INTELLECTUAL PROPERTY – DIRECT TAX CONSIDERATIONS Ameya Kunte 4 Feb 2015.
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Transcript of INTELLECTUAL PROPERTY – DIRECT TAX CONSIDERATIONS Ameya Kunte 4 Feb 2015.
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INTELLECTUAL PROPERTY – DIRECT TAX CONSIDERATIONS
Ameya Kunte
4 Feb 2015
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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)
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IP lifecycle – tax triggers
IP Taxati
on
In-house creation
Acquisition
Sale / transfer
Exploitation –
licensing
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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
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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;
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IP acquisition
IP acquisition cost eligible for depreciation @ 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
TDS @ 10% on royalty payment u/s 194J
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IP transfer
Sale or transfer of IP taxable as capital gains No specific domestic tax law exemption
Long term IP sale taxable @ 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
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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 applicable @ 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
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Royalty definition under IT Act
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
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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.
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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
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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
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Indian Case Studies
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Payment for computer software
Is there a transfer of ‘copyright’ or transfer of a ‘copyrighted material’?
Is the payment taxable as royalty?
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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)]
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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
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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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Ameya Kunte [email protected] - +91 9823038088www.taxsutra.com
www.tp.taxsutra.com
www.idt.taxsutra.com
www.lawstreetindia.com
Thank You