Taxing of intellectual property is a recent phenomenon across the globe. Developments in science and technology and rapid communication have made it accessible to every country. Intellectual Property is taxed in many ways, indirectly under different legislations in India. The whole cycle of intellectual property creation, development, acquisition and utilization are affected by the system of taxation.
INTELLECTUAL PROPERTY TAXATION UNDER THE INCOME TAX ACT, 1961
Intangible assets like IP have been recognized as a depreciable asset for the purpose of
computation of income.
INTELLECTUAL PROPERTY AND ACCOUNTING TREATMENT
When IP is created or acquired, the money flow will be shown as an asset.
Expenses incurred on research and developments are written off under the concept of materiality.
An asset will be acquired for direct purchase of IP.
The plant and machinery acquired along with the know-how, design and drawings are subject to levy.
INTELLECTUAL PROPERTY RIGHTS AND INCOME TAX
Sec 9(1) (vi) provides for taxation of income by way of royalties.
Where the transfer is made for a lump sum consideration once for all – will result in capital gains assessable to tax.
Where the transfer is made for a limited period as recurring payments, based on the trading results of the user of the intellectual property - revenue receipts.
Depreciations are allowed in the know how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of a similar nature, being intangible assets.
Section 35 AB- Deduction on expenditure on know-how
Any lump sum consideration for acquiring any know-how for the use of his business, one sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal installments for each of the five immediately succeeding previous years.
Section 80 QQA- Income from Copyrights
Any lump sum consideration for the assignment or grant of any of his interests in the copyright of any book or of royalties or copyright fees - a deduction to the amount of 25% will be allowed on such amount.
Section- 80 RRB - Royalty for patents
Deduction is allowed equal to the whole of such income or three lakh rupees, whichever is less.
INTELLECTUAL PROPERTY AND DOUBLE TAXATION AVOIDANCE AGREEMENTS (DTAAs)
Not to tax the same income twice
DTAA is designed in such a way that the taxes are levied on the income which arises in a particular state.
Section 90 of the Income Tax Act has authorized Central Government to enter into DTAA with other countries.
The agreements give the right of taxation in respect of the income of the nature of interest, dividend, royalty, and fees for technical services to the country of residence.
The source country is given the right of taxation but such taxation in source country has to be limited to the rates prescribed in the agreement.
The income is taxable only when a non-resident assessee has a permanent establishment in India.
Section 44 D and 115 A provide for special methods for calculating income by way of royalties or technical services of foreign companies and non-resident Indians.
Section 44 D – Any income by way of dividends, interests, income from mutual funds is charged at the rate of 20%.
Section 115 A – Income by way of royalty or fees for technical services is charged at the rate of 20%.
Sales tax was charged on sale of goods under the Sale of Goods Act, 1930.
Sales tax is levied on the sale of movable goods.
Sales tax is replaced with a new VAT system from 1 st April, 2005.
VAT is imposed on goods only and not services and it has replaced the sales tax system.
Whether IPRs could be treated as goods for taxing purposes?
The Supreme Court, in many cases held that intangible goods like electricity, software put in a tangible media, drawings and designs, trademark, copyrights, patents, technical know-how are goods for the purpose of ‘sales tax’.
Tata Consultancy Services v. State of Andhra Pradesh Circular No 81/2/2005-ST, 7 th October 2005 it was held that sale of computer software falls within the scope of sale of goods.
46 th Constitutional Amendment – States are entitled to tax goods which are ‘deemed to be goods and deemed sales’.
Execution of any contract includes the technical know-how and assignment and license of IPRs also considered as ‘deemed sales’ and will be taxed under this head.
There is no mechanism in India to monitor the movement of IPRs inter-state for the purposes of taxing.
The right to reproduce the imported goods in the country is excluded for the purpose of custom valuation.
State Bank of India v Collector of Customs, Bombay (2000) 115 ELT 597 (SC) “The court observed that, the license fee charged towards countrywide use of the same software is includible while determining the assessable value of imported software and manuals.”
Associate Cement Companies Ltd. v Commissioner of Customs (2001) 128 ELT 21 (SC) it was held that valuation for the purpose of customs duties on drawings, designs and technical matter and IP when put on media is to be regarded as an article on the total transaction value of which customs duty is payable.
BPL Display Devices Ltd. v Commissioner of Customs (2002) 142 ELT A 284 (SC) SC held that the cost of drawings, designs and know-how fees is includible in the assessable value of imports.
Anything imported for the purpose of re-distribution shall not be added to the price of the imported goods.
Central Excise duty is an indirect tax levied on goods manufactured in India.
Whether drawings, designs would be covered under the definition of “goods”?
Drawings and designs relating to machinery or technology are ‘goods’, even if payment is made for technical advice or information technology, which is an intangible asset.
The value of the goods is arrived on the basis of Maximum Retail Price (MRP) and transaction value.
Transaction value: includes the value of engineering, development, artwork, design work, plans and sketches.
The Valuation Rules, 2000 will be the basis of valuation.
Exception is allowed for Small Scale Industries (Union of India v Paliwal Electricals (P) Ltd 1996 (3) SCC 407 .)
Union of India v Citabul, (1985) 22 ELT 374 The Supreme Court held that the job worker who works on principal to principal basis would similarly be the manufacturer liable for central excise if any applicable.
The Supreme Court in Re Pepsi Foods Ltd 153 ELT 552 held that royalty paid has to be included in the value.
Any IP policy should encourage IP creation and innovation to create wealth. Presently, the incentives provided to industries for technology innovation are very primitive and insignificant in nature and exemptions are available only in areas like R&D and Small Scale Industries (SSI) Sector.
All the present taxing under different statues and court decisions may be inculcated in the new legislation.
Emphasis needs to be laid down upon IP taxation, since it is a huge potential area for revenue for the government.