Back Protein to help stay lean and mean, with less tax flab
D. Murali
Pfizer Corporation (PC) Panama, a non-resident company, owned technology information pertaining to the manufacture of both, while Pfizer India, another group company, manufactured and sold the product without payment of any royalty. The two trademarks are registered in India.
In November 2003, the EAC Nutrition Ltd of Denmark acquired from PC both the trademarks and technology information by two separate agreements. A return to the source, one may say, because PC had purchased, about three decades ago, the knowhow and technical information for Protinex and Dumex from EAC "when it was doing business in a different name." Well, EAC and Pfizer India entered into a separate agreement "for early termination of the licence granted to the Indian company to manufacture under the said trademarks" and consideration for `extinguishment of the licence' was to be $7 million; and the technology information was sold for $5 million.
So, PC put in all technology information into a `dossier' and gave it to EAC in Bangkok, "in exchange for the purchase consideration." I'm sure everybody should have had a party thereafter in celebration of a deal that got sealed, but headache came thereafter, because EAC deducted 21 per cent tax at source on the purchase consideration, deposited the tax with the Government of India. PC, therefore, knocked the AAR's doors to find "whether the income derived" by it from EAC would be taxable in India.
Something interesting happened even before the AAR delved into the issue. The Bench pointed out to PC's counsel Gautam Doshi that, on the one side, PC was admitting that the receipt from the transaction under consideration was `income' while, on the other, it claimed that the receipt was not in the nature of income. Then, PC sought permission from the AAR to revise the question, "and no objection on this account was raised by the Revenue." PC made a quick change: it struck off `income' and put `receipt' in its poser.
Rival submissions
Doshi said there should be no tax on PC, because of the following reasons. One, PC was "not engaged in the business of trading in technology information"; consideration for an outright transfer of knowhow would be a capital receipt unless the recipient is in the business of buying and selling knowhow. He cited CIT vs Ralliwolf Ltd, and Moriarty vs Evans Medical Supplies Ltd to emphasise the `capital receipt' angle. Supreme Court's decisions in the Scientific Engineering House P Ltd, and ACC cases, too, got mentioned.
Two, though intangible technical information became tangible when put on a media, "whether paper or diskettes", Doshi argued that the dossier was handed over outside India, and so "the capital gains on transfer of such asset will not be subject to tax in India since both parties to the transaction are non-residents."
Three, what PC received cannot be considered to be income received or deemed to be received in India since the payment happened outside India; also, the capital asset in the form of technology information was at the time of transfer situated in Bangkok, so no gains on the transfer accrued in India. Else, Section 5 of the Income-tax Act would have come into play.
Four, the payment for the "out and out sale of knowhow" is a capital receipt and not royalty that is covered by Section 9(l)(vi). To help, there was the decision in the Proquip Corporation case, where a distinction was drawn between out and out sale of property versus allowing use. The payment in the latter instance may be treated as licensing fee or royalty but the payment in the first category cannot be treated as royalty, it had been stated.
Arguing for the Department, Sunil Gupta pleaded that the payment was for "imparting of technical knowledge" and so we need to tax it as `royalty'. He cited a 1977 Central Board of Direct Taxes Circular which explained the rationale behind Section 9(1)(vi). "Royalty income consisting of lumpsum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawings, or process or trademark or similar property will be chargeable to tax in India," said Gupta. Even outright sale of technical information can be covered by the definition of `royalty', he averred.
Gupta, too, placed reliance on cases to press his point. Such as a 1999 ruling that royalty paid outside India as a consideration for granting the licence to use the trademark in India is liable to Indian tax. And the decision in the N. V. Philips case where it was held that income received for supplying specialised and exclusive information is in the nature of royalty.
On a different tack, Gupta argued that there was taxability even if one were to look at the transfer of dossier as transfer of capital asset, because "the capital asset was situated in India, both in tangible and intangible form since the process was being used in India for a long time and was developed in India." He said that it would not make a difference simply because another copy of the information was also available outside India. Quite insightful, this is.
Doshi too admitted that "a copy in intangible form was available in India", but it was the other copy available outside India that got transferred to EAC at Bangkok. AAR's ruling records that Doshi pleaded "that the law on the situs of an intangible asset is not very clear because it can be present at different places at the same time." A case that falls in that very gap, one may say.
AAR's reasoning
The Authority noted that in the absence of a DTAA between India and Panama, the taxability question had to be resolved only under the domestic law. First, it was necessary to ascertain the nature of property transferred; and second, the AAR had to decide where the property was situated in case it was a capital asset.
The Authority drew inputs from the Scientific Engineering House P Ltd where it had been decided that expenditure for the purchase of drawings, designs, charts, plans, processing data and other literature, comprised in `documentation service' was of a capital nature. "We are, therefore, of the view that transfer of technical information in the form of a dossier was transfer of a capital asset," said the AAR. Then came the question on the situs of the asset.
On this, the Authority said that the Indian company was "only a licensee" though "for a very long time the said information was almost exclusively used in India and improvements and improvisations in the said information were made in India." After the agreement between EAC and Pfizer India for early termination of licence, technical knowhow reverted to PC in Panama.
"As a result, no asset related to technical knowhow was located in India either in tangible or intangible form after termination of the licence granted to the Indian company," though there were subsequent agreements between EAC's Indian affiliate and Pfizer India for "business support" during the initial period of EAC's operations in India. "Therefore, the situs of the capital asset transferred to EAC Denmark was outside India," ruled the AAR, taking outside the ambit of both Sections 5 and 9 of the Act the purchase consideration for the dossier transferred in Bangkok.
Protein helps you to stay lean and mean, they say, though one may wonder if it also helps shake off the tax flab. If one were to get back to the mischief of reading the case again, there can be unanswered questions, such as, what improvements were made to the formulations in India, whether situs becomes irrelevant in the case of dossiers that can be multiplied using a simple photocopier, and if it was necessary to rule of the `colourable devices angle' in the arguments. Before delving into all that, you may break for some protein supplement!
Tailpiece
"We could not find a place to bury my dead uncle!"
"Oh, why?"
"Because his last wish was that his grave should not be adjacent to any tax evader's!"
© Copyright 2000 - 2009 The Hindu Business Line