SpicyIP:Trademark through the Taxmans Lens

IP acquisitions are becoming commonplace where companies are going a shopping for IP assets ;assets that could add synergy and diversity to existing product lines. Recent M&A forays by companies such as Biocon and Suven were largely driven by the IP acquisition rationale.

Heightened awareness that IP can constitute a discrete asset class capable of creating value and opportunities for arbitrage is fast gaining ground.IP value and IP related cross border transactions has seen a dramatic recognition in recent years.

WIth a surge in cross border transactions of intangibles, valuation and tax considerations of IP continue to be vexatious issues. The tax man is scrutinizing these deals with fine tooth comb( is he bored with celebrity tax bust ups??!!??) , perhaps also an attempt to establish judicial precedents in areas of IP tax law that hold much grey(read that as the provisions in 'The Income Tax Act'pertaining to IP)

Determination of 'situs' of such intangibles continues to be a tricky issue,the key determinant in deciding the jurisdiction for tax purposes.Transfer Pricing concerns follow.

'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 recent ruling by the AAR(Authority for Advance Rulings) on the SAB Miller case throws light in this direction and lays down some guiding principles that could help resolve this issue.SAB Miller is part of the Australian based brew biggie Fosters.

Interestingly,the AAR is a quasi judicial body that pronounces rulings only when parties initiate the process.

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.

Live mint as always carried an incisive analysis on this ruling.