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Global IT companies told to assign value to brands

Industry trackers said currently there is no valuation mechanism for global technology companies in India. In most cases, a brand licensing agreement is undertaken for which the Indian arms pay a fee to the parent that software majors club under “management fees” or “consultancy fees”.

Last Updated: Feb 21, 2020, 04.30 PM IST
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Taxman wants global players to levy a fee on its usage in India and pay 18% GST on the payment
MUMBAI: The indirect tax department wants the software companies to value the global brand names and logos used in India, charge a fee on that and pay 18% goods and services tax (GST) on top of it, according to people with direct knowledge of the matter.

Industry trackers said currently there is no valuation mechanism for global technology companies in India.

In most cases, a brand licensing agreement is undertaken for which the Indian arms pay a fee to the parent that software majors club under “management fees” or “consultancy fees”.

Software companies including Google, Facebook, Microsoft, SAP and Oracle, among others, have been questioned by the tax department and asked to explain whether they assign value on such transactions.

None of the companies responded to an email query ET sent.

“The moot point of debate will remain whether there is a mutual agreement for rendition of service. Further, the absence of consideration in various cases would lead to exclusion from the definition of supply,” said Abhishek A Rastogi, partner, Khaitan & Co, a law firm.

Tax experts said under the GST framework, nothing is for free. So a transaction between related parties — a company and its subsidiary— can come under the tax net even if there is no consideration involved. This has resulted in the indirect tax department raising demands on the brands and logos that are owned by a holding company or conglomerate but used by subsidiaries and group companies without any payment.

This will also increase the compliance burden of the companies, experts said, as the companies will have to pay the GST through a “reverse charge” mechanism.

The reverse charge mechanism is mainly used in cases where the company that is required to pay the taxes is not present in the country. In this case, the Indian subsidiaries will be required to pay the GST through the reverse charge mechanism. Earlier, the indirect tax department had questioned several banks and conglomerates on the same issue.

“The problem is that this is a revenue neutral transaction, that is, software companies can claim credit of GST paid,” said a tax expert advising one of the companies.

Although this would still end up in litigation, experts said many companies may not immediately get the credit after they pay GST— as the investigating officer and the assessing officer in such cases are different.

“While the GST paid on reverse charge basis is eligible for input tax credits, it could become litigative if it's paid in the course of an investigation as the credits for previous periods would also need to be claimed through the return filing process,” said MS Mani, partner, Deloitte India.

The first point of litigation would be how the company assigns a valuation to its global brand and logos.

“Despite the variety of methods available and their respective comprehensibility, the prominent problem that emerges time and again is the lack of uniformity in the methods adopted and the results so achieved as there exists large amounts of variations in the valuation amount obtained,” said Salman Waris, partner at TechLegis Advocates and Solicitors,

Many fear that in cases where the company doesn’t assign a value to their logos or brand names, the taxman could do it for them. The tax department could ask the companies to pay 18% GST on the ‘deemed’ value of the brand transactions and pay tax on the fees charged.

“The fixation of value on deemed basis would lead to arbitrary results and in the absence of clear valuation provisions. Entire taxability can be challenged on the basis of vagueness,” said Rastogi.

This is not the first time that the indirect tax department has raised this issue. The tax department started issuing notices to banks that allowed subsidiaries, such as mutual funds and insurance units, to use their logos for free. Several conglomerates were questioned on how they value their brands and logos and whether their subsidiaries are making any payments for using them.

Under GST law, the “supply of brand” is deemed to have taken place from the parent company to the subsidiary, which is a related party. Logos and trademarks are licensed by the parent company that holds them to subsidiaries.

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