Delhi High Court

Cub Pty Limited (Formerly Known As ... vs Uoi & Ors on 25 July, 2016

        THE HIGH COURT OF DELHI AT NEW DELHI
%                                      Judgment delivered on: 25.07.2016

+      WP(C) 6902/2008

CUB PTY LIMITED (FORMERLY KNOWN
AS FOSTER'S AUSTRALIA LTD)                                      ... Petitioner
                        versus

UOI & ORS                                                       ... Respondents
Advocates who appeared in this case:
For the Petitioner           : Mr S. Ganesh, Sr Advocate with Mr Atul Dua, Mr Amar
                               Dave, Mr Gautam Chopra and Ms Taru Gupta
For the Respondents          : Mr N. P. Sahni with Mr Nitin Gulati and Mr Judy James

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE SANJEEV SACHDEVA

                                   JUDGMENT

BADAR DURREZ AHMED, J

1. The question that arises for consideration in this writ petition

pertains to the situs or location of intellectual property rights such as logos,

brands, trademarks, which are capital assets, but intangible in nature. In

terms of Section 9(1)(i) of the Income Tax Act, 1961, all income accruing

or arising, directly or indirectly, inter alia, through the transfer of a capital

asset situate in India, shall be deemed to have accrued or arisen in India.

The petitioner had sought an advance ruling from the Authority for

Advance Ruling (Income Tax), New Delhi (hereinafter referred to as 'the

AAR) on, inter alia, the following question:-

(i) On the facts and circumstances of the case, whether the receipt arising to the applicant, from the transfer of its right, title and interest in and to the trademarks, Foster's Brand Intellectual Property and grant of exclusive perpetual licence of Foster Brewing Intellectual Property is taxable in India, having regard to the provisions of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement between India and Australia?

2. By virtue of its order dated 14.05.2008, the AAR has answered the

said question by holding that the income 'accrued' to the applicant, from

the transfer of its right, title and interest in and to the trademarks and

Foster's Brand Intellectual Property is taxable in India under the Income

Tax Act, 1961. Insofar as the income attributable to the grant of perpetual

and irrevocable licence in relation to Brewing Intellectual Property rights

is concerned, the same is not liable to be taxed under the Income Tax

Act, 1961.

3. The petitioner is aggrieved by the fact that the AAR has observed

that the income 'accrued' to the petitioner from the transfer of its right,

title and interest in and to the trademarks and the Foster's Brand

Intellectual Property is taxable in India under the Income Tax Act, 1961.

The AAR arrived at its said ruling after holding that the said intellectual

property rights of the petitioner, which were the subject matter of

assignment/transfer, were situate in India. The plea of the petitioner is that

in the case of intangible capital assets the situs thereof has to be

determined by the situs of the owner. This is so because the assets, being

intangible, do not exist in any physical form and, therefore, cannot be said

to be located at any physical place, unlike a tangible capital asset which

exists in physical form and has a specific physical location. It is the case

of the petitioner that because of the nature of an intangible capital asset,

the common law principle 'mobilia sequuntur personam' has been

evolved, whereby a fiction is created to the effect that the situs of an

intangible capital asset would be the situs of the owner of that asset. In

this backdrop, it has been contended that since the owner of the intangible

assets in question was located in Australia, the petitioner, being an

Australian company, the intangible assets, which include the intellectual

property rights of the petitioner, were also located in Australia. Therefore,

the transfer of those assets would not result in any income deemed to have

accrued in India and would not be exigible to tax in India.

4. On the other hand, the AAR was of the view that since the

intellectual property rights, which are the subject matter of the present

petition, pertain to India, in the sense that they were used in India, nurtured

in India and some of them were registered in India, the same had taken

roots in India and, therefore, were completely situate in India. In coming to

this conclusion, the AAR did not accept the applicability of the 'mobilia

sequuntur personam' principle to the facts of the present case and in doing

so placed reliance, inter alia, (i) Geoffrey Inc. v. South Carolina Tax

Commission: 437 S.E. 2d 13 : (1993) 313 SC 15; (ii) Kmart Properties

Inc. v. Taxation and Revenue Department: 139 NM 177 : 2006 NMCA

26 ; and (iii) Commissioners of Inland Revenue v. Muller and Company:

(1901) AC 217 (HL). The learned counsel for the revenue has supported

the decision of the AAR and contended that the transaction in question,

which involved the transfer of intellectual property rights, had a clear

relation to the use of such rights in India and, therefore, they were clearly

assets which were located in India.

