Intellectual property rights are legal rights for governing the use of creation of human mind. The recognition and protection of these rights is of recent origin. Patents, Designs and Trade Marks are considered as Industrial Property. As per international convention for the protection of industrial (Paris Convention) of property has as its object, patents, utility models, industrial designs, trademarks, service marks, trade names, indications of source or appellations or origin and the repression of unfair competition when copyrights, geographical indicator, layout designs and confidential information were included to industrial property, they all become intellectual property.
Forms of Intellectual Property Rights are as under:
(d) Industrial Designs
(e) Trade Secrets etc.
(f) Brand Name
The process of bringing it into commercial production and is tied up as secret (know-how). Know-how is really capable of protection against those who stick to make use of it without consent as distinct from those who will pay for a license to obtain it. This is a right granted to resist invasion of privacy. It protects the rights relating to films, music, literature and other creative works as well as the source code of computer programme.
(b) Copyright and Related Rights
The subject-matter of copyright is the literary, dramatic, and musical or artistic work, a cinematograph, film and sound recording. Literary work includes computer programmes, tables and complications including computer database. The object of this right is not the material thing produced, but the form impressed upon it by the maker. The picture in the abstract sense of the artistic form made visible by that paint and canvas belongs to him who made it.
A registered owner of a trade mark or goods retains its right to protect any reputation acquired by use, by means of passing action.
Actual goodwill in trade remains the fundamental to be protected and registration is concerned merely as a heightened forms of protection.
The registration must be pre-requisite to protection of anything that they define as a trade or service mark.
This right is granted to protect the symbol of the organization representing its logo or brand, it can be in the form of a figure, slogan etc.
(d) Industrial Designs
It means only the feature of shape, configuration, pattern, ornament or composition of lines or colours applied to any article whether in two dimensional or three dimensional or both forms, by any industrial process or means whether manual, mechanical or chemical separate or combined, which in the finished article appeal to and are judged solely by the eye, but does not include any mode or principle or construction and does not include any trademark.
(e) Trade Secrets
This is granted to protect right relating to formula practice process design, pattern, instrument, commercial method or compilation of information, not generally known or reasonably ascertained by others.
(f) Brand Name
Vide “Taxation services”
An Education Guide issued in 2012 under the Erstwhile Service Tax Regime, the Government has certified that the phrase “intellectual property rights” in normal trade parlance inter alia includes trade mark. Therefore, the brand name registered as trade mark can be covered as intellectual property rights.
Intellectual Property Rights
Transfer of Intellectual Property Rights (IPR) – Supply of goods or services:
Under the GST Law, it has been specified for both permanent and temporary transfer of intellectual property rights and done away with the issue relating to classification and rate.
Transfer of IPR is a supply of goods or service
Classification of supply as goods or service is still a debatable issue under the GST regime, due to different provisions contained as to the time of supply, place of supply, Reverse Charge Mechanism, rates, exports etc.
Therefore, it is necessary to determine the exact nature of intellectual property right transactions. GST law defines goods and services.
GST law defines goods under clause 2(52) which means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of land which are agreed to be severed before supply or under a contract of supply. In short, it means every kind of movable property.
It means movable property of every description except immovable property. Therefore, the intellectual property rights can be treated as “goods”, since it is not immovable in nature, goods covers both tangible and intangible property. Therefore, it can be transferred by way of sale or licensing that is either permanent disposal or temporary disposal. Permanent transfer of IPR is a supply of goods.
As per section 2(102) of CGST Act, 2017 “services” means “anything other than goods, money and securities.”
Section 7 read with Schedule II, Entry no. 5(1)(c) has clarified that the temporary transfer or permitting the use or enjoyment of any intellectual property rights shall be treated as supply of service.
Notification No. 8 of 2017
Central (Rate) Notification No. 8 of 2017, Serial No. 17 dated 28th June, 2017 under GST under the heading 9973, temporary or permanent transfer or permitting the use or enjoyment of intellectual property (IP rights) in respect of goods other than information technology software is a service. By issuing the said notification, they have created a confusion that they have used the word “permanent transfer” and considered as a service.
Notification cannot override the provisions of law and its rules. The law clearly spells out that unless there is a permanent transfer of IPR rights which will be treated as a goods and not services. It is a temporary transfer or permitting the use or enjoyment of intellectual property rights, in respect to goods other than with or without information technology, is a service.
