Introduction
The Bombay High Court, in the case of Hindustan Unilever Limited v. Deputy Commissioner of Income-tax[i], dealt with the issue of whether the High Court had the jurisdiction to entertain the writ petition (‘WP’) in cases involving cross-border intellectual property transactions for imposing tax deducted at source (‘TDS’) obligations under s. 195 of the Income-tax Act, 1961 (‘Act’).
Facts
Hindustan Unilever Limited (‘Petitioner’) acquired the trademark ('TM') ‘Horlicks’ (India-specific intellectual property) from foreign entities of GlaxoSmithKline Plc. under an Assignment Deed dated 01.04.2020 for a consideration of Euro 375.6 million (Rs. 3,045.14 crores)
On 07.10.2022, the Deputy Commissioner of Income-tax (‘DCIT’) issued a notice under s. 133 (6) of the Act, calling upon the Petitioner to furnish a detailed note of the nature of the transaction qua the foreign remittance. Further, between October 2022 and January 2023, multiple notices were issued seeking details of the transactions.
On 28.02.2023, a notice under s.201 of the Act was issued to the Petitioner calling for a valuation report from Ernst & Young (E&Y) justifying the transaction value and requiring the Petitioner to explain why the TM should not be considered a capital asset situated in India.
On 11.03.2024, a detailed show cause notice (‘SCN’) was issued under s. 201 of the Act, alleging that the consideration paid for the TM constituted a capital gain transaction taxable in India. The Petitioner responded to the SCN vide letter dated 14.03.2024 requesting DCIT to grant adjournment for four weeks.
Further, two additional notices were issued to the Petitioner on 18.03.2024. Subsequently, on 22.03.2024, the Petitioner filed a reply to the SCN, contending that the transaction did not attract TDS obligations under s 195 of the Act. The Petitioner relied upon the decision of the Hon’ble High Courts of Delhi and Bombay in the case of CUB Pty Ltd. (formerly known as Foster's Australia Ltd.) v. Union of India & Ors.[ii] and Mahyco Monsanto Biotech (India) Pvt. Ltd. v. Union of India & Ors.[iii], to argue that the intellectual property in question did not fall within the ambit of Indian tax laws as it was owned by foreign entities.
Subsequently, on 23.08.2024, the DCIT issued an order under ss. 201(1) and 201(1A) of the Act (Demand order), holding that the TM was a capital asset situated in India and raised a demand of Rs. 962.75 crores for non-deduction of TDS. Furthermore, penalty proceedings under s. 271C of the Act were also initiated against the Petitioner.
The Petitioner filed a WP under a.226 of the Constitution of India (‘Constitution’) challenging the assessment and penalty orders.
Held
The High Court dismissed the WP filed by the Petitioner, observing that the Petitioner had not demonstrated a patent illegality or jurisdictional error in the DCIT’s order. It emphasized that statutory remedies available under the Act, such as an appeal under s. 253, must be exhausted before invoking writ jurisdiction.
The High Court observed that the case involved mixed questions of fact and law, including the applicability of the territoriality principle recognized by the Hon’ble Supreme Court in Toyota Jidosha Kabushiki Kaisha v. Prius Auto Industries[iv].
The High Court further clarified that reliance on CUB Pty Ltd. (supra) to argue situs of ownership outside India was insufficient. It held that such issues required detailed factual findings, which were within the jurisdiction of the appellate authorities.
The High Court, relying on the decision of Director of Income-tax v. M&M[v] and Bharti Airtel Ltd v. Union of India[vi], observed that no specific limitation period is prescribed under s. 201 of the Act for non-residents, as recovery of taxes from non-residents presents unique challenges.
The High Court rejected the argument that the DCIT acted arbitrarily or without jurisdiction, stating that such issues were debatable and required a detailed examination by the appellate authority.
Our Analysis
This ruling highlights the procedural rigour required in tax litigation and the principle that writ jurisdiction under a. 226 of the Constitution is not a substitute for statutory remedies. By dismissing the writ petition, the court reinforced the necessity of following the appellate framework prescribed under the Act, particularly when issues involve mixed questions of fact and law. The judgment also reaffirms the territoriality principle, recognizing that intellectual property registered in India is deemed situated in India for tax purposes. This interpretation aligns with the Supreme Court’s jurisprudence in Toyota Jidosha (supra), emphasizing the need to determine the situs of intangible assets based on their legal and economic presence in the country.
End Notes
[i] 2024 SCC OnLine Bom 3049 dated 23.09.2024.
[ii] [2016] 71 taxmann.com 315/241 Taxman 278/388 ITR 617 (Delhi).
[iii] 2016 SCC OnLine Bom 5274.
[iv] (2018) 2 SCC 1.
[v] [2014] 48 taxmann.com 150/225 Taxman 306/365 ITR 560 (Bombay).
[vi][2016] 76 taxmann.com 256/[2017] 245 Taxman 80 (Delhi).
Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.