Taxation of Fosters Sab Miller Deal in India

Introduction

Business today has no boundaries, no limitations. The word has evolved drastically from local Barter system to the current global market. Also the laws governing them have changed a lot. When East India Company first came to India in 17th century they would have never thought about the various laws which are applicable for doing business in this country now.

The Indian economy is at the stage of volatile change. Due to Government’s foreign policy and huge Indian market, there has been a considerable influx of foreign companies into India. As a pursuant there are plenty of transactions, mergers and acquisitions of worth billions taking place. Government benefits from these transactions as the parties have to pay taxes because they occur in India and involve Indian companies and their assets which are situated here. But the real dispute occurs when the transaction is between two parties which are alien and also it takes place outside India. This was the main issue in the recent Foster’s SAB Miller deal. UK-based SABMiller had acquired Foster's India, belonging to global drinks giant Foster's Australia Ltd, for 120 million dollars in 2006. The tangible and intangible assets (brand and trademarks) of Foster's India were taken over by the UK Company. The question which was raised by Foster’s Australia Ltd before Authority of Advance Ruling (AAR) was whether the income arising to it from the transfer of its right, title and interest in and to the trademarks and Foster's brand intellectual property is taxable in India?

Main Text

The applicant (before AAR) was foster’s Australia Ltd which is a wholly owned subsidiary of Foster’s Group Ltd. It is non-resident foreign company incorporated in Australia in the name of Carlton and United Breweries Ltd. It is a major beer company which brews, process, packages, markets, promotes and sells beer products globally. It also owns various brands including Foster’s brand in relation to beer products which comprises of trademarks, logos, devices, brand guidelines, advertising material, technology and know-how including recipes and brewing specifications. It entered into a Brand License Agreement (BL Agreement) with Foster’s India Ltd on 13/10/97. By virtue of this agreement Foster’s India got an exclusive licence to brew, package, label, and sell Foster’s Lager (beer) and an exclusive right of user of the trade-marks within the territory of India. Foster’s India was also authorized to use the Mark (Foster’s) as part of its corporate name. On 04/08/2006, Foster’s Australia Ltd executed a Sale and Purchase Agreement (S &P Agreement) with SAB Miller, UK, in Australia, for the transfer of shares and other intangible assets in the nature of intellectual property. As a sequel to this agreement a Deed of Assignment was entered between Foster’s Australia Ltd and SKOL Breweries Ltd, an Indian company nominated by SAB Miller as transferee. Under this agreement Dismin Investment Pvt. Ltd., agreed to sell shares of its subsidiary company FBG Holdings Ltd. and also Foster’s Australia Ltd. agreed to sell (a) trade marks (b) Foster’s Brand Intellectual Property and (c) the grant of exclusive and perpetual licence in relation to Foster’s Brewing Intellectual Property, confined to the territory of India. It may be noted that both the companies i.e. Dismin and FBG Holdings are Foster’s Group Company and FBG Holdings (Mauritian company) held 77.2% shares in Foster’s India. However, taxability of income arising from sale of shares by Dismin is not an issue here. The major question was, whether Foster’s Australia Ltd. was liable to pay taxes in India by virtue of sale of its intangible assets in accordance with Income-Tax Act 1961 (the Act) and the Double Taxation Avoidance Agreement (DTAA) between India and Australia.

To answer this question it was relevant to find that the trademarks, Foster’s Brand and Brewing IP rights, which were conveyed to SKOL, can be said to be capital assets situated in India and the consideration received in connection therewith is liable to be treated as income that accrues or arises in India. Foster’s Australia contended that situs of intangible assets is located outside India as these assets have no geographical location and no situs except from the domicile of the owner. It also argued based on the AAR’s decision in Pfizer Corporation Case that the assets were restored to him in Australia because of the termination of the BL Agreement due to the S & P Agreement. But it was seen from the facts and circumstances that Pfizer ruling was not applicable because BL Agreement was terminated only after the sale and not before. According to Section 9(1)(i) of the Income-tax Act, 1961, the following incomes shall be deemed to accrue or arise in India : (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or from any asset or source of income in India or through the transfer of capital asset situate in India. If the transfer is of capital asset situated in India, then it is immaterial whether the transaction takes place outside India or it is governed by the provisions of DTAA, tax has to be paid by the non-resident by virtue of section 9(1)(i) of the Act. So, the crucial question is regarding the situs of assets.

Foster’s “F” logo was registered in India in 1993 and after the BL Agreement in 1997 the said intellectual property was being put to use for almost a decade. The registered trademark along with other features of the Foster’s brand like advertising, marketing, distributing, quality control, etc had created a appreciable goodwill in the market here and such goodwill has been nurtured by the coordinated efforts of both Foster’s Australia and Foster’s India. Thus, the IP had a tangible presence in India at the time of transfer in 2006. There is also no legal principle supporting that situs of intangible assets is only in the residence of the owner. There is sufficient evidence that situs can exist in more than one country. There are also decided cases in U.S.A and U.K  which supports the principle that goodwill is territorial and exists at the place of business. The Supreme Court of South Carolina in Geoffrey Inc. V South Carolina Tax Commission said “intangibles may acquire a situs for taxation other than at the domicile of the owner if they have become integral parts of some local business”. Same view was taken by Court of Appeals of New Mexico in the case of Kmart Properties Inc. vs. Taxation and Revenue Department where it was held “Being intangible property, a trademark can only have “physical presence beyond the state of its creation, in those locales where it is put to tangible use, it logically follows that those marks are physically present during their period of use.  Otherwise, trademarks could never be physically present anywhere other than where the tax payer designates for its own tax purposes”. In Star Industrial Co.Ltd. vs. Yap Kwee Kor Trading, the Privy Council speaking through Lord Diplock observed thus –“Goodwill, as the subject of proprietary rights, is incapable of subsisting by itself.  It has no independent existence apart from the business to which it is attached.  It is local in character and divisible; if the business is carried on in several countries a separate goodwill attaches to it in each.”

The contention was also raised about quantification of the consideration of the transaction which only attributes to India should be taxed. But it can be seen that the Foster’s Group owns Foster’s India through a cobweb of its own subsidiaries. So, the whole business in India is being transferred and the whole consideration is liable to be taxed in India.

Conclusion

This deal shows the intention of the tax authorities towards the various companies who try to evade taxes by taking help of the loopholes in the Act. The development is a shot in the arm for Indian tax authorities bent on taxing all recent cross-border acquisitions of Indian companies. The income-tax department feels that transactions between two offshore entities can be taxed, as long as the business pertains to the Indian market. Based on this argument, the department has raised tax demands on the Vodafone-Hutch deal, and more recently on participatory notes (PN) trades between FIIs and foreign entities, with no direct access to the Indian stock market. The tax department’s stance on the Foster’s deal is also based on a similar logic. Foreign companies adopt colourable device in routing the deal through a media of various companies. This deal was between two different entities which are located abroad but it mainly included Indian company and was a stapled transaction.

At the end I would like to mention a phrase here –     

                           “BEWARE TAXMAN IS WATCHING”