The Income Tax Appellate Tribunal (ITAT), Mumbai, has held that selling a registered trademark does not require the seller to transfer its entire corporate identity, house marks, or every element of product packaging.

Holding so, the tribunal deleted a ₹433.14 crore addition treated as royalty by the income tax department in the case of Swiss pharmaceutical company Novartis AG.

A bench of Judicial Member Beena Pillai and Accountant Member Arun Khodpia observed,

“The description of a mark as a word mark concerns the form of the registered mark; it does not reduce proprietorship to a licence or permission to use it. A word mark can itself be the subject matter of ownership and assignment. Sections 37 and 38 of the Trade Marks Act, 1999 recognise assignment by the registered proprietor, including assignment with or without goodwill and in respect of all or some of the registered goods or services. Section 45 provides for registration of the assignee's title. The change of proprietor in the Registry, read with the deed, therefore answers the Revenue's objection that only a restricted right to use the word mark was transferred. Sale of that registered property does not require sale of the assignor's entire corporate identity, house marks or every element of packaging.”

The dispute concerned ₹433.14 crore received by Novartis from assigning the JALRA/JALRA-M, VYSOV/VYSOV-M and ZOMELIS/ZOMELIS-M trademarks to USV Limited, Cipla Limited and Eris Lifesciences Limited, respectively, during the financial year relevant to Assessment Year 2020-21.

Novartis argued that the amount represented proceeds from the outright sale of its trademark rights in India. It contended that the receipts were not taxable in India under Article 13(6) of the India-Switzerland Double Taxation Avoidance Agreement (DTAA).

The Assessing Officer treated the entire amount as royalty under Section 9(1)(vi) of the Income Tax Act, 1961, read with Article 12 of the treaty. The Dispute Resolution Panel upheld the assessment.

The Revenue argued that the assignments were not absolute because the purchasers could use the marks only in India and could not export products bearing them. It also relied on restrictions concerning pharmaceutical preparations, trade dress and packaging, along with Novartis retaining corresponding trademark rights outside India.

The tribunal examined the assignment deeds and found that they transferred ownership of the specified Indian trademark rights, together with embedded goodwill. In the USV agreement, the purchaser was expressly made the absolute, sole and exclusive owner of the marks in India, while Novartis was barred from further use of the marks or claiming ownership rights there.

The tribunal held that the territorial restriction defined the scope of the property being transferred. Novartis retaining rights to corresponding trademarks outside India did not mean that it continued to own the Indian rights assigned to the purchasers.

It also distinguished the registered trademarks from product trade dress and packaging. The USV agreement required the purchaser to develop its own trade dress, but the tribunal found that excluding Novartis's existing packaging and other presentation elements did not negate the transfer of ownership of the registered marks.

The tribunal also considered the contractual restrictions on the products and use of the trademarks. It found that these provisions protected the agreed territorial and product boundaries rather than reserving ownership of the Indian marks to Novartis.

The consideration was fixed and was not linked to the purchasers' future turnover, profits, productivity or extent of use of the trademarks. The tribunal noted that the Revenue had not identified any such contingency in the agreements.

Applying the India-Switzerland DTAA, the tribunal distinguished consideration for transferring ownership of intellectual property from royalty paid for its use or the right to use it.

It held that the receipts arose from the alienation of trademark rights and fell under Article 13(6) of the treaty. The Revenue had not established that the trademarks formed part of the business property of a permanent establishment of Novartis in India or that the gains fell within another category covered by Article 13.

Since Novartis was a resident of Switzerland, the tribunal held that the gains were taxable only there. It accordingly deleted the ₹433.14 crore addition treated as royalty.

The tribunal left Novartis's alternative contention regarding non-taxability under domestic law open, as it was unnecessary to decide that issue after ruling in the company's favour under the treaty. The appeal was partly allowed.

For Appellant: J.D. Mistry, Senior Advocate, and Madhur Agarwal, Authorised Representative

For Respondent: Arju Garodia, Commissioner of Income Tax (Departmental Representative)

Tags:    
Case Title :  Novartis AG v. Assistant Commissioner of Income Tax (International Taxation), Circle 3(3)(1)Case Number :  ITA No. 1027/Mum/2023CITATION :  2026 LLBiz ITAT(MUM) 296
To Read the full text of the Order CLICK HERE