Pre-2002 Transfer Of Self-Generated Trademarks With No Cost Of Acquisition Not Taxable: Gujarat High Court

The Gujarat High Court on 12 March, held that consideration of Rs.29.10 crore received by Zydus Lifesciences Limited on assignment of self-generated trademarks prior to 1 April 2002 is not chargeable to tax either as capital gains or as business income under the Income Tax Act, 1961.

A Division Bench of Justices A.S. Supehia and Justice Pranav Trivedi dismissed the Revenue's appeal and affirmed the Tribunal's view that, in the absence of an ascertainable cost of acquisition, the charging mechanism under Sections 45 and 48 fails, and the receipt falls outside the tax net. It noted:

“....the consideration received on “transfer of trademark along with goodwill”, is not chargeable to taxable and will not be an “asset” to attract the charging provisions of section 45 (1) of the Act, and its assignment/transfer is not subject to income tax under the head of “capital gains….”

The dispute arose from a Deed of Assignment dated 15 June 2000, under which Zydus Lifesciences transferred 22 veterinary trademarks to a joint venture company. The Assessing Officer invoked Sections 45, 48, 55(2), 28(iv) and 41(1) and treated the consideration as taxable either as capital gains by adopting a nil cost of acquisition or as business income on the footing of business benefit.

The Bench held that the trademarks constituted self-generated capital assets with no determinable cost of acquisition. It relied on Commissioner of Income-tax vs. B.C. Srinivasa Shetty, [1981] 128 ITR 294 (SC), and held that when computation fails under Section 48, the charge under Section 45 also fails. The Court emphasised that Sections 45 and 48 operate together, and it held that if computation becomes impossible, the charging provision cannot survive.

On Section 55(2), the Bench held that the Finance Act, 2001 amendment inserting trademarks and brand names into the deeming provision of cost of acquisition as nil operates prospectively from 1 April 2002 and does not apply to the assessment year 2001–2002. It rejected the Revenue's contention that the amendment is clarificatory.

The Bench stated:

“Section 55(2) of the Act is amended by Finance Act, 2001 inserting the words 'or a trademark or brand name associated with a business', which has prospective effect from 1 April 2002. Thus, it is apparent that that the cost of acquisition in relation to a trademark or brand name associated with the business comes within the purview of taxability subsequent to 1 April 2002. In the instant case, the amendment is not applicable since the entire transaction is prior to the cutoff date.”

On the argument relating to goodwill, the Court distinguished between goodwill of a business and goodwill attached to trademarks. It held that Zydus Lifesciences did not transfer its entire business undertaking and continued substantial operations, and therefore only trademarks stood transferred, not business goodwill as a whole.

The Court rejected the applicability of Section 28(iv), holding that monetary consideration received from transfer of a capital asset does not constitute a benefit or perquisite arising from business. It also held that Section 41(1) does not apply because no remission or cessation of liability exists. The Bench observed:

“none of the provisions under either of these sections can be applied on the facts of the case, since the Section 28(iv) of the Act provides that "the value of any benefit or perquisite, whether convertible into money or not, arising from the exercise of a business or a profession" shall be chargeable to Income tax under the head "profits and gains of business or profession.” The sale consideration for assignment of trade marks as a benefit or perquisite arising from the exercise of a business cannot be treated as the value of any benefit or perquisite arising from the business or a profession, more particularly the same being intangible assets and the cost of acquisition cannot be ascertained.”

On valuation, the Court held that the Discounted Cash Flow method adopted by KPMG does not alter the legal character of the transaction or change the nature of the receipt.

The Bench stated that "The valuer-KPMG has adopted the methodology of “Discounted Cash Flow” (DCF), which is a standard accepted valuation procedure. The adoption of particular methodology will have no impact on the nature of assignment/transfer of goodwill of the business of Zydus Lifesciences. Adoption of valuation cannot alter the nature of transfer or the intent of the assignment deed."

Accordingly, the Court dismissed the Revenue's appeals.

For Appellant: Varun K. Patel, Advocate 

For Respondent: R.K. Patel, Senior Advocate, with Darshan R Patel, Advocate