was that the transfer of trademarks and other intellectual property rights amount to transfer of capital assets and the situs, or where the property is treated as being located for legal purposes, of such assets was located outside India. Accordingly, the consideration thereof cannot be subject to tax in India.
The basis of such contention was that intangible assets have no geographical location and no situs apart from the domicile of the owner. It was also contended that assets as well as the place of contract being executed outside India, taxability of such consideration was beyond the ambit of the provisions of the Act.
Given the above provisions of the Act and the contentions raised by Foster’s, the key issue to be examined and determined by AAR was whether the situs of the Foster’s intellectual property and trademarks could be construed to be in India, to attract Indian taxation.
In this connection, AAR held that the contention that the intangible assets transferred by Foster’s have no particular geographical location and also no situs apart from the domicile of the owner, that is, Foster’s Australia, does not merit acceptance.
Further, AAR also held that the contention that the place of execution of contract determines the situs was also untenable.
The decision of AAR to conclude the trademarks were situated in India was also, inter alia, aided by the fact that (a) the business of Foster’s India was being carried on in conjunction with Foster’s Australia and, since 1997, the said intellectual property was being put to use in India; (b) the Foster’s logo, etc., was registered in India in 1993 and, as such, were being used by Foster’s India by virtue of the exclusive licence agreements; and (c) Foster’s Australia retained its proprietary rights in the goodwill associated with the assets and simultaneously ensured that the assets acquired value in the form of reputation and goodwill (by sale of beer under the brand names).
AAR concluded that the capital assets in terms of the trademarks and the brand transferred by and through the S&P agreement were situated in India. Accordingly, the consideration received for the same was subject to tax in India.
As regards the provisions of article 13 of the Double Tax Avoidance Agreement between India and Australia dealing with taxation of capital gains, AAR held that taxation of capital assets such as trademarks and brands as per article 13 of the tax treaty would be governed by provisions of the Act. Accordingly, in the present case, no benefit could possibly be derived by taking resort to such article of the tax treaty.
The authority held that the core of the brewing intellectual property?was the brewing manual, which was the product of the research and development efforts of Foster’s Australia. It contained formulae and technical aspects relating to the brewing and packaging of Foster’s lager beer. The brewing manual, though in a sense a trade intangible, is also in the nature of goods. The brewing manual was physically made available to the nominee of the purchaser on the completion of the S&P agreement in Australia. Therefore, the brewing intellectual property could not be said to be situated in India and, hence, income attributable to such intellectual property could not be taxed in India.
The ruling of AAR in the case of Foster’s examines an important aspect of whether situs of a property or an asset is situated in India. Though the AAR ruling is technically binding only on the applicant, in the context of other international transactions involving transfer of India-specific intellectual property such as trademarks, brands, etc., the ruling in the Foster’s case could have a persuasive value.
Further, in the context of cross-border merger and acquisition transactions with an Indian perspective, it would become imperative to examine if such transactions involve a direct or an indirect transfer of any assets situated in India and the related Indian tax consequences of the same.
Ketan Dalal is executive director and Manish Desai is associate director, PricewaterhouseCoopers.
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