MHRD Chair on Intellectual Property Rights &

Centre for Intellectual Property Research and Advocacy

National Law School of India University, Bangalore

“IP taxation in India: India’s growth towards a knowledge based economy.”

Under the Guidance ofProf. (Dr) T. Ramakrishna,

MHRD Chair Professor on IPRAnd

Mr. VivekAnandSagar.BResearch Associate

Submitted ByVarnita Singh

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Certificate

This is to certify that Varnita Singh, a student of Gujarat National Law

University has successfully completed and submitted her report. This has been

submitted in fulfilment of his internship at the Centre for Intellectual Property

Research and Advocacy (CIPRA) during the month of November-December,

2016.

Bangalore, 19th December 2016 Signature of the Guide

Prof. (Dr.) T. Ramakrishna MHRD Chair Professor of IPR

Vivek Anand Sagar.B.Research Associate

CIPRA

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DECLARATION

Certified that this research work is my original work and I have not borrowed

any material from other’s work nor have I presented this partly or fully to any

other institution/college/university.

I have completed with all the formalities prescribed in this regard.

Date: Signature

Place: Bangalore NAME

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ACKNOWLEDGEMENT

I would like to extend my gratitude towards the Centre of intellectual property research and

advocacy for allowing me to intern with the esteemed research centre. Firstly, I would like to

thank Professor T. Ramakrishna for his valuable inputs and guidance. I would also to thank

Mr. Vivek Anand Sagar. Without his motivation and valuable inputs, I would not have been

able to complete the project. The completion of this undertaking could not have been possible

without the assistance of Ms. Sadhvi C Kant who brought out new aspects of law that should

be looked at and helped me structure this project. Lastly, I would like to thank Ms. Sadhana

for her constant care, support and encouragement.

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Table of ContentsAcknowledgement................................................................................................................................4

Introduction..........................................................................................................................................6

IP taxation.............................................................................................................................................7

IP and R&D............................................................................................................................................8

India’s policy:.....................................................................................................................................8

United Kingdom’s tax policy: Where India needs to improve............................................................9

Deductions on IP Expenditure............................................................................................................11

Is IP treated as capital or revenue expenditure?.............................................................................11

Effect of Double Taxation Avoidance Agreements (DTAA) and international taxation:...................12

Taxation on royalty............................................................................................................................13

The patent box regime........................................................................................................................15

Sales Tax and Service Tax on intellectual property............................................................................17

Sale of Intellectual property:...........................................................................................................18

Intellectual property services:.........................................................................................................21

Deemed sale v. declared service:....................................................................................................21

Copyright:........................................................................................................................................22

Patents:...........................................................................................................................................23

Trademarks:.....................................................................................................................................24

Conclusion...........................................................................................................................................25

Recommendations:.............................................................................................................................26

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INTRODUCTION

With the advent of the information age, the global economy moved towards a knowledge economy. This transition involved taking the best practices from service-intensive, manufacture-intensive and labour-intensive economies and adding knowledge based factors to create an interconnected globalized economy. The transition resulted in sources of knowledge such as human expertise and skills contributing just as much as other economic resources.

The knowledge economy looks at human capital as a productive asset because intellectual services and products can be sold and exported thereby yielding profits for the individual, business and the economy. It is dependent on man’s intellectual capability instead of exhaustive natural resources. It is one where building, evaluating, and trading knowledge is the basis of the economy.1

In today’s world of global competition, creation and management of knowledge plays a critical role in building and sustaining national wealth and integrating it with the global economy. Knowledge, as embodied in human beings and in technology, has always been central to economic development. But only over the last few years has its relative importance been recognised.

With natural resources depleting exponentially, economic growth based on boosting knowledge seems most promising and everlasting. Thus, investment is being directed to high-technology goods and services, particularly information and communications technologies. Computers and related equipment are the fastest-growing component of tangible investment. Equally important are more intangible investments in research and development (R&D), the training of the labour force, computer software and technical expertise. In fact, expenditure on research has reached about 2.3 per cent of GDP in the OECD area.2 Although India ranks 6th in the gross domestic spending on the R&D list,3 the expense accounts for only 0.85% of the Indian GDP.4

Thus, intellectual property is the basis of a knowledge based economy. Naturally, more the creation of knowledge, more the wealth created. To promote creation of knowledge in a country, it is important that there are systems in place which incentivize knowledge creation and also have strong knowledge protection systems. Thus, a knowledge based economy will have very strong IP protection and infringement laws.

Another important yet undermined organizational structure which catalyses more knowledge based income in a country is taxation. More the benefits and exemptions provided to research, more the motivation to produce knowledge. A good IP taxation regime with incentives for research and development would increase knowledge growth in the country. Similarly, an efficient royalty policy would increase the number of technology or know-how transfers into India thereby aiding small indigenous businesses.

India has always been an innovative society with the Indian medicines such as Ayurveda and Unani; advances in the cost effective Indian space programme and contributions to the pharmaceutical sector. However, much of the IP has remained unprotected due to lack of

1 BRIAN A. GARNER, BLACK’S LAW DICTIONARY 1527 (THOMPSON Reuters 2004).2 The knowledge based economy ( 4 December, 2016) https://www.oecd.org/sti/sci-tech/1913021.pdf 3 OECD (2016), Gross domestic spending on R&D (indicator). doi: 10.1787/d8b068b4-en (10 December, 2016) https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm 4 2016 Global R&D funding forecast (10 December 2016) https://www.iriweb.org/sites/default/files/2016GlobalR%26DFundingForecast_2.pdf

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awareness and belief that IP protection is not required. Understanding the need for awareness in the field of IPR as a financial asset and economic tool, the Department of Industrial Policy & Promotion (DIPP) came up with a national IP policy which was published in May 2016. 5 The objective behind the policy was to promote an environment where intellectual property is used to its full potential to promote India’s economic growth and socio-cultural development. The policy weaves in the strengths of the Government, research and development organizations, educational institutions, corporate entities including MSMEs, start-ups and other stakeholders in the creation of an innovation conducive environment.

Various schemes by the government such as the renowned make in India scheme and the scheme for promoting innovation, Entrepreneurship and Agro-industry have tried to promote innovation in India. However, despite the new incentives and boundless talent in the population of India, it is placed 25th in the list of leading innovators. On examination it can be inferred that the top 5 innovators of the world (Switzerland, Sweden, UK, USA, and Thailand) have one thing in common: a strong IP taxation policy. This project seeks to analyse the IP taxation policy of India, highlighting its strengths and areas of concern which once overcome would help India become a leading innovator in the world.

According to a report of the Asian Development Bank, India, taking advantage of its youthful population and thriving information and communication technology can become a leading knowledge-driven economy.6 However, to make this a reality, supporting laws which demolish trade and investment barriers and boost research and development will be needed.

IP TAXATION

IP is a key component in international taxation. With multinational companies spreading across borders, there is movement of intellectual property rights which offers scope for considerable income through taxation for technology receiving countries. Even though, there are some provisions in different legislations for intellectual property taxation, government officials and industry are unaware of the application and implications of the provisions. India opened its economy in 1991 with a bundle of tax reductions in customs and central excise duties, lowering corporate tax, widening the tax net and is also one of the founding members of the World Trade Organisation in 1995. There are different approaches taken by the centre and the state governments on taxability of intangible assets.

