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“MAKE IN INDIA” AS A TRADEMARK

Recently, Secretary of Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry has filed a Trademark Application for the logo “Make in India.”  The Trademark Registry has given an application number : 2829230 for the said application.  The application is filed in class 9, 16, 18, 25, 28, 35, 38, 41 and 42 of the Trademark classes.  The application is filed for the “Make in India” Logo (The Lion Image).

This application by the Secretary of Department of Industrial Policy and Promotion, prompted me to relook some conceptual aspects of Trademark.  Essentially a trademark is something that relates a good or services with its manufacturer or service provider as the case may be.

“A trademark is a distinctive sign which identifies certain goods or services as those produced or provided by a specific person or enterprise. Its origin dates back to ancient times, when craftsmen reproduced their signatures, or “marks” on their artistic or utilitarian products. Over the years these marks evolved into today’s system of trademark registration and protection. The system helps consumers identify and purchase a product or service because its nature and quality, indicated by its unique trademark, meets their needs.” (http://www.wipo.int/trademarks/en/trademarks.html)

A trademark provides protection to the owner of the mark by ensuring the exclusive right to use it to the select goods or services. Actual or proposed trade in goods in goods or services is a requirement for claiming ownership in a trademark and non use is a ground for its revocation. Keeping this in background can  we call a State Department as a trader or a manufacturer or service provider.  DIPP is not dealing with any goods or services.  Let me elaborate on all these in detail.

The above referred Trademark application for “make in India” is filed for the following goods and services.

  • [CLASS : 9]  APPARATUS AND INSTRUMENTS FOR RECORDING, TRANSMISSION OR REPRODUCTION OF SOUND OR IMAGES; MAGNETIC DATA CARRIERS, RECORDING DISCS; COMPACT DISCS, DVD AND OTHER DIGITAL RECORDING MEDIA; COMPUTER SOFTWARE
  • [CLASS : 16]  PAPER AND GOODS MADE FROM THESE MATERIALS (NOT INCLUDED IN OTHER CLASSES) ; PHOTOGRAPHS; PRINTED MATTER ; STATIONERY; OFFICE REQUISITES (EXCEPT FURNITURE); INSTRUCTIONAL AND TEACHING MATERIAL (EXCEPT APPARATUS); PLASTIC MATERIALS FOR PACKAGING (NOT INCLUDED IN OTHER CLASSES); PRINTING BLOCKS; PRINTERS’ TYPE.
  • [CLASS : 18]  LEATHER AND IMITATIONS OF LEATHER, AND GOODS MADE OF THESE MATERIALS AND NOT INCLUDED IN OTHER CLASSES; TRAVELLING BAGS; UMBRELLAS AND PARASOLS.
  • [CLASS : 25] CLOTHING; FOOTWEAR; HEADGEAR
  • [CLASS : 28] GAMES AND PLAYTHINGS; GYMNASTIC AND SPORTING ARTICLES NOT INCLUDED IN OTHER CLASSES.
  • CLASS : 35] SERVICES PERTAINING TO ADVERTISING , BUSINESS MANAGEMENT, BUSINESS ADMINISTRATION AND OFFICE FUNCTIONS WITH THE OBJECT TO HELP IN THE WORKING OR MANAGEMENT OF A COMMERCIAL UNDERTAKING AND MANAGEMENT OF BUSINESS AFFAIRS; ADVERTISEMENT UNDERTAKING COMMUNICATIONS TO THE PUBLIC, DECLARATIONS OR ANNOUNCEMENTS BY ALL MEANS OF DIFFUSION AND CONCERNING ALL KINDS OF GOODS OR SERVICES INCLUDING BANK LOANS; SERVICES RELATED TO REGISTRATION, TRANSCRIPTION, COMPOSITION, COMPILATION OR COMPILATION OF MATHEMATICAL OR STATISTICAL DATA; SERVICES RELATED TO DISTRIBUTION OF PROSPECTUSES, DIRECTLY OR THROUGH THE POST, OR THE DISTRIBUTION OF SAMPLES.
  • [CLASS : 38] TELECOMMUNICATIONS SERVICES BY WAY OF COMMUNICATING FROM ONE PERSON TO ANOTHER BY SENSORY MEANS.
  • [CLASS : 41] EDUCATION; PROVIDING OF TRAINING; SERVICES INTENDED TO ENTERTAIN OR TO ENGAGE ATTENTION; SERVICES FOR DEVELOPMENT OF MENTAL FACULTIES; PRESENTATION OF WORKS OF VISUAL ART OR LITERATURE TO THE PUBLIC FOR CULTURAL OR EDUCATIONAL PURPOSES.
  • [CLASS : 42] SCIENTIFIC AND TECHNOLOGICAL SERVICES AND RESEARCH AND DESIGN RELATING THERETO; INDUSTRIAL ANALYSIS AND RESEARCH SERVICES ; SERVICES INDIVIDUALLY OR COLLECTIVELY IN RELATION TO THEORETICAL AND PRACTICAL ASPECTS OF COMPLEX FIELDS OF ACTIVITIES SUCH AS EVALUATION, ESTIMATES RESEARCH AND REPORTS IN SCIENTIFIC AND TECHNOLOGICAL FIELDS.

