Trademark is defined as a mark (may include symbols, colour, shape, packaging of goods, etc.) that encompasses the capability to geographically represent and distinguish the goods or services of one party from other parties.It is a set of rights that enables the use of such marks by the owner to the exclusion of other parties. Trademarks are an essential commercial and economic tool, and are, usually, heavily endorsed with the intention to build the brand value of the business.
Valuation of trademarks is a practice having great pertinence especially due to the rising number of cases wherein the value of intangible assets such as intellectual property is considered higher than that of the tangible assets, as was the case with Coca-Cola in the year 2006-07 wherein the balance sheet equity was valued at $16.92 billion whereas the market capitalization was at a whopping $124.42 billion. Trademarks are, therefore, valued for primarily three reasons:
- Transactional purposes (not including matters of taxation).
- Financial accounting purposes.
- Taxation purposes.
The current article would be focusing upon the taxation aspect of trademark valuation.
Methods for Trademark Valuation
There are several methods for the valuation of trademark, however, there are three generally accepted approaches to it, which are as follows:
a. Cost Approach
This approach to valuation involves an assessment of the costs incurred during the creation and development of the trademark and, therefore, reflects the minimum value of the trademark. This method is, however, not always effective because the wide range of economic benefits accruing from trademarks is not successfully represented herein.
b. Market Approach
This approach seeks to compare and analyse the value of similarly situated trademarks (for example, businesses dealing with similar goods or services),which have been licensed or sold, to derive the value of the trademark being valuated.
c. Income Approach
This method is usually considered the most effective for valuating a trademark. It seeks to reach an estimation by the calculation of the present value of the future income that it is predicted to generate over the course of its remaining useful life (RUL).
Taxation Issues w.r.t. Trademarks
a. Cross-Border Use of IPR
One of the primary issues with regard to taxation of trademarks arises out of cross-border use of intellectual property rights. This may involve multinational entities (MNEs) licensing their IP to their subsidiaries (located in different countries), who, in turn, may or may not sub-license the IP to third-parties (franchisees/subsidiaries) functioning locally. In these instances, the company owning the IP may be established in a low-tax region and may charge royalties against the subsidiaries located in high tax regions, in an endeavour to avoid large tax cuts. A similar situation arose in the GlaxoSmithKline (GSK) Holdings dispute wherein the IRS (U.S.A.) increased the income of GSK’s U.S. subsidiary after taking into account the value of intangibles owned by its parent company, which was established in the U.K.
It is pertinent to note that several jurisdictions (including India) require such a company to ensure that the royalties charged do not exceed the respective ‘arm’s length rate’ (royalty rate charged in controlled transactions must be within the range of royalty rates charged in comparable uncontrolled transactions).In the Maruti Suzuki Ltd case, the Delhi High Court ruled on the transfer pricing aspects in instances wherein the promotional efforts of an associated entity significantly increases the value a trademark legally owned by another entity. The question considered herein was whether the income generated by the trademark is to be attributed to the IP owner (registered in a foreign country) or the affiliated entity (registered in India). It was held that if the advertising, marketing and promotional (AMP) expenditure of an affiliated entity is more than the ordinary expenditure that would’ve been incurred by an entity in a comparable situation, the IP owner is obligated to reasonably compensate for the same, and therefore, an estimation of the appropriate arm’s length royalty rate becomes crucial.
Furthermore, the aforementioned judgement refers to the ‘bright line test’ that was laid down by the U.S. Tax Court. The test states that if the investment of a licensee exceeds the routine expenditure expected out of it, that entity would be deemed to hold economic ownership over the IP. This test, though not explicitly stated, was also invoked in the previously mentioned GSK dispute.
b. Capital Gains or Business Income
In Commissioner of Income Tax v. M/S Mediworld Publications Pvt. Ltd., the Delhi High Court held that the income generated by the transfer of intangible assets (here, trademark and copyright) is in the nature of ‘capital gains’ and not ‘business income’, and are, therefore, taxable. The court clarified that ‘capital asset’ under S.2(14) of the Income-Tax Act, 1961, can be inferred to be inclusive of intellectual property; and in accordance with S.2(11) of the Act, IP would be considered as an intangible asset serving as a means for earning profit. It was, further, held that sale of intangible assets such as trademarks would be covered by the proviso provided within S.28(va).
c. Situs of an Intangible Asset
Identification of the situs of a property is vital for taxation purposes, however, the process is complicated with regard to intangible property. In 2016, the Delhi High Court ruled, in concurrence with international principles, that the situs of the owner of the respective property would be deemed to be the situs of the intangible asset, regardless of the same being registered in India. This conclusion was reached by the court through a strict interpretation of S. 9 of the Act, which reasoned that the non-inclusion of IP under the provisions of S.9 clearly denoted the legislature’s intent to not tax IP owners situated outside India even if they reaped profits in India through their respective IPs.
The importance of valuation of intellectual property, like trademarks, is on the rise, and with it, the complications with regard to its taxation. Globalization and rapid technological development have led to vast unpredictability making it increasingly tedious to accurately valuate intangible assets. Corporations need to be mindful of such developments and must implement sufficient measures to safeguard their interests. Furthermore, the various disparities that exist in different jurisdictions make it all the more difficult for entities having engagements worldwide to reach a middle ground and ensure their compliance with tax regulations. Such discrepancies may also lead to double taxations being imposed on entities and therefore, clear and specific regulations pertaining to the issue at hand is a need of the hour.
Author: Harsshita Pothiraj (intern), a III Year-B.B.A.LL.B., student of University School of Law & Legal Studies (GGSIPU, and Anubhav Gupta, Principal Associate- Taxation at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at email@example.com.
Trade Marks Act, 1999, No. 47/1999, s.2(zb).
Maruti Suzuki India Ltd. v. Commissioner of Income Tax, (2016) 282 CTR (Del) 1.
Commissioner of Income Tax v. M/S Mediworld Publications Pvt. Ltd., ILR (2011) 6 Del 203.
Income-Tax Act, 1961, No. 43/1961, s.2(14).
 CUB Pty Ltd v. Union of India, (2016) 288 CTR 361.