In the era of knowledge economy, it is natural that knowledge capital outnumbers the physical capital. However the knowledge component of the capital also throws challenges for its accounting, valuation and tax implication on all commercial transactions resulting into creation of intangible assets. It is very important to distinguish the revenue expenditure and the capital expenditure for the amount spent on research and development and on acquisition of intangible assets for tax purposes.
As per earlier provisions of Section 35A of Income Tax Act, 1961, expenditure of a capital nature incurred on the acquisition of patent rights or copy rights were allowed to be amortized over the legal/useful life of the related intellectual property rights (IPRs). Similarly expenditure on technical know - how was allowed to be amortized over a period of six years u/s.35AB of the Income Tax Act, 1961. However on or after 1st day of April 1998, relevant for Assessment Year 1999-2000, depreciation is allowable @ 25 per cent on any capital expenditure incurred for acquintis of know-how, patents, copy rights, trade mark, licences, franchises or any other business or commercial rights of similar nature, being intangible assets u/s. 32(1(ii) Rule 5, Appendix 1, Part 'B'.
In a recent judgement of Delhi High Court in the case of Areva T & D India Ltd. vs. DCIT (www.itatonline.org.), it has been held that business information, contracts, records etc. are part of "Intangible Assets" and eligible for depreciation. In this case, the assessee acquired a transmission and distribution business as a going concern for a lump sum consideration of Rs.44.7 crore as per slump Sale Agreement. The net tangible assets were valued at Rs.28.11 crores and the balance Rs.16.58 crores was allocated by the transferee towards acquisition of bundle of "Business and Commercial Rights". The above decision was delivered by relying upon an earlier Supreme Court Judgement in the case of Techno Shares 327 ITR 323 (SC). The Hon'ble Court ruled that the membership of Bombay Stock Exchange under Rule 5 of the BSE Rules, is a personal permission from the Exchange which is nothing but a "licence" or "akin to a licence". In another recently announced judgement, the Pune Bench of ITAT has held that the payment of Non-compete fees is capital in nature and would be eligible for depreciation (Serum Institute of India Ltd. vs. Addl. CIT (2012) 135 ITD 69 (Pune) (Trib).
Some of the important changes relating to IPRs as proposed in the Finance Bill 2012 are also discussed in brief.
A new section 35CCD has been incorporated allowing expenditure on skill development project to be notified by the Central Board of Direct Taxes, incurred by a Company to the extent of 150% of the actual expenditure. This will motivate innovation and productivity of the organization.
A further important change has been proposed in the existing provision of section 92B by clarifying the meaning of international transaction especially by giving a very elaborate meaning of the term "intangible asset" under sub-clause (ii) of Explanation to Section 92B as below:-
ii) the expression "intangible property" shall include-
(a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos;
(b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how;
(c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps, engravings;
(d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters;
(e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation;
(f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders;
(g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non-compete agreements;
(h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts;
(i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights;
(j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value;
(k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data;
(l) any other similar item that derives its value from its intellectual content rather than its physical attributes.'.
The above brief analysis of provision of income tax dealing with eligibility of depreciation claim on intangible assets and on certain amendments proposed in Finance Bill 2012 should be useful to readers and it would be earnest effort of ITAG to deal with several other aspects of IP taxation in our forth coming issues.
- Dr D. R. Agarwal