Thus, the intention is when there is a temporary transfer or transfer is for a limited period, then it is a service.
Supreme Court in the case of Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors. in a Writ Petition No. 183 of 2003 decided on 2nd March, 2006, where the Hon’ble Supreme Court has held that in order to constitute a transaction or the transfer of right to use the goods, the transaction must have the following attributes.
(a) There must be goods available for delivery. There must be consensus ad idem as to the identity of the goods
(b) The Transferor should have a legal right to use the goods. Consequently, all legal consequences of such use including any terms or license required, therefore should be available to the Transferee.
(c) For the period during which the Transferee has such legal right, it has to be the exclusion of the Transferor. This is necessary concomitant of the plain language of the constitute. Namely, (a) “transfer of the right to use and not merely a license to use the goods”.
(d) Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same right to others.
The above mentioned are the conditions for right to use the goods, then it would fall under the temporary or permitting the use or enjoyment of intellectual property rights in respect of goods other than information technology.
Scheme of classification of services
The scheme of classification of service provides that the rate shall be restricted for licensing of service only and thus not applicable when there is a sale of IPR. The same rate has been made applicable for permanent transfer of IPR through notification determining the rate of goods.
The principle regarding the permanent transfer or temporary transfer shall continue to be governed by the agreement of particular transaction and the settled the Rule by the Supreme Court in the case of BSNL v. Union of India 152 Taxmann.135
A question, therefore, arises that how a permanent transfer of intellectual property right is governed by GST rate provided for services. This has created confusion and unwanted debate. This creates a perplex situation as to permanent transfer of Intellectual Property Rights is governed by the GST rate provided for services.
Further to clarify the said confusion GST council in its 23rd meeting held on 10th Nov 2017 issued a press release stating:
“In order to obviate dispute and litigation, it is proposed that irrespective of whether permanent transfer of Intellectual Property is a supply of goods or service.-
(i) permanent transfer of Intellectual Property other than Information Technology software attracts GST at the rate of 12%; and
(ii) permanent transfer of Intellectual Property in respect of Information Technology software attracts GST at the rate of 18%.”
Situs of Sale
GST law provides different set-off rules for determining the place of supply of goods and place of supply of services.
Temporary IPR is governed by the place of supply of services. Temporary transfer of Intellectual Property Rights shall be governed by the provisions of Section 13 determining the place of supply of services which stipulates that the situs lies at the location of the recipient of service.
The place of supply for permanent transfer of IPR is debatable issue as the place of supply is dependent upon the movement of goods. Further, as per Section 10(1)(c) of the IGST Act, where the supply does not involve movement of goods, whether by the supplier or the recipient, the place of supply shall be the location of such goods at the time of the delivery to the recipient. Hence, it is difficult to say where the situs of place of supply lies and analysis has to be done on the facts of each case, nature of IPR and agreement between the parties.
Also, when the parent company has registered the IPR outside India and the IPR is used by the Indian entities, will it result into a supply, it becomes more complicated as every transactions between related persons and deemed distinct persons in the course of business, even without consideration brought under the ambit of GST, refer Entry 2 of Schedule I. Thus, it has widen the scope. Further, question arises whether there is any movement of permanent transfer of Intellectual property rights, what are the criteria to determine the commencement and termination of movement due to its intangible nature. All these issues remain unsettled.
Taxability when either supplier or recipient is outside India
a) In case of permanent transfer from a supplier located outside India to recipient located in India:
Section 7(2) specifies that supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce. Hence, it is an interstate Supply of goods.
Also, Section 5 deals with levy and collection of tax. Sub-section (v) of Section 5 provides that there shall be levied a tax called Integrated Goods & Service Tax (IGST) on all inter-state supplies of goods or services or both.
The provision to sub-section (1) of Section (5) provides that Integrated Tax on goods imported into India shall be levied and collected in accordance with the Provisions of the Customs Tariff Act, 1975. On the value as determined under the said Act, at the point when duties of customs are the levied on the said goods in accordance with a provision of Section 12 of Customs Act, 1962.
b) In case of permanent transfer form a supplier located in India to recipient located outside India:
The place of supply of goods,––
(a) imported into India shall be the location of the importer;
(b) exported from India shall be the location outside India.
