Taxation in IPR

“The Indian economy is overheated” says the Finance Minister. This comes as a prologue to the fact that the Government of India is bringing more and more sources under the taxation net or is tweaking the existing laws to levy taxes on a number of items/services/incomes, etc. This is being done through changes to existing laws or introduction of new sections in various acts like the Income Tax Act, Central Sales Tax Act, Value Added Tax Act, Profession Tax Act, Service Tax Act, etc. So in such a situation how can an upcoming sector like Intellectual Property Rights (IPR) be left out of purview of taxation?

Under the Intellectual Property Rights, the person assigning his rights to someone else earns an income in the form of Royalty. A person may also totally sell off his “trademark”, “patent”, “design” or “copyright” for a consideration.

TAXATION AND IPR –

1. Service Tax & IPR –

With effect from September 10, intellectual property services (other than copyrights) have been brought under the service tax net. According to the Revenue Department the definition of taxable services includes only such IPRs (except copyright) that are prescribed under law for the time being in force.

The Finance Ministry is of the view that the IPRs esp. Integrated circuits/undisclosed information would not be covered under the Taxable Services as these rights are not covered or prescribed under Indian Law.

Whether Payment of Royalty is a service ?

Payment of Royalty is not a service. It is rather a profit of the owner for permitting another to use his property. Hence payment of royalty should not be treated as a payment for service. IPR is in nature of property and the right to use IPR is a transaction in property and not consultancy or advice

Service Tax and Permanent transfer of IPR –

It has also been made clear by the Revenue Department that IPRs covered under Indian law in force at present alone, are chargeable to service tax. Further, permanent transfer of IPRs would not attract Service Tax because such transfer does not amount to rendering of service.

In cases where cess is levied under the Research and Development Cess Act, the Department has held that the cess amount so paid would be deductible from the total service tax payable.

Temporary transfer or permission to use or enjoy IPR can be classified as transfer of right to use goods, as it involves transfer of right to use movable property. Therefore, a tax on IPR is in pith and substance a tax on transfer of right to use IPR and not a tax on services.

Income Tax and IPR –

Earlier there was a lot of confusion over the provisions of Income Tax Act relating to Income Tax Act. However, over a period of time, various decisions given by the Tribunals, High Courts and Hon’ble Supreme Court and amendments to the Income Tax Act, the picture is quite clear now regarding transactions in IPR and its effect from Income Tax point of view

Purchase of Copyright – Capital or Revenue Expenditure –

Purchase of (c) is capital expenditure. Price paid for purchasing copyright of a book publisher and seller of books is capital expenditure – Hira Lal Phoolchand Vs. CIT [1947] 15 ITR 205 (All.)

Royalty for user of Trademark –
Royalty paid by the assessee for user of TM of another company is allowable as revenue expenditure. (CIT Vs. Raipur Manufacturing CO. [1996] 132 CTR (Guj.) 63

Expenditure on registration of Trademark –

Expenditure on registration of TM is not capital expenditure – The advantages derived by the owner of the TM by registration falls within the class of maintenance of the capital asset. The fact that a TM after regis. could be separately assigned and not as a part of the goodwill of the business only, does not also make the expenditure for registration a capital expenditure – CIT v. Finlay Mills Ltd. [1951] 20 ITR 475 (SC).

Deduction in repect of expenditure on acquisition of Patent –

As the term patent defined under the Patents Act 1970, only inventions can be patented and Beedi rolling or manufacturing, being not an invention, cannot be patented nor any patent right can be created therein. Therefore deduction cannot be claimed of expenditure on acquisition of patent or (c) in Beedi rolling or manufacturing in terms of Section 35A – CIT Vs. Mangalore Ganesh Beedi Works [2003] 128 Taxman 351/264 ITR 142 (Kar.).

Deductions U/s. 80O if the Income Tax Act –

From assessment year 2005 – 2006 and onwards no deduction shall be allowable in respect of income/royalty received from foreign enterprises in consideration for use outside India of any patent, invention, design or registered Trademark.

Conclusion –

Intellectual property laws in India are amongst the best in the world. The real problem is the implementation–the enforcement machinery is inadequate and the judicial process is slow.

So to improve this scenario, India will require great deal of political will, intellectual skill and administrative drill.