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TMI Blog2008 (5) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... rporated in Australia in the year 1907 under the name of Carlton and United Breweries Ltd. It is a wholly owned subsidiary of Foster's Group Limited (for short 'Foster's Group), Australia which is a global multi-beverage group dealing in beer, wine etc. and also non-alcohol beverages. The business of the applicant-Foster's Australia Limited includes the brewing, processing, packaging, marketing, promoting and selling of beer products in Australia and abroad. The applicant states that it owns various brands including Foster's brand in relation to beer products which comprises of trade marks, logos, devices, brand guidelines, advertising material, technology and know-how including recipes and brewing specifications. The applicant grants licences in respect of Foster's brand to parties in three countries and, until recently, in India. By virtue of the licence, the licencee can sell, market and distribute and sometimes brew, process and package Foster's beer within a particular territory. The applicant also states that it holds certificates of registration of trade marks pertaining to Foster's Brand and it has been continuously using the Foster's Brand since its registration. In India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be noted at this juncture that there were five parties to the Agreement, namely, Dismin Investments pty Ltd (for short 'Dismin'), Foster's Australia Limited (applicant), Foster's Group Limited, SAB Miller (A&A2) Limited, SAB Miller Africa and Asia B.V. Dismin and the applicant are the group companies of Foster's Group Ltd., Australia. It was a composite Agreement for the sale of shares by Dismin and the sale by the applicant of (a) trade marks (b) Foster's Brand Intellectual Property and (c) the grant of exclusive and perpetual licence in relation to Foster's Brewing Intellectual Property, confined to the territory of India. For all these items of sale including the shares (sold by Dismin), a sum of US $ 120 million has been stipulated as total consideration. 1.5. In connection with the above transactions (other than sale of shares) evidenced by the S&P Agreement and the Deed of Assignment, the applicant seeks advance ruling from this Authority on the following questions framed by it : 1. "On the facts and in the circumstances of the case, whether the receipt arising to the applicant, from the transfer of its right, title and interest in and to the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement. Pursuant thereto, the exclusive rights over trade marks, Brand Intellectual Property and Brewing Intellectual Property vested back with the applicant situated in Melbourne, Australia. Subsequent to the hearing, the applicant filed a copy of the deed purportedly executed on 12.9.2006, terminating the B.L. agreement. The applicant and Foster's India are the parties to the deed. 2. Terms and features of the A2reement 2.1. The definitions of certain relevant terms as given in the S& P Agreement dated 4.8.2006 may be noticed: "Foster's Brand" means the word "Fosters", the Foster's Beer Logos, any of the trade marks emphasis supplied registered as Trade Marks and any combination of any of the foregoing......." "Foster's Brand Intellectual Property means all Intellectual Property Rights (other than the Trade Marks) relating to the Foster's Brand in India·... ... .. " "Foster's Brewing Intellectual Property means all Intellectual Property Rights relating to the brewing and the technical aspects of packaging Foster's Lager in India emphasis supplied as at the Completion Date including the Brewing Manual." Foster's Beer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the parties (vide last clause 6.1). Completion is defined to mean "completion of the sale and purchase of the Sale shares, the Trade Marks, the Foster's Brand IP and the licence of the Foster's Brewing IP in accordance with clauses 6 and 7". The 'Completion Date' is defined to mean as the third business day after the day on which the condition in clause 2.1 has been satisfied subject to the stated exception. Clause 2.1 lays down that the obligations of the purchaser in respect of completion are conditional on the issue of a written notice by or on behalf of the Treasurer of the Commonwealth of Australia stating that the Government does not object to the parties entering into the contract. Clause 7 enjoins that the obligations of the parties in respect of Completion shall be interdependent and no delivery or payment will be deemed to have been made and completion will not occur until all deliveries and payments have been made. Clause 6.2, inter alia, spells out the obligation of Dismin and/or Foster's Australia (applicant) to deliver to the Purchaser duly executed counterparts of each of the trade marks and Foster's Brand IP assignments and the hard copies of brewing manual and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssignor (applicant) also granted to the assignee an exclusive, perpetual and irrevocable licence relating to Foster's brewing intellectual property for the purpose of brewing, packaging and marketing of Foster's beer within the territory of India with a right to sub-licence such right to any licensees of Foster's brand. A nominal consideration of 100 US dollars is stated to be the consideration for assignment. 3. Applicant's Contention Boradly 3.1. In the above factual scenario and the covenants between the applicant and the other parties concerned, the controversial question that arises broadly is whether the trade-marks and Foster's Brand and Brewing IP rights owned by the applicant - Foster's Australia and conveyed I assigned to SKOL Breweries can be said to be capital assets situate in India and the consideration received in connection therewith is liable to be treated as income that accrues or arises in India. That is how the applicant has framed the questions in the written submissions. 