Indian taxability of intangible assets turns on situs: trade marks taxable, brewing know-how not taxable, valuation subject to verification.
Trade marks, brand rights and associated goodwill were treated as capital assets that can have an Indian situs where they are commercially exploited in India, so consideration for their transfer was taxable under section 9(1)(i). By contrast, the brewing intellectual property, represented by brewing manuals and technical material, was found to have ceased to have an Indian situs after termination of the prior licence and delivery to the purchaser's nominee, so the related consideration was not taxable in India. An independent valuation report could be used to compute the taxable component, subject to verification by the income-tax authority.
Issues: (i) whether the consideration received on transfer of trade marks and Foster's brand intellectual property was taxable in India under section 9(1)(i) of the Income-tax Act, 1961; (ii) whether the consideration attributable to the grant of exclusive, perpetual and irrevocable licence in relation to brewing intellectual property was taxable in India; and (iii) whether, if taxable, the computation could be based on an independent valuation.
Issue (i): whether the consideration received on transfer of trade marks and Foster's brand intellectual property was taxable in India under section 9(1)(i) of the Income-tax Act, 1961.
Analysis: Trade marks, brand rights and the goodwill attached to them were treated as capital assets within the wide meaning of section 2(14) of the Income-tax Act, 1961. The transfer of such assets attracted section 9(1)(i) only if the assets were situate in India. On the facts, the trade marks and brand intellectual property had been used in India for many years under the licensing arrangement, had generated goodwill in the Indian market, and had an operative commercial presence in India when the transfer took place. Their location was therefore not confined to the place where the agreement was executed or to the foreign residence of the owner. The Treaty did not displace the domestic charging provision.
Conclusion: The receipt attributable to the transfer of trade marks and Foster's brand intellectual property was taxable in India.
Issue (ii): whether the consideration attributable to the grant of exclusive, perpetual and irrevocable licence in relation to brewing intellectual property was taxable in India.
Analysis: The brewing intellectual property was substantially represented by the brewing manual and related technical material. Once the prior licence was terminated and the manuals were delivered to the purchaser's nominee, that intellectual property ceased to have a situs in India and reverted to the foreign owner's control. On that footing, the transfer of the brewing intellectual property was analogous to the transfer of technical know-how that had moved out of India, and the deeming provision in section 9(1)(i) was not attracted.
Conclusion: The receipt attributable to the grant of licence in relation to brewing intellectual property was not taxable in India.
Issue (iii): whether, if taxable, the computation could be based on an independent valuation.
Analysis: An independent valuation report could be a relevant basis for quantification, but the assessing authority had to verify whether it reflected the true value and apply the material factors relevant to the taxable items.
Conclusion: The valuation could be relied upon for computation subject to verification by the income-tax authority.
Final Conclusion: The ruling upheld Indian taxability only in respect of the transfer of trade marks and brand intellectual property, excluded the brewing intellectual property component from tax, and left valuation of the taxable part to be examined by the revenue authority.
Ratio Decidendi: Intangible commercial assets such as trade marks, brand rights and the goodwill generated by their use can have a situs in India where they are commercially exploited in Indian business, so their transfer is taxable under section 9(1)(i), whereas technical know-how or manuals that have reverted to the foreign owner and cease to have an Indian situs are not so taxable.