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INTERPLAY OF LAW OF TAXATION & IP RIGHTS IN INDIA AN ANALYSIS

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INTERPLAY OF LAW OF TAXATION & IP RIGHTS IN INDIA AN ANALYSIS
By: Swagita Pandey
June 5, 2021
All Articles by: Swagita Pandey       View Profile
  • Contents

The Purpose of IP law is to serve society goals such as cultural development and promoting or innovating cultural activities. Scholars are concerned by the role of Taxation law for achieving the goals of IP law's innovation objectives. The number of scholars would reason that an idyllic tax system should hunt to curtail the social costs of taxation and escape unreasonably shaping economic activities. It might be definite that the tax arrangement should set forth from these taxing beliefs to further innovation. Tax directs that intentionally attempt to reward imaginative process and innovation must provide assurance, clarity, and reliability required for compliance with and appropriate administration of the law.

Rapid change in science and technology, together with development of legal protection, has created a new type of valuable intangible asset. As per section 65(55a) of the Finance Act, 1994 – IP mean any right to intangible property which includes patents, copyrights, and trademarks. These Intellectual intangible assets can be exploited in either of three ways as follows:

  1. Through use in operating a commercial enterprise, either by the owner of  the IP for oneself or in a joint venture arrangement;
  2. Through the grant of a short or long term license to another party in relation to the use of the IP; or
  3. Through its sale or assignment to a third party.

ROYALTIES

Income generated from such intangible assets has significant impact on tax treatment from a transaction which is worth of careful consideration. These intangible assets produce a higher rate of return since intangible assets have greater international mobility. Payments made to owners of intangible assets for the use of such assets are known as royalties. Royalties are taxable u/s 9(1) (VI) & 9(1) (vii) of the Income Tax Act, 1961. Royalties in the field of IP is one such area which is untouched in the present day scenario. Some of the issues which are highlighted here are in fact the major issues which one faces during the course of fixing the Royalties:-

  1. If the royalty is to be paid in foreign currency, thenceforth whether or not the local currency is strong or fragile and whether or not it can be a blessing or a curse to the licensee. To prevent this fluctuation and disparity, the parties to the license generally agree at a conversion rate ;
  2. If licensee fails to pay. The licensor's common and immediate response is to charge interest on unpaid amount and termination of license if the unpaid amount remains due after prolonged period of time. Moreover, it is  seen that the licensor will take huge amount as security deposit of the product which he is licensing. This helps the licensor to recover the royalties in installment, if not the lump sum.

Sometimes the licensor permits an innovation over which a patent application is still pending. While the parties generally continue on the confiding in conviction that a patent will be given, it might never do as such. The impact on royalties in case of possible inability to get a patent on the development is dependent upon exchange. The parties could concur that no royalties will be expected in a jurisdiction in which there is no patent assurance. Licensees may demand that the commitment to pay royalties end upon the expiration or abandonment of the underlying patent. The rationality is that the royalty is dependent upon the assurance offered by the patent without that security, there is nothing of significance  passed on to the licensee. The world may unreservedly make, use, and sell the authorized item, so there is no explanation behind the licensee to pay for the right to do as such.

SERVICE TAX & VAT

Under the present service tax law, the expression IP Right has not been defined.  All IPRs protected whether Registered, Unregistered, Indian or foreign, since there is no condition with respect to the law under which an IP right ought to be registered, temporary transfer of a patent enrolled outside India would likewise be enclosed in this section. However, it will become taxable only if the place of provision of service of temporary transfer of IP Right is in taxable territory. Under the present law, there is no overlapping between the aspect of levy of VAT and service. If the sum is liable to VAT, it is omitted from the definition of 'service' and automatically not liable to service tax. For better understanding the treatment of various transactions in IPRs are listed below –

  1. IP is considered as goods and there is a sale of such IP. It’ll be covered under VAT but not liable to service tax as definition of service excludes 'sale'.
  2. IP amounts to goods and there is no sale thereof, but, there is transfer of right to use such IP. It’ll be covered under VAT, as 'transfer of right to use' goods is deemed sales.
  3. IPR is goods, but, there is neither any sale nor transfer of right to use goods, though there are goods, but, there is no sale hence, no question of levy of VAT but it may amount to hiring of goods, without transfer of right to use so it would be taxable under Service Tax  as per section 66E(f).
  4. IP doesn't amount to goods, so no question of VAT, as 'goods' necessary for charge of VAT and if it is a service/declared service, then it may taxable under service tax.
  5. IP doesn't amount to goods and there is permanent transfer thereof thus no question of VAT, as 'goods' necessary for charge of VAT also not liable to service tax, as permanent transfer of IP is not covered within the definition of declared service u/s 66E(c).
  6. IP is not goods, but, it is temporarily transferred then there is no question of VAT, as 'goods' necessary for charge of VAT but taxable under service tax, as temporary transfer of IP is covered within the definition of declared service u/s 66E(c).

GOODS AND SERVICES TAX (GST)

Goods and Service Tax (GST) specifically provided the classification of Services and Goods. As per definition of Goods under GST Act means all kind of transferrable property, since movable property is not described under GST, it is defined under General clauses Act, 1897 which states that other than immovable property all kinds of properties is movable property. Hence, we can infer that all kinds of IP rights must be treated as goods because IP Rights are movable properties, it can’t be treated as immovable property because of its nature. However, we can say that most of the IP Rights are in intangible forms. Under the statute different rules and provision are provided for determining place of supply of services and place of supply of goods. Transfer of IP rights is governed by Place of supply of goods and short-term transferred of IP rights are considered as Place of Supply of Services. Short term transferal of IP Rights be going to be administered u/s 13 of GST Act for determining Place of supply of services which states that Place of supply of services is the location of the receiver of services. It means that where the person is receiving the services is considered as Place of Supply of services. A conundrum arose by wide Entry No. 17 dated 11/2017 is that, all the short term or temporary IP Rights will attract 12% GSR or permitting the usage or enjoyment of IP Rights in regards of goods other software relating to Information Technology also attracts flat rate of 12%. Thus, to bring everybody in a bewildered position as to how perpetual transfer of IP Rights is governed. The criteria to determine the permanent transfer or temporary transfer shall continue to be governed by the agreements of the particular transaction and the settled rule pronounced by the Hon’ble Apex Court in dispute of BSNL v. Union of India.

To summarize, with ever expanding technologies, it is difficult to make statutes which suit the changing needs. Royalties are one such area where the definition and actual applicability is very different. There is no set of format which governs the valuation as such. All we have is the International Conventions and Treaty and their interpretation with the Indian Statutes. There is lot more to explore in this grey area and derive means to provide a clear picture. Further, In the backdrop of an uncompromising and insecure patent regime combined with characterization of the Indian patent law system by a slow patent office, mediocre infrastructure, absence of specialized IP courts and a low application-to-grant ratio, there is room for improvement for India on both tax and non-tax front to become R&D hub.

 

By: Swagita Pandey - June 5, 2021

 

 

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