The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the consideration for permitting right to use of brand name or trademark would be treated as Royalty and would be taxable under India Turkey Tax Treaty
SoktasTekstil Sanayi assessee is a non-resident corporate entity incorporated under the laws of Turkey and a tax resident of Turkey, specialised in designing and producing cotton and cotton fabric, which was exported around the world. The assessee had a wholly owned subsidiary Soktas India Pvt. Ltd and in the year under consideration, the assessee had entered into Trademark Licence Agreement (TLA) with the Indian subsidiary transferring exclusive, irrevocable and perpetual rights to use the identified trademarks and brand names in defined
Taking shelter under Article 13 of India – Turkey DTAA, the assessee claimed exemption of the capital gain from taxation in India. AO as assessee failed to produce necessary documents that held that income derived from transfer of right to use of trademark/brand name is to be treated as income from other sources under Article 21 of the Tax Treaty.
Alok Vasant, on behalf of the assessee,submitted that under the TLA the assessee had transferred exclusive, irrevocable and perpetual right for usage of trademark and brand-name in favour of the Indian subsidiary.
R.D. Burman, on behalf of the revenue submitted that relinquishment or extinguishment of any rights in capital asset amounts to transfer. He submitted that as per the terms of TLA the assessee had granted irrevocable right to use the trademark/brand-name for perpetuity in the defined territories. Therefore, to that extent assessee’s rights over the trademark/brand-name in the defined territories stand extinguished. He also submitted that the consideration received for transferring such rights, being towards transfer of capital assets, to be considered as capital gain.
He further contended that the right to use of trademark/brand name was in the nature of capital gain and not royalty, could not be accepted.
The Divison Bench of Sakti Jit Dey, (Judicial Member) and N.K. Billaiya, Accountant Member dismissed this ground of appeal observing that, “Through the TLA, the assessee granted an exclusive, perpetual and irrevocable licence to the Indian subsidiary for creation of brand-name/trademark. Referring to OECD Model Tax Convention Commentary, learned DRP observed, where ownership right has not been alienated, the consideration is for the use of or the right to use the trademark, hence, represents royalty.”
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