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An intellectual property right is an intangible right. It is uncontested that the “brand” is often the most valuable asset to a company and the brand name is solely a goodwill and incorporeal property. As trademark denotes the valuation of a company’s goodwill, it is a crucial economic and commercial tool considered to be an intangible asset that can be sold, pledged, assigned, and franchised. Taxation of transfer of right to use of intellectual property law has always been environed by relative obscurity. The confusion regarding the collocation of the specific regime under which the transaction of a trademark should have been governed can lead to disparities.
For the purpose of understanding the tax liability on the transfer of the right to use a trademark, we should understand the difference between ‘Assignment’ and ‘Licensing’ of Intellectual Property.
- Licensing does not create propriety interest it means to endow some right to a person relating to the IP to make use of the said IP in a restricted way but does not create any proprietary interest. Therefore, the licensee and the owner of the IP are incomparable.
- Assignment means “transfer of rights”, endowing ownership to the assignee and accrediting them to make use of the IP in whatever manner, subject to such agreement.
Pre GST Regime: Vague landscape of transfer of Trademark for the purpose of tax liability
Income generated by the transfer of intangible assets (here, trademark and copyright) is in the nature of ‘capital gains and not ‘business income’, and is, therefore, taxable. Permanent transfer of Trademark did not amount to the rendering of service as the person selling these rights no longer remains a “holder of intellectual property right” therefore for the ‘assignment’ of trademark no service tax is applicable. The key ingredient for determining if any service related to intellectual property rights is taxable under service tax or not is to see if there has been “…temporary transfer of any intellectual property right OR there has to be the permission to use or enjoy any intellectual property right”.
VALUE ADDED TAX
VAT is levied on “sale and purchase of goods”. Right to use property, i.e., Brand name for consideration is a ‘sale’ under the definition of ‘sale’ in VAT Act, 2008 read with Article 366 (29A) of Constitution and on amount of consideration, VAT is chargeable. The demarcation of the taxability was indistinct and it was critical to distinguish the transfers that constituted a transaction assessed by VAT.
The Apex court laid down an exclusivity test to determine the constituents of a transaction for the transfer of ‘rights to use’ the goods, the transaction must fulfill the following five conditions-
- There must be goods available for delivery and a consensus ad idem as to the identity of the goods
- The transferee should have the legal right to use the goods consequently all legal consequences of such use including any permission or license required thereof should be available to the transferee
- For the period during which the transferee has such legal right, it has to be the exclusion to the transferor this is the necessary concomitant of the plain language of the statue viz. “transfer of right to use” and not merely a license to use the goods; and
- Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to the others.
Inclining contrarily, it was later held in different cases that Transfer of rights to use goods of incorporeal character such as trademarks, copyrights, patents, etc. is exigible to state value added tax and that there need not be any exclusive and unconditional transfer. That means Transfer of right to use goods relating to a goodwill or Brand name, will be within the ambit of sale and exigible to VAT under VAT Act, 2008
It was held in BSNL case that “even when there is a transfer of ‘right to use’ a trademark, it would not give rise to taxable event if the owner of the trademark retained to itself a right to make further use”, which, later on was subsided in various judgments as “dealing of altogether another facts and issue” that the transaction of a trademark should attract tax even if there may be various transferees and the transferor continues to use goods. Tax liability under VAT remained a subjective matter of facts.
Earlier the obscurity related to intellectual property law is diminished by the advent of GST. Center and state simultaneously levied a tax on supply, goods, and services.
It is significant to note that the difference between the permanent and temporary transfer of the trademark is also irrelevant under the GST regime as the transaction irrespectively will lead to the same concurrent tax. Entry 5(c) to schedule II of section 7 of the CGST act, temporary transfer or permitting the use or enjoyment of the IPR has been regarded as ‘supply of services and is levied to GST at the rate of 12% provided such IPR is not in respect of Information Technology(IT) software, in terms of IPR related to IT the tax is 18%. Permanent transfer of trademark is treated as supply of goods as it is leviable to tax at the rate of 12%
An unregistered trademark is exempted from tax. Various products like raw grains, pulses, cereals, etc. sold loosely without any brand name are exempt from GST but the same commodities sold in a packaged form under a registered brand name attract GST.
The situs of an intangible capital asset, such as intellectual property, is deemed to be the same situs as that of its owner, and therefore, the trademarks owned by the Australian company, although registered and used in India will not be taxable in India under Section 9 of the IT Act.
The Prominence of valuation and intricacy with regard to taxation of trademarks follows proportionality. The valuation of tax on the transfer of the ‘rights of use of Trademark or intangible assets has remained a matter of persistent hassle in PRE GST Regime. After the enactment of GST, the ambiguity has lessened but there are still many inadequacies to address as the fast digitalization of the IP economy comes along with its own issues to deal with.
Author: Surabhi Maheshwari, a final year student at faculty of law, University of Delhi, in case of any queries please contact/write back to us via email to email@example.com or at IIPRD.
 In Commissioner of Income Tax v. M/S Mediworld Publications Pvt. Ltd., ILR (2011) 6 Del 203.
 M/S.Ags Entertainment Private Ltd vs Union Of India on 26 June 2013
 SKOL Breweries Ltd. (Now known as Anheuser Busch InBev India Ltd.) Vs C.C.E & C.S.T. (CESTAT Bangalore)
 M/S G.D. Goenka (P) Ltd. vs State Of U.P. And Others on 9 December 2016
 Bharat Sanchar Nigam Ltd. & Anr vs Union Of India & Ors on 2 March 2006
 Tata Sons Limited And Anr vs The State Of Maharashtra And Anr on 20 January 2015
 M/S G.D. Goenka (P) Ltd. vs State Of U.P. And Others on 9 December 2016
 India: Taxability Of Intellectual Property Rights (IPR) Under GST,
 Cub Pty Limited(Formerly known as Foster’s Australia Ltd) v. UOI& ors., 25 July 2016
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