It is very clear from the role and procedure of DIPP that DIPP is not a manufacturer, or trader of any goods or services. Its role should lie in governance, regulations, policy making and implementation.  In such case how, could a department own a tademark?

Goods and Services are defined in the Trademark Act.  Goods means anything which is the subject of trade or manufacture, and Service means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial matters such as banking, communication, education, financing, insurance, chit funds, real estate, transport, storage, material treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement, construction, repair, conveying of news or information and advertising.  It is very clear that DIPP would not be either doing a trade or manufacture or doing any service mentioned in the definition of services.  Section 18 of the Trademark Act makes it very clear that only a person who claims to be the proprietor of the Trademark used or proposed to be used by him can apply for the trademark.  Whether DIPP will be considered as a trader or manufacturer  of paper goods, magnetic record carrier, or record disks, leather and imitation of leather, clothing and footwear, games and playthings for which they have made trademark application.  Similarly, whether DIPP shall be doing advertising services, telecommunication services, education services or scientific and technical services for which the application is made.  DIPP is neither a trader, manufacturer or service provider. Thus a trademark application by DIPP in strict sense of law is bad.

Yes, make in India as brand has achieved tremendous public attention. And  use of this brand, image etc. should be regulated. However, making these emblems and names as trademark is against the  spirit of law. My intent is not to say that Make in India is not a brand having commercial value.  Make in India is one of the successfully launched initiative of the Government and the logo designed for the said program has become immensely popular and has very high commercial value and it is also true that Department shall take appropriate steps to protect the value of the said commercially viable symbol.  However, filing a trademark application may not be the right step to protect that important government program and its connected symbols. Government is neither a trader, manufacturer, or service provider to qualify for making a trademark application.  Instead of filing trademark applications, government should have used the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950 which provides protection for all national emblems.  Government should have declared this as a national emblem and should have regulated its use rather than assuming the role of a trader, manufacturer, or service provider.

“Make in India” is a national program of the Union of India. All intellectual property generated, created, belongs to the Union of India. As per Article 299 of the constitution of India all assurances of property of the union of India shall be on behalf of President of India.   Such being the law, whether a Secretary to the Ministry can own property  including intellectual property on behalf of the ministry or on behalf of the Union of India ? In my view, it may not be legally permissible for a Secretary of a Department to Own any property including Intellectual Property, it should belong to the Union of India and is represented by the President of India.

 

Supreme Court Judgment in Vodafone case

Indian Tax authorities have imposed capital gain tax against Vodafone International Holdings, a Netherland based company for the capital gains for that they received by the acquisition of C.G.P Instruments Holdings,  a Cayman Islands Company.  Tax authorities say that, by this acquisition Vodafone has acquired 65% interest in Hutchison Essar Limited. Thus taxable for the gains in India. The claim of Indian tax authorities are based on an interpretation of Section 9(1) (i) of Income tax Act. The said Section states,” all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India”.

