TERRITORIALITY OF TRADEMARKS AND MOBILIA SEQUUNTUR PERSONAM

By Rajesh Vellakkat posted 10-20-2016 06:54 AM

  

I write this after reading the recent judgment of the Delhi High Court in Cub Pty Ltd. Vs. Union of India, where the Court, interpreting Section 9(1) (i) of the Income Tax Act, 1961, concluded that for taxation of capital gains resulting from assignment of intangible assets such as trademarks, brand logos and other IP, the situs of the owner of that asset should be considered. The judgement states that such gains should be taxed only at the place of the situs of the owner.

The entire judgement relied on the legal maxim Mobilia Sequuntur Personam, which means “movables follow the law of the person”. Intellectual properties being “movable properties”, the court concluded that this maxim is applicable and assignment of trademarks is taxable only at the place of the owner of the mark. This judgment will have a significant impact on IP transactions.  Therefore, I took some time to carefully read the judgement to study the details. It is my view that the judgement has not considered many aspects of law relating to trademarks and other intellectual property rights. The counsels on either side do not appear to have put forth those points either.  This write-up isan attempt to discuss those missing aspects.

Before discussing those aspects, here is a brief narration of the case:

In 1997, CUB Pty Limited (formerly Foster’s Australia Limited) entered into a brand license agreement with its subsidiary Foster’s India that granted the latter the right to use four of its trademarks registered in India. CUB Pty received royalty payments in consideration of this limited license to use the marks in India.

The primary issue that arose was whether the income resulting from the sale of the Trademarks, being intangible capital assets, is subject to tax under Section 9 of the Income Tax Act, 1961. The Authority for Advance Ruling had opined that in such a transaction wherein income accrued from transfer of the intellectual property, taxes are payable by Foster’s Australia.  

A writ petition was filed by Foster’s Australia before the High Court of Delhi. Where they argued that the situs of an intangible property is where the owner of the property resides and therefore the income from the transfer of the capital asset (i.e. its marks) cannot be deemed to accrue or arise in India under Section 9(1)(i) of the ITA, 1961.

The Union of India, in response, submitted that the trademarks were registered in India with no value at the time of original registration, and that over time, they gained appreciable goodwill and value through the concerted efforts of the appellant and Foster’s India Limited. Therefore, the principle of Mobilia Sequuntur Personam must be discarded and as such, the situs of the property is in India.

After reading the Delhi High Court’s judgement, I did a study of the status of the trademarks Foster’s F logo, Kangaroo device etc. in the India trademark registry. A search under Class 32 revealed that there are 32 registrations for the word Fosters and label, captions etc. I perused those registrations and noted that the applications were filed starting from   in 1943 by Carlton United Breweries of Australia. In 2006, Foster’s Group Australia assigned a bunch of its trademarks including its Indian trademark registrations to Skol Breweries, which subsequently changed its name to SABMiller India. From the submissions filed in those applications, the entire flow of title can be identified, including assignment of the trademarks, referred above, which is the subject matter of this discussion. Based on this trademark search, I find that the mark Fosters was a registered mark in India. I also came to know that Fosters manufactures beer in India and the goods are sold all over India through various business channels.   

A registered mark confers on its owner an exclusive right to use the trademark in relation to its goods and services. This exclusive right is available in the country where the mark is registered. For a person to get an exclusive right to use it all over the world, a registration in each country is required. In short, a trademark right is a territorial right. The same trademark can be owned by different entities in different countries. In most countries of the world, use of the mark in the country is a pre-requisite for obtaining a trademark registration in that country. Non-use in the country is a good reason for cancelling the registration granted as well. A globally registered trademark can be assigned or licensed to different people in different countries. The same is the case for goodwill. It exists and can be exercised only in the country of use. All over the world, goodwill is also considered as a territorial right. Unless you develop your business and use the trade symbols in the country concerned, you cannot claim goodwill. Let me quote one of the old judgements from UK court in Commissioners of Inland Revenue v Muller & Co. Margarine; hl 1901, wherein Lord Lindley wrote. ‘Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. In that connection, I understand the word to include whatever adds value to the business by reason of the situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on. Such business may be carried on in one place or country or in several, and if in several there may be several businesses, each having a goodwill of its own.”  A recent UK supreme court judgment in Starbucks (HK) Limited and another v British Sky Broadcasting Group plc and others [2015] UKSC 31 reiterates this aspect.

