E-Malt.com News article: India: Foster’s gets a tax hangover over SABMiller

In what could have serious implications for cross-border deals into India, the Authority for Advance Ruling (AAR), a quasi-judicial body, has ruled against Foster’s Australia, saying that the beer major’s sale of brand and trademarks to SABMiller in India is taxable in the country, TNN reported May 20.

The development is a shot in the arm for Indian tax authorities bent on taxing all recent cross-border acquisitions of Indian companies.

The income-tax department feels that transactions between two offshore entities can be taxed, as long as the business pertains to the Indian market. Based on this argument, the department has raised tax demands on the Vodafone-Hutch deal, and more recently on participatory notes (PN) trades between FIIs and foreign entities, with no direct access to the Indian stock market. The tax department’s stance on the Foster’s deal is also based on a similar logic.

Foster’s sold its Indian beer arm to SABMiller in 2006 for about $120 million, exiting the market completely. The sale included the brand and trademark rights. SABMiller continues to sell Foster’s separately in the country.

Prima facie, the AAR order is binding only on the company that sought answers from it. However, the authority’s rulings have persuasive value and tax officers often cite them in support of their orders.

“The tax authorities approach is consistent in both cases — Vodafone as well as Foster’s,” said Sushil Lakhani, a senior chartered accountant.

AAR’s decision was on an application filed by beer major Foster’s Australia. The AAR held that the Foster’s India brand, trademark and goodwill are always associated with the company’s Indian business, and hence their sale to SABMiller is liable to be taxed here.

The AAR did not find merit in the Australian company’s argument that unlike other capital assets, which can be geographically located, the situs of intangible assets like brand and trade name have no particular geographical location. Therefore, they have no situs apart from the domicile of the owner.

AAR pointed out that the trademark of Foster’s beer was registered in India in 1993. Further, Foster’s trademark and brand were used by Foster’s India for about a decade after the licence was granted to it by Foster’s Australia in 1997.

These intangible factors have become inextricable components of the business of manufacturing and marketing of Foster’s beer in India. Foster’s Australia, by entering into the beer licence agreement with Foster’s India, became a collaborator in the Foster’s Indian business. The AAR also observed that the Australian company was even receiving royalty from Foster’s India for the licence granted to use Foster’s trademarks as well as brewing rights.

The commercial exploitation of the trademarks and brand by the applicant, aided by the marketing and advertising efforts of Foster’s India, has resulted in the creation of valuable intangible assets in India. Hence, it is reasonable to hold that the assets in the form of trademark and brand, together with the goodwill they generated, were situated in India, when the transfer of ownership took place in 2006, the AAR said.

The Australian company has independently valued intangible assets, such as brand, trademark, goodwill, its licence to Foster’s India to brew the brand, at about $90,000.

Foster’s Australia had sought answers from AAR on the following issues: whether the sale of brand, trademark and brewing licence of Foster’s India to SABMiller is liable to be taxed in India.

AAR held that the income arising to Foster’s Australia from the transfer of its right, title and Foster’s brand is taxable in India under the Income-Tax Act. However, the licence given by the Australian company to its Indian arm for brewing Foster’s beer is not taxable in the country.


20 May, 2008