Investment of multinational companies in India’s technology industry is increasing day by day. Although different legislations provide provisions for IP taxation, government officials and the industry is unaware of the provisions and its implications. Thus, accounting practices of companies differ due to lack of a uniform guideline in calculation amortisation of intangible property. The incentives provided to industries are primitive and exemptions are available only in areas like research and development and small scale industries sector. However, not much research has been done on this pertaining to the Indian economy due to which there is no clarity on IP taxation. Therefore, there is imminent need to create awareness and understanding in this regard.

5 National Intellectual Property Rights Policy ( 5 December 2016) http://dipp.nic.in/English/Schemes/Intellectual_Property_Rights/National_IPR_Policy_08.08.2016.pdf6 India can be a leading knowledge based economy with right steps (29 November, 2016) https://www.adb.org/news/india-can-be-leading-knowledge-based-economy-right-steps-report

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Any IP product that is manufactured has various IP transactions each of which are taxed separately. Before a product is developed, there needs to be research into the working, machinery, design, etc. of the product. This requires funds for research and development which is treated as an expense by the company. Funds put into research and development are given tax deductions in India much like most jurisdictions in the world. These deductions are discussed hereon.

Once the IP is created, it can be commercialised either by integrating it into products and selling them or the right to use the IP can be transferred- temporarily or permanently. The income received by transfer of IP is treated as royalty and taxed under the Income Tax Act, 1961. The permanent sale of the good is liable to sales tax whereas the permission to use/ temporary transfer of right is treated as an IP service and hence liable to service tax. To promote innovation in the country, royalty income is given tax incentives which are discussed in this paper.

R&D TAXATION

India is the sixth largest country in the world investing in R&D with $71.5 billion to be spent in 2016, a 7.5% increase over the $66.5 billion estimated to be spent in 2015. India also is likely to surpass both South Korea (# 5) and Germany (# 4) in terms of total R&D investments by 2018.7 India was always known for its strong IT infrastructure and educational resources. However, over the past several years, more multinational technology conglomerates have been setting up ambitious R&D projects within India, to serve the large Indian market with its 1.3 billion population, and to create and deliver new products faster to the global marketplace. Google, for example, recently announced that it was setting up new data centres in India following the likes of Microsoft and Amazon.8 Multinational automotive and pharmaceutical companies are setting up large R&D centres within India. Multinationals that have set up R&D units recently in India include Kellogg, Dell, Daussalt Systemes, BASF, Broadcom, Xiaomi and Twitter.

Like China, India is expanding its research presence globally with an increasing number of published technical papers, expanding its output at nearly three times the global average over the past decade. With the creation of R&D, there has been a 32% increased creation of intellectual property.

India’s policy:

Under present laws, expensed deductions and additional weighted deductions are permitted to all taxpayers for R&D expenditure. A weighted deduction of 200% and 175% on capital and revenue expenditure is available up to 31 March 2017 in respect of expenditure incurred on scientific research in an in-house R&D facility approved by the prescribed authority for companies engaged in specified businesses and in research associations, universities, etc., respectively. Such weighted deduction will be restricted to 150% of the expenditure from tax year 2017/18 to tax year 2019/20. Thereafter, deduction will be restricted to 100% of the expenditure.

7 Infra note at 4.8 Google to set up data centres in India; chases Microsoft, Amazon over the cloud ( 29th november, 2016) http://economictimes.indiatimes.com/articleshow/54597967.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

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A payment made to an approved research association undertaking research in the social sciences or in statistical research, or to an Indian company to be used by it for scientific research, is eligible for a weighted deduction of 125% of the payment made up to 31 March 2017. Such deduction will be restricted to 100% of the expenditure from tax year 2017/18 and onwards.

Contributions made to any National Laboratory, approved scientific research associations, universities, and the Indian Institute of Technology are eligible for a deduction of 200% of the contributions made up to 31 March 2017. Such weighted deduction will be restricted to 150% of the expenditure from tax year 2017/18 to tax year 2019/20. Thereafter, deduction will be restricted to 100% of the expenditure. Thus, the tax framework will no longer provide any tax incentives for capital intensive patent development.

Unfortunately, despite requisite approvals and incurring genuine expenditure, taxpayers engaged in R&D activities run the risk of being disallowed the expenditure. Revenue authorities routinely disallowed such expenditure, alleging that it was not incurred for business purposes or that the expenditure was of enduring benefit that ought to be capitalised.

United Kingdom’s tax policy: Where India needs to improve. On an analysis of the UK taxation policy on R&D, it is noticed that the country provides super deductions and credits that vary depending on the size of the taxpayer. This includes an extensive R&D credit regime complemented by favourable provisions for the commercialisation of innovation in the shape of the new Patent Box.

Tax credits for companies investing in R&D were introduced for SMEs in 2000-01, extended to larger companies in 2002-03, and enhanced for vaccine research in 2003-04. In 2008, there were substantial changes to the schemes: the rates of enhanced deductions for both large companies and SMEs were increased; and the definition of a SME was expanded to include some companies that were previously classified as ‘large’. The rate of enhanced reduction was further increased for SMEs in 2011 and 2012, while the Research and Development Expenditure Credit (RDEC) scheme was introduced in 2013. This will fully replace the Large Company Scheme from 2016. At Autumn Statement 2014, the Government announced a package of measures to streamline the R&D tax credits application process for smaller companies, to ensure that all companies performing qualifying R&D are able to access the relief.

For large companies, UK provides a relief of 130 per cent of expenditure on R&D. Intra-group R&D expenditure which is contracted out by Company A to Company B is treated as R&D directly undertaken by B, and where B makes payment to a third party C for such activities it is treated as R&D contracted out to C.

This regime has recently been further enhanced by the introduction, from 2013, of the ‘above the line’ (ATL) credit for large companies. This allows companies to offset the benefit of the credit against the R&D cost in the accounts – creating an immediate cost reduction. The ATL credit will be ten per cent of qualifying R&D spend and payable to companies with no tax liability. This credit regime will initially work alongside the existing R&D ‘super-deduction’ system, giving businesses the choice of which regime to claim under. From 2016, the ‘super-deduction’ system will be replaced by the ATL regime. The ATL regime provides enhanced visibility of the benefits of the relief to business management outside of the tax department. This should allow global decision-makers to see more easily the cash benefit of locating R&D activities in the UK. For foreign investors into the UK, this new ATL relief could also help preserve the full benefit of double tax relief and so help preserve the value of the R&D

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credit in the worldwide group. The regime now provides large loss-making businesses the potential for immediate cash benefits to support further R&D.

Section 69 of the Financial Act 2000 introduced a new regime for enhanced relief on expenditure on research and development for small and medium sized companies in respect of the accounting periods ending on or after April 1, 2000 with the detailed provisions being set out under Schedules 20 and 21, now under section 1039-1142 in Corporation Tax Act, 2009.

