Transferring IP via Offshore Structures

Introduction

The landscape of cross-border intellectual property transfers and tax liability in India has undergone a significant shift over the years. Indian jurisdiction is moving more towards the principle of economic substance instead of emphasizing on formal documentation. For multinational enterprises the intersection of IP situs, royalty characterization, and General Anti-Avoidance Rules (GAAR) now demands a strategy which is grounded in operational reality rather than legal fiction. The shift is anchored through the precedent established in Tiger-Global which re-oriented the importance of economic analysis over the structural aspects. 

Thus, this evolution significantly impacts IP transfers to permanent establishments in off-shore locations. They continue to attract scrutiny with respect to classification of the royalties, the attribution of profits, determination of ownership, transfer pricing, and even tax avoidance techniques such as the General Anti-Avoidance Rules (GAAR). The recent developments in India show that a trend towards economic analysis is emerging.

Determining where the IP is actually located

An important factor that governs cross-border IP disputes is the location of the asset. The difficulty lies in understanding the location of an intangible asset since it lacks a physical presence which makes it difficult to determine the jurisdiction of the property. An important precedent was set by the Delhi High Court with regards to the taxability of an ip transfer, in CUB Pty Ltd. Vs. Union of India. The dispute was concerned with the transfer of trademark rights between two non-resident entities, the trademark was being used and exploited in India. However, the Court was of the opinion that the transfer was not taxable in India. It was affirmed by the Delhi High Court that in the absence of a specific statutory deeming fiction, the domicile of the owner was to be considered. In the following case because both the transferor and the transferee were non-residents, the capital gains fell outside India’s taxing jurisdiction. 

Royalties vs. Business Profits

The boundary between taxable royalties and exempt business profits remains an important conflict in International Taxation. The distinction forms an important part of the conflict because royalty income is taxable in India however, business profits are considered taxable only if the foreign enterprise comprises a permanent establishment in India. 

In the case of Engineering Analysis Centre of Excellence v. CIT, the Supreme Court clarified the distinction between a royalty and a business profit. It was held that payments made for off-the-shelf software (under EULAs) do not constitute royalties because they grant a right to use a copyrighted article rather than transferring the copyright itself. This precedent was further adhered to in the Oracle Systems Corporation ruling. The ITAT Delhi clarified that royalty income cannot be imputed to a non-resident without a legally enforceable contractual right to receive it. The Revenue cannot rewrite contracts to create a tax liability where no IP transfer was intended.

Permanent Establishments (PE) and the Disposal Test

A problem that arises with offshore intellectual property structures is that the Indian tax authorities claim that there is a Permanent Establishment (PE) in India due to the operations of the Indian subsidiary through which the IP rights are managed, thus attributing income in India.

With respect to establishing Fixed Place PE status, the Oracle decision has made it clear that it is very difficult to do so. It will be necessary for the tax authorities to show that the premises in India are "at the disposal" of the foreign entity – this cannot be achieved simply on the basis that an Indian subsidiary provides services to its parent company. Further, it has been stated that in case the Indian Subsidiary is compensated at arm’s length for the functions performed no further profits can be considered. The intersection of transfer pricing and the Indian subsidiaries as permanent establishments thus forms an important aspect of the offshore IP structure management in India. 

The Tiger Global Reset: Effects on IP Transfer

The January 2026 decision of the Indian Supreme Court in Tiger Global has realigned the burden of proof and standards applicable to offshore IP transfer structures within the country. First and foremost, the ruling reduced the importance of Tax Residency Certificate from an absolute defence to a condition of eligibility, enabling the authorities to go beyond it and ascertain whether the control lies elsewhere and whether the holding structure does indeed have any substantive presence in the jurisdiction.

With regards to IP transfer specifically, such a change brings up immediate structural concerns. An offshore structure holding IP on paper but making development, utilization, and commercialization decisions through Indian nationals is exposed to increased risks. As such, a business that technically holds the IP but actually uses individuals based in India to conduct research and development or make any decisions concerning the licensing or exploitation of the IP may be considered to have difficulties with respect to both beneficial ownership and eligibility for the benefits of the treaty.

Conclusion

The method adopted by India for taxing foreign intellectual property transactions is moving towards an economy-based system, rather than one that depends on documentation. Some examples of this trend can be seen in the recent jurisprudence and regulations involving IP situs, characterization of royalties, PE attribution  and GAAR.

Ownership still plays a part in the determination of the status of the intellectual property asset as seen in the case law of CUB Pty Ltd. Furthermore, in the cases of Engineering Analysis and Oracle Systems Corporation, it was made clear once again that no royalty can be taxed without the occurrence of a genuine transfer of ownership of the said property right. Likewise, for cases involving Permanent Establishments, there must be proof that the establishment of the Indian subsidiary has been placed under the effective control of a foreign company before profits are attributed to it.

Above all, the case of Tiger Global made it clear that neither the eligibility of a tax treaty nor proper documentation will do on their own anymore. There is now a tendency on the part of the tax authorities to look into where the decision-making takes place, value creation occurs, and the actual control over the IP asset is exercised. For multinational companies, it is evident that any cross-border structure of IP should not only have the necessary corporate structure and documentation but more importantly, real substance.

Author: Auridraa Chatterjee, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References

1. Indian court clarifies tax treatment of foreign-owned intangibles (no date) Kluwer International Tax Blog. Available at: https://legalblogs.wolterskluwer.com/international-tax-law-blog/indian-court-clarifies-tax-treatment-of-foreign-owned-intangibles/ (Accessed: 16 June 2026).

2. Kulkarni, R.M. et al. (2016) Searching for situs: Delhi High Court holds IP transfer by foreign based entity not taxable in India, SpicyIP. Available at: https://spicyip.com/2016/08/searching-for-situs-delhi-high-court-holds-ip-transfer-by-foreign-based-entity-not-taxable-in-india.html (Accessed: 16 June 2026).

3. Tiger global: Sc says ‘tax sovereignty comes first’ but verdict raises questions (2026) Supreme Court Observer. Available at: https://www.scobserver.in/journal/tiger-global-sc-says-tax-sovereignty-comes-first-but-verdict-raises-questions/ (Accessed: 16 June 2026).

4. Engineering Analysis Centre of Excellence (P) Ltd. v. CIT, (2022) 3 SCC 321

5. AAR v. Tiger Global International, (2026) 485 ITR 214

6. CUB Pty Ltd. v. Union of India, (2016) 388 ITR 617