INTELLECTUAL PROPERTY – DIRECT TAX CONSIDERATIONS

Ameya Kunte

4 Feb 2015

Indian IP Taxation – Overview

Federal structure in India Tax collection rights distributed between

Center, State and Municipal Corporations… Taxes relevant on IP – Income tax,

Customs, Service No coordinated tax policy on IP in India Notable international precedents on

favourable IP tax regime – Switzerland , UK (Patent box)

IP lifecycle – tax triggers

IP Taxati

on

In-house creation

Acquisition

Sale / transfer

Exploitation –

licensing

In-house IP development

Revenue expenditure for ‘scientific research’ relating to business allowed as deduction [S 35(1)]

200% of revenue & capital expenditure on approved in-house R&D facility [S 35(2AB)] Land and building cost excluded For pharms companies – clinical trial &

regulatory approval expenses included

Scientific research definition

Sec 43(1)(i) "scientific research" means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries;(ii) references to expenditure incurred on scientific research include all expenditure incurred for the prosecution, or the provision of facilities for the prosecution, of scientific research, but do not include any expenditure incurred in the acquisition of rights in, or arising out of, scientific research;(iii) references to scientific research related to a business or class of business include—(a) any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all businesses of that class;(b) any scientific research of a medical nature which has a special relation to the welfare of workers employed in that business or, as the case may be, all businesses of that class;

IP acquisition

IP acquisition cost eligible for depreciation @ 25%

Intangible assets eligible for depreciation know-how, patents, copyrights, trademarks,

licenses, franchises or any other business or commercial rights of similar nature, being intangible assets …, owned, wholly or partly, by the assessee and used for the purposes of the business or profession

IP acquired on license basis – royalty payments allowed as revenue expense

TDS @ 10% on royalty payment u/s 194J

IP transfer

Sale or transfer of IP taxable as capital gains No specific domestic tax law exemption

Long term IP sale taxable @ 20% Capital gain = Sale value - Cost of

acquisition Self acquired IP – cost of acquisition is NIL Use of DTAA relief on international IP

transfer – to mitigate tax

Cross border – IP licensing

IP licensing income earned by non-residents from Indian business taxable in India

Withholding tax applies on IP license payments Highest rate applicable @ 25% (where PAN is

not available) Rate can be reduced to 10% under DTAA

Definition of royalty / fees for technical service & characterization – key to determine tax liability

Royalty definition under IT Act

Royalty defined widely under IT Act [Sec 9(1)(vi)] Includes transfer of all or any rights Imparting of any information Payment for use is covered Rendering of any services in connection

with above Medium of transfer irrelevant Possession or control with payer irrelevant location of such right, property or

information in India irrelevant

Royalty definition under DTAA

Narrow definition under treaty The term “royalties” as used in this Article

means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

IP & transfer pricing

Profit attribution of enterprise & jurisdiction linked to IP

Transfer pricing – FAR analysis – key to determine profits

MNC’s may shift profits using situs of IP Use of tax favourable jurisdiction for house

IP

International tax key issues

Countries’ tax approaches – source vs residence

Business profit attribution follows IP Determining situs of IP – impacts

taxation base Mere ‘contract’ sufficient ? How to demonstrate substance?

OECD’S BEPS project New rules to deal with IP taxation

Indian Case Studies

Payment for computer software

Is there a transfer of ‘copyright’ or transfer of a ‘copyrighted material’?

Is the payment taxable as royalty?

Payment to French News agency

Delhi Tribunal : French news agency’s income from Indian news agencies (PTI, UNI, IANS etc) on use of its ‘news reports’ & ‘photographs’ as ‘copyright of literary, artistic work’ coming under ambit of ‘royalty’ under Indo-French DTAA

Rejects assessee’s stand that news reports & photos were mere facts / current news & not ‘original literary work’ having any copyrightable value under Copyright Act

Copyright exists over “the way in which a news item is reported" that includes ‘modicum of creativity’ & considerable skill, labour, capital

Even photos used for news reports had an intrinsic value of their own and assisted in conveying the message in news story, thus copyright exists even in photographs

Agence France Presse [TS-583-ITAT-2014(DEL)]

NR to NR patent licensing

OEMs – China / Korea

Wireless Carriers

(Worldwide)

Outside India

In India

License of CDMA

Patents

Sale of CDMA

Products

Royalty

Ultimate Subsidiary

Sale of CDMA

Products

End User – Customers of Indian

Wireless Carriers

Sale of CDMA Products

NR to NR patent licensing

Delhi Tribunal - Royalty received by Qualcomm USA from foreign OEMs on sale of CDMA technology-enabled handsets & equipment to Reliance & Tata group in India not taxable

Source of royalty is place where patent is exploited or where manufacturing activity takes place.

Royalty income not taxable u/s 9(1)(vi)(c) What is important is not whether right to property

is used “in” or “for the purpose of” business, but to determine whether such business is “carried on by such person in India”

Delhi Tribunal - Qualcomm Incorporated [TS-35-ITAT-2013(DEL)]

Ameya Kunte ameya.kunte@taxsutra.comMobile - +91 9823038088www.taxsutra.com

www.tp.taxsutra.com

www.idt.taxsutra.com

www.lawstreetindia.com

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