Hence, in this case it amounts to export of Goods and hence provision related to exports of service will apply.
a) In case of temporary transfer form a supplier located outside India to recipient located in India:
Section 7(4) of the IGST Act, 2017 states that Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.
Further, sub-section (3) of Section 5 provides that the Government may specify categories of supply of goods / services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and the provisions of IGST Act shall apply to such recipient as if he is the person who is liable to pay tax in relation to the supply of such goods or services or both.
The Government has issued a Notification specifying categories of supply of goods or services or both liable to pay tax on reverse charges basis vide Notification No. 10/2017 – Integrated Tax (Rate) dated 28th June, 2017:
As per serial No. 1, any service supplied by any person who is located in a non-taxable territory to any person, located in India other than non-taxable online recipient. Hence, it amounts to import of services and applicable GST is payable under RCM.
Further, as per Schedule I Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business is to be treated as supply even if made without consideration.
b) In case of temporary transfer form a supplier located in India to recipient located outside India:
Section 7(5) of the IGST Act, 2017 states that Supply of services when the supplier is located in India and the place of supply is outside India shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.
As per Section 13 (2), the place of supply of services shall be the location of the recipient of services. Hence, in this case as the recipient is outside India it amounts to export of Services and provision related to exports of service will apply.
Taxability of Intellectual Property Right as supply of services
Hon. Supreme Court in the case of Vikas Sales Corporation v. Commercial Taxes AIR 1996 SC 2082, Yasha Overseas v. CIT (2008) has considered that in respect of REP Licenses and Exim Scrips are goods and the same would be chargeable to sales tax. Based on the above decision of Supreme Court alternatively view can be taken that permanent transfer of Intellectual Property Right is goods and should be taxed under the Goods Rate Notification. It is relevant to note that no specific HSN is mentioned against the entry relating to permanent transfer of Intellectual Property Right (IP) in respect of goods in goods rate Notification. Therefore, the doubt arises as to under which HSN, the permanent transfer of IP Rights has been made by the Govt. Till date there is no amendment to service rate notification to delete permanent transfer of IPR has been made by the Govt. From the aforesaid situation, can it be gathered that the taxpayer has option to choose the rate notification which gives greater relief to the taxpayer. It is well settled law that when the policy offer various alternatives, it is the assessee’s option to choose the one which gives him the maximum benefit. Refer: Share Medical Care v. UOI 2007 (209) ELT 321 (SC).
H C L Limited v. CC New Delhi (2001) 130 ELT 405 (S C) 405
Domestic supply – Import of Goods or Services
In a situation where brand name is treated as goods and the seller is located outside India, the first and foremost question arises whether it will be treated as import of brand name as import of goods? The import of goods means bringing goods into territory of India from a place outside India. In this case, there is no physical movement of goods into India. Hence, there is no import of goods. There are various judgments wherein it has been held that situs of Trade Mark is the situs of the owner. Refer: Mahyco Monsanto Biotech (India) P Ltd. v. UOI 2016 (95) VST 499 (Bom). Lal Products v. Intelligence Officer v. Commercial Taxes 2018-VIL-565 Ker. On the basis of above decisions, doubt still persists as to whether the situs of brand name is the situs of owner hence there is an import of such Brand Name into India from a place outside India. However, the Maharashtra Sales Tax Tribunal in case of Merck KGAA, Germany v. State of Maharashtra (2016-VIL-13-TRB). Hon. Tribunal has held that situs of intangible goods would be the location where the property is registered or where rights to property can be enforced. In my view, there is no clarity on the situs of brand name for determining the import of goods. It can neither be derived from the provisions of GST law nor from judicial decisions. It is, therefore, uncertain as to whether the situs of brand name can be said to be located outside India, i.e., Location of supplier or the location where the trade name is registered.
Further, treating the sale of brand name as import of goods may involve the following up of the procedure to be followed by filing Bill of Entry and paying custom duty as the goods are not in physical form. In such a case, proviso to section 5(1) and section 2(10) of IGST Act may not apply. Next question arises as to whether the sale of brand name by foreign seller to the recipient in India can be treated as import of service under GST Law? A question may arise even if one treats the sale of brand name as an import of service, in such a situation can the foreign seller be made liable to discharge GST in India on the plea that situs of trade mark is the place of registration i.e., India.
In view of above complexity Government should remove genuine difficulty faced by bonafide taxpayers and issue clarification or amend the GST law to settle the ambiguity to avoid costliest litigations.