TMI Blog2008 (5) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ant is a non-resident foreign company incorporated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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 Trade Marks, Foster ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 means the brand of beer known as "Foster's Lager" and any other brands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 other manuals within the possession of Foster's India. Similarly, under clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transfer of capital assets and the situs of such assets being located outside India, the consideration relating to the transfer cannot be subjected to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 entire consideration is liable to be taxed in India only. The absence of independent valuation report has also been commented upon by the Revenue. The inter-relationship be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 business amounts to acquisition of capital asset. This Authority held in the case of Pfizer Corporation271 ITR 101 that the transfer of technology information in the form of dossier was a transfer of capital asset. The technology information therein related t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 execution of contract determines the situs. We are inclined to hold that the intellectual property comprising of Foster's trade-marks and <?xml:namespace prefix = st2 /> brand I. P. can be said to be located in India where the business of Foster's India was being carried on in conjunction with the applicant. After the 1997 Agreement (Br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 being carried out in India by Foster's India with the exclusive license granted by the applicant. To use a metaphor, the intellectual property belonging to the applicant had its "tangible presence" in India at the crucial point of time. As a result of transfer, the intangible property that was being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring 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 and advertising efforts of Foster's India thus resulted in creation of valuable intangible asset in India. In the circumstances, it is reasonable to hold that the assets in the form of trade-mark and brand together with the goodwill they generated were situated in India when the transfer in question took place in 2006. The fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Appeals of New Mexico in the case of Kmart Properties Inc. vs. Taxation and Revenue Departments 139 NM 177; 2006 NMCA 26. Kmart Properties Inc. (KPI), a Michigan subsidiary of Kmart Corporation owned and managed trade-marks previously developed by Kmart Corporation. Kmart Corporation created KPI for the purpose of holding little to and managing the trade-marks and trade na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 usually acquired. Then comes the question, Can it be said that goodwill has a local situation within the meaning of the Act" I am disposed to agree wiith an observation thrown out in the course of the argument, that it is not easy to form a conception of property having no legal situation. What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible. 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 to invoke the ratio of this Authority's ruling in Pfizer case, the learned counsel for the applicant strenuously urged that the brand licence agreement of 1997 stood terminated as a result and by virtue of the S P Agreement and the Deed of Assignment entered into in 2006 and in pursuance of the same, the exclusive rights over the trade-marks, brand and brewing intellectual property got vested back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 stated at page 7, para (i) of written submissions that "in terms of clause 6.1 and 6.3 of the Agreement, the delivery took place on the appointed date i.e. 4.8.2006". In the earlier part of the written submissions, it is stated that the licence under BL Agreement "was terminated upon completion of the transactions referred to in section B below". In response to a specific query, the applicant clarified on 15th April 2008 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied 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 lessee and situs of sale of such a deemed sale would be the place where the contract in respect thereof is executed". (Para 28) 9.4. The learned counsel submits that the above decision settles the issue as regards the situs and as per the law laid down in that case, the situs of intangible goods gets located at the place where the contract is executed which, in the instant case, is Australia. In order to press into service the rati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, though in one sense is a trade intangible, it is also in the nature of goods going by the ratio of the decision in Associated Cement company case (infra). With the applicant severing its business ties with its group company - Foster's India as a sequel to the S P Agreement, the situs of brewing Intellectual property in the form of Brewing Manual shifted to the applicant's corporate headquarters in Australia. Clause 6.2 (f) of S P Agreement casts the obligation on the applicant to deliver to the purchaser "all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dossier containing technical know-how took place in Bangkok. 11.3. The Brewing Manual with which we are concerned stands on the same footing as "dossier" in the case of Pfizer. It being intellectual property having physical identity has obviously been removed from India, that is to say, from the custody of Foster's India and handed over to the purchaser within Australia on the completion date of SP Agreement. We are, therefore, of the view that this particular capital asset in the form of Brewing Manual a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 under the Income-tax Act, 1961. As far as income attributable to the grant of perpetual and irrevocable licence in relation to Brewing I.P. is concerned, the same is not liable to be taxed under the Income-tax Act, 1961. 15. Question No. (2): "If the above mentioned receipt is held taxable in India, then whether the applicant is justified in contending the tax should be computed based on the consideration as per the independent valuation obtained by the applicant"? 15.1. It is the case of the applicant that it has obtained an independent valuation report relating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew 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 permissible at all to get behind the smoke screen and unravel the true state of affairs in view of the ruling of the Supreme Court in Union of India VS. Azadi Bachao Andolan 2004, 10 SCC,1 case which virtually de-recognized the principle enunciated in McDowell cases 154 ITR 148 are larger issues which do not call for an answer in this matter for more than one reason. First of all, any disquisition or probe into this aspect may incidentally involve going into the nuances of transfer of shares, which is not an issue before us. Secondly, sufficient material is not available with us on the aspects relating to formation of Company which transferred th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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