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Taxation On Intellectual Property Rights

Intellectual Property is an idea, design, creativity, invention, etc., which can ultimately give rise to a useful product or application. It also includes creations such as artistic or literary creations, names, symbol, images etc. Intellectual property rights include trademarks, patents, copyright, industrial design rights, geographical indications. It is a property that is not physically tangible, hence intellectual property is an intangible property that are basically creations of the mind.

To protect this property certain rights are awarded to the creator to protect their property. Intellectual property are considered as assets that can be mortgaged, sold, bought or licensed like any other physical property. Patents, trademarks, industrial designs and geographical indications falls under the category of Industrial property and Copyright includes literary works such as novels, poems, films, play and artistic works such as drawings, architecture, paintings, sculptures, and photographs.

Copyright:

Copyright is the right which a person has for a literary or artistic creation. This right is given under copyright act, 1957 to protect the individual's intellectual property from being exploited by others without the consent of the creator.

Industrial Designs:

These are ornamental in nature and it is in two dimensional or threedimensional form. While geographical Indications are signs that are used on products to show the geographical origin of that product and it conveys the quality or the reputation of the product due to its place of origin. Agricultural industry is the main industry that uses geographical indications. For example, tea from Darjeeling, green apples from Kashmir are geographical indications. These indications convey the quality of the product as per its origin. These geographical indications are considered as an intellectual property that is protected to stop the misrepresentation of them by commercial operators.

Patent:

A patent is an exclusive right that is awarded for an invention. This invention must be of a new product or new process for doing or making something. Such patent's validity is for a limited period of 20 years which is given to the holder of the patent. A patent protects the inventor from the exploitation of his invention by any third parties and it also protects the monetary interest of the inventor.

Trademark

Ttrademark is a unique or specific sign that certain goods or services are provided by a particular company or individual. The concept of a trademark came from long time ago where artists and craftsmen used to leave unique marks or signatures to their product. In today's world, the trademark has to be registered for it to be protected by law and such protection ensures that the owners of the trademark have the exclusive right to use them to identify their goods or service. The protection awarded to the trademark also has a limitation period or can be called as a validity and the trademarks may be renewed for an indefinite number of times.

Intellectual Property Taxation

Income tax comes under the category of direct taxes which is paid to the central government. As per section 5(2) of the Income Tax Act, 1961 a non- resident is taxable in India on incomes received or deemed to be received in India and on income which accrue or arise in India. Although there is no specific definition of intellectual property rights under the income tax act. The income tax act, 1961 however includes the difference between tangible and non-tangible assets under section 2(11).

The non- tangible assets includes patents, copyrights, trademarks, franchises, license or any other business rights which are all part of the intellectual property. As per the definition of capital asset in Section 2(14), a capital asset has an all-embracing connotation except if it expressly excludes a certain item. It includes property of any kind so it also includes intellectual property. In the case, CIT v. HEG Ltd. the payment was made for the purchase of data on carbon graphite electrode industry, the court held that the payment made for every information is not considered as royalty. For the payment to be constituted as royalty it should involve some sort of skill or expertise.

The Income Tax Act has added specific provisions for the taxation of the income which is accrued through Intellectual property rights. The provision in India specifies that the income from intellectual property rights are separate as per the nature of the transaction. If the intellectual property right is for any literary work the author of the novel or book, the creator or for any inventions then in such cases the Income tax act, 1961 provides for tax deductions. The nature of the transaction is being determined and then it is identified that whether the income should be taxed or it is applicable for tax deductions.

The categories under which IP can be taxed are:

Deductions:
In the pre-existing era of an Intellectual Property, the cost which is incurred on analysis and manufacturing, i.e., capital spent on research and development is treated as an expense and that is to be deducted from the gross income received for the calculation of income tax.

Income:
Income from an Intellectual property rights either by assignment or licensing is considered as Capital gains or income received from royalties under the Income Tax Act, 1961.
Goods and Sales Tax : Tax on the sale of IP, transfer of IP, licensing of IP and assignment of IP are covered under the GST Act.

The transfer of intellectual property generates income by way of royalty and this royalty is taxed under income tax act. Royalty means consideration for the transfer of all or any rights in respect of a patent, invention, model, design, formula, and trademark. The imparting of any information concerning the working of or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property.

The transfer of all or any rights in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but including consideration for the sale, distribution or exhibition of cinematographer films, etc.

