ITAT Holds Sale of Indian Trademark Rights by Novartis AG Not Taxable as Royalty Under India-Switzerland DTAA:

Novartis AG is a company incorporated and tax-resident in Switzerland and was engaged in the pharmaceutical business. During the relevant previous year, it assigned trademark rights relating to JALRA/JALRA-M, VYSOV/VYSOV-M and ZOMELIS/ZOMELIS-M to USV Pvt. Ltd., Cipla Ltd. and Eris Lifesciences Ltd., respectively. The total consideration received from these transactions amounted to Rs 433,14,76,894.

The assessee claimed that the consideration represented proceeds from the outright assignment of trademark rights in India and was not taxable in India under Article 13(6) of the India-Switzerland Double Taxation Avoidance Agreement (DTAA).

During assessment proceedings, the AO questioned whether the trademarks constituted capital assets, particularly because their acquisition cost was not recorded in the assessee's financial statements. Accordingly, the AO treated the entire consideration of Rs 433.14 crore as royalty under Section 9(1)(vi) of the Income Tax Act, 1961, read with Article 12 of the India-Switzerland DTAA. The DRP upheld the AO's position. 

The Tribunal examined that in the present case, the consideration was fixed and was not linked to the purchasers' future profits, productivity, turnover or extent of use. Applying its reasoning to the assignment transactions involving USV, Cipla and Eris, the Tribunal concluded that the consideration represented proceeds from the alienation of trademark rights rather than royalty for the continued use of property belonging to Novartis in India.

The Tribunal further observed that Article 13(6) of the India-Switzerland DTAA allocates the taxation of gains from the alienation of property, other than property covered by the preceding paragraphs of Article 13, to the Contracting State of which the alienator is a resident. As the assessee was a Swiss tax resident and the Revenue had not established that the trademarks formed part of the business property of an Indian permanent establishment or fell within another applicable category under Article 13, the gains were taxable only in Switzerland.

Accordingly, the Tribunal deleted the addition of Rs 433,14,76,894 made by treating the trademark assignment consideration as royalty.