Transfer of intangible assets with right to carry on business is taxable as capital gains and not as business income

Delhi High Court in the case of CIT Vs. M/s Mediworld Publications Pvt. Ltd (ITA No. 549 of 2011) held that transfer of intangible assets with right to carry on business was taxable as capital gains and not as business income.

Facts of the case

• The taxpayer was engaged in the business of health care print media and electronic communications. Business of print media communications comprises of publication of regular journals and customized publications for the industries and professional groups and business of electronic media communication includes production of customized audio video healthcare communications.
• Through a Specified Asset Transfer Agreement (the Agreement) the rights, titles and interest in Business of Healthcare Journals and Communications were transferred to CMP Medica India Private Limited (the Transferee Company). As part of the Agreement the taxpayer assigned the copyrights and trademarks pertaining to the business to the Transferee Company. Further the taxpayer entered into a non-compete for six years with respect to the publication business and continued with its clinical research business.
• The taxpayer treated the sale consideration as long term capital gain; however the Assessing Officer (AO) contended that the same should be assessed as business income.
• The Commissioner of Income-tax Appeal [CIT(A)] and the Income-tax Appellate Tribunal (the Tribunal) dismissed the appeal of the AO.
• The Tribunal observed that the Journals were a capital asset of the taxpayer which were registered with the Trademark Authorities. The taxpayer was the owner of the Trademark & Copyright in the journals, which were sold by the taxpayer to the Transferee. Therefore the provisions of Section 28(va) of the Income-tax Act, 196 1(the Act) were not applicable.

Taxpayer’s contentions

• The taxpayer had been publishing the journals for more than five year. The Journals were registered with the Registrar of Newspapers of India (RNI) and the taxpayer was the exclusive holder of the Trademark, Brand Name and Copyrights in the journals.
• The copyright! trademark was an intangible asset under Section 55(2)(a) of the Act and since it was a self-generated asset, the cost of acquisition was Nil. Therefore the entire Sale Consideration was long term capital gain in the hands of the taxpayer.

Tax department’s contention

• The taxpayer had not sold his entire business and has retained non-exclusive license to use some of the data for its clinical trials business. Further the taxpayer has entered a non-compete clause in the agreement. Therefore in accordance with the provisions of Section 28(va) of the Act the sale consideration was a business income of the taxpayer.

High Court ruling

• The High Court has also ruled in favor of the taxpayer and held that the sale of intangible assets, i.e. trademark & copyright, amounted to a long term capital gain.
• On the basis of the definition of capital asset in Section 2(14) of the Act and intangible asset in Section 2(11 )(b) of the Act the High Court has held that trademark! brands, copyrights and goodwill will constitute asset of the business and are means of earning profit.
• Further under the provisions of Section 55(2)(a) of the Act the right to carry on any business is a capital asset and the proviso to section 28(va) of the Act stipulates that Section 28(va) of the Act would not be applicable to any receipt on account of transfer of the right to carry on any business which is chargeable to capital gain. Therefore Section 55(2)(a) of the Act should be read in conjunction with the proviso to Section 28(va) of the Act.
• The High Court further observed that there is no dispute regarding the fact that the taxpayer had permanently transferred the assets and contracts in the business and the transfer of the intangible assets were the main constituents of the Agreement.
• On the basis of the aforesaid facts the High Court held as follows
  • The Agreement defines the “Business” to mean the business of publishing, distributing and selling the periodical and products as carried on by the taxpayer. Further all the publications are defined as “Business Intellectual Property Rights” which were treated as “Specified Assets”.
  • The taxpayer through the Agreement transferred the business of Healthcare Journals and Communication in entirety to the Transferee Company.
  • The taxpayer continued to carry on the Clinical trial business which was distinct from the business of Healthcare Journals and Communication.
  • Post transfer the Transferee Company acquires sole and undisputed ownership of the Specified Assets.
  • Therefore the consideration received by the taxpayer was a long term capital gain and in accordance with the provisions of the proviso to Section 28(va) of the Act, Section 28(va) of the Act would not be applicable in the instant case.

Our comments- This is a welcome judgment of the Delhi High Court wherein it has been upheld that if the taxpayer transferred its business including the right to carry on the business and intangible assets through the Agreement, the transfer would be subject to tax under the head Capital Gains and not as Business Income.