As per the section 5(2) of Income Tax Act a non-resident (including a company incorporated outside India) is chargeable to income tax in India for the income that received or deemed to be received, accrues, or arises or deemed to accrues or arise from India. Indian Tax authorities argued that by acquiring stake in C.G.P instrument, Vodafone has acquired 67% interest in Hutchison Essar, an Indian company. Hence, they have indirectly gained from the property or asset or source of income in India. According to the interpretation of the tax authority the word used in Section 9(1)(i) is relating to the asset or source of income in India. Hence, indirect sale of parent company would also attract capital gain tax.  Full bench of the Supreme Court of India comprising Justice S. H. Kapadia, Justice Swatantar Kumar, Justice K. S. Radhakrishnan consider the appeal against Mumbai High Court judgment, upholding the arguments of tax authorities. Supreme Court in a detailed Judgment decided against the tax authorities interpreting Section 9(1) (i)  court observed that the legislature has not used the word “indirect transfer” in section 9(1)(i). The direct or indirect used in relation to the income and is not in relation to the assets. On the other hand if the word indirect used in section connected to the  word asset then the word “ Capital asset situate in India” would be rendered  nugatory. Court in its detailed judgment discussed about the FDI policy of the country, share holding structures, tax havens,  and other related  the section in detail while arriving at the conclusion, Court further re emphasizes the legitimacy of tax planning and approved investments through tax havens. This land mark judgment once again demonstrates the independence of Indian judiciary and its resole to implement law appropriately without interference from the executive.

However, to nullify the judgment the legislature introduced amend to section 9(1) (i) is with amendments as follows

“Certain judicial pronouncements including the Supreme Court judgment in the case of Vodafone International Holdings have created doubts about the scope and purpose of sections 9 and 195. Further, there are certain issues in respect of income deemed to accrue or arise where there are also conflicting decisions of various judicial authorities.

Therefore, there is a need to provide clarificatory retrospective amendment to restate the legislative intent in respect of scope and applicability of section 9 and 195 and also to make other clarificatory amendments for providing certainty in law.

 

Hence, the following clarifications have been inserted in various sections:-

 

Clarification regarding section 9(1) (i)

 

(i) Explanation 4 has been inserted in section 9(1) (i), w.e.f. A.Y. 1962-63 to clarify that the expression ‘through’ (used in section 9(1) (i) in relation to any asset or source of income in India) shall mean and include and shall be deemed to have always meant and included “by means of”, in consequence of” or “by reason of”.

 

(ii) Explanation 5 has been inserted in section 9(1) (i), w.r.e.f. A. Y. 1962-63 to clarify that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.

This amendment was internationally criticized sating that foreign investor’s faith in Indian legislative process and the certainty of taxation have been critically   impacted. Retrospective amendments and introduction of explanations to counter and nullify Supreme court judgements, whereby foreign investors are charged with huge tax liability has highly impacted FDI flows in to this country. This amendment is again challenged before Supreme Court and is pending consideration.

Rajesh Vellakkat

RETIREMENT OF PARTNER FROM PARTNERSHIP

Here is a small note on the legal steps to be taken when a partner retires from partnership, to have safe exit. What steps are to be taken by the firm, so that firm is escaped from future acts and wrong doings of the retired partner.

Following the appropriate procedure laid down in Partnership Act is highly important because firm could be sued for the acts of retired partner. The retired partner can be sued for the wrong-doing of the firm as well.

A firm, unlike a company is not separate entity in the eye of law. A Partnership is an association of people, a partner is an agent of the firm and a partner can represent all other partner and bind them.  Hence, any act of the partner will be considered as the act on behalf of the firm and vice-versa. As per partnership law, a partner is entitled to share profit and loss of the firm.  This being a legal status of the partner and the firm, it is important to announce to the public at large when partner is retiring from a partnership.

