Introduction

“Jo dikhta hai woh bikta hai”. We are living in a hype world. The value of any product increases, if it has a recall value; and the recall value is created through a Commercial Brand, the official name of a product. The brand name has been responsible for success of many products .Patanjali Rice will always fetch premium over any ordinary loose bag of rice. Moreover, if a brand name is registered, the person gets exclusive rights to use such brand name and can file a suit for infringement of his registered trademark/brand name.

Government also understands the value of a brand name. So, they have kept separate rates for branded and unbranded goods in many categories. Most of the items are food stuff and carry 5% GST rate of branded goods and NIL GST rate for non-branded goods. Major items in this list are:

• Many food-grains, Rice, Pulses, Vegetables, Cereals, etc.
• Paneer
• Frozen foods
• Natural Honey
• Flour, Bread, etc.
• Namkeens
• Medicaments
• Organic Fertilizers

Moreover, the branded goods should also be packaged (put up in unit container) to attract the additional tax burden.

What is Brand?

Brand in Earlier Tax Regime:

Brand is not a new concept. Brands and patents existed and have grabbed their share of attention and importance even in the earlier regime. The modern times brought along new concepts and better marketing techniques. So, the Government started differentiating between branded and unbranded goods. Various Notifications have defined ‘Brand Name’. Notification No. 8/2002-Central Excise, dated 1st March, 2002, defined Brand Name as:

“brand name” or “trade name” means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, monogram, label, signature or invented word or writing which is used in relation to such specified goods for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified goods and some person using such name or mark with or without any indication of the identity of that person;

 As per this notification, SSI exemption was not available on branded goods, whether registered or not, other than few exemptions. Similar definitions were inserted in various Chapters of Central Excise Tariff Act, 1985, to charge excise duty on branded goods, like garments, packaged food products, etc.

 Central Excise was chargeable only on ‘manufacturing’. So, purchasing goods in bulk and selling under own brand-name didn’t amount to manufacture and resultantly was saved from additional excise burden.

Brand in GST:

From the inception of GST, Government had assured of keeping separate categories for many branded goods.

Initial Introduction:

Initially, in GST, only Registered Brand Name was considered Brand and was taxable accordingly. Notification No.1/2017-CT (Rate) defined ‘registered brand name’ as:
The phrase “registered brand name” means brand name or trade name, that is to say, a name or a mark, such as symbol, monogram, label, signature or invented word or writing which is used in relation to such specified goods for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified goods and some person using such name or mark with or without any indication of the identity of that person, and which is registered under the Trade Marks Act, 1999.
The definition was borrowed from the erstwhile regime and a condition of being registered under the ‘Trade Marks Act, 1999’ was added. All the descriptions in rate notifications carried the wordings ‘Registered Brand Name’ except ‘Medicaments’ under Chapter 30 and ‘Organic Fertilizers’ under Chapter 31.
Most of the branded goods having additional tax are food products and their raw materials mostly carry NIL rate of GST. So, the registered brands were at a disadvantage, as the consumers had to shell more money to buy those products. However, the definition gave an opportunity to taxpayers to save GST. Many taxpayers misused the flaw and started de-registering their brand thus saving huge amount of tax. Yet they used the same brand and enjoyed the goodwill or the advantages attached to the same.

Changed Definition

On realising this, suitable changes were made. Notification No. 27/2017-CT (Rate) was issued on 22nd September, 2017 widening the scope of taxation of branded goods. Definition of “Brand name” was introduced. As per this notification:
‘The phrase “brand name” means brand name or trade name, that is to say, a name or a mark, such as symbol, monogram, label, signature or invented word or writing which is used in relation to such specified goods for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified goods and some person using such name or mark with or without any indication of the identity of that person’.
This definition is similar to the erst while regime as the condition of being registered has been removed. Additionally, definition of “Registered Brand Name” was also changed as:
The phrase ―registered brand name means,
(A) a brand registered as on the 15th May 2017 or thereafter under the Trade Marks Act, 1999 irrespective of whether or not the brand is subsequently de-registered;
(B) a brand registered as on the 15th May 2017 or thereafter under the Copyright Act, 1957(14 of 1957);
(C) a brand registered as on the 15th May 2017 or thereafter under any law for the time being in force in any other country.’
Thus, the Brand will be considered registered if it was registered as on 15th May or was registered thereafter, anywhere in the world, even if it is de-registered subsequently. Moreover, previously, only the registration under the Trade Marks Act was considered as a registered brand. Now, it will also cover the registration under the Copyright Act.

