How the Licensing and Assignment of Indian Intangibles Is Taxed

India has witnessed strong M&A activity in recent years, particularly among startups and businesses in the financial, technology, and pharmaceutical sectors that depend on valuable intangibles such as copyrights, know-how, trademarks, and patents. In a globalized and digital era, these intangible assets have emerged as key business drivers. This article explores certain key Indian tax implications associated with the sale or monetization of intangible assets and the importance of robust documentation.

From a tax administration standpoint, an ever-evolving technological landscape puts existing tax provisions to the test and revised tax laws are required to find a fine balance. With the increasing prominence of technology-driven businesses, the associated tax and regulatory landscape must be understood in order to keep pace with the requirements of the evolving considerations in the M&A space. One key factor in this aspect is understanding the use and exploitation of intellectual property rights (IPR) and other intangibles.

This article explores (1) the Indian income tax implications of (a) licensing IPR; (b) assigning or transferring IPR (and the legal controversy regarding the “lex situs” of intangible assets) and capital gains tax; and (2) the importance for an entity to maintain in place robust and appropriate documents to support the underlying tax treatment.

The most popular ways to monetize intangibles–such as trademarks, brand name or mark, and know-how–are either to grant a right-to-use license or assign the IPR to a recipient.

Licensing IPR is generally limited to granting an exclusive, non-transferable right to use an IP in a defined geographical territory with limited rights to modify or amend. A complete assignment generally involves the transfer of all risks and associated rewards, including the right to sub-license the underlying IP.

To ascertain the correct characterization of the transaction, and consequently the correct tax treatment, it is critical that the underlying documents are carefully drafted and have well-defined terms of arrangement.

I. Licensing—Tax implications

Licensing arrangements ensure that the licensor gets a periodic stream of returns from the underlying intangible while retaining ownership of the intangible. Depending on the commercial arrangements between the parties, royalties are generally devised either as a percentage of the revenue earned by the licensee or on a fixed lump sum basis.

A. Licensor’s Tax Considerations
The following are the key tax considerations for licensors:

1. Taxability of Royalty: Royalty earned by a licensor from IPR licensed for the purpose of a business or profession in India is taxable in India under the country’s domestic tax law provisions ( (Income-tax Act, 1961 (IT Act) as follows:

• For resident corporate licensor: Taxable as ordinary income at applicable corporate tax rate (~25.17%) on a net basis.
• For non-resident licensor: Taxable at 20% rate (plus surcharge and cess), subject to tax treaty benefits (if any), which often provide a lower 10% (treaties such as Singapore, Mauritius, Netherlands) or 15% (US, UK) tax rate.

On some occasions, treaties provide a restrictive definition of “royalty.” For instance, under India’s domestic tax laws, royalty is broadly defined to include the “transfer of all or any right for use or right to use a computer software (including granting of a license).” Whereas the definition under most tax treaties, such as the US-India tax treaty, is generally restricted to the “use of or right to use copyright in literary, artistic, or scientific work.” Thus, unless a right in “copyright” is being granted (i.e., the licensee should be free to reproduce, use, and exploit the computer software), such license fee should not qualify as a “royalty” under the tax treaty. Engineering Analysis Centre of Excellence (P.) Ltd, 432 ITR 471 (SC).

Evaluating a non-resident taxpayer’s entitlement to tax treaty benefits is paramount since benefits are not automatic and depends on certain conditions to be fulfilled (i.e., beneficial ownership, etc.) and certain documents to be furnished (i.e., tax residency certificate, etc.). All these aspects are critical and require careful analysis.

2. Valuation: While there are no specific valuation rules for determining the royalty to be charged, transactions between associated enterprises (related parties) would be subject to transfer pricing provisions and would have to be on an arm’s length basis.

3. Cost of acquisition for purposes of computing capital gains: Cost of acquisition for an acquired intangible would be the price paid to aquire the intangible. Whereas if the intangible is self-generated, its cost would be treated as nil.

B. Licensee’s Tax Considerations
The following are the key tax considerations for licensees:

1. Withholding tax obligation of licensee: The licensee’s withholding obligations depend on the residency of the licensor, so determining the taxability of such royalty in the hands of the licensor is critical.

• Resident licensor: Licensee would be required to withhold at 2% or 10% rates, depending on the nature of the royalty.
• Non-resident licensor: Licensee would be required to withhold applicable taxes (as set out above i.e., 20% rate (plus surcharge and cess), subject to tax treaty benefits (if any).

In case of default in withholding tax obligations, the licensee could be liable for recovery of the amount of the shortfall in tax withheld, plus interest and penalties, etc. The withholding tax position should be carefully analyzed because where the licensor has filed its Indian tax return reporting royalty income, there should not be any double recovery of taxes or penalty from the licensee (though some interest could be recovered).

Further, under Indian tax laws, because tax authorities can conduct tax audits for about seven years, in an Indian M&A context, it is important that the licensee negotiates relevant indemnity protection around its withholding tax position.