3.2. The contention of the applicant is that the transfer of trademarks and other intellectual property rights amounts to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement was only after the sale of shares, trade-marks etc. under the said agreement and the exclusive rights over the trade-marks, Brand I.P. and Brewing I.P. did not revert back to the applicant before the sale. The termination followed the event of sale of shares trade-marks and brand I.P. It is on this ground that the decision in Pfizer Corporation case is sought to be distinguished. The fact that the trade-marks are registered in India indicates, according to the Revenue, that the rights in and over the trade-marks existed in India only. It is then submitted that the capital assets in intangible form viz. trade-mark and Brand I.P. in relation to Foster's India having been transferred by the applicant and the sale of shares being integrally connected with it, the income accruing on the transfer of such assets is exigible to capital gains tax in India as per the provisions of Section 9(1) of the Act in the hands of the applicant. Regarding the alternative submission of the applicant that it is only such part of the consideration as is reasonably attributable to India that is liable to the taxed, it is submitted that the whole of business in India is being transferred and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets is concerned, the appropriate provision is clause(i) of section 9(1). It is on the interpretation of this provision that contentions on both sides are advanced. 6. Capital asset 6.1. The term 'capital asset' has been defined under sec. 2(14) of the Act to mean property of any kind held by an assessee whether or not connected with his business or profession. The definition of 'capital assets' clearly reveals that the said expression has been assigned a wide meaning. 'Property of any kind' undoubtedly includes intellectual property which is but a species of intangible property. Trade marks, brand, goodwill, technical know-how relating to the manufacture of goods would all qualify to be treated as capital assets within in the meaning of Section 2 (14) of the Act. 6.2. As observed by the Division bench of Kerala High Court in the case of Haji Abdul Kader42 ITR 296, the definition of capital asset is of such wide amplitude as to take in an intangible asset such as goodwill of business. In Devidas and Vithaldas vs. CIT Bombay City 84 ITR 277 the Supreme Court also expressed the view that the acquisition of goodwill of the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onferred on Foster's India ceased and by the date of effective transfer the applicant stationed in Australia became the sole repository of all these assets. It is submitted that the transferred assets cannot be said to be located in India when they got divested from the Indian business and vested with the applicant in Australia prior to the crucial Agreement dated 4-8-2006 taking effect. Thus, from whatever angle the issue is examined, the learned Sr. Counsel for the applicant submits that the situs or location of the capital assets transferred in the instant case was in Australia and therefore Section 9(1 lei) of the Act is not attracted. 8.2. We are of the view that the applicant's contention that the capital assets in question were not located in India on the relevant date of transfer is liable to be rejected. The applicant's contention that the intangible assets transferred by the applicant have no particular geographical location and that they have no situs apart from the domicile of the owner does not merit acceptance. We find no legal principle to support such a broad proposition. Equally untenable is the contention of the applicant that the place of execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... high reputation in the market and buildup considerable goodwill. The trade-marks registered in India together with the other features of Foster's brand had undoubtedly generated appreciable goodwill in Indian market and such goodwill has been nurtured in India by reason of coordinated efforts of the applicant and Foster's India till the date of the agreement entered into in 2006. Thus, the applicant's business presence in India manifested itself with the tie-up it had with Foster's India which made use of the intellectual property rights granted by the applicant. Keeping this background in view, it is reasonable to hold that the marketing intangibles comprising the Foster's trade-marks and brand which were in use for nearly a decade had their abode in India by the crucial date of transfer of the said capital assets. Even assuming that some of these trade-marks were used elsewhere also, their existence in India cannot be denied. Irrespective of the fact whether the location of Foster's trade-marks could be traced to the place of domicile of the owner, it can also be said that the trademark/brand I.P. had its location in India as well where it had perceivable impact on the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricable components of the business of manufacture and marketing of Foster's lager beer in India by the group Company of the applicant. The applicant was apparently interested in promoting and preserving the goodwill for its branded product in India and every clause in the B.L. agreement emphasizes this fact. The applicant, by entering into the B.L. agreement, for all practical purposes, became a collaborator with Foster's India in its business. It was even receiving royalty from Foster's India for the licence granted to the latter