Widening the Scope of Taxation

Additionally, scope of taxation on branded goods was extended to unregistered brands also. To attract higher rate of taxation, either of the two following conditions needs to be satisfied by the goods:

1) If it is a Registered Brand Name or
2) If it is a Brand Name on which an actionable claim or enforceable right in a court of law is available. For e.g. Mr. Sanjay markets pulses with the name “Sanjay Pulses” and he reserves the right to enforce action against any person, who uses his brand name, in the court of law. In such an instance, even if his brand is not registered, it will attract additional tax burden.

When it is not a Brand

Definition of a Brand is very wide and includes even symbols or labels. So, it can create problems for small players. An escape route, therefore, is given to mitigate the same. To avoid the rate of branded goods, the taxpayer has to voluntarily surrender his special rights for the brand. Taxpayer needs to do following two things to surrender his right:

1) The taxpayer needs to file an affidavit with the jurisdictional commissioner that he is voluntarily foregoing his actionable claim or enforceable right on such brand name; and

2) The taxpayer packing such branded goods shall, on each such pack (bag, bottle, etc.), clearly print in indelible ink, both in English and the local language, that he has foregone his actionable claim or enforceable right voluntarily, for the brand.

Also, if the brand-owner and manufacturer are different persons, the affidavit will have to be submitted by the brand-owner.

The author has never seen any such printed words on any branded goods so far. We may see heavy litigation in this matter, in future. Even a small bag of rice or a pouch of pulses, generally carry a small logo or the name.

Phrase used in the notification is “brand name on which an actionable claim or enforceable right in a court of law is available”. Registered brand name possesses wide powers in the respective laws. Unregistered brand may not have the same powers but still can be protected by means of common law of tort. To succeed in such action, it is necessary to establish that though unregistered, the name has comparable brand-value or goodwill in connection with the product with which it is used.

Brand Name Vs. Registered Brand Name:

With the changes through the rate notification mentioned above, the scope of “Brand name” has been widened and now, even the unregistered brand names will have to bear the burden of taxation equal to registered brand names. Only options available with the taxpayers are either to use the brand and pay tax or give a declaration of forgoing of the right along-with mentioning the same on every pack.

In short, we can say that no big brand can go untaxed any more, as big players will not be willing to risk all their rights attached to a brand, on which they have spent a lot of money, just to save 5% tax. On the other hand, small players may opt to surrender their rights by submitting affidavit with intent to accomplish price competitiveness.

Unit Container:

Branded goods also should be packed in unit container to attract the additional tax burden. Unit Container is defined as:

‘The phrase “unit container” means a package, whether large or small (for example, tin, can, box, jar, bottle, bag, or carton, drum, barrel, or canister) designed to hold a pre-determined quantity or number, which is indicated on such package.’

Very few branded products are sold in loose or unpackaged form. Suppose, a Flour mill having a registered brand also sells the same flour in loose portions to people who buy directly from the mill, in such a case, the flour sold in loose portions will be exempt from GST.

Rulings and Case Laws:

GST Law is still in its infancy. So, there are not many case-laws so far. Most of the litigation has been through Authorities of Advance Ruling in various States.

In the case of Aditya Birla Retails Ltd. (Order no. GST-ARA-13/2017/B-16 Mumbai, dated 23.03.2018), Maharashtra Authority of Advance Ruling ruled that, goods merely having a declaration mentioning the name and registered address of the manufacturer, as per the statutory requirement, will be considered as bearing a brand name. The ruling was upheld by Maharashtra Appellate Authority.

Coming to some cases in the earlier regime, in the case of Tarai Foods Ltd. Vs. CCEx., Meerut-II, the Hon. Supreme Court observed that “Under the Standard Weights and Measures (Packets Commodities) Act, 1977 every packet is required to bear thereon or on a label squarely affixed thereto a definite, plain and conspicuous declaration as to, inter alia, the name and address of the manufacturer” In other words, unit containers would have to bear the name of the manufacturer. If the name of the manufacturer were to be a brand name then this would mean, that there would be no unbranded unit container at all in law and the distinctiveness of T.H. 2001.10 would be meaningless.” The Hon. Court further observed that “This name or mark etc. cannot, therefore, be the identity of a person itself. It has to be something else which is appended to the product and which establishes the link.”

In the case of CCEx, Trichy Vs. Grasim Industries, Ltd., the Hon. Supreme court observed in relation to ‘brand’ that “Even the name of some other company, if it is used for the purposes of indicating a connection between the product and that company, would be sufficient. It is not necessary that the name or the writing must always be a brand name or a trade name in the sense that it is normally understood.”

Judgements in both the cases are totally different. Even the facts of both the cases are different. In the case of Aditya Birla, referred supra, the authority relied on the ‘Grasim Industries Ltd.’ case and observed that the taxpayer has tried to use the brand indirectly and hence denied the benefit of exemption.

