Section 115BBF – Concessional rate of tax @ 10% on income from patent – Issues to be addressed
a) Benefit may be extended to other intellectual property rights
The Finance Act, 2016 has inserted section 115BBF to tax royalty income derived from worldwide exploitation of patents developed and registered in India @ 10%. It is a welcome move and would greatly boost the research and innovation environment in the country. However, the provision provides the benefit of reduced rate of tax to only royalty income derived from patents subject to specified conditions. This may partly achieve the intended objective of the government behind introduction of this provision i.e. to encourage indigenous research & development activities and to make India a global R & D hub, research is the driver of innovation and innovation provides a thrust to economic growth.
The current income tax law treats the other intellectual rights like any know-how, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services in the same vein as patent. Hence, there appears to be no reason not to extend the benefit of section 115BBF to income from other intellectual property rights.
In particular, it needs mention that jurisdictions like Ireland, Luxemburg extend benefit by specifically covering software within the list of qualifying assets though; commercially it enjoys protection under Copyright Act and not under Patent Act.
It is suggested that the benefit of concessional rate of tax @ 10% of income by way of royalty in respect of a patent developed and registered in India be also extended to other intellectual property rights like knowhow, copyright, trade-mark etc.
b) Benefit restricted to ‘true and first inventor of the invention’: Benefit may be extended to assignee of the true and first inventor in respect of the right to make an application for a patent
The benefit of the provision is restricted to ‘true and first inventor of the invention’. As per the provision, even a person who is jointly registered with ‘true and first inventor’ should be ‘true and first inventor’.
In view of following features under the Patent law, the benefit of the provision may be denied to firms/LLPs/companies who register the patents jointly with true and first inventor who may be an employee even though they may have incurred significant expenditure for development of the patent and they are first economic owners of such patent.
Under the Patents Act, following persons can apply for patent (a) a person claiming to be true and first inventor of the invention (b) an assignee of the true and first inventor in respect of right to make an application and (c) legal representative of a deceased person who immediately before his death was entitled to apply.
It is also settled under the Patent Act that a company or firm cannot claim to be ‘true and first inventor’. They can only apply as assignee of true and first inventor.
Similarly, whether an invention made by employee should belong to employer depends upon contractual relations, express or implied. It is possible that, in the absence of any contractual obligation, an employee may apply for an invention in his own name even though he developed the invention in the course of employment and by using employer’s resources.
It is, hence, suggested that the condition of joint patentee also being ‘true and first inventor’ be omitted. If the intent is to allow benefit only to first person to register patent, the phrase ‘being the true and first inventor of the invention’ used in context of joint person may be substituted with the phrase ‘being the assignee of the true and first inventor in respect of the right to make an application for a patent’
c) Benefit may be extended to capital gains arising on sale of patented products
The taxpayer may exploit its Intellectual Property by outright transfer which has no differential impact merely because for one assessee the amount is assessable as business income whereas for other it is assessable as capital gains income. There is no reason to exclude amount which is chargeable as capital gains in the hands of the taxpayer.
It is suggested that, in line with BEPS Action 5, in addition to royalty income, this concessional regime maybe extended to income on sale of patented products also.
d) Extension of benefit to royalty income earned from inventions for which patents are applied under Patents Act 1970 but registration is awaited
The commercial exploitation of invention starts even before it is formally registered as a ‘patent’ under the Patents Act. The Patents Act recognises that even the right to apply for patent can be assigned. As per the provision, royalty from a patent which is ‘registered’ alone will qualify for the new regime. If royalty income is earned when patent application is filed but registration is awaited, there may be denial of the benefit.
It is suggested that the concessional tax regime be extended to royalty income earned from patents which are applied for and awaiting registration as well.
e) Other Issues which need to be addressed
Some of the conditions for availing the benefit of concessional tax regime is that the patent should be developed and registered in India, the patentee should be a resident and income should be in the nature of royalty.
To make the regime truly meaningful and comparable to the regimes which exist in other jurisdictions, its scope need to be extended to cover or clarify the following:
a. That consideration received for settling infringement disputes is also an alternative form of royalty which qualifies for the benefit.
b. To provide an option to the taxpayer to opt out of the regime if the expenditure and allowances admissible in computation of royalty income is likely to result in net taxation below the regime prescribed rate.
c. Since almost all comparable jurisdictions extend benefit to non-resident permanent establishment which develops IP under the circumstances comparable to those under which IP is developed by the resident. The benefit may be extended to non-resident having permanent establishment in India.
d. In case of a business reorganisation in the form of merger, demerger etc., the successor entity and in case of death of the patent owner, its legal heir/inheritor of the patent may be considered as eligible to claim the benefit provided such successor/legal heir satisfies the condition of being a resident of India.