Under section 1044, the scheme gives R&D relief of 230% of the qualifying R&D expenditure in the accounting period. Qualifying R&D expenditure for this scheme is revenue expenditure attributable to relevant research and development directly undertaken by the company or on its behalf. The expenditure must not normally be incurred in carrying out sub-contracted R&D for others. In essence, an SME is entitled to large company R&D relief without a minimum expenditure threshold. Although there was a required R&D threshold of at least 10,000 pounds per annum in the accounting period as stated under section 1050 of the CTA, 2009.

For SMEs in a loss position, cash credits are available up to 33.35%.

Such detailed provisions prove to be fantastic for UK. Total revenue expenditure on research and development in the UK has been increasing relatively steady since 2001. A peak of £16.4 billion was reached in 2011, decreasing slightly to £16.0 billion in 2012. The effects of the financial crisis of 2008 appear to be relatively small, with a slight decrease in total expenditure from £15.0 billion to £14.6 billion in 2009, followed by an increase to £15.1 billion in 2010.9

Although the ATL scheme is going to be replacing the current deduction scheme for large companies, the scheme is going to exist for small and medium companies. India needs to look at classifying benefits given depending upon the size and resources of the company.

India’s recent announcement on reducing the deductions to 100% by 2020 will prove to greatly damage and disappoint biotech firms and pharmaceutical companies in the country. Indian companies rely more on tax incentives and grants from the government because venture capitalists and other firms don’t show much interest in investment. The Indian pharmaceutical industry spends, only about 6-8% of their sales on R&D, compared to 15-20% by companies in the developed world. The cost of discovering a single molecule and its further development, representing a journey from mind to market, is in the range of $250-500 million and takes about 10-12 years. Just 1% of the drugs see commercial success.

To boost innovation, the pharma industry expected an increase in weighted tax deduction on R&D from 200% to 250% and expand the scope of the benefit to include R&D expenses incurred outside the facility like bio-equivalence studies, clinical studies, patent filings and product registrations.

The proposed tax exemptions, specifically the decrease in R&D weighted deduction to 150%, may have an impact on innovation and could de-incentivise the industry to spend more on R&D.

9 Evaluation of research and development tax credit ( 8 December, 2016) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413629/HMRC_WorkingPaper_17_R_D_Evaluation_Final.pdf.

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In my opinion, acknowledging the long gestation period and risk it takes for R&D in life science as opposed to R&D of other sectors, the R&D in biotech and pharma should been treated separately.

DEDUCTIONS ON IP EXPENDITUREBesides the R&D exemptions that are provided, IP being an asset depreciates in its value year by year because of the expenses incurred in its maintenance. The depreciation of the asset can be accounted for.

In most jurisdictions in the world, expense taken in creating IP is written off as revenue expenditure for business. Companies can also treat expenses for creating IP as a capital expenditure and treat it as an asset.

Is IP treated as capital or revenue expenditure?

Referring to the case of CIT v. Ciba of India10, the Supreme Court in Assam Bengal Cement Companies Ltd v. CIT11 held:

‘if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce profits, it is a revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure; whether it is a capital expenditure or a revenue expenditure.’

The object of the acquisition of the expenditure of the intellectual property would determine the nature of expenditure.

India also provides for depreciation of assets. Depreciation of assets has been explained in section 32(1) (ii) of the Income Tax Act. Depreciations are allowed in cases of acquisition of know-how12 and any other intangible assets in a business such as patents, trademarks or licenses.13

Deductions are also available on expenditure on scientific research.

Section 35A of the IT Act deals with expenditure on acquisition of patents and copyright. If the patent/copyright is acquired for a consideration with an enduring benefit, the purchaser has the right to claim depreciation over a period of time.

Section 35AB of the Act explains deductions on expenditure on know-how. The section reads:

‘For the purpose of this section, ‘know-how’ means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working

10 CIT v. CIBA of India, (1968) AIR SC 1131.

11Assam Bengal cement companies v. CIT, [1955] 27, ITR 34 SC12 Income Tax Act, 1961, section 35AB. 13 Income Tax Act, 1961, section 35A.

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of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto.’

If the assesse pays whole 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 of the business for that year and the balance amount will be deducted in equal instalments over five immediately succeeding years. This helps reduce the tax paid by 1/6 th every year and is a huge benefit to companies. Where the know-how acquired is developed in a laboratory, university or institution, one-third of the whole consideration will be deducted in computing profits and gains of that year and the balance will be deducted equally over two years.

Effect of Double Taxation Avoidance Agreements (DTAA) and international taxation:

Section 90 of the Income Tax Act has authorized the central government to enter into double tax avoidance agreements with other countries. A non-resident Indian becomes liable to pay tax in India in respect of income arising here by virtue of its being the country of source and then again, in his own country in respect of the same income by virtue of the inclusion of such income in the ‘total world income which is the tax base in the country of residence. The objective of DTAA is to prevent double taxation and promote international investment, free flow of international trade and international transfer of technology. These 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 also given such right but the taxation has to be limited to the rate given in the agreement. The rate of taxation is on gross receipts without deduction of expenses.

Suppose an Indian company X imports concept designs and drawings for a product from a company incorporated in another country, let us say the United States. Numerous questions arise regarding the taxation of such designs and drawings. Is such a payment in the nature of a royalty payment, thereby having tax incentives, or is it a payment for an outright purchase of the designs and drawings?

When designs are imported by an Indian company from a foreign company, it becomes pertinent to ascertain the definition of royalty given in the double taxation avoidance agreement, if any, that India may have with that foreign country.

For example, in the India-UK DTAA, a royalty payment is a payment of any kind for the use of, or the right to use:

(a) any patent, trademark, design or model, plan, secret formula or process; (b) industrial, commercial or scientific equipment, or information concerning industrial, commercial or scientific experience; (c) any copyright of literary, artistic or scientific work, cinematographic films, and films or tapes for radio or television broadcasting.14

While determining the liability of a non-resident company in India, if there is any DTAA entered into under section 90 of the Act, the provisions of the DTAA must prevail over the provisions of the Act.15

In CIT v. HEG India16 it was held that payments made for all kinds of information given cannot be broadly classified as royalties. In this case, an Indian company paid a certain 14 Section 13(3), Income Tax Act. 15 CIT v. Visakhapatnam Port Trust [1983] 144 ITR 14616 CIT v. HEG India, 130 Taxman 72

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amount to a US firm to obtain information concerning certain technical knowledge of the US Company. In this regard, the Madras High Court held that payments made to obtain mere data or a calculation sheet could not be treated as royalty payments. In order to receive tax benefits on information received, the information should have some special features and should not merely be of a pure commercial nature.

Foreign transactions involving technical know-how were taxed from 1969.17 Treatment of fees paid for manufacturing know-how would depend on whether the know-how gave an enduring benefit. In CIT v. Ciba of India Ltd18 the Supreme Court held that payment made for the use of scientific data, patent and trademark were allowable as business expenditure and thus held them as revenue in nature because it was not in the nature of enduring benefits. Similarly, the Delhi High Court held in Commissioner of Income Tax v. M/s Eicher Limited19 held that payment of non-compete fee by assesse was business expenditure and not capital expenditure.

