Under The Lens: Authorities Investigate Use Of Brands And Logos

The taxability of intangibles such as Intellectual Property Rights including brands, logos and trademarks has perennially drawn the attention of tax authorities, inviting thorough investigations. Such investigations and inquiries have extended into the domain of GST law as well, leaving taxpayers in a tight spot.

The uprising investigations and the ambiguity surrounding the taxability of these subtle exchanges of brands and logos within group companies make it pertinent to critically examine various transactions involved in the inter-group usage and transfer of brands and logos. 

Background

In the world of globalization, a company’s brand and/or logo is not merely considered as symbols or words, it stands for the company’s value and reputation. With companies expanding their presence around the world, inter-group usage of brand names and/or logos have become a common phenomenon. It has allowed entities to collectively share and leverage the brand equity and reputation built by the group company over the years. 

Though inter-group usage of brand names and/or logos is a widespread practice, it has become a cause of concern for taxpayers under the GST law since tax authorities have initiated scrutinizing these transactions and insisting on GST payments on the same. The said transactions are sought to be covered under Schedule I of the CGST Act, 2017 which assumes transactions between related parties as supply even if no consideration is involved. 

Through this article, the authors will be discussing the taxability of such transactions under different scenarios. 

Absence of formal usage/transfer agreements

The brands or logos within a group usually flow seamlessly from the parent company to its subsidiaries without the involvement of any explicit agreements, declarations, or formal considerations. 

The absence of explicit documentation raises doubts as to whether the usage of brands or logos qualify as a transfer for the purpose of GST law since the party has not expressly granted these rights to the other party or does it simply constitute a breach under the IPR laws and thus, not taxable under GST. 

Further, often the subsidiaries incorporate the brands and logos of their group companies in their documents and other materials such as their stationery and letterheads. This practice symbolizes a unified corporate identity. The question that arises here is whether such practice would also attract GST? The tax authorities stand in this case is leaning towards subjecting these transactions to GST. It has to be seen how extensively the concept of transfer of brand/logo can be expanded. 

Agreement to use of brand or logo

Even in cases when companies have taken due care to safeguard their brand or trademark usage through formal agreements, there are still a series of doubts that arise about its taxability. 

Agreements under GST law

In situations where businesses have entered into agreements for the transfer of right to use brands or logos in the GST regime, considering such transfers as supply under the GST law appears to be a better choice to prevent potential disputes.

Agreements entered into prior to GST law

Businesses have also entered into agreements for perpetual use of brands or logos in the pre-GST era. The pivotal question that emerges here is whether a perpetual transfer of IPR prior to introduction of GST law can also be said to be taxable under GST law. 

Although at first glance, these transactions appear to be outside the ambit of GST law, however, such transactions are also under scrutiny. The authorities, while leveraging the concept of continuous supply of services have been aiming to encompass these transfers within the scope of GST.

One may contend that such transactions are outside the net of GST by considering them as one-time supply having been made under pre-GST era. Existing agreements entered into prior to GST law must be revisited carefully to examine the nature and time of underlying supply.

Valuation 

Even in cases where the transfer of the right to use brands or logos is treated as a taxable supply, it is intricate to ascertain its valuation. Since the transaction is between related parties, recourse may be taken to Rule 28 of the CGST Rules, 2017, which inter alia provides that the value shall be the open market value of such supply, if available. If the open market value is not available, then the value shall be the value of supply of goods or services of like kind and quality.

Since the rights to use the brands and logos are exclusively granted to related parties and are not made available in the regular course of business, establishing an open market value poses a significant challenge. 

Furthermore, in accordance with second proviso to Rule 28, the value mentioned on the invoice is deemed to be the open market value in case the recipient is eligible to avail full input tax credit. As a result, it is possible to fix a certain amount for the said transfer to fulfill tax obligations. 

However, it is noteworthy that the tax authorities are insisting on ascertaining the value of such transfers based on a specific percentage of the turnover of taxpayers. This approach poses potential challenges for taxpayers, especially considering that a seemingly small percentage of turnover can translate into a substantial amount. 

Thus, the valuation of supply of transfer of brand or logo highlights a grey area in the current framework, underscoring the necessity for government directives. 

The Government in the past, acknowledging the need for intervention has come up with various amendments and clarifications to address the taxpayer’s valuation concern such as fixing the value of such supply (in case of corporate guarantee), clarifying the open market value of services to be zero (in case of personal guarantee or cross charge).

Conclusion

In this atmosphere of investigations and doubts surrounding the transaction of inter-group exchange of brands and logos, the businesses have not been able to take a breath of fresh air. Hence, it is evident that the Government’s provision of clear and comprehensive guidelines is imperative for the seamless operation of the businesses. The same would not only ensure smooth business functioning but would also alleviate the burden on taxpayers.