3 March 2021
In the recent case of The Principal Commissioner of Income Tax v Redington (India) Limited, the Madras High Court ruled in favour of the commissioner and overturned decisions of the Income Tax Appellate Tribunal (ITAT). The court held that the company had used its subsidiaries in other countries to avoid paying income tax in India. The ruling settled substantial questions of law, including whether the trademark license fee paid by Redington to one of its subsidiaries for a registered mark it already owned could be set off against tax.
The tax avoidance scheme
Redington had appealed to the Income Tax Appellate Tribunal (ITAT) against the decision of the Income Tax Department that profits earned on the transfer of investments in its overseas subsidiaries were taxa- ble. The ITAT ruled in favour of the company.
The high court overturned the decision of ITAT and ordered Redington to pay over ₹1.4 billion (US$19.13 million) in taxes. The court held that the transaction in the form of a transfer of shares to subsidiaries was not a gift as argued by the company and was not eligible for tax exemption. Some subsidiaries were incorporated in Mauritius and the Cayman Islands immediately before the transaction took place, and the respondent received no consideration. This act of the parent company was a way to avoid taxation in India and the subsidiaries were used as conduits for this purpose.
The trademark fee
The parent company based in India claimed tax exemption on the trademark licensing fee it paid to its subsidiary in Singapore, even though the respondent was the owner of the trademark Redington. This issue was questioned by the transfer pricing officer (TPO). Redington dis- puted their authority to do so as it was outside their remit to calculate tax. The TPO noted that a parent company cannot plausibly pay a fee to a subsidiary company for using a trademark owned by the parent company. The company had not submitted any evidence showing that the Singapore subsidiary owned the trademark or that the mark was registered in Singapore. The TPO disallowed the set-off of the trademark and licensing fee against tax. The ITAT agreed with Redington’s submission and allowed the company to claim tax benefit without coming under scrutiny on the legitimacy of the transaction.
In the high court the commissioner submitted that the parent company had been using the mark Redington since 1993, had applied for trademark registration in 2000 and had obtained the certificate of registration in 2009. The entity in Singapore was formed in 2005, later than the time when the Indian entity began using the trademark. The parent company had signed an agreement with the subsidiary in 2006 to allow the use of the trademark in Singapore. The commissioner argued that the ITAT was in error since the transaction was simply not rational.
Redington submitted that this was a commercial transaction and the TPO had no right to question it. The company argued that the Singapore entity was the actual owner of the mark, and operated through a branch in India until 1987. That year, the Indian entity changed its name to Redington and took over the business from Redington, Singapore. The trademark registration application also claimed use since 1986. The respondents submitted no supporting documents in evidence.
In the absence of documentary evidence, the court rejected the claim that the Singapore entity was the legal owner of the mark. It held that the Indian entity was the parent company and had been using the mark since 1993. It was illogical for a parent company to pay a trademark license fee to its subsidiary company, especially when the mark was registered in the name of the parent company and a license agreement for the respondent to use the mark had been signed only in 2006. The TPO had properly questioned the transaction as being irrational, and the findings of the ITAT were perverse.
Businesses often license the use of their trademarks. However, this is usually done by written agreement, for good commercial reasons and for good consideration. In this case, had not an alert TPO questioned the act of a parent company paying its subsidiary a license fee for the right to use the mark that it owned, the tax evasion as evidenced by illogical expenditure would have gone unnoticed. The reality behind intellectual property rights and related agreements must always be examined carefully.
Can a parent company pay its subsidiary a license fee for the right to use a mark that it owns? First published in IBLJ, Manisha Singh and Simran Bhullar discuss the Madras High Court’s judgment in the Redington case.