for making use of Foster's trade-marks as well as the brewing Manual, while retaining its proprietary rights over the goodwill "associated with the Mark and the device". By reason of such collaborative effort and the circulation of product (beer) bearing the imprint of applicant's trade-mark and brand over a length of time and the undoubted goodwill it generated in Indian market, the applicant's trade-mark and brand established their presence, rather predominant presence, on the Indian soil and it continued to hold its sway in India on the date of transfer. The commercial exploitation of the trade-marks and brand by the applicant, aided by the marketing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on South Carolina sales. Toys R deducted the royalty payment made to Geoffrey from its South Carolina taxable income. The Tax Commissioner of that State took the position that Toys R was entitled to deduct tax and Geoffrey was required to pay South Carolina tax on the royalty income. The Trial Judge upheld the Commissioner's assessment of taxes against Geoffrey. Geoffrey appealed to the Supreme Court of South Carolina and contended that due process clause and the commerce clause of the U.S. Constitution prohibited the taxation of its royalty income by South Carolina inasmuch the nexus requirement was not satisfied. Geoffrey contended that the situs of intangibles was its corporate headquarters in Delaware, not South Carolina. 8.7. The Supreme Court after citing certain decisions which laid down the proposition "intangibles may acquire a situs for taxation other than at the domicile of the owner if they have become integral parts of some local business", rejected Geoffrey's claim that its intangible assets were located exclusively in its corporate headquarters in Delaware. 8.8. Another decision worth noticing is that of Court of Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew Mexico to work on behalf of KPI's goodwill and associated interests. That apparatus represents KPl's property interests in New Mexico, pursuant to a licensing agreement that requires Kmart Corporation to act on KPI's behalf. 8.9. The opinion of House of Lords of U.K. in the case of Commissioners of Inland Revenue vs. Muller & Co. [(1901) AC 217] is also relevant to the present case. The question that arose in that case was whether goodwill attached to the business which lay abroad fell within the exception provided by Section 51 (1) of the Stamp Act in respect of the property "locally situate out of United Kingdom". The majority opinion of Law Lords was that the goodwill was property locally situated out of United Kingdom and therefore no stamp duty was chargeable on the agreement made in England. The following observations and the exposition of law deserve reference: "It was argued that if goodwill be property, it is property having no local situation. It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is bought and sold every day. It may be acquired, I think, in any of the different ways in which property is usuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f existence somewhere. Incorporeal property has no existence in nature and has, physically speaking, no locality at all. We, however, are dealing not with anything which in fact fills a portion of space, but with a legal conception, or in other words, with rights regarded as property. But to talk of property as existing nowhere is to use language, which to me is unintelligible. I am not aware of any case in which goodwill, as property, has been treated as having no locality for legal purposes. (per Lord Lindley) 8.10. In Star Industrial Co. Ltd. vs. Yap Kwee Kor Trading·1976(2) F & S Reports 256; 1976(1) Malayan Law Journal 149, the Privy Council speaking through Lord Diplock observed thus - "Goodwill, as the subject of proprietary rights, is incapable of subsisting by itself It has no independent existence apart from the business to which it is attached. It is local in character and divisible; if the business is carried on in several countries a separate goodwill attaches to it in each." The decision in Muller & Co (supra) was relied upon. 9. Case Law relied on by applicant's counsel and their applicability 9.1. In order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts between EAC Trading Ltd., an Indian affiliate of EAC Denmark and Pfizer India to have business support during the initial period of EAC Trading's operations in India do not affect the situs of the asset which is the subject matter of transfer. We are of the view that the situs of the technical information which is the subject matter of the sale agreement was not in India in any form after early termination of the licence." 9.2. The said ruling is distinguishable on facts. The agreement similar to the one entered into between EAC Denmark and Pfizer India to procure the early termination of the license for valuable consideration is absent in the present case. That apart, we find that in the instant case, the termination of the brand license agreement by the applicant was not antecedent to the S&P agreement. That is so, even according to the applicant who filed a document claimed to be the deed of termination of S.L. Agreement bearing the date 12.9.2006. Even if we accept this document evidencing termination brought on record subsequent to the oral and written submissions, the termination was on the completion date of S&P Agreement. Though the applicant sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in the present case). Transfer of other intellectual property rights was not involved. Hence, for more than one reason, the applicant cannot draw support from Pfizer case in all respects. 