Same Right, Different Tax: Why India’s IP Law and Tax Law Must Speak Same Language

Harshita Agarwal & Hir shah

Summary: India’s intellectual property (IP) laws define the rights transferred through assignments, licences and registered instruments, while tax law determines the consequences of those transfers. In Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT ((2021) 432 ITR 471), the Supreme Court demonstrated that the tax treatment of software payments depends on the rights actually conveyed under the Copyright Act, 1957. However, inconsistencies remain between IP ownership rules and the taxation of intangible assets. This article identifies three principal gaps: the effect of statutory drafting defaults on tax characterisation, the patent-box regime’s eligibility conditions for assignees and software, and the treatment of brand-building expenditure under transfer-pricing rules. It examines the interaction between copyright assignments, patent ownership, registered trade mark users, the DEMPE framework and judicial decisions concerning software royalties and advertising, marketing and promotion expenditure. It also considers compulsory-licence royalties and the uncertainty created by retrospective tax amendments. Four reforms are proposed: making the rights conveyed under IP instruments the starting point for tax characterisation, revising patent-box eligibility, codifying the treatment of development and marketing of intangible assets, and improving valuation certainty through compulsory-licence benchmarks and advance pricing agreements. The central argument is that India should establish a statutory framework that connects IP-law ownership and contractual rights with tax treatment, providing greater consistency, predictability and certainty for businesses that create, acquire, license and commercialise intellectual property.

Introduction

In Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT  ((2021) 432 ITR 471), the Supreme Court settled a tax dispute that had run for years across dozens of appeals. It did not do so by reading the Income-tax Act. It read the Copyright Act, 1957. The question was which right had actually moved, and the Court answered that by looking at sections 14 and 30 of that Act, not at the tax statute. The case shows something Indian tax law has not yet absorbed. The tax character of an intangible is decided by IP law, what the instrument transfers, for how long, where, and to whom. Yet the two bodies of law are not aligned. That mismatch is the subject of this post, and so is a proposal to close it.

The IP-Law Foundation Of IP Tax

Every IP statute treats ownership as a bundle of separable rights. Section 14 of the Copyright Act lists the exclusive rights in a work, including, for a computer programme, rights of reproduction, adaptation and commercial rental. An assignment under section 18 must be in writing as per section 19 and, if it is silent on term or territory, section 19(5) and (6) read it as lasting five years and extending to India. A license under section 30 permits particular acts without transferring ownership. The Patents Act, 1970 requires an assignment of a patent to be in writing of as per section 68 and registered with the Controller. The Trade Marks Act, 1999 allows a registered mark to be assigned with or without goodwill as per section 39 that covers unregistered marks, and lets a registered user use it under section 48 without owning it.

Tax law builds on this directly. Income from the temporary grant of rights is royalty under section 9(1)(vi) of the Income-tax Act, 1961 now carried into the Income-tax Act, 2025. An outright transfer is capital gains or business income. In Engineering Analysis, the Court held that Indian distributors and end-users who paid foreign software suppliers under distribution agreements and end-user license agreements (EULAs) were not paying royalty. The EULAs were not licenses under section 30 because they transferred no right under section 14. The Court also read the 1999 amendment to section 14(b)(ii) as recognizing exhaustion of the copyright on first sale. The treaty definition of royalty could not be widened by Explanations 4 to 6 inserted in the domestic Act, so no withholding arose under section 195. IP law, in other words, decided the tax outcome.

Three Gaps

First, characterization turns on IP drafting defaults the tax law ignores.

Under section 19(5) and (6) of the Copyright Act, a silent assignment is deemed to last five years in India only. A deed that spells out a perpetual worldwide transfer is a different disposal from one that says nothing, though both may be called “assignments”. The tax consequences which are, capital gains or royalty, and the withholding on each, can differ. No provision of the tax code tells an assessing officer how to weigh the IP statute’s presumptions against the commercial reality.

Second, the patent box is built on a view of ownership that does not match how patents are held

. Section 115BBF (now section 194 of the 2025 Act) gives a 10% rate on royalty from patents. The Income Tax Department’s FAQ states that only the “true and first inventor” whose name is on the patent register qualifies, that at least 75% of the invention expenditure must be incurred in India, and that no deductions are allowed. Many commercial patents, however, are applied for by employers or acquirers as assignees, which the Patents Act expressly permits as per section 6 that lets an assignee of the true and first inventor apply, and section 68 governs the assignment. On the FAQ’s reading, a company that holds a patent by assignment from its research staff may fall outside the incentive, even though it funds and exploits the invention. The box also excludes copyrighted software. Section 3(k) of the Patents Act excludes computer programmes “per se”, and although the Delhi High Court in Ferid Allani v. Union of India (2019 SCC OnLine Del 11867) held that inventions showing a “technical contribution” can be patented, most Indian software is still protected mainly by copyright and so is outside the box.

Third, valuation of brand and know-how ignores the IP-law position on title

. In Maruti Suzuki India Ltd. v. CIT ((2010) 328 ITR 210 (Del)) the Delhi High Court used a “bright line” test to find that excess advertising spending by an Indian licensee was a service to the foreign trade mark owner. In Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT ((2015) 374 ITR 118 (Del)) it overruled that approach, finding it had no statutory basis. The DEMPE (Development, Enhancement, Maintenance, Protection and Exploitation) framework in the OECD Guidelines asks who performs and controls those functions, whereas the Trade Marks Act gives ownership to the registered proprietor, and the licensee is a registered user under section 48 without title. Without a statutory bridge, a licensee’s brand-building can be taxed as a service one year and ignored the next. In Bayer Corporation v. Union of India (IPAB 2013; upheld by the Bombay High Court, 2014), the first compulsory licence under section 84 of the Patents Act was granted to Natco, and the appellate board set the royalty at 7%, up from the Controller’s 6%.

A Four-Part Solution

1. Make the IP instrument the starting point for tax character

. A statutory rule or CBDT circular should provide that the tax character of a transfer follows the rights actually conveyed under a written, registerable instrument under Patents Act, section 68; Copyright Act, sections 18 and 19; Trade Marks Act, sections 37 to 45, and that deemed terms under section 19(5) and (6) alone do not fix the character. This writes the Engineering Analysis method into law.

2. Repair the patent box.

Replace the “true and first inventor” condition with registered proprietor status, so assignees qualify, and replace the 75% test with the OECD’s modified nexus fraction, which gives qualifying R&D spending a 30% uplift. Extend eligibility to copyrighted software. The benefit then follows real R&D in India, which also guards against abuse.

3. Codify DEMPE and a marketing-intangibles rule tied to registered-user agreements.

Where a licensee has contractually undertaken brand-building and bears the cost, the rules should say how that effort is rewarded, so that Maruti and Sony Ericsson are not left to further appeals.

4. Anchor valuation and certainty

. Allow compulsory-license royalty determinations to serve as reference points in transfer pricing, and widen Advance Pricing Agreements under section 92CC of The Income-Tax Act, 1961 for IP transactions. Bar retrospective amendments from creating liability on treaty-protected income. Parliament’s reversal of the Vodafone decision in 2012, and its undoing in 2021 after the Cairn and Vodafone arbitrations, shows what the absence of such a bar costs.

Conclusion

An intangible is taxed on the strength of the rights it carries, and those rights are defined by IP law. India’s tax statutes have not yet caught up with that fact. The courts have supplied the reasoning (Engineering Analysis), and the OECD has supplied the model. What remains is for Parliament and the Central Board of Direct Taxes to write the two systems into a single set of rules.