As Trademark Licensing evolves in India, we see an emergence of increase of taxation problem on marketing intangibles. Trademark Licensing has become very important in various industries like automobiles, FMCG and pharmaceuticals where licensing of intangibles along with its advertising has become significant. The recent case of Maruti Suzuki , India has thrown light on the issue of creation and compensation for marketing intangibles.

Suzuki Motors Corporation, which holds 50% stake in Maruti licensed to Maruti its ‘S’ Logo and ‘ Suzuki ‘ Trademark. The ‘S’ logo was to replace the current ‘M’ logo. Maruti was required to use the joint trademark of ‘Maruti Suzuki’ on all its vehicles.

The tax office stated that Maruti has spent huge amount to promote ‘Suzuki’ intangible asset. Consequently Suzuki should compensate Maruti the same rather Maruti paying Suzuki the royalty amount. The tax office also disallowed the royalty being paid by Maruti to Suzuki. The Delhi High Court has lucidly linked the compensation for intanginble asset to the benefits derived from their use. The High Court has stated the scenario where the ultimate benefits from the use of intangible asset accrues only to the licensee royalty compensation is enough. The licensor need not compensate the license for marketing and advertising, as only benefit derived from them would only be incidental in nature. However, where the marketing and advertising spend is extra-ordinary, a marketing intangible may be considered to have been created.

Such observations not only apply to Indian subsidiaries of foreign MNCs but will also be felt by Indian MNCs with foreign subsidiaries. This judgment will give new angle to cases involving huge transfer of IP rights to Indian Companies.

It would be prudent for companies who have similar intra-group arrangements to review existing models to ensure that the pricing is in accordance with the benefits derived from intangible assets.

Any extra-ordinary or non-routine expenditure will lead to creation of marketing intangibles with economic ownership in the hands of licensee.

Looking at the above issue, the question arises what will determine that the expenditure would be ordinary or extra-ordinary. The amount spent on promotional activities of trademark may depend on various

factors :

The industry
Strength of the brand
Whether the product is old or new
The target audience
Market penetration of the brand

Thus, the Delhi High Court has thrown up the new challenge on how to get reliable comparable data to examine the advertising expenditure done by Maruti.

In fact , of the three companies examined by the tax office, Hindustan Motors and Tata Motors had no advertising expenditure during this year. And the Court had itself rejected Mahindra & Mahindra on the grounds that its products and target audiences do not match those of Maruti’s . Meanwhile, High court has suggested Honda and Hyundai as quiet possible comparables.