9.3. Applicant's counsel also places reliance on the Constitution Bench decision of the Supreme Court in the case of Twentieth Century Finance Corporation (supra). The following passages at paragraphs 25 and 28 (of STC) were relied upon in particular: "Where the party has entered into a formal contract and the goods are available for delivery, irrespective of the place where they are located, the situs of such would be where the property in goods passes, i.e. where the contract is entered into." (para 25) "No authority of this Court has been shown on bhalf of respondents that there would be no completed transfer of right to use goods unless the goods are delivered. Thus, the delivery of goods cannot constitute a basis for levy of tax on the transfer of right to use any goods. We are, therefore, of the view that where the goods are in existence, the taxable event on the transfer of the right to use goods occurs when a contract is executed between the lessor and the les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e situated in India within the meaning of the Explanation to section 9(1). The situs of these intellectual property assets, in our view, should not be traced and confined only to the place where the contract (India S&P Agreement) was entered into and acted upon by the parties. On the relevant date of transfer, they were very much present in India and the transfer of such assets took place concurrent with the transfer of controlling interest in Foster's India to SAB Miller. At best, their location in Australia is only notional or fictional. The fact that the trade-marks and names originated in Australia and initially registered there does not make material difference. 11. Re: Transfer of brewing I.P. 11.1 In so far as brewing intellectual property is concerned, different considerations arise. The ratio in Pfizer case would, in our view, squarely apply. The core of brewing intellectual property, in ultimate analysis, is the Brewing Manual which is the product of research and development efforts of the applicant. It contained formula and technical aspects relating to the brewing and packaging of Foster's lager Beer. The Brewing Manual, thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dossier in regard to the manufacture of nutritional food supplements. This Authority while recording a finding that the transfer of technical information in the form of dossier amounted to transfer of a capital asset while relying on the dicta in Me case referred to supra proceeded to consider the question of situs of the asset and held as follows: "It is admitted that the said asset was available in India both in tangible as well as intangible form before the transfer to EAC (Denmark) ................... It is also not disputed that the Indian company was only a licensee and the original technical know-how was always available with the owner i.e. applicant. Once the Indian company entered into an agreement with EAC Denmark for early termination of licence to manufacture the products, the technical know-how reverted back to the owner and there was extinguishment of the right to manufacture for which consideration has been paid to the Indian Company. As a result no asset related to technical know-how was located in India either in tangible or intangible form after termination of the licence granted to the Indian company." Earlier, the Authority noted that handing over of the doss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced. Double Taxation Avoidance Agreement (DTAA) 13. Though a reference is made to the DT AA in question no. (1 ), no arguments have been raised and no provision of the DT AA has been referred to. The applicable provision in the DTAA between India and Australia is Article 13 relating to alienation of property. Article 13(6) lays down, that "nothing in this Agreement affects the application of a law of a Contracting State relating to the taxation of gains of a capital nature deriving from the alienation of property other than that to which any of the paragraphs (1), (2),(3),(4) and (5) apply." Paragraph (1) to (5) have no application here. Hence, going by clause (6) of Article 13, the domestic law provisions will hold good in the instant case. No benefit can possibly be invoked by taking resort to Article 13 or any other provisions of the treaty. Answer to 1st question 14. Our answer to the first question is, therefore, as follows: The income arising to the applicant from the transfer of its right, title and interest in and to the trade-marks and Foster's brand Intellectual Property is taxable in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p Ltd. Really transferred the entire ownership of its Indian company - Foster's India including its tangible as well as intangible assets to another Indian company SKOL Breweries and as a result of the transfer, the said assets continued to be used in India. It goes to prove that the situs of the capital assets transferred were in India only. The Revenue submits that though the shares and trade-marks and Foster's brand IP were ostensibly sold by two different entities, it is in fact "a stapled transaction". It is, therefore, submitted that the income accruing from the sale of these assets is clearly liable to capital gains tax in India in view of section 9(1) of the Income-tax Act. 16.1. It is not possible, on the material placed before the Authority, to come to a definite conclusion whether in reality and substance, the entirety of Foster's India's business in India including shares and intellectual property rights were transferred by Foster's Group limited as an integrated transaction. The question whether any subterfuge or colorable device was adopted in routing the deal through the media of various group companies of Foster's Group Limited and whether it is legally ..... X X X X Extracts X X X X X X X X Extracts X X X X
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