I should not forget to mention here the exceptions available for “Well Known Trademarks” granted under Article 6bis of the Paris Convention and later adopted in the TRIPS Agreement. These exceptions apart, in general, trademarks and goodwill remains as territorial rights. The value of the trademark is directly connected to the goodwill it possesses. Hence, there is separate legal existence in different countries and as such, has different situs too.

I do not want to make this writing very academic by quoting many judgements from different countries. However, those who are interested to know further could read a very old article with the title “Territorial Scope and Situs of Trademarks and Goodwill” written by Walter J. Derenberg in Virginia Law Review, Vol. 47, No. 5 (Jun., 1961), pp. 733-750. One could also read “Territorial Intellectual Property rights in an age of Globalism” written by Curtis A Bradley in Virginia journal of International Law. This is available at http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1982&context=faculty_scholarship. This position of law narrated therein remains same even today. Indian courts too have upheld this position. Judgment of Calcutta High Court in Aktiebolaget Jonkoping Vulcan Vs. V.S.V Palanichamy Nadar AIR 1969 Cal 43 is good judgement to read on this aspect.

There is a huge difference in character between other movables and Intangibles. In case of tangible movables, the ownership remains with one person all over the world, while in case of Intangibles like a trademark ownership could well be with different entities, subject, of course, to necessary registrations under the laws of the respective countries.  Another differentiator between Intellectual Property and other movable items is that, in case of any movable item, ownership can be transferred without registration. A movable property can be assigned and transferred by mere transfer of possession. In the case of registered Trademark, an assignment of a trademark should necessarily be registered with the Trademark office. A registered Trademark can be assigned only through a written instrument. A Trademark which is registered in multiple countries can be assigned to multiple unrelated people. Hence, applying the rules of other movables on Intellectual Property in the same manner may create fundamentally incompatible results. Which is what appears to have happened as a result of the Delhi High Court’s judgement.

If we look at the trademark law, for a foreign trademark owner to register their mark in India, it is mandatory that they should have either an address in India or should appoint an agent and in such cases the address of the agent shall be considered the address of the foreign trademark applicant. Rule 3 of the trademarks Rules is relevant for this discussion.

Rule 3. Principal place of business in India. - Principal place of business in India means- (i) where a person carries on business in the goods or services concerned in a trade mark- (a) if the business is carried on in India at only one place, that place; (b) if the business is carried on in India at more places than one, the place mentioned by him as the principal place of business in India; (ii) where a person is not carrying on a business in the goods or services concerned in a trade mark - (a) if he is carrying on any other business in India at only one place, that place; (b) if he is carrying on any other business in India at more places than one, the place mentioned by him as the principal place of business in India; and (iii) where a person does not carry on any business in India but has a place of residence in India, then such place of residence in India.

Hence, any registered trademark owner as per trademark law should have a situs in India. Explaining further, the principles of agency law apply in cases where the trademark proprietor has no business in India. In such cases the agent’s place of business is deemed to be the office of the owner’s business. An agent is someone who acts on behalf of another. A Trademark which is registered in multiple countries thus has situs in multiple countries.

Hence, even if we apply the maxim of Mobilia Sequuntur Personam, the situs of the Indian Trademark remains in India irrespective of the owner’s registered office address being in another country. The judgement states that rights in Trademark are a common law right and Trademark statutes merely fortify the common law right. It is true that trademark as a right originated as a common law right. However, merely for the reasons that it is a common law right, it shall not confer global privileges. As mentioned earlier, trademark rights are granted by the state and are thus territorial in nature.

Based on the above, I am of view that the judgement requires a review. Otherwise, it will have great impact on the revenue of our country and deprive our country of legitimate tax collection opportunities. I wish to bring the reader’s attention to an article titled “Only A Name? Trademark Royalties, Nexus, And Taxing That Which Enriches” written by Sheldon H. Laskin in Akron Tax Journal which is available at:https://uakron.edu/law/lawreview/taxjournal/atj22/docs/LaskinT22.pdf.

In short, I believe that physical presence of the owner as nexus rule for taxing the income derived from intangibles is inconsistent with well-established and soundly reasoned tax and trademark jurisprudence and would be totally incongruous with the way businesses are presently conducted. A state’s authority to tax intangibles cannot be limited by considerations of the intangible’s non-existent physical location. The business situs rule is more appropriate for taxing income from transactions of intangibles. Literal application of the maxim Mobilia Sequuntur Personam may not be appropriate while deciding on taxation of intangibles. 

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