Issues on recovery of sales tax on trademark royalties clarified

The case of GlaxoSmithKline Asia P Ltd v Assessing Authority, Special Zone Trade and Tax Department (Case (C) 10726 of 2006), May 24 2007), is part of a recent trend of fiscal actions in which the Indian courts are required to examine trademark issues. In the case at hand, the Delhi High Court has clarified the law in relation to the recovery of sales tax on trademark royalties.

A number of taxes can be levied on trademark-related transactions, including the following:

• Assignments of trademarks attract capital gains tax.
  
  
• Trademark royalties attract income tax.
  
  
• Transfer pricing issues in relation to trademark licences granted to group companies are the subject of heated debate. Tax officials are contending that if sufficient royalties are not paid by the Indian subsidiaries to the overseas parent company that allows the use of its trademarks to such subsidiaries, then a portion of the subsidiaries' income would be deemed to be the income of the overseas parent and is chargeable to tax in India.
  
  
• Assignments of trademarks attract ad valorem stamp duty on the market value of the assigned trademarks, the rate of which varies from state to state. Recent amendments in certain state legislation suggest that ad valorem stamp duty may also be leviable in respect of trademark licence agreements.
  
  
• The grant of a trademark licence is deemed to be a 'rendering of service' under the federal service tax statute attracting service tax of about 13.5% on the 'value of the services' (ie, the royalties receivable in respect thereof).
  
  
• Trademarks are deemed to be 'goods' under several state statutes pertaining to sales tax on the sale of goods and sales tax on the transfer of a right to use goods. Under these statutes, the sales tax authorities are seeking to levy sales tax on the assignment of trademarks and also on royalties that may be earned from trademark licences. In some states, the sales tax statutes have been replaced by value added tax (VAT). Under the VAT statutes trademarks are deemed to be goods and the revenue authorities claim that an assignment or a licence thereof attracts VAT.
  

Hence, there is an increasing tendency for trademark issues to come up for consideration in fiscal-related legislation. In the case at hand, GlaxoSmithKline Asia P Ltd (GSK) has obtained a stay against the revenue authorities invoking the Delhi Sales Tax On Right To Use Goods Act 2002 (Delhi Act) for recovering sales tax on trademark royalties. The revenue authorities contended that the extended definition of 'goods' under the act includes trademarks. Sales tax is leviable under this act on the 'transfer of right to use any goods' and accordingly transfer of a right to use any trademarks attracts sales tax. GSK had granted a non-exclusive trademark licence to SmithKline Beecham Consumer Healthcare Limited on which it earned royalties. According to the revenue authorities, the grant of such a licence amounted to a transfer of a right to use goods attracting sales tax.

GSK contended that it was already paying a service tax on the royalty amounts earned by it on the basis that the grant of a trademark licence amounted to a rendering of service under the federal service tax statute. Accordingly, the same transaction (ie, the grant of a trademark licence) cannot amount to a rendering of a service and at the same time a transfer of the right to use goods. Further, GSK argued that the licence granted to SmithKline Beecham was non-exclusive and it retained a right to give simultaneous licences in respect of the same trademark to other persons. Hence, the licence could not be regarded as a transfer of a right to use a trademark so as to attract the provisions of the Delhi Act.

By an interlocutory order, the Delhi High Court restrained the revenue authorities from recovering sales tax under the Delhi Act on royalties earned from such a trademark licence until the final hearing of the petition by the bench dealing with tax matters.

An interesting aspect of this area of law was not considered in the decision. The Indian Constitution permits states to levy sales tax on 'goods'. However, it is debatable whether trademarks constitute 'goods' as envisaged by the Constitution. If they are not goods, it would be unconstitutional for the states to extend the definition of 'goods' in their sales tax legislation and levy sales tax on trademark-related transactions. The fundamental concept of a trademark is that it is a sign used in relation to 'goods' so as to indicate the source of the goods or the trade origin, or a connection in the course of trade between the trademark proprietor and the trademarked goods. From a trademark point of view, it seems inappropriate to treat trademarks as goods themselves. Although there are several decisions pronouncing that incorporeal or intangible rights such as copyrights and trademarks can constitute moveable property, in the author's opinion, even if trademarks are regarded as moveable property, there is a distinction between moveable property and goods.

Mustafa Safiyuddin, DSK Legal, Mumbai