Budget Proposals on Taxation of IPR

The Finance Minister Mr. Pranab Mukherjee has presented his Budget Proposals for Financial Year 2010-2011 and has recognized the current decade as the "Decade of Innovation" as first mentioned by Smt. Pratibha Devisingh Patil in her Presidential address to the joint session of the Parliament in June 2009. He has made certain positive proposals to promote research and development activities. Some of the proposals dealing with IPR, are as below:-

(i) Paragraph 35 of the Budget speech deals with the initiative for the complete liberalization of pricing and payment of technology transfer fee, trade name, brand name and royalty payments, now to be made under the automatic route. This will facilitate smooth transfer of technology and also improve the climate for foreign direct investments which has already recorded US$ 20.9 billion during April-December 2009 compared to US$ 21.1 billion during the same period last year.

(ii) Paragraph 130 provides for increase in weighted deduction for expenditure incurred on in-house research and development (R & D) to all manufacturing businesses from the present 150 percent to 200 percent. He has also proposed for enhancing the weighted deduction on payments made to National Laboratories, research associations, colleges, Universities and other institutions for scientific research from 125 percent to 175 percent.

(iii) Paragraph 131 deals with extending the benefit of weighted deductions of 125 percent for payments made to approved associations, engaged in research in social sciences or statistical research. The income of such institutions shall also be exempt similar to scientific research associations.

(iv) Paragraph 159 provides for a concessional excise duty of 4 percent to cycle rickshaws developed by CSIR, an innovation product called 'SOLECKSHAW' to replace manually-operated rickshaws which will run on batteries charged by solar power.

(v) Paragraph 166 deals with rationalization of custom duty on import of digital master of films for duplication or distribution loaded on electronic medium vis-à-vis those imported on cinematographic film owing to different customs duty structure. Now customs duty will be applicable only on the value of the carrier medium. The same principle will apply to music and gambling software imported for duplication. However in all such cases, the value representing the transfer of intellectual property rights would be subject to service-tax.

(vi) The Finance Minister has also proposed for change in explanation to Section 9(1) for taxability of interest, royalty and for for technical fees paid to a non-resident. There were few controversies on interpretation of the clauses (v) (vi) and (vii) regarding the deemed income under the above three heads of income to a non-resident. The amendment clarifies that the situs of the rendering of the services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India.

(vii) The existing taxable services 'Intellectual Property Right (IPR)' excludes copyright from its scope. Copyrights on (a) Cinematographic films and (b) Sound recording are being brought under the ambit of service tax. However, copyright on original literacy, dramatic, musical and artistic work would continue to remain outside the scope of service tax.

It may be noted that taxation of intellectual property rights is a very important area and ITAG shall endeavor to enrich the knowledge of its readers in this area through this news letter in future.