FACTS:

5. It would be necessary to set down the factual backdrop in which the

question has arisen for our consideration. The petitioner (CUB Pty.

Limited, formerly known as Foster's Australia Limited) had a 100%

subsidiary - Dismin India Private Limited (Dismin). In turn, Dismin held

100% shares of FBG, Mauritius, which, in turn, held 100% shares of

Foster's India Limited. The latter company, namely, Foster's India Limited

was incorporated on 26.09.1995. On 13.10.1997, a brand licence agreement

(BLA) was executed between the petitioner and Foster's India Limited. By

virtue of the BLA, Foster's India Limited was licensed to use in India four

of the trademarks owned by the petitioner. They were:-

     (i)      FORSTER's & F logo
     (ii)     F logo
     (iii)    FORSTER's
     (iv)     Kangaroo Device

In consideration of this licence, the petitioner received royalty and was

subjected to withholding tax in India. It is pertinent to note that the BLA

permitted Foster's India Limited to use the said licensed trademarks in

India. The BLA did not transfer any other right to Foster's India Limited.

In other words, the licensed trademarks continued to remain the absolute

property of the petitioner. Foster's India Limited was only permitted to use

the said four licensed trademarks in India as a licensee.

6. On 04.08.2006, an agreement, known as 'India sale purchase

agreement' (ISPA), was executed in Melbourne between Dismin, the

petitioner, Foster's Group Limited, SABMiller (A & A2) (hereinafter

referred to as the said SABMiller) and SABMiller Africa & Asia B.V. The

said transaction was a composite agreement which provided for:-

(i) Sale of shares of FBG Mauritius by Dismin to SABMiller (A & A2);

(ii) Sale of the following by the Petitioner to SABMiller (A & A2)/its nominee:

(a) 16 Trademarks, including the said four licensed trademarks;

(b) Foster's Brand Intellectual Property; and

(c) Grant of exclusive and perpetual license in relation to Foster's Brewing Intellectual Property confined to India, to SABMiller. Purchase price as mentioned under the ISP Agreement was USD 120 million.

7. As a result of the ISPA, SABMiller (A & A2) became the owner of

FBG Mauritius and thereby the owner of Foster's India Limited.

Furthermore, 16 trademarks, which were owned by the petitioner (which

included the said four licensed trademarks), were sold/assigned to

SABMiller (A & A2) and/or its nominee. Clause 5.3 of the ISPA is relevant

as it relates to pre-completion transactions. To the extent relevant, the said

Clause 5.3 is reproduced herein below:-

"5.3 Pre -- Completion transactions

(a) On or before Completion, each of FGL, Dismin and, where applicable, Foster's Australia, must procure (at its own cost and expense) each of the following to occur:

              (i)      xxxx            xxxx         xxxx       xxxx
             (ii)     xxxx            xxxx         xxxx       xxxx
             (iii)    the termination of each of the:
                      (A)    Brand Licence Agreement; and
                      (B)    Technical Licence and Services Agreement;

       xxxx                 xxxx      xxxx         xxxx"

It is, therefore, clear that under the ISPA, prior to the completion of the sale

and purchase of the sale shares, the trademarks, the Foster's Brand

Intellectual Property and the licence of the Foster's Brewing Intellectual

Property in accordance with clauses 6 and 7, the BLA was required to be

terminated. It will be remembered that the BLA had been entered into

between the petitioner and Foster's India Private Limited, whereby the

former had licensed four trademarks to the latter for use in India.

8. On 12.09.2006, a deed of termination of the BLA was executed in

Australia. On the very same day, that is, on 12.09.2006, a deed of

assignment was executed in Australia, whereby the petitioner assigned the

said 16 trademarks to Skol Breweries Limited [nominee of SABMiller

(A & A2)].

9. On 22.09.2006, the petitioner moved an application before the AAR

under Section 245-Q of the Income Tax Act, 1961, seeking an advance

ruling on, inter alia, the question extracted earlier in this judgment. By the

impugned order dated 09.05.2008, the AAR held the income arising from

the transaction of the transfer of the 16 trademarks to be deemed income

accruing in India on the basis of its finding that the said intellectual

property rights were capital assets situate in India. Being aggrieved by the

said ruling, the petitioner had initially filed a Special Leave Petition, being

SLP (Civil) No. 21519/2008 before the Supreme Court of India. But, on

08.09.2008, the same was withdrawn by the petitioner with liberty to move

the High Court. And, that is how the present petition has been filed

challenging the ruling given by the AAR.

