Technology transfer is a sensitive issue. Technology may be an intellectual property right (‘IPR’) of the originator, whether registered as a right or not. Development of technology involves significant costs and any transfer (as assignment, license or otherwise) of technology without proper legal protection can lead to misuse by the recipient without effective remedy being available to the originator. Any misuse causes huge financial loss as the originator is not able to enjoy the rightful fruits of its investment. Risk of loss of huge investment by recipient to use the technology is also relevant in case of default by originator.

Protection of IPR is a critical aspect of technology transfer. It is highly imperative that any technology transfer should be based upon an effective contract clearly defining rights and obligation of each party involved. Any non-compliance with local law of the state of recipient may affect the effectiveness of the underlying contract. Another general cause of concern is the effectiveness of IPR enforcement system and contractual rights enforcement system under the local laws of the recipient and access available to the originator to use that system. Another major factor is the tax planning; pay out of taxes may affect the financial viability of the whole transaction. Like in the matter of sale by Foster’s of certain IPR with respect to Indian territory, Advance Ruling Authority has held that sale of IPR is taxable in India as IPR gained value in India due to being used in India. But Delhi High Court has admitted the matter on writ by Foster’s and has restrained tax authorities from passing any order in this matter. However, sale of technology manual was held not to be taxable in India as sale was done outside India and technology manual was developed outside India. Parties should agree as to which tax is to borne by which party. Transfer pricing regulations under tax laws act as a deterrent for any payment for technology transfer in excess of arm’s length price. Indian Government seems to be aware of impediments in the technology transfer to and from India and appears to be doing the needful for the technology advancement of Indian industry.

Successful implementation of technology transfer requires efficient coordination amongst the technical, financial, legal and marketing personnel and advisors of both parties. Originator may undertake limited due diligence to assess the existing or proposed abilities and requirements of the recipient for ensuring bonafide use of the technology, while recipient may undertake limited due diligence of the rights of the originator to transfer the technology. Evaluation of risks involved and devising an effective legal and tax strategy pertaining to the transaction process and implementation is important. Some of the issues involved in technology transfer requiring thorough assessment at each stage of the transaction right from inception are noted below:

Contractual
Specification of technology; scope and conditions of use of the technology; confidentiality; non-compete; termination and its consequences; continuing obligations; guidance / training and support for use; indemnity; third party claims; records & reporting; inspection & audit; quality control; territory; exclusivity; taxes; remedies for breach; dispute resolution; governing law.

Tax
Taxes on income – situs of income; nature of income; taxability; withholding taxes; credit or offset of taxes paid or withheld in the state of recipient; transfer pricing;
indirect taxes – depending upon nature of transaction - taxes on service; customs duty; research & development cess; stamp duty; availability of credit or offset of indirect taxes.

IPR
Ownership; right to assign or license or sub-license; improvements and derivations; registrations with respect to technology and its transfer; infringement including infringement by third parties; remedy for infringement.

Regulatory
Approvals for quantum and frequency of payments for technology transfer; proposal for new guidelines on no limits for such payments; competition law.

Contact:
Seth Dua & Associates
C-56, Neeti Bagh
New Delhi - 110 049, India
Phone: +91 11 / 4164 4400
Fax: +91 11 / 4164 4500
Internet: www.sethdua.com
Atul Dua
Email: atul.dua@sethdua.com