In the absence of a public notice of retirement, a third party can make claim against the firm for the acts of the retired partner, in similar way, third parties can sue the partner even for the act done by the firm.  Section 32 of the Partnership Act describe the procedure to follow on retirement.

Section 32: Retirement of a partner.

(1) A partner may retire-

(a) with the consent of all the other partners,

(b) in accordance with an express agreement by the partners, or

(c) where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public notice is given of the retirement: Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner.

(4) Notices under sub- section (3) may be given by the retired partner or by any partner of the reconstituted firm.

The above section makes it abundantly clear that a public notice is to be given regarding retirement otherwise the retiring partner will be liable for the acts of the firm.

Hence it is important  to know,  how public notice is given. The same  is discussed in Section 72. Of the Partnership Act

Section 72 of Partnership Act is reproduced below;

72. Mode of giving public notice. A public notice under this Act is given-

(a) where it relates to the retirement or expulsion of a partner from a registered firm, or to the dissolution of a registered firm, or to the election to become or not to become a partner in a registered firm by a person attaining majority who was admitted as a minor to the benefits of partnership, by notice to the Registrar of Firms under section 63, and by publication in the Official Gazette and in at least one vernacular newspaper circulating- in the district where the firm to which it relates has its place or principal place of business, and

(b) in any other case, by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm to which it relates has its place or principal place of business.

From these two sections it is very clear that if a retiring partner fails to  issue a public notice in any vernacular newspaper as well as in public gazette, he is liable to the acts of the firm and vice-versa.

Incase, the firm is a registered partnership, then the retiring partner/ firm should ensure that the entries in the Register of Firms are amended reflecting the retirement of the person concerned.

Partnership is an important legal structure, popularly followed as preferred choice of entity for all small and medium  sized enterprises. However, partners of a firm while retiring from the partnership, ignore the above legal prescriptions and fail to give public notice. This has resulted in many legal disputes and financial liabilities impacting the partner/ or the firm, for the acts not done by him or authorized by him and vice versa.

Rajesh Vellakkat  and Prathap.K

Domestic Transfer Pricing; a new Tax Compliance Requirement

Indian finance act of 2012 with effect from financial year 2013-14, introduced a new tax law compliance requirement in relation to transaction between group companies. According to which two domestic companies under the same management or under common control ( Associated enterprises)  do transaction aggregating five crore rupees in a year, is required to comply  with the following;-

(a)Ensure the value of transaction is at arms – length price as per the method prescribe by income tax act 1961, b) maintain and keep information and documents in relating to such transaction as statutorily required, c) obtain and file an accountant’s  report in respect of such transaction along with return of Income.

This amendment to the income tax act was caused to be made in accordance of Supreme court judgement , in CIT Vs Glaxo Smith Kline  Asia Pvt Ltd.(2010)195 Taxman 35 SC.  In this judgement, Supreme court addressed the issue whether transfer pricing regulation should be limited to cross border transaction, or that to be extended to domestic transaction as well. Supreme Court noticed that even in certain domestic transaction, the under invoicing of sale and over invoicing of expenses in certain circumstance create tax arbitrage. For example-by under invoicing of sale and over invoicing of expenses they could save tax a) if one of the related company is loss making, and other is profit making concern, b) if the tax rates are different from two related units, on account of different status and if profit is diverted to towards the unit of lower side of arbitrage, for example;- sale of goods and services from a non special economic zone(SEZ) areas,(Taxable unit ) to SEZ unit(non taxable unit),at a price below the market price so that taxable division will have less profit taxable, and non taxable division will have a higher profit exemption. Citing these two instances, Supreme Court  has suggested making amendments  to income tax act incorporating domestic transfer pricing provisions.

The amendment made to income tax act by finance act 2012 is based on the recommendation of Supreme Court. The finance act 2012 introduced section 92BA ,  40 A, 80 A, , 10 AA , 80 IA etc to the income tax Act

Based on this amendment transaction between two related domestic  parties ( it could e companies, individuals,  firm ) if they transact each other should ensure that, the transaction is at arms length price.   The method of arms length price determination are same as that applicable to international transaction between associated enterprises.