2. Deductibility of license fee paid: The deduction for the amount of license fee paid is another important consideration for the licensee. While claiming a deduction for the amount paid for the license, it is important to analyze and understand whether such payment can be regarded as consideration for the acquisition of a capital asset (i.e., acquisition of a right as an asset) or whether the payment is merely to secure a right to use the asset. In case of the latter, the license fee paid should be eligible for a tax deduction. In case of the former, the amount paid should be treated as a cost to acquire a capital asset and thus should be eligible for amortization. In a recent Indian Supreme Court decision dealing with the deductibility of telecom license fees, the court held that fees paid to acquire an asset (telecom spectrum) to carry on a business would be capital in nature and thus eligible for amortization. Bharti Hexacom Ltd, 458 ITR 593 (SC). License fee payments by the licensee would require careful analysis for tax deductibility since an incorrect tax treatment could have significant financial implications.

3. Other tax considerations: Licensing arrangements should be carefully approached and negotiated. Depending upon various terms of the arrangements, factors such as economic and operational control exerted by the licensor over the licensee could result in tax implications such as the foreign entity (licensor) being alleged to have a Permanent Establishment (PE) in India. The Indian Supreme Court held in a recent tax ruling that sustained operational, financial, and strategic control of the licensor over the Indian licensee resulted in the licensor creating a PE in India.

Thus, it is critical to (i) assess existing licensing arrangements in view of the level of control or underlying rights granted to the licensor to evaluate any potential PE concern; and (ii) have robust and comprehensive documentation recording the licensing arrangement and analyzing the rights provided pursuant to the license, whether such rights are in the nature of a mere right to use or exploit the IPR or whether such rights are broader in nature potentially resulting in the transfer of the IPR itself. In the case of any potential tax risks, the licensee should seek appropriate commercial indemnities and related contractual protections.

II. Assignment or Transfer—Tax Implications

The assignment of IPR occurs when a licensor transfers all of its ownership rights (with all related benefits and obligations) to a licensee.

Under Indian domestic tax law, gains arising from the transfer of property situated in India is subject to tax in India. Therefore, the lex situs of an asset is vital while examining the tax implications arising from its transfer.

A. Resident Seller: For a resident seller, gains from its global income (including transfer of any capital asset) would be taxable in India–accordingly, gains on transfer of intangibles would be taxable in the hands of the resident seller.

B. Non-resident Seller: For a non-resident seller, the transfer of a capital asset such as IPR should not be taxable in India unless such IPR are situated in India. Where IP is taxable in India, the purchaser would be required to withhold applicable taxes on the purchase of IP from a non-resident seller and thus it becomes critical that tax implications are carefully analyzed and understood.

C. Tax Treaties: India’s treaties with countries such as Netherlands and Singapore provide for a possible exemption on the transfer of IPR in India. The residuary clause under the “Capital Gains” article in these treaties should apply on the transfer of IPR, which allocates taxing rights to the state of the alienator. If the transfer of IPR is taxable in India, the buyer would be obligated to withhold taxes. Thus, to determine the taxability of such “capital asset” in the hands of a non-resident seller, it is important to understand where such IPR is situated (i.e., the lex situs of the IP).

D. Court Cases: The Delhi High Court in a tax ruling held that the situs of an intangible is coterminous with the situs of its owner and thus where an intangible is sold by a non-resident, such sale would not be subject to tax in India. CUB Pty Ltd., 71 taxmann.com 315 (Delhi). The court noted that there is no provision under the IT Act to deem the situs of an intangible asset to be the place from which it derives substantial value.

However, recently, the position adopted by the Delhi High Court has been challenged by tax authorities and was put to question before the Bombay High Court. Placing reliance on certain tax rulings, revenue authorities contended that a trademark represents a separate and distinct asset in each territory where it has substantial goodwill and countered the aforesaid favorable ruling on the ground that it did not engage with the territoriality principle.

While the Bombay High Court did not specifically adjudicate the taxability of the transfer of trademarks and dismissed the petition on the grounds that the taxpayer had an alternate and efficacious remedy available, the position adopted by Revenue in this case merits careful examination and fact specific analysis.

That said, the above-mentioned discussion is confined only to the tax implications under the IT Act and a taxpayer can claim benefits under the relevant tax treaties (if available).

III. Key Takeaways

With tax authorities leaning towards adopting a substance-over-form approach, tax positions adopted while evaluating IP-centric deals have become critical, be it a taxable presence PE risk, considerations on taxability of IP transfer, or the licensee’s eligibility to claim a tax deduction. Multiple facets should be considered (both for the investor/licensee and the target/licensor) while planning and implementing such deals.

The structures and arrangements adopted by taxpayers must be in conformity with the commercial goals of the taxpayer and should not be driven solely by tax factors. Robust documentation underlying the arrangement concerning intangibles, including clearly laying out the rights and obligations of each of the parties, is necessary. Further, there should be active stakeholder collaboration between the target’s management and the acquirer’s management along with proactive engagement with consultants to understand the nuances around past tax positions. Such an ever-evolving landscape underscores the need for effective tax counseling while structuring and monitoring commercial arrangements.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Vinita Krishnan is the Executive Director, Bharat Jain is a Principal Associate, and Anuraag Bukkapatnam is an Associate in the Direct Tax team at Khaitan & Co LLP.

Write for Us: Author Guidelines