ARGUMENTS:

10. On behalf of the petitioner, Mr Ganesh, the learned senior advocate,

contended that the origin of the Forster's mark was unquestionably in

Australia. The petitioner was the owner of the said brand/mark and the

petitioner is an Australian company. The petitioner has also granted

licences to use the trademarks in various countries across the world

(approximately between 70-100 countries), including India. It was

submitted that a licence to use a trademark confers only a limited right for

the use of the mark and there is no assignment of any proprietary interest

therein. It was, therefore, submitted that the initial licence granted under

the BLA did not confer any proprietary rights in Foster's India Limited. It

was contended that as the trademarks were originally adopted by the

petitioner in Australia, admittedly the intellectual property rights therein

vested in the petitioner and the situs of those rights was clearly Australia.

He submitted that by the grant of the licence under the BLA, since there

was no transfer of any proprietary right, there was no shift in the situs of the

trademarks to India. It was submitted that a distinction has to be drawn

between the trademark and the right to use the trademark. According to

Mr Ganesh, the situs of the trademark would be that of its owner. The right

to use a trademark only generates royalty, which is paid to the owner, but

the situs of the trademark remains that of the owner of the trademark. It

was also contended by Mr Ganesh that if the contention that the grant of

licence results in transfer of the situs of the trademark to the licensee

countries were to be accepted, serious and major consequences involving

multiple taxation would result. It was also contended that registration of

trademarks in India did not imply the migration of the intellectual property

rights to India. According to him, registration of a trademark only

recognizes a right which pre-exists in the trademark. It was contended that

the rights in a trademark are of common law origin and are protected

thereunder. A trademark does not derive its existence from any statute and

is protected even in the absence thereof. The statute, more or less, fortifies

the common law by conferring a statutory title to the trademark on the

owner. Mr Ganesh referred to the decision in the case of Norwich

Pharmacal Company v. Commissioner of Internal Revenue: 1934 BTA

Lexis 1344, wherein it was observed as under:-

"Rights in trade-marks are of common law origin, General Baking Co. v. Gorman, 3 Fed.(2d) 891; certiorari denied, 268 U.S. 705. The right to a trade-mark exists at common law, L. H. Harris Drug Co. v. Stucky, 46 Fed. 624, and has long been protected thereby, Piggly Wiggly Corp. v. Saunders, 1 Fed.(2d) 572; affd., 30 Fed.(2d) 385. A trade-mark does not derive its existence from any statute, state or Federal, but exists independent of statutes, and is protected even in the absence thereof. Trade-marks are not created by the trade-mark statutes. Such statutes merely fortify the common law right to a trade- mark by conferring the statutory title on the owner. Authorities cited, supra, and La Croix v. May, 15 Fed. 236."

11. The learned counsel for the petitioner submitted that the location of a

trademark is governed by the common law maxim of 'mobilia sequuntur

personam'. According to this principle or doctrine, the personal property

held by a person is governed by the same laws that govern that person.

This principle has been applied to determine the situs of intangibles which

entails that the situs of intangible assets are to be determined on the basis

of the situs of the owner of such intangible assets. It was submitted that

the principle behind this doctrine was that intangibles are subject to the

immediate control of the owner and since the intangibles themselves do not

have any real situs, the domicile of the owner is the nearest approximation

to their location. Reliance was placed on the decision of the Court of

Appeal of California, Third Appellate District in the case of Rainier

Brewing Company v. CHAS. J. McColgan: 94 Cal. App. 2d 118;1949 Cal.

App. LEXIS 1499, wherein it was observed as under:-

"It is immaterial that the plaintiff, prior to the transfer of its trade-mark and goodwill to be used in the State of Washington, also owned and conveyed a warehouse and equipment which it owned in Seattle. It still remains true, as conceded by the written stipulation of facts and the findings of the court, that plaintiffs domicile and principal place of business was in California and not in Washington. All of the facts and circumstances of this case indicate that the domicile and principal place of business was in San Francisco. That was, therefore, the situs of the intangible property rights represented by the proceeds from the transfer of the trade-mark and good will of the business. The receipts from that source, and not from the actual sales of beer in Washington, were attributable to the good will of the business attached to the trade-mark which had its situs in this state. That property interest did follow the "personam" of the corporation to its domicile in California. The doctrine of "mobilia sequuntur personam" appears to apply in full force to the facts of this case. We conclude that the commissioner properly and lawfully assessed ["*8] and taxed to plaintiff the proceeds received in the year 1938, from the transfer of the trade-mark and good will of plaintiffs business. It is immaterial whether those property rights in intangible property may also be attributable to the contract, which the court suggests merely created the relationship of debtor and creditor between plaintiff and [*122] the Seattle Brewing Company. That contract may be considered as mere

evidence of the terms and conditions upon which the trade-mark for use in Washington was transferred. Even though the contract itself may not warrant the commissioner in attributing the receipts therein provided for to it, which we do not concede, the fact remains that they were attributable to the transferred trade- mark and attached goodwill of the corporation whose business was located in this state. That fixes the situs of the taxable property."

xxxx xxxx xxxx xxxx

"The term "mobilia sequuntur personam" is a maxim defined as meaning, "Movables follow the [law of the] person." (58 C.J.S.