Internationally countries like UK, Malaysia, Ireland, Peru, Hong Kong, Norway and Russia had similar provisions in their tax laws.  The new amendment to the Income tax act is definitely  create additional tax revenue. However, the implementation of the same will definitely open up another window for litigation and friction between tax officers and assesses;  unless we have more standardization  and better approved processes in determination of arms length price.  Arms length price determination should not be left at whims and fancies of the tax officers.

By: Rajesh Vellakkat

 

 

UNITED NATIONS TRANSFER PRICING MANUAL FOR DEVELOPING COUNTRIES AND INDIAN VIEW POINT

When two related parties (parent & subsidiary, group companies or companies under the same management) located in two different countries transact with each other, they are expected that those transaction be at an arm’s length price. The intent of this rule is to prevent companies from siphoning the profits from one territory at the cost of the other related entities and using this as a tool to reduce the tax burden by inflating the profits of the company located in a country where tax rates are less.The documentation that companies have to do, the method and manner of transaction with related enterprise are made by organisation for Organisation for Economic Co-operation and Development. (OECD). OECD is an organisation mainly dominated by developed economies. Brazil, India China and South Africa and other developing economies are not the part of this organisation. OECD guidelines on transfer pricing is thus more developed countries-focused. The developing countries including India were not comfortable with the same. Recently, Department of Economic and Social Affairs of the United Nations issued a practical manual on transfer pricing for developing nations. Chapter X of the said manual outlines individual countries point of view. India has expressed its point and same is the part of this manual. The following are the main view points of India.

Indian transfer pricing regulations are based on arm’s length principle, thus income arising from international transaction between associated enterprises shall be computed based on arm’s length price. For determination of arm’s length price few methods are prescribed:

  • Comparable price control method
  • Re-sale price method
  • Cost Plus price method
  • Transaction price method
  • Profit-split method

Indian transfer pricing regulations do not provide any hierarchy of methods and do not recommend any most appropriate method. Indian transfer pricing regulations prescribe mandatory annual audit and maintenance of documentation by a tax payer who is doing international transaction. The onus of proving arm’s length price of the transaction lies with the tax payer. The Income Tax department has a specialised directorate of transfer pricing to administer transfer pricing rules.

In recent years the tax litigation related to transfer pricing has increased manifold. The primary issue on all these tax litigation is the appropriateness of the method used for achieving arm’s length price. The uniqueness of every international transaction, increased market volatility, lack of comparable data are some of the challenges for determination of arm’s length price. Indian transfer pricing stipulates that data to be used in analysing the comparability of an uncontrolled transaction with an international transaction should be the data related to financial year in which an international transaction has been entered into. However, this rule has created many practical issues. Availability of comparable data when audit is to be conducted is a real challenge.

While determining the arm’s length price, the risk taken by the entity is the major factor. Multi-national entities while dealing with transfer pricing issues have a practice to argue that the risk of the business is with the foreign entity. Hence, it is justified in having a higher margin in relevant transaction to that of the foreign entity. But the Indian tax department believes that the risk of a multi-national enterprise is a by-product of ownership and is not an independent element. Therefore, an argument of multi-national enterprise that their contract research and development center in India is a risk-free entity and entitled to only low cost plus remuneration is not favoured by the tax department.

Indian tax department believes that if the core functions of research and development service are located in India, then, the Indian entity is exercising control on the operations and associated risk. Hence, allocation of risk to parent company is illogical and not accepted. Indian tax authorities believe that returns filed by Indian entities based on cost plus method will not reflect the true arm’s length price of the transaction.