Section 44D and 115A lay down a special method to calculate income by way of royalties and technical services of foreign companies and non-resident Indians. The rate of tax fixed under Section 44D is 20% of the gross amount.20

Activities of multinational companies are another area of taxation. Section 92 of the Finance Act, 2002 makes interest arising from international transactions taxable. When shares are transferred to a non-resident Indian for consideration of transfer of technical know-how or services rendered in India or profits made in India, the income to that extent is taxable in India. The IP acquired has to be accounted for along with plant and machinery as a depreciable asset. If the licensing or transfer is for a limited period, then it is considered as revenue receipts. If any interest is accruing for less than three years, it is deemed to be short term capital and taxed at 30%. Long term capital is taxed at the rate of 20%. In conclusion, it is stated that withholding tax rates for royalties and technical services are 10% and for any other services are 30% for individuals and 40% for corporates. This number changes based on the DTAA signed between the nations.

TAXATION ON ROYALTY

India ranks 10th in the FDI inflow 2016.21 With the increased FDI, it is expected that Indian firms would be using improved technology to grow its industrial production and services. The increasing use of technology is connected to the increased royalty and license fees payments by the business firms.22

Black’s Law dictionary defines “Royalty” as

“Compensation for the use of property, usually copyrighted material or natural resource, expressed as a percentage of receipts from using the property or as an account per unit produced … …”23 17 Circular number 21 issued by the Ministry of finance on 9 July, 1969. 18 CIT v. Ciba of India, 69 ITR 692.19 CIT v. M/s Eicher limited.20 Section 44D, Income Tax Act.21 World investment report 2016 ( 7 December, 2016) http://unctad.org/en/PublicationsLibrary/wir2016_en.pdf22 Royalty and fees for technical services ( 6 December, 2016) http://www.incometaxindia.gov.in/booklets%20%20pamphlets/royalty-and-fees-for-technical-services.pdf 23 BRIAN A. GARNER, BLACK’S LAW DICTIONARY 1527 (THOMPSON Reuters 2004).

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Generally, royalty is most often associated with the fee paid to a patentee for the use of a patent or the money owed to an author for each copy of a book sold. The salient feature of a royalty payment is that it is given as a compensation for the use of some property.

India’s Income-tax Act, 1961 defines “royalty” to mean any consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital Gains”) for

(i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula, process, trademark or similar property;

(ii) the imparting of any information concerning the working of, or the use of a patent, invention, model, design, secret formula, process, trade mark or similar property;

(iii) the use of a patent, invention, model, design, secret formula, process, trade mark or similar property;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(v) the use or right to use any industrial, commercial or scientific equipment, not including the amounts referred to in section 44BB;

(vi) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vii) The rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).24

Such payments can be in the form of a regular payment (such as monthly or quarterly) or can be one time lump-sum payment or a combination of the two but such payment even if any lump sum consideration should not be such that it qualifies to be the income chargeable under the head “Capital gains”. This would mean that it should not be a sale or transfer through which the person transferring it revokes its right to use it again.25

The income tax act provides multiple instances at which tax credits for royalties in various forms of IP are prevalent in the country. Section 9(1) (vi) of the IT Act provides for taxation on income received by way of royalties. The section states that income tax on royalties will be payable by the government, a resident or a non-resident of India. However, the transaction will be taxable only when the right, property or information is used by a business or profession carried out in India or for the purpose of earning any income from a source in India.

If the royalty is payable in respect of any right, property or information used or services utilized for the purpose of helping a business outside India or for the purpose of making income from any source outside India it is not taxable.

Other exemptions include income by way of royalty made by a person who is a resident of India and transfers all rights including grant of license in respect of computer software

24 Section 9, Income Tax Act. 25 Infra note at 22.

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supplied by a non-resident manufacturer along with a computer-based equipment under any scheme approved under the policy on Computer software export, development and training, 1986 of the Government of India.26

Deductions on payment of royalties are provided in section 80 RRB of the IT Act. The section states that when income is received as a royalty, the whole income or Rs. 3 lakhs (whichever is lesser) will be deducted. While these deductions may not make a difference to the big players however they may have the potential to act as incentives for the small and medium players be it authors or small enterprises. Even then Rs. 3 lakhs may be considered to be much too small a deduction. It would be interesting to see whether even artists and performers are able to lobby for similar provisions, especially artists performing the endangered arts.

THE PATENT BOX REGIME

Commercialization of IP is one of the drivers of economic growth in developed nations. It is the process by which new products or production methods are introduced into the market. It can be defined as the process of turning an invention or creation into a commercially viable product, service or process.

Intellectual property is a mobile asset and a multinational group will be faced with a range of strategies for holding such assets in a tax efficient manner. Countries such as Ireland, Luxembourg, Belgium, Netherlands and the United Kingdom provide special regimes for patent income and thus prove to be competitive markets. The effective tax rate established by the Netherlands’ innovation box is 5%, in Luxembourg it is 5.76% and in Belgium it is 6.8%.27 In order to compete with these well-known intellectual property holding jurisdictions, the Indian government announced at Budget 2016 that it would introduce a tax-advantaged regime for income from patents called the ‘patent box’.

The introduction of the Patent Box is a significant step towards making India the location of choice for holding certain intangible assets. It provides an additional incentive for companies in India to exploit existing patents by commercializing them and develop new, innovative patented products. It should also encourage companies to locate the development, manufacture and exploitation of patents in India, given the wide range of income associated with a patent which potentially benefits under the regime. The Patent Box reduces the cost of commercially exploiting intellectual property. If it succeeds, this will create new high quality and high paying jobs for Indian talent and cut down brain-drain in India.

Under the new law, an eligible taxpayer who earns a royalty income from a patent developed and registered in India can be taxed at a concessional tax rate of 10% on the gross amount of royalty received with effect from April 1, 2017. Besides, the tax payer will also not have to pay Minimum Alternate Tax. This provision has been proposed by addition of section 115BBF in the IT Act.28

According to section 115BBF, benefits under the patent box will be available to an Indian tax resident who is a ‘true and the first inventor’ of the invention and registered as the patent holder under Patents Act, 1970. The term ‘true and first inventor’ has been given the same meaning as section 2(1)(y) of the Patents Act to not include either the first importer of an

26 Explanation 2 to 9(1)(vi), Income Tax Act. 27 NIGEL EASTAWAY, INTELLECTUAL PROPERTY LAW AND TAXATION 233 (Sweet&Maxwell, 8 ed.)28 Clause 52 of the finance Bill, 2016 http://indiabudget.nic.in/ub2016-17/fb/bill.pdf

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invention into India or a person to whom the invention is communicated from outside India. Since the term juristic persons has not been excluded from the scope of ‘true and first inventor’, companies also enjoy the benefit offered by the proposed section 115BF. For a patent to be ‘developed’ in India, 75% of the expenditure needs to have been incurred within India. The rationale behind linking the beneficial tax rate to 75% expenditure is to ensure that the ministry will not lose any tax revenue if the taxpayer moved the patent revenue abroad.

