Sometimes certain assessees particularly the Non-Residents transfer certain capital assets outside India. However, the capital asset may be situated in India. In such cases the controversy arises as to whether capital gains tax would be attracted in such cases particularly where the actual process of transfer is outside India. Fortunately, the Authority for Advance Rulings in Foster`s Australia Ltd.., In re (2008) 302 ITR 289 (AAR) has given an important ruling that capital gains tax would be attracted in the case of a Non-Resident if the capital asset is situate in India even if the actual process of transfer happens to be outside India. As this is an important ruling particularly on the provisions of Section 9(1)(i) of the Income Tax Act, the facts of the case and the ruling are analysed in the article below.
FACTS:
The applicant was a non-resident foreign company incorporated in Australia involved in the brewing, processing, packaging, marketing, promoting and selling of beer products in Australia and abroad. The applicant stated that it had entered into a brand licence agreement with Foster`s India Limited on 13.10.1997.
In this agreement granted to Foster`s India an exclusive licence to brew, package, label, and sell Foster`s Lager (beer) an exclusive right of user of the trade marks was specified in Schedule A within the territory of India. From the agreement it was seen that Foster`s India was also authorised to use the mark (Foster`s) as part of its corporate name. Thus Foster`s India utilised the rights aforesaid for a consideration and on such consideration received, the applicant was paying income-tax in India, treating the same as royalty income. However, the said licence was terminated before completion of the transactions specified in the sale and purchase agreement of 4.8.2006. The agreement was entered into between CUB Ltd. and Raly Beverages Ltd. In the agreement, it was mentioned that Raly Beverages Ltd. intended to change its name to Foster`s India. Accordingly, the name was changed. Carlton and United Breweries Limited changed its name on 1.7.2004, to Carlton and United Beverages Ltd. On 3.7.2006, again there was a change in the name of the company to Foster`s Australia Ltd. which was the applicant herein. It was a public company limited by shares.
From the facts narrated the applicant entered into a contract for the transfer of shares and other intangible assets in the nature of intellectual property to SAB Miller, UK under an agreement styled "India sale and purchase agreement" hereinafter referred to as "S&P agreement. The agreement was executed in Australia on 4.8.2006. As per this agreement, a deed of assignment dated 12.9.2006, came to be executed between the applicant company and SKOL Breweries Ltd. SKOL Breweries Ltd. which was an Indian company was nominated by SAB Miller, UK as the transferee in terms of the said S&P agreement. There is a three party to this agreement. It was a composite agreement for the sale of shares by D and the sale by the applicant of trade marks, Foster`s Brand Intellectual Property and the grant of exclusive and perpetual licence in relation to Foster`s Brewing Intellectual Property, confined to the territory of India.
For all these items of sale including the shares a sum of US $ 120 million was stipulated as total consideration. On these facts the applicant sought an advance ruling from the Authority for Advance Rulings on the question whether the receipt arising to the applicant, from the transfer of its right, title and interest in and for the trade marks, Foster`s Brand Intellectual Property and grant of exclusive perpetual licence of Foster`s Brewing Intellectual Property was taxable in India. In particular a question was about the provisions of the Income-tax Act, 1961 and the Double Taxation Avoidance Agreement between India and Australia.
The Director of Income tax (International Taxation) submitted that the income had arisen in India to regularise the physical asset by the Foster`s Group to produce the Foster`s brand beer in India along with trade marks in relation to the business in India were sold under the S & P agreement. Apart from that, an exclusive and irrevocable licence relating to breweries' rights including packaging of Foster`s lager beer in India was conferred on the transferee under the said agreement. It was pointed out that effectively, Foster`s India was held by the Foster group, Australia through the cobweb of its subsidiaries. Though the shares and trade marks and Foster`s brand IP were shown to be sold by two different entities, in effect and in substance, Foster`s group, Australia had transferred the ownership of its Indian company, i.e. Foster`s India including its tangible as well as intangible assets.
RULING:
After narrating all the facts of the case, the Authority for Advance Rulings referred to the provisions of Section 9(1)(i) of the Income-tax Act under which some income was to be deemed as income accruing or arising in India. The main part of that section says that income arising or accruing, whether directly or indirectly through or from some business connection in India or through or from any property in India, or from any asset or source of income in India, or through the transfer of capital asset situated in India, would be taxable income in India. In view of this provision, the Authority was of the view that the assets transferred by the S & P agreement could be said to be in relation to assets "situated in India", income arising from the transfer of capital asset situated in India by a Non-Resident would be deemed to be his income liable to asset in India as per the explicit mandate of Section 9(1). The Authority referred to various Supreme Court and other decisions and distinguished various cases which were cited by the applicant. Hence, the Authority for Advance Rulings held that the income arising to the applicant from the transfer of its right, title and interest in and to the trade marks and Foster`s Brand, Intellectual Property was taxable in India under the Income-tax Act.
