When a Swiss pharma major assigns Indian trademarks for a fixed lump sum, is the receipt ‘royalty’ or ‘capital gain’? The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has answered this by holding that as the assignment provisions vested exclusive ownership of the Indian trademarks in the purchaser and barred Novartis from using or claiming rights in those marks in India, these clauses were inconsistent with a mere licence arrangement.
The ITAT clarified that retaining corresponding trademark rights outside India did not mean Novartis retained the Indian rights it had sold. The relevant enquiry was whether it had divested ownership of the property forming the subject matter of the sale, not whether it had transferred every corresponding right worldwide. Further, exclusion of pre-existing trade dress and restrictions protecting product and territorial boundaries did not override the express transfer of trademark ownership.
Rights to enforce those covenants were not, by themselves, a reservation of proprietorship. The consideration was not linked to future turnover, profits, productivity or extent of use. The Protocol’s provision for taxing alienation gains contingent on profits, productivity or use therefore did not support royalty treatment on the facts, added the Tribunal.
The ITAT asserted that since the Revenue did not establish that the trademarks were business property of an Indian permanent establishment or otherwise fell within Article 13(1) to (5), Article 13(6) therefore applied, making the gains taxable only in Switzerland and requiring deletion of the Rs. 433.14 crores addition. The ITAT held that transfer of exclusive Indian trademark ownership was an alienation, not a licence, and territorial and protective restrictions did not alter its character.
Briefly, Novartis AG, a Swiss pharmaceutical company, assigned its JALRA/JALRA-M, VYSOV/VYSOV-M and ZOMELIS/ZOMELIS-M trademarks to USV Pvt Ltd., Cipla Ltd. and Eris Lifesciences Ltd., respectively, for an aggregate consideration of Rs. 433.14 crores. For Assessment Year 2020-21, it claimed that these were outright sales of trademark rights and that the resulting gains were not taxable in India under Article 13(6) of the India–Switzerland DTAA. The Assessing Officer treated the receipts as royalty, reasoning that territorial, product and trade-dress restrictions prevented an absolute transfer.
The Division Bench comprising Beena Pillai (Judicial Member) and Arun Khodpia (Accountant Member) observed that neither describing a transaction as an “assignment” nor including contractual restrictions conclusively determines whether it is a sale or a licence: the deed must be read as a whole. The operative clauses transferred exclusive ownership of the Indian trademark rights to the purchaser and extinguished Novartis’s ownership and right to use those marks in India. Retention of corresponding rights outside India, and exclusion of pre-existing trade dress, did not amount to retention of ownership in the Indian trademarks actually sold.
The Tribunal further observed that protective covenants and remedies for breach did not, by themselves, reserve proprietorship in the Indian marks. The consideration was fixed and was not contingent on future profits, productivity or use. It also held that the absence of an acquisition cost or carrying value in the financial statements did not establish that the self-generated trademarks were not property; their cost for capital-gains computation was a separate question from whether ownership had been transferred.