There is a requirement to mention various details including name and address of the manufacturer in the packaged goods under various acts like Food Safety & Standards Act, 2006, Legal Metrology Act, 2009, etc. In the opinion of the author, mere mentioning of the name and address of the taxpayer will not be considered a brand unless there is some direct or indirect benefit that can be established to be achieved by such use.

Brands in Compensation Cess:

There are different rates of Compensation Cess for various branded and unbranded tobacco products. The difference in rates of branded and unbranded goods ranges from 5% to 61% depending upon the product. The government probably wants to give benefits to farmers or small manufacturers who sell loose tobacco and at the same time curb tax evasion.

Brands in Service Sector:
Many branded goods carry additional tax burden, but there is no such scheme for services, yet. Branded as well as unbranded services attract the same rate. However, the world is changing very fast. Value of branded services is increasing very quickly. The government might look into the same in future.

GST on Usage of a Brand:

Brand value is an intangible asset. It can’t have fixed value. Brand is an Intellectual Property. As per Heading 9973, of Notification No. 11/2017-CGST (Rate), GST rate on “ Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology software”is 12%.

Allowing the usage of a brand will be considered as “permitting the use or enjoyment” of the same. Such temporary usage agreements generally occur between group companies. In most cases, holding companies have ownership of a brand and it allows its usage to one or more subsidiaries. Suppose, “TATA” brand is owned by TATA Sons, the holding company and it allows use of “TATA” Brand to many of its subsidiaries, like TATA Salt, TATA Chemicals, etc. The holding company can charge its subsidiaries for the usage of its brand. Holding company will be a supplier; the supply will be chargeable to GST as “usage of intellectual property” and will be taxed accordingly. 

Now, suppose the holding company is a foreign company and the subsidiary using its brand is an Indian Company. For e.g. App Inc. registered in USA allows App India Pvt. Ltd. to use its brand “App” and charges it for the same. 

As per Section 2(11) of the IGST Act:
‘‘import of services” means the supply of any service, where
the supplier of service is located outside India;
the recipient of service is located in India; and
the place of supply of service is in India;

As per Section 13(2) of IGST Act, “Place of Supply” where location of either the supplier or the recipient of services is outside India shall be ‘the location of the recipient of services’ So, in our case, Place of Supply will be the location of App India Pvt. Ltd., i.e. India and the transaction will be considered as “import of services”.

 Holding companies allowing the usage of brand are, generally, not registered in India. As per Notification No. 10/2017-Integrated Tax (Rate), tax shall be paid on Reverse Charge Basis (RCM) by the recipient of services in case “any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient”. So, in our case, tax needs to be discharged by App India Pvt. Ltd.

Usage of Brand without Consideration:

As per Section 7 of the CGST Act, ‘Consideration’ is an important limb of ‘Supply’. However, as per Para 4 of Schedule I of the CGST Act, “Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business” will be considered as supply even though made without consideration.

Therefore, in our example, even if no consideration is received for the usage of brand, it will still be considered as supply, because the supplier and recipient are related parties. Valuation provisions will apply as far as value of the supply is concerned. These provisions can create litigation in future because in many cases, the holding companies
do not charge anything for usage of brand. They get consideration in form of profits or appreciation in the value of their investments.

GST on Sale of a Brand:

Heading 9973, mentioned supra also covers ‘permanent transfer of IP’. So, the GST rate will be 12% normal valuation principle of transaction value will be applicable, unless the brand supply is between related parties as explained supra. However, if a brand is sold as a part of transfer of a going concern, the same will get the exemption under Entry No. 2 of Notification No. 12/2017-CT (Rate) dated 28th June, 2017. Supplier also has to take into account the provisions of Transfer of Property Act, 1882.

Brand Name Vs. Trade Mark & the Concept of Passing off:

The word “Brand” has not been defined separately in the Trade Mark Act, 1999. However, the definition of “Mark” includes Brand. We can say that “Mark” as per Trade Mark Act is much wider than “Brand” as per the CGST Act. Registration under Trade Mark Act gives vast powers to any brand. However, even the unregistered brands also get the benefit under section 27(2) of the Trade Mark Act. As per Section 27(2):

“Nothing in this Act shall be deemed to affect rights of action against any person for passing of goods or services as the goods of another person or as services provided by another person, or the remedies in respect thereof.”

In simple terms, “passing off” is when one person passes off or sells his goods as that of another person. For e.g. a supplier of shoes uses logo of “Nike” in his shoes without having the permission for the same. It is a common law tort that is mostly used to protect the goodwill that is attached to a brand. Section 27(2) sited above also protects the rights attached to unregistered brands. If the owner of the unregistered brand-name can use his right under this provision, he will be become liable for GST as per the branded rate structure.

