Taxation of Income from Transfer of Intangible Assets between Non-Residents

[The following guest post is contributed by Shailendera Singh, who is a lawyer practising in Delhi. He can be reached at shailenderasngh@gmail.com]
A judgment of the Delhi High Court rendered on July 25, 2016 in CUB Pty Limited (Formerly Known as Foster’s Australia Ltd) v. Union of Indiahas held that the situs of an intangible property is where the owner of the property resides, and a transfer of such property by a non-resident owner to another non-resident would not be taxable in India. This poses interesting questions following the arguably settled controversy around the retroactive amendments to Section 9 of the Income Tax Act, 1961 (“ITA, 1961”).
Facts of the case and arguments presented:
In 1997, the parent company (Foster’s Australia Limited) entered into a brand licence agreement with its subsidiary two levels below (i.e., Foster’s India Limited) granting it the right to use its trademarks. The trademarks were registered in India. In 2006, Foster’s Australia Limited executed a composite agreement with SAB Miller for sale of shares of the holding company of Foster’s India Limited, and sale of its trademarks and brand intellectual property. The matter was on appeal before the High Court against the ruling of the Authority for Advance Ruling, which had ruled that Foster’s Australia Limited’s income which accrued from transfer of the intellectual property was taxable in India.
Foster’s Australia argued before the High Court that the situs of an intangible property is where the owner of the property resides (mobilia sequuntur personam – a common law principle) and therefore the income from the transfer of the capital asset cannot be deemed to accrue or arise in India (fourth limb of Section 9(1)(i) of the ITA, 1961).
The Union of India, in response, submitted that the trademarks were registered in India with no value at its time of registration, gaining appreciable goodwill and value over time through the concerted efforts of the appellant and Foster’s India Limited. Therefore, the principle of mobilia sequuntur personam must be discarded to hold the situs of the property in India.
Decision and analysis:
The Court allowed the appeal solely on the basis that the legislature while introducing Explanation 5 to Section 9(1) of the ITA, 1961 (a retrospective amendment pursuant to the Finance Act, 2012) has chosen to not provide for the location of intangible capital assets, in the absence of which the common law principle shall apply.
It is interesting to note that while the Union did adopt the argument that the property (capital asset) derives its value from India, it did not argue that Explanation 5 being a mere clarification, the principle of source based taxation, inherent in Sections 5 and 9 of ITA, 1961, should prevail over a principle laid down by English Courts – as it did in the case of Vodafone v Union of India ((2012) 6 SCC 613). Readers may remember that the arguments in Vodafone by the Union was precisely this in order to get over another judicial principle (shares are situated where the company is incorporated), where it was argued that since the share is only a mode and derives its value from the assets in India, it must be held to be situated in India. A question also arises: would a transfer of any capital asset between non-residents – other than share or interest in a company – not be taxable in India as long as its situs can be argued to be located outside India? A question, most likely, to be answered by the addition of another Explanation!

– Shailendera Singh

Supreme Court Resolves Conflict Between Companies Act and SICA

[The following guest post is contributed by Aditi Jhunjhunwala, who is a partner at Vinod Kothari & Co. The author can be contacted at aditi@vinodkothari.com.]
In a recent ruling in the case of Madura Coats Limited v. Modi Rubber Ltd. & Anr., the question before the Supreme Court on appeal was: where an order for winding up is passed under the Companies Act and the company has made a reference before the Board for Industrial and Financial Reconstruction (BIFR) which is registered, can the company take shelter under section 22 of Sick Industrial Companies Act, 1985 (SICA) (that relates to suspension of legal proceedings and contracts)? The Court upheld the argument and ruled that the very scheme of law is that the revival of company must be first resorted to rather than putting it to death. In paragraph 20 the Court observed that:
“The legislative intention is to ensure that no proceedings against the assets of the company are taken before any decision is taken by the BIFR because if the assets are sold or the company is wound up, it may become difficult to later restore the status quo ante.”
This post highlights some of the important issues that arise from the ruling.
Overriding effect of SICA
Section 22 of SICA is a non-obstante clause providing that any other legal proceedings under any other law in connection with the industrial company shall not be proceeded with any further and that a winding up order, if any, will also be stayed where a reference has been made before the BIFR. A similar issue was raised in the present case as well where Modi Rubber resorted to the making of an application before BIFR while the Court had passed the winding up order against it on an application made by Madura Courts Limited. However, the very scheme of law is that it does permit such an action by a company whereby it may use this leeway and take shelter under section 22 of SICA wherein the provisions of SICA would prevail over Companies Act. Similar decisions have been rendered in the case of Tata Motors Ltd v. Pharmaceutical Products of India Ltd., (2008) 7 SCC 619 and Real Value Appliances Ltd. v. Canara Bank, (1998) 5 SCC 554, which were relied upon by the Modi Rubber in the instant case.
The High Court however did not take into consideration the contention of Modi Rubber citing that what is important is not the date of filing the application with BIFR but the date of registration of the application, which in the present case was after the date of the passing of the winding up order. However, the Court thereafter took into consideration the subsequent events, namely the fact of registration of the reference and relying upon Rishabh Agro Industries Ltd. v. P.N.B. Capital Service Ltd., (2000) 5 SCC 515 it was held that Modi Rubber was entitled to the benefit of the provisions of Section 22 of the SICA. The High Court also held that a winding up order passed under the Companies Act, 1956 is not the culmination of the proceedings pending before the Company Court. The final order to be passed in the winding up proceedings is an order of dissolution of the company under Section 481 of the Act.      
Abuse of process of law
It was argued by Madura Courts that since the reference before BIFR got registered only after passing of the order of the winding up by the Court, Modi Rubber cannot take shelter under SICA and that the order for winding up should prevail. However, the Court based on various judicial pronouncements and the scheme of law discussed that the scheme is such that the company must be first allowed for revival and that only then should the period of moratorium begin. Although this scheme seems to be in the spirit of things, this provision being overriding in nature over other laws may be used as a protracting device by companies at times. The provisions of SICA prevailing over the winding up order has always been controversial. In paragraph 25 of the ruling the Court discussed that it could not be said that the provisions of Section 22 of the SICA would not be attracted after an order of winding up is passed.
In fact the Court in paragraph 20 lamented that although at times it may seem that the provision of law may be used but may cause abuse of process of law, however, the Court cannot do anything about the same as the same is for the legislature to take appropriate steps. Therefore, this become obvious that the Court also acknowledges the fact that the provisions of law could be misused as well.
Provisions under the Bankruptcy Code
The provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”) provides for corporate insolvency process. Once the Code comes into force, the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 will be enforced. Once the said Act gets enforced, SICA being the principal legislation will lose its existence. Therefore, the revival of companies will not be possible under SICA. Currently, sections 253 to 269 of the Companies Act, 2013 provide for revival of companies; however, the said sections are not yet enforced. Therefore, once SICA gets repealed one would have to take shelter under the Companies Act, 2013. However, with the Code coming into force, these sections will get omitted as one will have to proceed for revival under Chapter II of the Code.
Once an application under the Code is admitted by the National Company Law Tribunal (NCLT), all the proceedings under other laws will be stayed until the moratorium period under the Code.

Aditi Jhunjhunwala