Bombay High Court Denies Hearing Hindustan Unilever's Challenge Against Tax Demand On Horlicks Acquisition

The Bombay High Court on Monday denied hearing Hindustan Unilever Ltd.'s case challenging a demand of over Rs 962 crores from the Income Tax Department.

The petition challenged an order dated Aug. 23, 2024, issued by the Deputy Commissioner of Income Tax, which raised the demand.

The issue stems from allegations that Hindustan Unilever failed to comply with the income tax provisions, which mandate tax deduction at source for purchasing a trademark registered in India. The company acquired the rights to the health food drink brand Horlicks from GlaxoSmithKline Plc. for over Rs 3,000 crore in 2020.

Following this, several notices were issued to HUL between October 2022 and January 2023, seeking detailed explanations about the nature of the foreign remittance. In response, Hindustan Unilever provided the requested information and sought extensions for compliance.

On Feb. 28, 2023, the Deputy Commissioner issued another notice requesting a valuation report from EY regarding the trademark, questioning whether it should be considered a capital asset situated in India. Hindustan Unilever addressed this notice and submitted further clarifications by March 22, 2024.

Despite Hindustan Unilever's efforts to comply with tax regulations, the Deputy Commissioner of Income Tax determined that the company's payment for acquiring India-specific intellectual property rights was effectively the purchase of assets located in India. This led to the imposition of a substantial tax demand.

Interestingly, there is a 2016 judgment of the Delhi High Court in the case of CUB Pty Ltd. v. Union of India that deals with a similar issue. The court decided that when a company transfers rights to use intangible assets (like trademarks or patents) in India, the income from that transfer is not subject to Indian taxes if the ownership of those assets is based outside of India.

This means that, for tax purposes, simply using an intangible asset in India does not automatically make the income from that asset taxable in India if the actual ownership is located in another country.

However, in this particular case, the tax official concerned made ill remarks about the Delhi High Court ruling because of which the Bombay court criticised the Deputy Commissioner, ordering that these remarks be removed from the official record.

The Bombay High Court then permitted Hindustan Unilever to appeal this tax demand before the relevant revenue authorities. Also, it allowed the company to seek a stay on the related penalty proceedings under the Income Tax Act provisions which address failures to deduct tax at source.

Hindustan Unilever now has 15 days from the receipt of the fresh order to file an appeal and seek a stay on the enforcement of the demand.