The Hindu Business Line : Brand touch in tax law

OVER 75,000 brands are said to be fighting it out in the Indian consumer market. Differentiation is the order of the day, with micro-niche, niche and mass products jostling for a share of the market pie.

Markets and marketers have never had to face the challenges of today. For every brand that succeeds in the market, several dozens fail.

Obsolescence of consumer is a nightmare for many. With better technologies at lower costs and backed by focused marketing, many old brands are gasping for breath.

Market failures are faced not just by smaller firms, but even major manufacturers of consumer products and durables.

Changing consumer behaviour in a culturally diverse country such as ours has caught many napping. The recent failure of the NDA Government as a brand is itself a classic example.

The US accounts for one of the highest instances of brand failure. Brands from the even the most professional stables face failures.

What is a brand? Black's Dictionary defines it as a word, mark, symbol, design, term, or a combination of these, both visual and oral, used for the purpose of identification of some product or service. Brand ambassadors — Sachin Tendulkar, Saurav Ganguli, Aishwarya Rai, and so on — get paid heavily for promoting the products they endorse. Such payments to brand ambassadors will, of course, go into the cost of the brand.

A brand is different from a trade name. The latter is used by manufacturers, industrialists and merchants to identify their businesses, which actually symbolises reputation of business. It may include individual names and surnames, firm names or titles lawfully adopted and used in business. It is different from a trademark.

Is a brand different from goodwill? Yes. Goodwill is the favour which the management of a business wins from the public. It is the custom of patronage of an established trade or business; the benefit of advantage of having established a business and secured its patronage by the public. It means every positive advantage acquired by the proprietor in carrying on the business. Goodwill is an intangible asset and cannot be amortised for tax purposes. For accounting purposes, goodwill has no basis unless it is purchased.

Brands, trade names and goodwill are all closely linked and income-tax law makes subtle distinctions in this regard.

The chain of amendments

In CIT vs BC Srinivasa Setty (128 ITR 294 SC), the Supreme Court had ruled that it is not possible to evaluate the cost of goodwill, as it is a self-generated asset. To overcome the judicial interpretation, the Finance Act, 1987, with effect from April 1, 1998, provided in Section 55(2)(a) of the Income-Tax Act, 1961, that cost of acquisition in case of self-generated goodwill will be taken to be nil.

This was followed by a similar procedure for ascertaining cost in respect of tenancy rights, route permits and loom hours by the Finance Act, 1994 with effect from April 1, 1995. A further amendment to the law took care of bonus shares with effect from April 1, 1996.

There are instances where the right to manufacture, produce or process any article or thing have been extinguished for a consideration and claimed to be not taxable. The Finance Act, 1997, therefore, amended Sections 55(i) and 55(ii) of the I-T Act to extinguish such a right to manufacture, and so on, within the ambit of capital gains tax. The treatment for ascertaining the cost of acquisition of such right will be similar to that for goodwill.

The plethora of amendments to the law initiated in 1987 culminated in the amendment to Section 55(ii)(a) made by the Finance Act, 2001 with effect from April 1, 2002. It was laid down that even in respect of a trademark or brand name associated with a business, the cost of acquisition will be ascertained as nil if no purchase price is paid. The right to carry on any business was also included in this category by the Finance Act, 2002 with effect from April 1, 2003.

The Vysali case

In this case (Vysali Chemotherapeutics (P) Ltd vs CIT — 269 ITR 362 Kerala), the company sold the brand name in respect of eight items of medicine to a sister concern called Vysali Pharmaceuticals for Rs 4 lakh. This was in March 1992 and the assessment year was 1992-93. The assessing officer (AO) applied Section 55(ii) for finding out capital gains and took the cost of the brand as nil. The company pleaded that there was no provision in the law for taking the cost as nil. The Revenue contended that brand name was only a part of the goodwill of the business.

The Kerala High Court referred to the amendment of the law by the Finance Act, 2001, bringing in brands for treatment similar to the one extended to goodwill.

The amendments have only prospective effect from April 1, 2002. The court posed the question whether the amendment indicated that for the earlier period the brand name associated with a business was included in the expression `goodwill' or not.

The effect of the amendment in relation to the earlier period is necessarily a matter to consider and the case was remitted back to the Tribunal.

Obviously, the last word has not yet been said about the valuation of brand name.

(The author is a former chief commissioner of income-tax.)