Section 115BBF (2) disallows any deduction in respect of any expenditure or allowance in computing income received from patent royalties as allowed erstwhile under section 35(2AB) (1) of the Income Tax Act.

A patent box being an IP regime must be compliant with Action 5 of the action plan on Base Erosion and Profit Shifting which relates to harmful tax practices. An analysis of the OECD BEPS report and India’s patent box shows that India’s policy is in consonance with Action 5. Action 5 adopts a ‘nexus approach’ which requires a direct nexus between the income receiving the benefit and the R&D activities receiving these benefits. The purpose of the approach is to grant benefits only to income arising from IP. The policy in India complies with this approach by linking reduced tax rate on IP income to the expenditure incurred on development.

Developing new patents and its registration is expensive. It may take years before a registered patent fetches profits. Under the patent box regime, royalty received from sale of products using the registered patent is also excluded from the beneficial tax rate. Hence, a company which develops a certain drug will be able to claim the lower tax rate only if it transfers the right to use the drug or provides other similar rights such as services related to the exploitation of the patent but not if it sells the drug or the patent.29 Since the said provision deals only with expenditure and allowances, it is expected that the deduction under Section 80RRB (deduction on patent exploitation) will remain unaffected and will therefore coexist with the concessional flat tax under Section 115BBF.

One major area that has not been covered by the patent box is computer related inventions (CRIs). The CRI guidelines published by the Indian Patent Office recently clarify that many CRIs such as algorithms and mathematical models may not be eligible for patent protection. 30 This might make many technology-driven companies ineligible for the regime.

Although India is trying to increase IP research in the country, multinational companies are sceptical towards innovation activity in India because of the scarce resources at the patent office. Besides, jurisdictions like Luxembourg, Singapore and United Kingdom not only provide beneficial tax rates but also are known for their strong patent protection laws.

Secondly, an IP intensive business may have a bundle of IPs exploited on an aggregate basis. Only some of these IPs may be patented. In such a situation, breaking the aggregate income from IP exploitation and allocating it to patented IP will be a challenge.

Presently, the deciding factor in granting exemptions is whether the IP is patented. In my opinion, the deciding factor must be whether the IP can qualify as R&D activity and claim exemptions thereon. This will make a wider range of innovative and knowledge-based enterprises eligible to claim exemption.

29 This is because royalty does not include capital gains. 30 Guidelines for examination of Computer Related Inventions (CRIs) http://www.ipindia.nic.in/writereaddata/Portal/IPOGuidelinesManuals/1_36_1_2-draft-Guidelines-cris-28june2013.pdf

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The proposal to introduce a patent box regime in the Indian tax law is a welcome move. With a strong technology- and knowledge-driven economy, India may be in a sweet spot to attract investors in such a regime. Given the proliferation of IP regimes worldwide, India would be competing with a number of other countries to attract investors in their respective IP regimes. The Government should therefore consider further improving the regime to make it more attractive for investors.

This can be done by expanding the coverage of qualifying IP income to IP income embedded in the sale of manufactured products which would also support the Government’s “make in India” initiative by enabling active deployment of IP in manufacturing activities. Allowing lower tax rates to incomes from in-licensed patents and outright sale too may contribute to IP being housed in India. Larger legal/enforcement and commercial concerns too need to be addressed, before the “patent box” can become a treasure box of innovation.

SALES TAX AND SERVICE TAX ON INTELLECTUAL PROPERTY

Intellectual property such as copyright, trademark or patent can be sold or provided as a service and hence liable to tax other than income tax. This is in the form of sales tax or service tax.

Tax levied on intellectual property is claimed by the central and the state government for service tax and sales tax or value added tax respectively. This area of taxation has witnesses increased amount of litigation because tax paid by a business to one government is disputed by the other government.

Sales tax and service tax was charged on sales and services from 1930 under the Sale of Goods Act and the Finance Act, 1994 respectively. This paper first discusses sales tax, then moves on to service tax and finally concludes with grey area between what constitutes a sale and a service.

Sale of Intellectual property: Sales tax is payable as Central Sales Tax (CST) when sale of goods takes place inter-state and is payable as Value Added Tax when the sale of goods is intra-state. CST was levied at a rate of 4% initially but was reduced to 3% with effect from 1st April 2007 and finally to 2% with effect from 1st June 2008. 31 The central government is empowered to levy tax on inter-state sale of goods by Entry 92A of List I. The state derives its power to levy tax on sales of goods from Entry 54 of list II of the seventh schedule to the constitution of India read with article 246 clause 3. The provisions of the constitution stated above make it clear that to levy sales tax, there must be a transaction of sale or purchase of goods. The first contention that arose in front of courts by taxpayers was that since intellectual property is not a good, sales tax cannot be levied on it.

Goods is defined under section 2(7) of the Sale of Goods Act to mean:

“Every kind of movable property not being newspaper, actionable claims, money, stocks, shares, securities or lottery tickets and includes live stocks, growing crops, grass and trees and plants including produce thereof including property in such goods attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale”.

31 Introduction to Central Sales Tax (29th November, 2016) http://dor.gov.in/centralintro

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The Supreme Court in Commissioner of Sales Tax v. Madhya Pradesh Electricity Board32 interpreted the term ‘goods’ widely to include electricity because although electricity is not tangible or movable per se, it is capable of abstraction, consumption and use and it can be transmitted, transferred, delivered, stored, possessed, etc. Hence, it shows attributes of goods and hence must be chargeable to sales tax.

On similar lines, in the case of Tata Consultancy Services v. State of Andhra Pradesh33 the Supreme Court applied the applied the test of abstraction, consumption, use, transmission, transfer, delivery, storage or possession and observed that:

“16. Thus this Court has held that the term "goods", for the purposes of sales tax, cannot be given a narrow meaning. It has been held that 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 submission of Mr. Sorabjee that this authority is not of any assistance as software is different from electricity and that software is intellectual incorporeal property whereas electricity is not, cannot be accepted. In India the test, to determine whether a property is "goods", for 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. Admittedly in the case of software, both canned and uncanned, all of these are possible.

24. …….. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed, etc. The software programmes have all these attributes.

The Supreme Court in the case of State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.34 has laid down the criteria for a transaction of sale of goods to be subjected to Sales tax. The Supreme Court held that: “In order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods. Unless all these elements are present, there can be no sale. Thus, if merely titles to the goods passes but not as a result of any contract between the parties, express or implied, there is no sale. So also if the consideration for the transfer is not money but other valuable consideration, it may then be exchange or barter but not a sale.”

Pursuant to this decision, the Constitution was amended to deem certain transactions as sale and purchase with a view to enable levy of Sales tax thereon. This was done by inserting clause (29A) in Article 366 of the Constitution. Sub-clause (d) of article 366(29A) reads:

(29A) Tax on the sale or purchase of goods includes:

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; …… and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;”

32 1970, 25 STC 18833 2004 137 STC 62034 State of Madras v. Gannon Dunkerley & Co [1958, 9 STC 353]

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This addition to the constitution led to a debate on whether transfer of right to use goods must be differentiated from a mere permission in light of intellectual property. In this regard, the Supreme Court upheld the decision of the Andhra Pradesh High Court in Rashtriya Ispat Nigam Ltd. v. State of Andhra Pradesh35 where the High Court held that to constitute a transfer of right to use, transfer of possession and effective control is necessary.