837.) In Miller v. McColgan, 17 Cal.2d 432 [110 P.2d 419, 134 A.L.R. 1424], it is said at page 443: "The doctrine of mobilia sequuntur personam has been repeatedly and consistently maintained in determining the taxable situs of intangible property, and as recently as the 1938-1939 term the Supreme Court of the United States recognized it in Curry v. McCanless, 307 U.S. 357 [59 Sup.Ct. 900, 906, 83 L.Ed. 1339, 123 A.L.R. 162], . . ." (Quoting with approval, to that effect, from the last cited authority.)"

(underlining added)

12. It was further submitted on behalf of the petitioner that the common

law rule of 'mobilia sequuntur personam' continues to operate and be

applicable in the absence of any contrary statutory provisions especially

providing for the situs of intangibles. It was further submitted that it is

within the jurisdiction of the legislature to promulgate specific provision

for determination of situs of the trademarks. However, in India, since the

legislature has not specifically provided for the situs of trademarks,

therefore, the common law rule of 'mobilia sequuntur personam' would be

applicable. Reliance was placed on the following decisions:-

(i) Reliable Stores Corp. v. City of Detroit: 260 mich. 2 (Pg 2 and 3);

(ii) Humble Oil & Refining Co. v. Calvert: 414 S.W.2d 172 (Tex. 1967) (Pg 8);

(iii) David M. Howell v. The Village of Cassopolis: 35 Mich.

471 (Pg 2);

       (iv)    Bradley et al. v. Bauder: 36 Ohio St. 28 (Pg 5);
       (v)     In re Truscon Steel Co.: 246 Mich. 174 (Pg 2); and
       (vi)    Fordhman Law Review: Vol. 4 Issue 2 Article 9 (page
               355)

13. It was also contended by Mr Ganesh that the registration of a

trademark does not entail creation of a trademark nor does it have any

impact on its location. Reliance was placed on the Supreme Court decision

in Commissioner of Income Tax, Bombay v. Finlay Mills Limited: (1951)

20 ITR 475(SC). It was, therefore, contended that the mere fact that the

trademarks were registered in India also did not mean that the situs of the

trademarks had been shifted from Australia to India.

14. Mr N. P. Sahni appearing on behalf of the respondent/revenue

supported the ruling of the AAR. He drew our attention to the said decision

and, in particular, to paragraph 7 thereof, where the AAR noted that the

crucial question that needs to be addressed is whether the capital assets

transferred by and through the ISPA read with the deed of assignment were

situate in India - an expression that is employed in Section 9(1)(i) of the

Income Tax Act, 1961. If they were, then the income arising from the

transfer of the capital asset by a non-resident would be deemed to his

income liable to be taxed in India. Thus, the question to be answered is

whether the trademarks and other related intellectual property rights, which

were transferred by virtue of the ISPA and the deed of assignment, were

located in India?

15. The AAR came to the conclusion that the trademarks registered in

India, together with the other features of the Foster's brand, had

undoubtedly generated appreciable goodwill in the Indian market and such

goodwill had been nurtured in India by the reason of coordinated efforts of

the petitioner and Foster's India Private Limited till the date of the ISPA in

2006. The AAR was, therefore, of the view that it was reasonable to hold

that the marketing intangibles comprising the Foster's trademarks and

brand, which were in use for nearly a decade, had their abode in India by

the crucial date of transfer of the said capital assets. The AAR was also of

the view that even assuming that some of the trademarks were used

elsewhere also, their existence in India could not be denied. The AAR used

the expression that intellectual property belonging to the petitioner had its

"tangible presence' in India at the time of the transfer. The AAR also took

the view that the registration of the petitioner's trademark was one of the

relevant factors pointing to the roots that the trademarks had taken and the

recognition they had gained in India. The AAR also took the view that the

termination of the BLA was not antecedent to the deed of assignment. This

observation was straightaway criticized by Mr Ganesh as being wrong

inasmuch as the termination of the BLA was a condition precedent to the

assignment as noted in Clause 5.3 of the ISPA. We would tend to agree

with Mr Ganesh on this aspect of the matter. At this point, it may be stated

that Mr Ganesh had raised an argument that if the grant of a licence shifted

the situs of the trademarks from Australia to India, the cancellation of the

very same licence would, in any event, entail shifting back of the situs of

the trademark to Australia. His argument was that if this were to be

accepted, then clearly at the time when the deed of assignment was made,

the situs of the trademark was firmly located in Australia and, therefore,

could not be the subject matter of taxation in India.