Persons filing affidavit for disowning a brand or those choosing not to register to get the rate advantage of un-branded goods will lose the right under section 27(2) of the Trade Mark Act. This can be a major disadvantage from market point of view. So, any such action must be properly thought upon beforehand.

Incidental right to use brand name in franchise arrangements:

Franchise agreements/Contracts allow the Franchisees (user of the brand) to use the brand of the Franchisor (owner of the brand). Such agreements have different types of clauses for consideration to be given to the franchisors. Franchisor mainly earns in one or more of the following methods: one time franchise fees, commitment deposit, periodic fees, profits earned due to sale of various raw-materials or finished products to franchisee, some fixed share of total sales or a portion in profits.

One time or periodic franchise fees will be considered as “permitting the use or enjoyment of Intellectual Property (IP) right” and will be taxed accordingly. There is also another view, where the periodic payments are considered as commission. It is pertinent to note that commission is to be taxed differently.

Commitment deposits are generally interest-free refundable deposits. So, they will not be considered a supply. However, in case, the deposit is withheld by franchisor due to infringement of any condition of the agreements, the same will become a supply. It will be considered as a supply of services under the clause 5(e) of Schedule II of the CGST Act.
There can be different views about the applicable GST rate in such case. One view is that it will be covered under Heading 9973; while the other view is that it will be covered under residual heading 9997 which carries a service tariff code for “agreeing to tolerate an act”.

When additional profits are earned by supplying various goods or services to the franchisee, the amount of additional profit is already covered under the transaction price. So, there will not be any additional supply.

Agreements where the franchisor gets a share in sales value or the profits of the franchisee are generally in the nature of commission. However, there can be another view where the same may be regarded as the use of IP right. Nature of supply will be decided on a case to case basis in such transactions.

Allowing usage of Brand to a Distinct Entity outside the Territory of India

“Export of Services” has been defined under section 2(6) of the IGST Act. According to clause 5 of section 2(6) ‘there cannot be any export of services between establishments of a distinct person as explained in Section 8 of the IGST Act’. This clause has been inserted to discourage repatriation of profits to evade various taxes in different geographies by multinational organizations.

However, an exemption has been given in Serial No. 10F of Notification No. 9/2017- Integrated Tax (Rate), whereby supply of services by an establishment in India to any establishment outside India, will be chargeable to NIL rate of tax, provided the Place of Supply is outside India, for the reason that both are treated as establishments of distinct entity.

Usage of Brand among distinct entities is very common in multinational organizations, whereby brand owner is registered in one country while the same brand is used by multiple entities in different countries. In such a case, if the Indian entity uses the brand name and pays for the same to a Singaporean entity, it will be considered an import of services and the Indian entity will have to pay tax on Reverse Charge Basis. While, in the reverse case, it will not be considered an export of services but the Indian entity can charge NIL rate of tax as per 10F of the Notification no. 9/2017 sited above.

One important point that has to be considered here is that this supply will not be a zero-rated supply and consequently, the Indian supplier has to reverse input tax credit attributable to this supply as per section 17(2) of the CGST Act.

Supply of Brand – Whether Goods or Services?

As per section 2(52) “goods” means every kind of movable property. However, as per Clause 5(3) of Schedule II, ‘temporary transfer or permitting the use or enjoyment of any intellectual property right’ is a service. Therefore, while permanent transfer or sale of a Brand will be considered as supply of goods, the temporary transfer or permitting the use of a brand will be a supply of service.

 Demise of a Brand:

When a brand is acquired, the reason is mainly to take advantage of its consumer base or recall value. But sometimes, a brand is purchased even to kill it. It happens mainly because it’s a competitive brand. For e.g. a famous Ice-cream brand purchases its rival brand and doesn’t use the brand at all, thus killing it slowly as people will forget it after sometime and eventually the buyer’s brand will take-over its market.
On the other hand, in many mergers, a new brand is created, killing the old brands. We can see the recent example of mergers of “Vodafone” and “Idea”. The merged company has made a new brand “VI” and is killing the old brands.

 In the first case of killing a brand after acquiring it may result in invoking clause (c) of Section 17(5) of the CGST Act which restricts the claim of Input Tax Credit. As per Clause (h) ITC will not be available in case goods are “written off”. In case a brand is acquired and subsequently killed, its value would be written off as per accounting principles resulting into loss of ITC due to clause (h). However, in the second case of merger, such an issue will not arise as there will not be any supply when the 2 taxpayers are merged.

Conclusion:

Branding is still an evolving concept as far as taxation is concerned. It is sure to evolve further and may see many changes in future before or after litigations, as more and
more people are trying to be brand-conscious. Even government schemes now are branded and sold to the citizens as consumers!

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