The aforementioned case was one relating to the right of transfer of machinery to the contractors who were assigned work by the respondents and provided with machinery for the same. The tax officials claimed that the transaction by which the owner made the machinery available to the contractors constituted a sale. The court rejected this submission by stating that even though the contractors used the machinery, the ‘effective control’ of the machinery remained with the respondent company. The contractor was not free to make use of the machinery for the works other than the project work of the respondent or move it out during the period the machinery was in his use. Thus, sales tax could not be applied to the transfer of the machinery.

In Bharat Sanchar Nigam Ltd. v. Union of India,36 the Supreme Court exhaustively interpreted the term transfer and stated that when there is a transfer of rights to use the goods, the transaction is deemed to be a sale. It further stated that:

“To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes: a) there must be goods available for delivery; b) there must be a consensus ad idem as to the identity of the goods; c) the transferee should have a legal right to use the goods—consequently all legal consequences of such use including any permissions or licenses required therefor should be available to the transferee. d) for the period during which the transferee has such legal right, it has to be the exclusion to the transferor—this is the necessary concomitant of the plain language of the statute—viz. a "transfer of the right to use", and not merely a licence to use the goods; e) having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”

However, the five tests of the BSNL case have been distinguished by courts in some decisions. In Tata Sons Limited v. State of Maharashtra37 the Mumbai High Court held that transfer of right to use trademarks is exigible to State Value Added Tax and that there need not be any exclusive and unconditional transfer.

In the Tata Sons case, the appellants contended that there was no right created but a mere permission for the use of the brand name that was given which must be treated as a license. The right to use trademark was not exclusive as the same was given to many subsidiaries. However, the Bombay High Court did not expressly deal with this issue. The High Court adjudicated that since there was a transfer of use intangible good (the trademark), there was no escaping consequences of the transaction being a deemed sale. They did not consider the requirements of a deemed sale laid down by the BSNL case.

35 Rashtriya Ispat Nigam Ltd. v. State of Andhra Pradesh (2003) 3 SCC 21436 BSNL v. Union of India (2006) 2 STR 161 (SC).37 Tata Sons Ltd. v. State of Maharashtra (2015) TS 33 HC BOM.

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Another important judgement is the case of Commissioner of Commercial Tax v. Seagram India Pvt Ltd38 where the appellants contested that since the right to use the trademark was given to different persons and the test laid down in the BSNL case was not satisfied, the right to use the trademark must not be treated as a transfer of right to use of intangible goods. The Allahabad High Court accepted this view and said that the right to use trademark must be treated as a license.

The dissimilarity in the courts applying the tests laid down by BSNL case shows that there is utmost need for the formulation of a judicial precedent to clarify the stance of the judiciary on the law.

Over the years, there have been few other notable decisions based on the question of distinction between right to use and license to use. The case of Malabar Gold Pvt. Ltd v. Commercial of Tax Officer39 and that of Indus Towers v. Deputy Commissioner of commercial tax40 hold that the permission to use trademark merely constitutes a license to use trademark and not right to use. The Madras high court went against the view of the Kerala High court and the Delhi High Court respectively when it stated in a case that the right to use trademark in an identified location is an exclusive right and hence a deemed sale.41

The conflicting views of the High Courts in Delhi, Bombay, Madras, and Karnataka only prove that the law on this aspect is unclear. Due to unclear laws, the courts are bound to interpret the legislation using various rules such as the mischief rule of interpretation. There is a high chance that the interpretation of the law is not just and affects the rights of the parties associated to the suit. There are so many cases were the assessment made by the tribunal is not appealed to and a party to the suit ends up paying the wrong and higher tax.

Intellectual property services: "Service" means any activity carried out by a person for another for consideration, and includes a declared service.42

A declared service has been illustrated in section 66E of the Finance Act, 1994 as amended in 2012. Through the Finance Act 1994, the Government of India brought in a new levy of tax on services in the name of service tax and the provisions relating to service tax are still a part of the Finance Act. 43Declared services as those which were earlier difficult to determine as services but now are considered services and hence service tax applies on these services.

"Declared service" means any activity carried out by a person for another person for consideration and declared as such under section 66E.44

Temporary transfer or permitting the use or enjoyment of any property right is a declared service. Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software is also declared a service.45

The term intellectual property right has not been defined in the act and has to be understood in normal trade parlance to include copyrights, patents, trademarks, designs, any other similar

38 Commissioner of Commercial Tax v. Seagram India Pvt Ltd (2014) VIL 30 ALH HC.39 Malabar Gold Pvt. Ltd v. Commercial of Tax Officer (2013) TS 64 HC40 Indus Towers v. Deputy Commissioner of commercial tax (2013) TS 34 HC DEL.41 Vitan Departmental Stores and Industries Ltd v. State of Tamil Nadu (2013) TS 195 HC MAD.42 Section 65B(44), Finance Act, 2012.43SUDHIR RAJA RAVINDRAN, INTELLECTUAL PROPERTY AND TAXATION, 46 (2007).44 Ibid, at 65B(22).45 66E(d) of the Finance Act, 1994

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right to an intangible property.46 All types of intellectual property rights will be taxable under this category.

It is to be noted that a permanent transfer of intellectual property right does not amount to rendering of service.47 This is so because on such a transfer, the person selling the rights no longer remains a holder of the intellectual property right and thus does not come under taxable service.48

Deemed sale v. declared service: Article 366(29A)(d) of the Indian constitution states that the transfer of right to use goods for some consideration is a deemed sale and hence leviable to tax by the states.

Intellectual property service is a taxable service.49 The government has furthered the ambit of taxability by bringing ‘declared services’ into taxable service.50 The provision regarding declared services is exhaustive and clearly states that any transfer, delivery or supply of goods which is deemed to be a sale within 366(29A) is not a declared service.51

While a transaction is deemed to be a sale when there is a transfer of right to use, it is declared a service when there is a temporary transfer or permit to use. There is a fine line between the terms transfer and temporary transfer which tax officers tend to exploit causing companies/ individuals to pay double taxes. One of the most common problems occurs in relation to the transfer of brand name. As is well known, large and well known Industrial Groups allow their Group outfits as also their franchisees to use the Group brand or name by collecting a fee which is largely based on the sales turnover achieved by the users of the brand. We have had multiple decisions of the Supreme Court as well by the High Courts that has led to a fair amount of confusion surrounding this subject.

The Supreme Court laid down the “Dominant Nature Test” in the case of Bharat Sanchar Nigam Limited v. of India52 which says that in the composite contracts where there is both sale and service, the tax applicable would depend on the substance of the contract, if the intention of the parties is sale of goods and services are the ancillaries, then, sales tax would be levied or vice versa.

This ‘dominant nature’ is not easily decipherable as the sales tax authorities contend that it is a sale while the service tax authorities contend it to be a service.

