HUL challenges Rs 962-cr tax demand for ‘Horlicks’ deal with GlaxoSmithKline with Tax Commissioner

The Core Dispute

The primary issue hinges on whether the sale of intellectual property (IP), such as a brand name, should be taxed in the country where the IP is held or in the country where it is used. This question has created a grey area in Indian tax law, particularly for cross-border deals involving intangible assets like trademarks.

In 2020, HUL purchased the Horlicks brand from GSK for Rs 3,045 crore. The deal did not involve any transfer of shares or corporate ownership, only the brand name. The tax department argues that this transaction is subject to capital gains tax and that HUL, as the acquirer, should have deducted this amount as Tax Deduction at Source (TDS) when paying GSK.

In response, HUL has filed an appeal with the Commissioner of Income Tax challenging the assessment.

A company spokesperson told Moneycontrol, “The Company has a strong case on the merits of tax not withheld, basis available judicial precedents. Further, the Company has undertaken necessary steps towards invocation of the indemnification right to recover the demand raised by the Income Tax Department. The Company does not foresee any material financial implications at this stage.”

Legal experts say the tax indemnification clauses can be invoked by HUL against the seller GlaxoSmithKline in case of any unexpected tax outgo due to the transaction. Since the proceeds were received by the seller, the indemnification places the onus on GlaxoSmithKline to pay up for any tax notices received in the transaction.

The case highlights the broader issue of taxability on intangible assets like IP. According to legal experts, this is not the first time such a dispute has arisen in India.

Legal Precedents

This ongoing case adds to a series of similar disputes that are yet to be resolved. Legal experts say several cases involving the taxation of intangible assets like trademarks and brand names are pending before the Supreme Court. Among them are cases involving Australian brewer CUB PTY (formerly Foster’s Australia) and Mahyco Monsanto Biotech, where similar circumstances arose. Both companies received favourable judgments from the high courts, but the Supreme Court’s final rulings are awaited.

Legal experts say different courts have interpreted such cases differently.

“In the case of Fosters, the Delhi High Court ruled that the location of the trademark owner determines the location of the asset. On the other hand, the Bombay High Court, in the Subway case, held that the location where the agreement was signed determines the transaction’s situs.” Said Ankit Jain, Partner, Ved Jain & Associates.

“The core issue centres on where a trademark or brand is considered to be 'situated.' A trademark is intangible, with no physical form or fixed location, which raises the question of how its location should be determined.”

The HUL case mirrors past tax disputes in India involving the sale of shares by foreign companies. For instance, cases involving Hutchison Telecommunications and Cairn Energy saw the revenue department issue large tax demands for capital gains on share transfers. These tax demands were issued retrospectively, years after the transaction was concluded. In 2017, the government codified the law of indirect transfers covering such cases. However, in 2022, the government withdrew retrospective tax notices, clarifying that the law will be used only prospectively.

Legal experts say there is no clear precedent for such cases.

"The underlying issue is whether the sale of IP rights, which derives its value from India (on account of being exploited in India) is taxable in India or not, on the pretext that they are the assets located in India. We have seen a spate of litigation on this issue in the past. There is no clear law, which provides the situs of IP rights registered in the name of an offshore entity in India on account of its exploitation in India. The issue is not likely to be settled below the Supreme Court." Said Amit Singhania, founder, Areete Law Offices.

Ritika Nayyar, partner at Singhania & Co said, “Such stringent stances adopted by our courts on these situations is not conducive to the investment opportunities in India. Indian tax laws are ambiguous regarding the taxability of trademark sales, particularly when the IP is registered in one country and the brand is used in another. This uncertainty is deterring foreign investors and increasing legal costs for both businesses and the government.”