The notion of taxation of goods, services and income has already been established in the global society far back in time. However, the idea of taxing what is known as intellectual property rights is a fairly recent phenomenon. Intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce. IP is protected in law by, for example, patents, copyrights and trademarks, which enable people to earn recognition or financial benefit from what they invent or create.[i]
IP falls within the class of assets termed as �intangible assets� which form a prime component of taxation policy development, in the realm of international taxation. Commercialization of IP is done by way of assignment and licensing. In India, IP is taxed in various indirect ways. Provisions for IP taxation are spread over different legislations making it difficult for any of the stakeholders to assess their applicability and implications. This has often resulted in varied approaches being taken by the Central and State governments on taxability of intangible assets. At times, the judiciary has had to step in to interpret the provisions so that liability to tax could be correctly ascertained. One such instance is the dispute between Tata Consultancy Services and the State of Andhra Pradesh[ii] where the Supreme Court clarified the meaning of the term �goods� for the purposes of sales tax. It stated that �the properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored, or possessed, etc., are �goods� for the purposes of sales tax. The test to determine whether a property is �goods�, for the purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc�
�Even intellectual property, once it is put onto a media, whether it be in the form of books or canvas or computer discs or cassettes and marketed, would become �goods�.
Under Indian law, taxation of IP has been covered in a fragmented manner under the following legislations � Income Tax Act, 1961; Sales of Goods Act, 1930; Customs Tariff Act, 1975; Central Excise Act, 1944. It has also been covered within the law relating to Value Added Tax and Service Tax. The only straightforward provision in the Income Tax Act, 1961 is Section 9(1) (vi) which deals with taxation of income by way of royalties under the head �income deemed to accrue or arise in India�. Foreign transactions which involve sharing of technical know-how are being taxed since 1969 on wards and Section 92 of the Finance Act, 2002 makes interest arising from international transactions, taxable. Deductions are provided on expenditure on know-how[iii] , expenditure on scientific research[iv] , income from copyrights[v] , etc. There is still scope to expand the segment of deductions with respect to the income earned by one on expending his intellect and the expenditures he makes towards it.
Service tax was imposed with the enactment of the Finance Act, 1994. Soon after the taxation of services provided by �consulting engineers� was embedded into service tax law. Attracting controversy and therefore being laid bare to judicial interpretation, �consulting engineer� services were held to also include �training of personnel, software support, operation/maintenance, emergency support, technical consultancy, etc.� in addition to advisory/consultative assistance, by the Supreme Court.[vi] It was only in 2004 that �IP services� were expressly brought within the service tax net.
Further, ever since the scope of service tax was enlarged to include transactions amounting to �deemed sales�, double taxation of a transaction has been the subject of much debate. VAT is collected on the retail sale of goods. The 46th Constitutional Amendment defined �tax on the sale or purchase of goods� to include �a tax on the transfer of property in goods (whether as good or in some other form) involved in the execution of a works contract�. This amendment brought �deemed goods� and �deemed sales� within the ambit of taxation. On application, it meant that any contract which included technical know-how, assignment or license of IP would be considered as �deemed sales� and taxed accordingly. �Temporary transfer or permitting the use or enjoyment of any intellectual property right� was included as a declared service with the insertion of Section 66E in the Finance Act, 1994. All the activities listed out in Section 66E amount to provision of service and are therefore liable to service tax. When the Negative List was introduced, it was clarified that declared services for service tax purposes that are related to �deemed sales� transactions have been carefully specified to ensure that there is no conflict. However, the conflict appears to have remained unresolved in the area of taxation of intellectual property rights. The same transaction is subject to VAT and service tax on the entire value. One hopes that the legislation on Goods and Services Tax will effectively eliminate this incidence of double taxation.
It is evident that even though certain provisions taxing intellectual property rights exist, the inherent ambiguity in the law coupled with the lack of a comprehensive policy has led to a bee-line at the courts in order to resolve matters. The same position holds true when we bring intellectual property within the scope of customs duties. The customs law in India is codified in the Customs Act, 1962 and the Customs Tariff Act, 1975.One question that has repeatedly presented itself for determination before the bench is � whether royalty, license fees, value of technical know-how etc. must be added to the total import value for the purpose of being charged to customs duty. One of many decisions on this point was given in Associate Cement Companies Limited [vii]. Commissioner of Customs where the Supreme Court held that valuation for the purpose of customs duties on drawings, designs and technical material and IP when put on a media, is to be regarded as an article, on the total transaction value of which customs duty is payable. It is therefore not permissible to split the architectural designs into intellectual input on one hand and the paper on which it is given shape to, on the other. We see that though the law and the judicial pronouncements on it have eagerly emphasized on taking the total value of the imported item into account for the imposition of duty, the past governments have not shown any signs of developing a scheme to incentivize the acquisition of technical know-how and other IP.
That companies have begun to place significant value on their intangibles, cannot be emphasized enough. Technological developments and far-reaching communication systems have made IP accessible globally. In order to discourage siphoning of profits and to encourage creation of IP, UK has recently (in June 2013) introduced tax benefits in the form of �Patent Box� such that incomes earned by companies from patents owned in the UK, is taxed at a concessional rate of 10%. India is an IP starved country and it would do well to encourage creation and harboring of the IP within the country, by providing tax incentives. Therefore, it is time that the Government considered deliberating upon an inclusive policy for the taxation of intellectual property � one which would not only ensure revenue but also incentives to the industries and augment the economic growth of the country.
1. Prasad, Sathish, Singh (Working Paper, 2014): Emerging Global Economic Situation � Opportunities and Policy Issues for Services Sector
2. Tax Updates (June 2014), Federation of Indian Chambers of Commerce and Industry
3. Global Intellectual Property Centre (U.S. Chamber of Commerce): India � International outlier on IP (July 2013)
4. Income Tax Department: Royalty and Fees for Technical Services (Taxpayer Information Series � July 2013)
[i] World Intellectual Property Organisation
[ii]Tata Consultancy Services v. State of Andhra Pradesh 271 ITR 401 (SC) (BCAJ)
[iii]Section 35AB of the Income Tax Act, 1961
[iv] Section 80GGA of the Income Tax Act, 1961
[v] Section 80QQA of the Income Tax Act, 1961
[vi] Bharat Sanchar Nigam Limited &Another c. Union of India &Ors. 2001 CTR 346 (SC)
[vii](2001) 128 ELT 21 (SC)