The Tata Sons case rekindled interest in the matter and stated that royalty received by Tata Sons Ltd from its subsidiaries can be said to be a deemed sale thus chargeable to sales tax. It is pertinent to note in this case that the decision was rendered in the context of the Transfer of Right to use any Goods for any Purpose Act, 1985, a special Act covering levy of sales tax on leasing transactions. Most States do not have such an Act and the levy of lease tax is sought to be covered under their existing sales tax / VAT laws.

The Bombay High Court failed to take into consideration the decision of the Kerala High Court, in Malabar Gold Private Limited, Calicut v Commercial Tax Officer, Kozhikode and

46 SUNIL B GABHAWALLA, SERVICE TAX LAW AND PROCEDURE, 2727 (2010).47 Government of India circular, ( July 24, 2016, 8:15pm ), http://www.cbec.gov.in/resources//htdocs-servicetax/st-profiles/intel-proprty.pdf 48 SUNIL B GABHAWALLA, SERVICE TAX LAW AND PROCEDURE, 2727 (2010). 49 Section 65B(zzr) of the Finance Act, 1994.50 Section 65B(44) of the Finance Act, 1994.51 Section 65B (44) (a) (ii) 52 BSNL v. Union of India

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Others53 wherein it had been held that, based on the terms of the franchise agreement, the mere permission granted by the owner of a registered brand name/trade mark to a franchisee, cannot be treated as a transaction involving transfer of right to use the brand name, was not considered by the Bombay High Court.

Another very relevant case that has not been considered is that of the Karnataka High Court in Indus Towers Limited, Bangalore v The Deputy Commissioner of Commercial Taxes, Enforcement I, South Zone, Bangalore and others (2012) 56 VST 369 (Karn.), wherein, it was held that the owner of a property has a bundle of rights, namely, right to possess, right to use and enjoy, right to usufruct, right to consume, to destroy, to alienate, transfer, etc. and therefore, to constitute a deemed sale under Article 366 (29-A)(d) of the Constitution of India, it is only such transactions wherein under a contract, all the bundle of rights are transferred by the owner of goods, except the title, the transaction constitutes deemed sale of transfer of right to use goods.Copyright:

Under section 13 of the Copyright Act, 1957, copyrights subsists in

(i) original literary, dramatic, musical and artistic works; (ii) cinematograph films; and(iii) Sound recording.

Section 18 and 19 provides for assignment of copyrights, which shall be only by an agreement in writing. Assignment may be in any existing works or in any future work. Section 30 provides for grant of any interest by license in writing to any person. The Copyright Act, 1957 recognises an “exclusive licence” which is defined as “a licence which confers on the licensee or on the licensee and persons authorised by him, to the exclusion of all other persons (including the owner of the copyright), any right comprised in the copyright in a work, and "exclusive licensee" shall be construed accordingly”.

While assignment and lease of copyrights would attract value added tax, licences should be outside the purview of value added tax. The type of transaction and the tax position on the same is discussed hereunder.

Assignment of copyrights :This is subject to levy of value added tax Line Production services: This involves a transaction in the nature of work for hire,

where a line producer undertakes production of whole or part of a cinematograph film for the producer. These transactions are in the nature of services.

Co – Production Agreements: These are agreements where a producer and a financier come together to co-produce a cinematograph film. The producer undertakes the production of the film, whereas the financer funds the same. Generally copyrights in the movie are jointly held by both the producer and the financier. Generally, such co-production agreements do not involve transfer or assignment of any copyrights by the producer.

Distribution Agreement: Under these transactions, the producer enters into agreement with distributors/ sub-distributors for distribution of the cinematograph films. Such distribution agreements are entered with various distributors who may or may not have exclusive rights to a territory. Such transactions, have been held to be

53 Malabar Gold Private Limited, Calicut v Commercial Tax Officer, Kozhikode and Others 2013-TIOL-512-HC-KERALA-ST

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transactions of ‘temporary transfers’ and therefore, liable to service tax54 as the producer has effective control and the distributors is not free to use the same for other media, such as satellite, TV, audit, etc.

Patents:

Patents are granted for any novel invention made by any person.

‘Invention’ is defined under section 2(j) of The Patents Act, 1970 as any new and useful:

(i) Art, process, method or manner of manufacture; (ii) Machine, apparatus or other article; (iii) Substance produced by manufacture,

Section 68 of the Patents Act provides that any assignment, license, or creation of any other interest in a patent shall be by an agreement in writing only. The Patents Act, 1970 also recognizes the concept of “exclusive license”, similar to that under the Copyright Act, 1957 and “patentee” includes an exclusive licensee55 who have rights similar to an owner. (Under Section 109, an exclusive licensee can institute a suit in respect of any infringement of a patent).

Assignment: assignment transfers the rights of the owner to the purchaser and divests the owner of his rights in the property. This constitutes a sale and hence sales tax is applicable.

Temporary assignments, although the transfer of rights is for a determined period of time, the assignment is still exigible to sales tax. ‘Temporary transfer’ is also covered within the meaning of declared service under clause (c) of section 66E of the Finance Act, 1994. This creates a dichotomy as to the nature of the levy attracted on such temporary transfers. Being in the nature of assignment involving passing of ownership, the transaction should more appropriately be eligible to value added tax.

Lease: Lease involves granting exclusive rights to the lessee for a specific period of time. A transfer creates or gives rise to some interest in the intellectual property in favour of the lessee. The lesser may obtain registration under the intellectual property law as a registered user. Under a transaction of lease, the lessee is entitled to use the intellectual property in any manner he deems fit subject to the restriction imposed with a view to protect the intellectual property of the owner. Such transaction would squarely fall under the meaning of ‘transfer of the right to use’ and should, therefore, be subject to value added tax. The question arises whether leases can be granted to numerous persons simultaneously and still constitutes transfer of the right to use for the purpose of levy of value added tax. It has been held56 that simultaneous grant makes the transfer non-exclusive and thus would not constitute a transaction of sale or transfer of the right to use. Many Courts have held otherwise and have not applied the criteria laid down by the Supreme Court.

54 AGS Entertainment Private limited v. Union of India [2013, 65 VST 88]55 [Section 2(1)(f)],56 BSNL case

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Trademarks: Trademarks have been categorized as ‘goods' in various cases in different high courts such as by the High Court in Bombay57 and the Kerala High Court58. Although trademarks are intangible, they can be treated as goods for the purpose of VAT. This was well established by the Supreme Court in the landmark Tata Consultancy Services case. 59 This laid down the property of intangible goods. It said that the true test of a good is its ability to be transmitted, transferred, delivered, stored, etc.

The taxation of transactions of assignment and lease of trademarks is similar to that of patents.

CONCLUSION

The conceptual framework designed and applied by the World Bank Institute indicates that developing a knowledge economy requires the following key pillars: effective government institutions and economic incentives, education and training, ICT and infrastructure and developed system of research and development.

The influence of effective government on economic performance is evident in developed countries. Experiences in developed countries show a strong correlation between state governing and per capita income. Indicator of the quality of government indicates key obstacles to knowledge economy development.

