Tax Character of Intangibles and the Rights Conveyed under IP Statutes

It is argued that the tax character of income from an intangible should follow the rights actually conveyed under the relevant IP statute, and that the Income-tax Act, 1961, and its successor, the Income-tax Act, 2025, do not yet say so.

The question is current because software, patent and brand transactions are priced and withheld on every day, and the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT ((2021) 432 ITR 471) established a method that remains uncodified. The reforms discussed below are proposals only; no statute or circular is stated to exist for them.

1. The issue

Under Section 9(1)(vi) of the 1961 Act, a temporary grant of rights is royalty, and the position is carried into the 2025 Act. An outright transfer yields capital gains or business income. Which side of the line a transaction falls on depends on what the instrument actually conveys, and what it conveys is a matter for the Copyright Act, 1957, the Patents Act, 1970 and the Trade Marks Act, 1999.

2. What the IP statutes provide

The exclusive rights attaching to a work are enumerated in Section 14 of the Copyright Act; for a computer programme these include reproduction, adaptation and commercial rental. Section 18 permits assignment and Section 19 requires it to be in writing. Under Section 19(5) and (6), if the assignment is silent on term it is taken as five years, and if silent on territory it extends to India. A licence under Section 30 permits specified acts without transferring ownership.

(ii) Patents

An assignment of a patent must be in writing and registered with the Controller (Section 68). Section 6 lets the true and first inventor's assignee apply for a patent. Computer programmes "per se" are excluded from patentability (Section 3(k)), and a compulsory licence is granted under Section 84.

(iii) Trade marks

A registered mark may be assigned with or without goodwill (Section 39), and a registered user may use the mark without owning it (Section 48). Sections 37 to 45 deal with assignment and transmission.