In the case, CIT Vs. Neyveli Lignite Corporation ltd., the Court contended that the term royalty normally implies the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The restriction of the right to the thing for which royalty is paid should be with the grantor of that right.

Section 9(1) (vi) of the Income Tax Act defines royalty and provides for taxation of income by way of royalties which are taxable as income or as a business expense. If the Intellectual property is of India, then the consideration for its use or disposal will arise in India and it will be taxed according to Section 5(2) of the Income Tax Act. Income by way of royalty is taxable under for a resident but there are few exceptions i.e. if any right, property or information is used or any service utilized outside India or to make or earn any income from any source outside India.

Under these circumstances these are non-taxable. Furthermore, Royalty income is taxable for a non-resident in conditions where any right, property or information used or services are utilized in India or to make or earn any income from any source in India.

Section 32(1)(ii) of the Income Tax Act, 1961 explains about Depreciation of assets. Depreciations are allowed in few cases such as for know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of a similar nature. Deductions are available for expenditure on scientific research.

Further, Section 35A of the Income Tax Act, 1961 explains about expenditure on acquisition of patents and copyrights rights. If the consideration is paid in a lump sum then the depreciation for the same patent or copyright shall be claimed.

Section 35AB of the Income Tax Act, 1961 enumerates that if an assessee has paid any lump sum consideration in any previous year for acquiring any know-how for the use of his business then one-sixth of the amount so paid shall be deducted while computing the profits and gains of the business for previous year, and the balance amount shall be deducted in equal portions for each of the five immediately succeeding previous years.

Section 80QQA of The Income Tax Act, 1961 explains about deduction for income from copyrights. In the case of an individual resident in India, being an author any sort of income derived by him in the exercise of his profession through any lump sum consideration for the assignment of any of his interests in the copyright of any book, or of royalties or copyright fee, then a deduction to the amount of 25 per cent will be allowed on such amount.

According to Section 80-O of The Income Tax Act, 1961 where an Indian Company receives any income from foreign state or enterprise in consideration for using any patent, registered Trademark, invention, design etc and the income is received by way of convertible foreign exchange in India or having been received as convertible foreign exchange outside India or having been converted into convertible foreign exchange outside India is brought into India, a deduction of certain percentage is account as per the section.

There is a specific provision for Patented Goods and Services-Section 80RRB specifies about Royalty on Patents and according to it in the case of an assessee who is resident in India, a patentee, in receipt of any income by way of royalty in respect of a patent registered on or after the 1st day of April, 2003 under the Patents, and his gross total income of the previous year includes royalty, be allowed a deduction, of an amount equal to the whole of such income or three lakh rupees or whichever is less.

In the case of compulsory license is granted in respect of any patent under the Patents Act, 1970, the income by way of royalty for the purpose of allowing deduction under this section shall not exceed the amount of royalty under the terms and conditions of a license settled by the Controller under that Act.

Goods and service tax (GST) under intellectual property is applicable only in one condition when the actual owners of an intellectual property rights allows any other person to use their intellectual property temporarily in exchange for some amount of consideration. And in case of a permanent transfer of intellectual property right, there is no rendering of service. Hence, the sale of intellectual property services does not come under the purview of taxable services since the owner no longer remains an owner of the intellectual property right.

Taxation of NRIs:

Royalties earned by Non Resident Indians called as NRIs has been defined as any income that is arising out of any transaction of intellectual property rights such as for patent, invention, model or trade mark, etc. The taxation applied is same and there is no difference in taxation even though the payments are in lump sum or recurring in nature. For NRIs, Royalty is taxable if it is received in or accrued in India. If the property is used for business in India and any income accruing out of it then it will be taxed.

Conclusion
Taxing of the income from intellectual property or from any other source is necessary to boost the economy of the country as it the main source of financing the expenditures of the public and for the development of the society. Nowadays, Intellectual property rights are of good value and the intellectual property right holder invests an adequate amount of money to secure these rights.

Moreover, several individuals or organizations earn most of their income from their intellectual property rights thus Intellectual property is of great importance and its tax regime need to be sorted. Hence the provisions of taxation for intellectual property rights needs to be codified separately for better administration as for now intellectual property is indirectly taxed.

Written By: Soumya Bhojwani,
IVth Year BA.LL.B - Ajeenkya DY Patil University- School of Law

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