In transition countries such as India, this obstacle is mainly an inadequate legal environment. Generally, empirical research shows that investors are primarily interested in the regulatory framework in a country and that they prefer to invest in countries with low-risk political regimes. Economic incentives in form of good tax laws, financial initiatives and flexible intellectual property regulative creates a more competitive business environment. This is important for creation and accumulation of new knowledge. Generally speaking, in a country with poor competition and with lack of pressure to create new products and services the level of creation of new knowledge is very low and therefore the level of economic growth as well.

India has recently pushed itself in the aspect of government incentives. To facilitate the growth of start-ups in India, the Financial Budget of 2016-17 has provided great tax incentives. A 100% deduction of profits and gains for a business involving innovation development or commercialization of new products, processes or services driven by intellectual property. The 100% deduction will be available to businesses which start before the 1st April, 2019. The government has also proposed a Startup India Action Plan which aims to raise 2500 crores annually to fund startups.

Small and medium industries have recorded strong growth over the past years and contribute 6 per cent to the country’s GDP. According to the estimate, there are over 13 million SMEs in India providing employment to 42 million people. It is vital for these companies to develop and invest in their own IP so that the IP can be commercially exploited to the benefits of all connected with them. SME can identify various potential such as improvement in the market values and competitiveness of SME by generating an income for SME through IP

57 Commissioner of Sales Tax v. Duke and Sons Pvt Ltd (1999) 112 STC 371 BOM.58 Jojo Frozen Foods (P) Ltd. v. State of Kerala (2009) 24 VST 327.59 Tata Consultancy Services v. State of A.P (2004) -TIOL-87-SC-CT-LB.

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assignments of IP protected products. IP helps in enhancing the value or worth of the company in the eyes of investors and financial institutions

In India, many SMEs export raw materials to large companies and manufacturing units, without realising the importance of IPR in the business to protect their ideas and innovation of their product as they are more concerned with the production and operation of raw material. If these SMEs hold their knowledge on IPR, then they would definitely create an asset and huge profits on their ideas and innovation. Besides, In India many SMEs operate their business without having technical knowledge on their product and they manufacture it without concerning of IPR issues and profits. This lack of business intelligence drown this sector from the global counterparts.

RECOMMENDATIONS:In my opinion, India’s path to a knowledge economy is by taking advantage of the large number of start-ups and SME’s in the company.

Although India has provided various incentives at different aspects, there are unlooked aspects in almost every class of taxation which causes major stakeholders such as indigenous drug and biotechnology firms to lose out on benefits.

• R&D: The weighted tax deduction scheme cannot be given up just yet. Research based firms which look forward to tax exemptions because of lack of investment from venture capitalists will be disadvantaged greatly because of the huge gestation period in the development of a drug or chemicals. Because providing weighted deductions to all firms and companies will be difficult, India should structure and classify exemption claimers based on the size of the company or the kind of work they do. Businesses whose main source of income is intellectual property development should be given more incentives in comparison to a large business with adequate resources.

• Taxation on royalty: the deduction of Rs. 3 lakhs from the taxable income is very less and not a good enough incentive for companies to create and transfer their IP.

• Patent box regime: The patent box regime has a very narrow scope because it limits only to patentable products. The patent box should be increased in its scope much like the Luxembourg innovation box to include not only patented products but also R&D activities.

• Service v. sales tax: There is a very fine line between permanent and temporary transfer of right to use which cause a lot of resource consuming litigation. The difference between what constitutes a sale and what constitutes a transfer must be laid down distinctly.

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REFERENCES:

Books referred:

BRIAN A. GARNER, BLACK’S LAW DICTIONARY (THOMPSON Reuters 2004)

NIGEL EASTAWAY, INTELLECTUAL PROPERTY LAW AND TAXATION 233 (Sweet&Maxwell, 8 ed.)

SUNIL B GABHAWALLA, SERVICE TAX LAW AND PROCEDURE, 2727 (2010). Cases referred:

Assam Bengal cement companies v. CIT, [1955] 27, ITR 34 SC CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 CIT v. HEG India, 130 Taxman 72 CIT v. CIBA of India, (1968) AIR SC 1131 CIT v. M/s Eicher limited. State of Madras v. Gannon Dunkerley & Co [1958, 9 STC 353] Rashtriya Ispat Nigam Ltd. v. State of Andhra Pradesh (2003) 3 SCC 214 BSNL v. Union of India (2006) 2 STR 161 (SC). Tata Sons Ltd. v. State of Maharashtra (2015) TS 33 HC BOM. Commissioner of Commercial Tax v. Seagram India Pvt Ltd (2014) VIL 30 ALH HC. Malabar Gold Pvt. Ltd v. Commercial of Tax Officer (2013) TS 64 HC Indus Towers v. Deputy Commissioner of commercial tax (2013) TS 34 HC DEL. Vitan Departmental Stores and Industries Ltd v. State of Tamil Nadu (2013) TS 195

HC MAD. Malabar Gold Private Limited, Calicut v Commercial Tax Officer, Kozhikode and

Others 2013-TIOL-512-HC-KERALA-ST AGS Entertainment Private limited v. Union of India [2013, 65 VST 88] Commissioner of Sales Tax v. Duke and Sons Pvt Ltd (1999) 112 STC 371 BOM. Jojo Frozen Foods (P) Ltd. v. State of Kerala (2009) 24 VST 327. Tata Consultancy Services v. State of A.P (2004) -TIOL-87-SC-CT-LB.

Acts and statutes: Income tax Act, 1961. Finance Act, 2004. Finance Bill, 2016. Finance Act, 2012.

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Constitution of India.

Other authorities:

2016 Global R&D funding forecast https://www.iriweb.org/sites/default/files/2016GlobalR%26DFundingForecast_2.pdf

A guide to UK taxation https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/183408/A_guide_to_UK_taxation.pdf

Evaluation of research and development tax credit https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413629/HMRC_WorkingPaper_17_R_D_Evaluation_Final.pdf.

Google to set up data centres in India; chases Microsoft, Amazon over the cloudhttp://economictimes.indiatimes.com/articleshow/54597967.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Government of India circular: http://www.cbec.gov.in/resources//htdocs-servicetax/st-profiles/intel-proprty.pdf

Guidelines for examination of Computer Related Inventions (CRIs) http://www.ipindia.nic.in/writereaddata/Portal/IPOGuidelinesManuals/1_36_1_2-draft-Guidelines-cris-28june2013.pdf

India can be a leading knowledge based economy with right steps https://www.adb.org/news/india-can-be-leading-knowledge-based-economy-right-steps-report

National Intellectual Property Rights Policy http://dipp.nic.in/English/Schemes/Intellectual_Property_Rights/National_IPR_Policy_08.08.2016.pdf

OECD (2016), Gross domestic spending on R&D (indicator). https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm

Royalty and fees for technical services http://www.incometaxindia.gov.in/booklets%20%20pamphlets/royalty-and-fees-for-technical-services.pdf

The knowledge based economy https://www.oecd.org/sti/sci-tech/1913021.pdf World investment report 2016

http://unctad.org/en/PublicationsLibrary/wir2016_en.pdf

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