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T. C. A. Ramanujam

T. C. A. Ramanujam discusses a recent case on patents, copyrights and trademarks

INTERESTING issues emerge in the tax treatment of patents, copyrights and trademarks. Section 35A of the Income-Tax Act, 1961 allows amortisation of the cost of acquisition of a patent or copyright. Section 35AB permits deduction of cost of lumpsum consideration for acquiring knowhow in six equal annual instalments. While Section 35A does not define patent or copyright, Section 35AB attempts to define "knowhow". Cases on these sections seldom come up before the High Courts. The CIT vs Mangalore Ganesh Beedi Works (182 CTR 23) case is one such, In 1939, late Raguram Prabhu started beedi manufacturing and several reconstitutions of the business took place. The business was carried on with 13 partners and this firm stood dissolved in December 1987.

In successive reorganisations, different taxable entities arose by way of a firm, an association of persons (AoP) consisting of 13 (AoP 13) and three members (AoP 3).

AoP 3 acquired the assets of the firm as a going concern as per the orders of the court in January 1995. It had deposited Rs 92 crore for this purpose. The question posed was whether AoP 3, the assessee, was entitled to claim any deduction on alleged expenditure of acquisition of patent right, copyright and knowhow in terms of Sections 35A and 35AB of the Act. The Karnataka High Court observed:

"We have held that in the present case there was no occasion for transfer of any knowhow. It is further clear that in this case, there was no patent right to be acquired. "Patent" is defined under the Patents Act, 1970, according to which only inventions can be patented. Beedi rolling or beedi manufacturing is not an invention which can be patented or which would create any patent right. Further, expenses on trademark is not covered either under Section 35A or 35AB of the Act. It appears that these have been created by the valuers of the assessee — AoP 3 — just to devise a claim deduction for which there was hardly any factual or legal base or foundation available. Accordingly, we hold that the Tribunal has erred in directing deduction under Sections 35A and 35AB of the Act."

The next question posed before the High Court was whether the value of trademarks, copyright and technical knowhow can be treated as plant and machinery and depreciation granted on the capitalised value of the same. The High Court ruled thus:

"From the facts and various orders passed by this court in the winding up proceedings, it is quite clear that there was no assets of the firm like copyright or technical knowhow to which any value could have been assigned. So far as trademark is concerned, it had the value but that was taken to be the part of the tangible assets.

It was recognised by this court that the main asset of the firm was the goodwill earned by the beedies manufactured by it. Curiously, after purchasing the assets of the firm, the assessee, AoP 3, through its valuer, got bifurcated the value of the goodwill being Rs 72 crore in the ratio of 50 per cent knowhow, 30 per cent copyright and 20 per cent for trademark, thereby rendering the value of the goodwill to "zero".

The AO as well as the CIT (A) rejected the claim of the assessee (AoP 3) that they can claim any depreciation or deduction in respect of trademarks, copyrights and technical knowhow. But the vice-president, without giving any good reasons, directed that the trademark, copyright and technical knowhow should be treated as part of plant and machinery and self-assessed value given by the assessee should be capitalised and, accordingly, depreciation should be granted.

"In our opinion, the direction given by the Tribunal is bereft of any acceptable reasoning. It is also not supported by the orders passed by this court in the wining up proceedings and the stand taken by the parties in these proceedings. It is quite apparent to us that the valuer had split up the goodwill into three parts and assigned values to them by rule of thumb. Obviously, for enabling the assessee (AoP 3) to take benefits of depreciation and deductions under Sections 35A and 35AB of the Act. In our considered opinion, the alleged value of the trademark, copyright and technical knowhow cannot be capitalised for grant of depreciation."

This ruling of the Karnataka High Court was rendered on December 19, 2002. The court was dealing with assessment year 1995-96. Assuming that the valuation of copyright, trademark and knowhow was arbitrary, the court could have directed scientific valuation on the basis of the Accounting Standards which identify goodwill, patents, trademarks and designs as intangible assets which can be included in the financial statements as fixed assets.

The Finance No. 2 Act, 1998, brought in Explanation 3, including intangible assets such as knowhow, patents copyrights, trademarks, licences, franchises or any other business or commercial right of similar nature, under the definition of assets. The utility of the Karnataka ruling is of limited value.

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