Trademark is basically a mark which can be represented geographically and distinguish the goods and services of one party from those of others. Trademarks include name, symbol, Logo, colour of goods, shape of goods, packaging of goods etc. Trademarks are important commercial and economic tools and are being heavily endorsed in order to build a high brand value in the market.
Trademark valuation is therefore a practice which gives rise to a number of intangible assets as compared to the tangible one. For eg. In the year 2006-2007 Coca cola was valued in the balance sheet at $16.92 whereas the market capitalization was at a whopping $124.42 billion. Trademarks are therefore valued for primary three reasons-
- For Transactional purposes
- For financial accounting purposes
- For Taxation purposes
Here in this blog we are focusing on the Taxation aspect of Trademark Valuation.
Methods for Trademark Valuation
Following are the methods for Trademark Valuation
- Cost Approach
This approach involves assessment of cost which is incurred during the creation and development of Trademark and therefore reflects the minimum value of Trademark. This method is however not always effective because of the economic benefits accruing from Trademarks is not represented herein.
- Market Approach
In this one has to analyse and compare similar Trademarks in the market if any. For eg. Trademarks which are dealing in similar markets or products have been analysed properly to derive the value of the Trademark being evaluated.
- Income Approach
This method is usually considered as the most effective method for valuation of 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.
Taxation issues with respect to Trademarks
- Cross Border Use of IPR
The major issue arises with taxation is with regards to cross border use of Intellectual Property rights. This may include licensing the intellectual property to subsidiaries located in different countries by the MNCs and locally it can be sublicense to other subsidiaries also. It may happen that the company owning the IP is established in the place of a low tax region and is sub-licensed to the region where tax rates are high, therefore they may charge royalties according to the high tax rates in the particular country.
- Capital gains or Business Income
In CIT Vs Mediworld Publications Pvt. LtdThe Delhi High Court Held that the income generated by the transfer of intangible assets i.e. by Trademark or Copyright is in the nature of capital gains and not business income, and therefore is taxable. The court clarifies unders section 2(110 if the Act< intellectual property is considered as intangible assets serving as means for earning profits. It was further held that the sale of intangible assets such as Trademarks, Copyrights would be covered by the proviso within section 28(va).
- Situs of an Intangible Assets
Identification of situs of a property is important for the taxation purposes, however its process is complicated with regard to intangible property.
Therefore, it is concluded that valuation of Intellectual property like Trademarks, Copyrights is important, at the same time it is complicated with regard to its taxation as well. Globalization and rapid technological developments have led to vast unpredictability making it increasingly tedious to accurately evaluate intangible assets. In this regard cprtaions must take effective and sufficient measures to safeguard their interests. Furthermore, there are different jurisdictions which makes it difficult for any corporation to make engagements worldwide. Such discrepancy may also lead to double taxation being imposed on entities and therefore clear and specific regulations pertaining to the issue at hand is the need of the hour.