Trademark Valuation And Taxation

Trademark is a distinct mark associated with goods or services of a business, company or individual. Trademark means a mark/brand consisting of colour, symbol, packaging of goods, shape, etc. Trademark helps to differentiate and geographically represent the goods or services of one person from another. It is a set of rights that provides exclusive use to the owner and builds goodwill for the goods or services with which it is associated.

Trademarks are an essential economic and commercial tool that builds the brand value of a business. The trademark owner can transfer his/her trademark rights in the trademark to others, just like the transfer of property. Thus, it is considered an intangible asset for a business. It can be sold, pledged, assigned or franchised.

Trademark Valuation

In a commercial transaction that involves the sale of an asset, including an intangible asset such as a trademark, it is essential to arrive at the accurate price at which the seller is ready to sell it, and the buyer is ready to buy it within a reasonable time. 

However, sellers find it difficult to arrive at a price to sell the asset and find buyers who will buy for that price. The valuation of an asset can help a buyer determine its approximate price, including a trademark using different valuation methods.

Entrepreneurs or trademark owners often wonder about the value of their trademark. Thus, trademark valuation has great pertinence, especially because of the number of rising cases where the value of intangible assets such as trademark is considered higher than that of the tangible assets.

Trademarks are usually valued for three primary reasons, which are:

• Transactional purposes (not including matters of taxation) 
• Taxation purposes
• Financial accounting purposes

Trademark Valuation Methods

There are many methods of trademark valuation. However, the following three valuation methods are the generally accepted approaches:

Cost Approach

The cost approach of valuation involves assessing the costs/expenses incurred during the development and creation of the trademark. Thus, it reflects the minimum value of the trademark. However, this approach is not always effective because the broad range of economic benefits accruing from a trademark, including goodwill associated with the trademark, is not considered. This method is good for valuing a relatively new trademark in the market.

Market Approach

The market approach of valuation compares and analyses the value of similar trademarks to arrive at the trademark value. This method considers the trademark of the businesses dealing with similar services or goods that have been sold or licensed to determine the value of the trademark. In this method, market data relating to buying, selling, licensing or franchising of similar trademarks are used to arrive at the trademark valuation.

Income Approach

The income approach of valuation is usually considered the most effective method for evaluating a trademark. In this method, an estimate is arrived at by calculating the future income that the trademark is predicted to earn over the course of its remaining life based on the present value.

Trademark Taxation Aspects in India

The tax treatment on intangible assets that include trademarks in India is provided and discussed below.

Capital Gains or Business Income

In the case of ‘Commissioner of Income Tax vs M/S Mediworld Publications Pvt. Ltd.’, the Delhi High Court held that the income/profit generated from the transfer of an intangible asset, i.e. trademark and copyright, is in the nature of ‘capital gains’ and not ‘business income’, thus taxable. The court clarified that a ‘capital asset’ under Section 2(14) of the Income-Tax Act, 1961, can be implied to be inclusive of intellectual property. 

As per Section 2(11) of the Income Tax Act, intellectual property would be considered as an intangible asset that serves as a means for earning profit. It further held that the sale of an intangible asset such as a trademark would be covered by the proviso provided in Section 28(va) of the Income Tax Act.

Cross-Border Use of Intellectual Property Rights (IPR)

One of the issues regarding the taxation of trademarks arises from the cross-border use of Intellectual Property Rights (IPR). It involves Multi-National Entities (MNEs) licensing their IPR to their subsidiaries located in different countries. These subsidiaries may sub-license the IPR to third parties functioning locally. The companies/entities owning the IPR may be established in a low-tax country/region. They may charge royalties against the subsidiaries located in a high tax country/region to avoid large tax cuts.

A similar circumstance arose in the ‘GlaxoSmithKline (GSK) Holdings’ dispute. The Internal Revenue Service (IRS) in the USA increased the GSK’s US subsidiary income after taking into account the intangible values owned by its parent company that was established in the UK. Several jurisdictions, including India, require such companies to ensure that the royalties charged should not exceed the respective ‘arm’s length rate’ (royalty rate charged in a controlled transaction should be within the range of royalty rate charged in a comparable uncontrolled transaction).

In the case of ‘Maruti Suzuki India Ltd. vs Commissioner of Income Tax’, the Delhi High Court passed a judgement on the transfer pricing aspect in the case where the promotional efforts of an associated entity significantly increase the value of a trademark that is legally owned by another entity. The question, in this case, was whether the income generated by the trademark was to be attributed to the trademark owner (registered in a foreign country) or the affiliated entity registered in India. 

The court held that if the marketing, advertising, and promotional (AMP) expenditure of an affiliated entity are more than the ordinary expenditure that would have been incurred by it in a comparable situation, the trademark owner is obligated to compensate for the same. Thus estimation of the appropriate arm’s length royalty rate becomes necessary.

Further, the judgment referred to the ‘bright line test’ which the US Tax Court laid down. The test provides that when the investment of a licensee exceeds the regular expenditure expected out of it, such an entity would be deemed to hold economic ownership over the IPR. The ‘bright line test’ was also invoked in the ‘GlaxoSmithKline (GSK) Holdings’ dispute, though it was not explicitly mentioned in that dispute.

Location of an Intangible Asset

The identification of the location/situs of a property is required for taxation purposes. But, the process of identification of the location of intangible property is complicated. In concurrence with international principles, the Delhi High Court held that the location/situs of the owner of a respective property would be deemed the intangible asset’s location, regardless of it being registered in India. 

The court reached this conclusion through a strict interpretation of Section 9 of the Income Tax Act. The court held that the non-inclusion of IPR under the provisions of Section 9 clearly denote the legislature’s intent not to tax IPR owners situated outside India even when they earned profits in India through their respective IPRs.

The importance of the valuation of IPR, including trademarks, is on the rise, along with the taxation complications concerning it. The differences that exist in various jurisdictions make it more difficult for entities having transactions/engagements worldwide to reach a middle ground for ensuring their compliance with tax regulations. Such differences may also lead to double taxation being imposed on entities, and thus, specific and clear regulations relating to this issue is the need of the hour.

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