2015 (12) TMI 1470 - HC - Income Tax

Trademark transfer excludes goodwill; tax amendment not applicable; Revenue's appeal dismissed; assessee prevails.

The Court upheld the Tribunal's decision that the transfer involved only the trademark, not the goodwill of the business. The amendment to Section ... Computation for the income chargeable under the head 'capital gains' - whether the Tribunal after elaborately considering the clauses in the Settlement Agreement entered into between the parties, has rightly come to the conclusion that the 'capital gains' income is only towards the transfer of trademarks associated with the product 'SHARP' and not to the business of the assessee as a whole? - Held that:- The assessee has suffered a loss during the relevant assessment year as reflected in the assessment order and it is also submitted by the learned counsel appearing for the assessee that in the previous three assessment years also, the assessee had suffered loss. In such an event, it can be observed that the goodwill of a business of a company running under loss, may not have a potential value, profit would be sine qua non for the goodwill of a business. This factor also adds to hold that the goodwill of a business is not transferred. The goodwill of a trade mark associated with the business cannot be construed as a goodwill of a business, as already held, these are two distinct separate intangible assets, both cannot be intermixed. We have perused the relevant clauses of the settlement deed entered into between the parties extracted supra, which clearly indicates, the assignment made by the assessee company to M/s Sharp Corporation, is only transfer of trademarks and the goodwill associated with the trade marks. It cannot be misconstrued to that of goodwill of a business. It is observed in the judgment of the ITAT, 'it is common ground before us that the assessee did not sell its entire business undertaking to Sharp Corporation'. This admitted fact itself proves that the assessee has transferred only the trade marks and not the goodwill of a business. Even assuming the goodwill related to the trade mark is transferred, it cannot be construed as the goodwill of a business. If the arguments of the revenue that the transfer of trade mark itself is goodwill of a business is accepted, then there was no necessity for the Legislature to amend Section 55(2)(a) of the Act inserting the words 'trade mark' or 'brand name' associated with the business by Finance Act, 2001. In such view of the matter, we are of the considered opinion that the ITAT, after elaborately examining the terms of the settlement deed, has arrived at a right conclusion and the same does not warrant any interference by this Court. - Decided in favour of the assessee and against the revenue Issues Involved:1. Whether the sum of Rs. 3,99,75,400/- paid by Sharp Corporation, Japan to the assessee for the transfer of the trademark 'SHARP' and associated goodwill attracts capital gains tax.2. Interpretation of the Assignment Deed and Settlement Agreement regarding the transfer of goodwill and trademark.3. Applicability of Section 55(2)(a) of the Income Tax Act, 1961, to the transaction in question.4. Distinction between goodwill of a business and trademark.Detailed Analysis:Issue 1: Capital Gains Tax on Transfer of Trademark and GoodwillThe primary issue is whether the amount of Rs. 3,99,75,400/- paid by Sharp Corporation, Japan to the assessee for the transfer of the trademark 'SHARP' and associated goodwill attracts capital gains tax. The Revenue contended that the entire amount should be taxed as capital gains, while the Tribunal held that only the trademark was transferred, not the goodwill of the business.Issue 2: Interpretation of the Assignment Deed and Settlement AgreementThe Revenue argued that the Assignment Deed indicated the transfer of both the trademark and the goodwill of the business. Key clauses of the Deed were cited to support this claim, such as:- 'The Assignee is desirous of acquiring the said trade marks along with the goodwill...'- 'The Assignor will not hereinafter use the said trademarks either as a trademark or as part of its business or corporate name...'However, the Tribunal found that the transfer was limited to the trademark and not the goodwill of the business. The Tribunal noted, 'what was transferred by the Assessee-Company to M/s. Sharp Corporation, Japan, was only the trademark and not the goodwill of the business.'Issue 3: Applicability of Section 55(2)(a) of the Income Tax Act, 1961The Revenue contended that the transaction involving the transfer of goodwill is liable to tax under Section 55(2) of the Act, which was amended with effect from 1.4.2002 to include 'a trademark or brand name associated with a business.' However, the Tribunal held that this amendment was not applicable to the assessment year in question (1996-97).The Court noted:- '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.' Thus, it is clear that the cost of acquisition in relation to a trademark or brand name associated with the business comes within the tax net subsequent to 1.4.2002.'Issue 4: Distinction Between Goodwill of a Business and TrademarkThe Court elaborated on the distinction between goodwill and trademark. Goodwill is an intangible asset representing the reputation and connection of a business, while a trademark is associated only with specific products. The Court cited several judgments to support this distinction, including:- 'The goodwill of a business depends upon a variety of circumstances or a combination of them... the location, the service, the standing of the business...'- 'Goodwill of a business is an intangible asset representing the whole advantage of reputation and connection formed with the customers...'The Court concluded that the assessee continued its business and only transferred the trademark, not the goodwill of the business. The Court observed:- 'The assessee company has not lost its right to manufacture the products to which licence is granted by M/s Sharp Corporation, Japan. Thus, the business activity of the assessee is continued.'Conclusion:The Court upheld the Tribunal's decision, stating that the transfer was limited to the trademark and not the goodwill of the business. The amendment to Section 55(2)(a) of the Act, which includes trademarks within the tax net, was not applicable to the assessment year in question. The appeal by the Revenue was dismissed, and the substantial question of law was answered in favor of the assessee.