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 Taxation 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 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  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 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 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)] 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)]

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