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Tds on purchase of patent from foreign company

Lokesh Bahl (CA Practice ) (72 Points)

24 October 2015

Dear Experts,

I need your advise on a cross border transaction, kindly refer the below case

Case: An Indian Pvt Ltd Company is buying a Patent from an Israel based Company, Money will be paid from India directly to Israel Based Company and patent will be used for production in India, the total consideration that is to be paid by Indian Company is for Patent, Know How related to Patent and Some equipments. (but Cost of Patent forms majority part of total consideration)

Question: My understanding is that Patent is an Intangible Asset and doesnt come under the category of "Fee for Technical Service" or "Royalty", so will the Indian Company be required to deduct the TDS on this Payment?

Best regards

CA Lokesh Bahl

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3 Replies

Karthik.V.Kulkarni (Chartered Accountant) (594 Points)
Replied 24 October 2015

Royalty u/s 9 excludes income by way of capital gains. So if transaction is chargeable to capital gains then it is not considered royalty u/s 9. But for considering whether an asset is a capital asset sec 2 (14) has to be looked into. Not sec 32. So patents are right to use certain invention which bars others from production. Sec 2 (14) requires property to be held by assesse. Here the property is held by Israel company and merely patent is licensed to you for certain period. Assuming the same it rightly comes under royalty u/s 9 and tax has to be withheld read with relevant dtaa. If the property that is the patent is wholly transfered to you then it is capital gains and also needs to be withheld u/s 195 read with relevant dtaa.

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Lokesh Bahl (CA Practice ) (72 Points)
Replied 24 October 2015

Thank You Karthik,

But in this specific case, Israel based Company is selling its Patent, so after the transaction Indian Company will be Owner of the Patent and Israely Company will not be allowed to use the Patent any further, so transaction is of "transfer of ownership" and not "permission to use", so in my opinion its Sale of Intangible Asset which results in Capital Gain in the hand of Israely Company, your views please.

Best regards

Karthik.V.Kulkarni (Chartered Accountant) (594 Points)
Replied 24 October 2015

If it is complete transfer of patents then it is capital gain but liable to tax only in isreal. Yes there will be no tax consequence hence no need to with hold, only if the Israel company has completely reliquished its title. If the terms of contract are as such that the foreign co can relinquish the transaction then care should be applied. If it clearly stipulates complete relinquishment of title then it is capital gain and same is not taxable in india.