As stated earlier, the onus of proving the accurate comparability of the price is on the tax payer. Therefore, mere claim of risk adjustment in favour of foreign entity without sufficient documentary support would not suffice. Indian tax department believe that locational saving is one of the factors to be considered for comparability analysis. The operational advantages, low labour cost, material cost, rent, infrastructure cost, tax incentives, etc. gives an incremental profit to the multi-national enterprises. This incremental profit is in short referred as location rents. Indian tax department consider that location savings and rents should also be considered to arrive arms length price. The transfer pricing administration believes that it is appropriate to have profit-split method to determine arm’s length allocation of location savings and rent. It says that arm’s length compensation for location savings should be distributed to benefit both the parties of the transaction and there must be an appropriate split of cost saving between the parties.

Indian tax department’s point of view on intangibles have a huge relevance in present day context as the world royalty and world licensing receipts are over $200 billion. The arm’s length price of the royalty allocation, cost of development of market, branding in a new country, remuneration for marketing, research and development of intangibles and co-branding cost are the factors in considering the arm’s length price.

With regard to payment of royalties for use of trademark, design and technology between parent and subsidiary, the rate of royalty is a challenge in determination of arm’s length price. Indian tax department’s view is that it is impossible to find comparable arm’s length price for such transactions. Income tax department believe that if a subsidiary has borne the cost of developing the market and made expenses on marketing and enhancement of brand value in its territory, then the subsidiary should get compensation on arms length on such cost.

Income tax department will also consider the value of Indian entity’s research and development efforts while determining arm’s length price of royalty for use of technical knowledge. When an Indian subsidiary is established for research and development on contract basis and uses cost plus mark up method for arriving arm’s length price stating that risk associated are with the parent company, at the same time if claim of controlling risk of core function of research and development with the parent entity are not documented and such claims are not justified. On most occasions monitoring the research and development activities were also carried out by Indian subsidiaries. So, mere reason that the funds for research and development activities are transferred from multi-national enterprises will not solely justify a higher allocation of margin favoring parent entity.

Income tax department believes that the assets of a business include capital and technically skilled manpower, know-how, etc., and capital contribution should not get a higher relevance. According to income tax department, risks are distributed between the enterprises and therefore, a cost plus method is not an appropriate method. Income tax department’s view is that transfer of legal ownership of intangibles under a contract by an Indian entity in favour of a parent company are in most cases without any appropriate compensation and an additional arm’s length compensation to be determined in such instances. Similarly, the effort of an Indian entity in marketing the intangible like brand, trademark in Indian market, creating product royalty in minds of the customer, creation of effective supply chain, distribution network, after sale service, etc., to be quantified while arriving arm’s length price. The normal practice of cost plus method is not favoured in such instances. Advertising, marketing and promotion expenditure if borne by Indian entity, while the ownership of those brands and trademark are with the parent entity, then in such cases reimbursement cost of excess arm’s length price along with mark up should be considered. While calculating arm’s length price or profit-split method should be adopted in these cases.

Increase of intra-group services between associated enterprises such as technical support is required have an arm’s length price computation. Income tax department have noticed that parent entities generally do not allow any profit mark-up on services rendered by Indian companies to them. On the other hand, where Indian companies receive intra-group services from the parent company, it often charges mark-up on all these services. It is also noticed that in many such claims of rendering services to be found incorrect, income tax department consider this as a high risk area and discourage all such malpractices.

Inter-company loans and terms of such loan is another transfer pricing issue that the income tax department is not favoring along with the practice of Indian parent company advancing loans to its foreign entities at LIBOR and EURIBOR rates. Indian transfer pricing authorities’ believe all should be at prime lending rates of Indian banks. Similarly, guarantees extended to foreign entities abroad where the Indian parent company is a guarantor. In such cases, income tax department says an arm’s length price to be determined on such guarantees.

These are some of the views of income tax department on transfer pricing issues reflected in the UN manual. While critically looking into the views, the effort of Indian tax administration to determine an appropriate arm’s length price at location rents and other territorial advantages should be applauded in the perspective of the state treasury. However, this would certainly nullify the investment attractiveness of India and I am worried that it would result in less foreign investment in this country.

We advise to all multi-national enterprises to consider all these view points while doing documentation on transfer pricing so that disputes can be avoided.