Details

1. TDS provisions typically pertain to transactions categorized as revenue expenditures, which are claimed as expenses in the profit and loss account. Nevertheless, specific provisions for TDS liability on transactions involving capital expenditure or asset purchases have been incorporated into the Income Tax Act.

2. The acquisition of a trademark does not constitute expenditure but rather an asset purchase. Given this distinction from expenditure, TDS deduction would not be warranted at first glance.

3. However, it is crucial to note that the transfer of a trademark is expressly included within the ambit of the definition of royalty.

4. Explanation (ba) to section 194J of the Income Tax Act, 1961 delineates that the term "royalty" shall hold the same import as elucidated in explanation 2 to section 9(1)(vi).

5. Sec 9(1)(vi):  Royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for—

(i) The transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) 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;
(iii) The use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
(iv) The imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(iva) The use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
(v) The transfer of all or any rights (including the granting of a licence) 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; or
(vi) The rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).

6. As per the above definition, it is discernible that an exception to royalty exists, whereby consideration taxable as capital gains for the recipient would not qualify as royalty.

7. In case of M/S Mediworld Publications Pvt Ltd v/s Income Tax Commissioner 2011, the High Court held that the profit or income generated from the transfer of intangible asset, i.e. Trademark & Copyright, is in the capital gains nature and not business income. The court clarified that a capital asset under section 2(14) of the Income Tax Act 1961, can be implied to be inclusive of Intellectual Property.

8. Furthermore, the definition of 'transfer' encompasses the extinguishment of any rights in the asset as stipulated in section 2(47) of the Act. Thus, it is pertinent to assess whether the transfer of rights in assets could be construed as the extinguishment of rights chargeable under the head of 'Capital gains'.

9. Several criteria can serve as test checks to ascertain whether the transfer of rights in an asset would constitute royalty, including but not limited to

• Ownership of the patent, copyright, etc. is not transferred.

• The asset is appearing in the books of the transferor.

• The income received by the transferor is treated as revenue receipt.

• The transferor does not forego his right to use the patent, copyright, etc. even after the rights are granted/ transferred to the transferee.

• The transferee does not get enduring benefit out of the rights transferred.

• The transferee treats the payment made for rights as revenue expenditure.

10. Consequently, if the entire ownership of a trademark is transferred, with the transferor categorizing the receipt as a capital receipt, the transferee treating the payment as capital expenditure, removal of the asset from the transferor's books, and the relinquishment of any future benefit from the trademark, it may be inferred that such a transaction does not fall within the ambit of royalty.

11. In conclusion, if the transaction aligns with the parameters delineated above, TDS would not be applicable under section 194J, as the transaction falls within the exception to the definition of royalty as per the subject matter assessment under said section.

Best regards,
CA Ronak Gandhi