16. The AAR also relied on Geoffrey's case (supra), Kmart's case

(supra) and Muller's case (supra). According to Mr Ganesh, Muller's

case was related to goodwill and not trademarks and the Kmart's case

(supra) could not have been relied upon because it had been overruled by

the Supreme Court in a subsequent decision. Insofar as Jeofferey's case

(supra) was concerned, Mr Ganesh pointed out that the same was in respect

of income from intangibles, which is different from capital gains from the

transfer of intangible assets.

17. Mr Sahni, reiterating the reasoning and finding of the AAR,

submitted that the transfer of intellectual property rights which are the

subject matter of the present petition were only in respect of those rights

which were within the territory of India. It was submitted that though the

petitioner was the owner of the Foster's brand trademarks on a global basis,

no other rights except India specific intellectual property rights were the

subject matter of the transaction in question. He also submitted that when

the brand was initially introduced in India, it had no value. But, when the

petitioner sold the trademark and the brand intellectual property rights with

respect to the territory of India, substantial proceeds were received by them

from SABMiller. This clearly represents the value it had gained from its

operations in India. It was, therefore, contended that this was income

which had accrued to the petitioner in respect of transfer of capital assets

situate in India and was clearly liable to tax in India. It was also submitted

by Mr Sahni that merely because the composite agreement of the

transactions had taken place outside India, did not render any income

arising from the said transactions to be not taxable in India.

18. Mr Sahni submitted that there was a fallacy in the arguments made

on behalf of the petitioner placing reliance on the maxim of 'mobilia

sequuntur personam'. As an example, he submitted that suppose an

Australian had registered trademarks and had spent and promoted the said

trademarks only in India, could it still be said that since the said Australian

was a resident of Australia, the situs of the trademark could also lie in

Australia. A further question was posed that if the Australian migrated to

another country, would the situs shift to that country? These questions

were answered by Mr Sahni himself, obviously as - 'no'. According to

Mr Sahni, these were business intangibles and the situs of the same would

be where the business is carried out and where the intangibles would be

protected under the local law. It was submitted by Mr Sahni that the

trademarks and other intellectual property rights, to the extent they related

to India, would have to be deemed to be located in India and it did not

matter as to where the owner was located. Consequently, it was submitted

that the principle of 'mobilia sequuntur personam' would not apply in the

present case and, therefore, no interference with the ruling of the AAR was

called for.

DISCUSSION:

19. The issue of situs of an intangible asset, such as the intellectual

property rights in trademarks, brands, logos etc. is indeed a tricky one.

Insofar as the tangible assets are concerned, there is absolutely no

difficulty. They exist in physical form and their existence is at specific

locations. Thus, fixing their situs does not pose any problem. An intangible

capital asset, by its very nature, does not have any physical form.

Therefore, it does not exist in a physical form at any particular location.

The legislature could have, through a deeming fiction, provided for the

location of an intangible capital asset, such as intellectual property rights,

but, it has not done so insofar as India is concerned. With regard to a share

or interest in a company registered/incorporated outside India, Explanation

5 has been added to Section 9(1)(i) of the Income Tax Act, 1961 by virtue

of the Finance Act, 2012 with retrospective effect from 01.04.1962. The

said Explanation 5 reads as under:-

"Explanation 5. - For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India."

20. Thus, the legislature, where it wanted to specifically provide for a

particular situation, as in the case of shares, where the share derives,

directly or indirectly, its value substantially from assets located in India, it

did so. There is no such provision with regard to intangible assets, such as

trademarks, brands, logos, i.e., intellectual property rights. Therefore, the

well accepted principle of 'mobilia sequuntur personam' would have to be

followed. The situs of the owner of an intangible asset would be the

closest approximation of the situs of an intangible asset. This is an

internationally accepted rule, unless it is altered by local legislation. Since

there is no such alteration in the Indian context, we would agree with the

submissions made on behalf of the petitioner that the situs of the

trademarks and intellectual property rights, which were assigned pursuant