PROTECTION OF GOODWILL UNDER TRADEMARKS ACT, 1999

FINAL DRAFT SUBMITTED IN THE COMPLETE FULFILLMENT FOR THE COURSE INTELLECTUAL
PROPERTY LAW FOR THE ATTAINING DEGREE OF B.B.A., LL.B (HONS.).

SUBMITTED By- SUBMITTED TO:

ADITI CHANDRA (1806) PROF. DR. S.C.

ROY

B.B.A., LL.B. (HONS.) FACULTY OF

INTELLECTUAL PROPERTY LAW

CHANAKYA NATIONAL LAW UNIVERSITY, NYAYANAGAR-MITHAPUR, PATNA

800001
 TABLE OF CONTENTS

DECLARATION.............................................................................................................................2

ACKNOWLEDGEMENT...............................................................................................................3

INTRODUCTION...........................................................................................................................5

WHETHER GOODWILL IS AN INTELLECTUAL PROPERTY RIGHT..............................8

TRADEMARK & GOODWILL: SEPARABLE OR INSEPARABLE....................................12

DOES TRADEMARK ACT, 1999 PROVIDE PROTECTION TO GOODWILL..................14

CONCLUSION.............................................................................................................................17

BIBLIOGRAPHY.........................................................................................................................18

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 DECLARATION

I hereby declare that the work reported in the B.B.A., LL. B (Hons.) Project Report entitled
“PROTECTION OF GOODWILL UNDER TRADEMARKS ACT, 1999” submitted at
Chanakya National Law University is an authentic record of our work carried out under the
supervision of PROF. Dr. S.C. Roy. I have not submitted this work elsewhere for any other
degree or diploma. I am fully responsible for the contents of my Project Report.

NAME OF CANDIDATE:

ADITI CHANDRA (1086)

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

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 ACKNOWLEDGEMENT

I have taken efforts in this project. However, it wouldn’t have been possible without the kind
support of many individuals and institutions. I would like to extend my thanks to all of them.

I thank God for providing us with everything I required in completion of this project.

I am highly indebted to my faculty for his guidance and constant supervision as well as providing
necessary information regarding the project and also for his support in the completion of this
project.

I would like to express my gratitude towards my parents for their kind cooperation,
encouragement and guidance regarding this project.

Also I would like to thank my friends and batch mates who willingly helped me out in the
development of this project.

THANK YOU

ADITI CHANDRA (1806)

COURSE: B.B.A., LL.B. (HONS)

SEMESTER: VII

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STATEMENT OF PROBLEM

To understand what is the role of goodwill under Trademarks Act, 1999 during transfer of
trademark.

HYPOTHESIS

The researcher would like to undertake the hypothesis that it is the goodwill which creates the
value of a trademark and a trademark which is transferred with goodwill will get much higher
value in comparison to the trademark which is transferred without goodwill.

AIMS AND OBJECTIVES

The primary objective of this project report is to understand the importance, if any, of goodwill
under Trademarks Act, 1999 and the protection it is rendered by the provision of this Act.

RESEARCH METHODOLOGY

In this project Doctrinal Method of Research is used. Doctrinal Methods refer to Library
research, research or processes done upon some texts writings or Documents, legal propositions
and Doctrines, Articles, Books as well as Online Research and Journals relating to the subject.

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 INTRODUCTION

A business’ identity and its brand awareness are growing increasingly important over the last few
decades as consumers, customers, clients have immediate and unlimited access to local and
national marketplaces throughout the world; thus, strong trademarks continue to increase in
value also. Well-crafted and well-known trademarks command high premiums as a function
their underlying goodwill. As such, businesses with strong, unique, effective trademarks and
service marks can significantly enhance their tangible and intangible value through increased
sales and less marketing/advertising.

The intellectual capital of a business’s product and/or service most often includes a portfolio of
intangible assets. These assets include the obvious patents, trademarks, copyright, trade names,
logos, slogans, symbols and other elements. These assets are frequently categorized as goodwill
and seldom valued individually. Goodwill encompasses all of the intangible assets of a business,
company or organization, which can be managed and the value measured. In a legal context,
goodwill may be defined as value that attached to a piece of intellectual property (e.g.,
trademark). For example, US Courts have ruled that a trademark cannot continue to maintain its
value or uniqueness apart from its goodwill and that the goodwill of a particular trademark is
always linked with the trademark that describes the particular product, service and/or company
brand.

Trademarks are vital symbols of goodwill and reputation. In fact, goodwill and reputation are
indeed very tightly interconnected. It includes the value to a business by reason of customer
situation, name and reputation, connection with consumers, among other things.

Goodwill means consumer willingness to purchase a good or service over and over again. When
a consumer recognizes a product, he or she will likely have a previously formed opinion
regarding that product and/or service. This may be positive, neutral, or negative. This opinion
will influence his decision whether to purchase the product or not. If the consumer’s opinion is
positive, the trademark has come to symbolize the goodwill of the mark’s owner to encourage
the continued use of the product and/or service.

The concept and definition of goodwill is often difficult to understand; to state it simply,
goodwill may be defined as the value within a business that is left over after all other assets, both
tangible and intangible, have been accurately valued.  As assets, trademarks and service marks

5
have become ever more important to the financial success or failure of the businesses with which
the trademark is associated

Goodwill is essentially an intangible asset of a firm accruing to it by the good conduct and
business performance. Therefore it can effectively be defined as the benefits arising from
connection and reputation of the business and is primarily an asset. It is intangible and rather
difficult to identify per se. It is also difficult to specify when the goodwill takes existence and no
business which commences possesses goodwill from the start. It is generated as the business is
carried on and may be augmented with the passage of time.

It has been held in the case of CIT v. B.C. Srinivasa Setty that the goodwill is affected by
everything relating to the business, the personality of the owners, the nature and character of the
business, its name and reputation, its location, its impact on the contemporary market and on the
prevailing socio-economic ecology.

Lord Eldon's observation in the case of Churton v. Douglas is a very important aspect of the
meaning of goodwill, 'goodwill must mean every advantage -every positive advantage , If I may
so express it as contrasted with negative advantage of the later partner not carrying on the
business himself - that has been acquired by the old firm in carrying on its business , whether
connected with the premises in which the business was previously carried on, or with the late
firm , or with any other matter carrying with it the benefit of business.'

It is the public approbation which has been won by the business, and that is considered as a
marketable thing; it is the probability of the customers or clientele of the firm resorting to the
person or persons who succeed to the business as a going concern. 'Approbation ' was one of the
original meanings of goodwill before it was used as commercial slang.

Now, at the time of dissolution, the goodwill may be sold separately or along with the other
assets. If there is dissolution of a partnership with a condition that the assets fall to a particular
partner and no mention of goodwill is made, it is assumed that the goodwill also falls to the
partner getting the other assets. It is therefore quite clear that goodwill is an integral part of the
assets. At this time goodwill might in fact be the most important and valuable asset. Also if there
is no express or implied agreement to the effect then the goodwill may be sold as an asset on

6
insistence of a partner. This shows that goodwill is inclusive of brand value and based on number
of other factors. While trademark get its value from goodwill associated with products or
services.

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 WHETHER GOODWILL IS AN INTELLECTUAL PROPERTY RIGHT

Regardless of the valuation methodology used, trademark owners do have control over the value
of the goodwill associated with a particular trademark, and such control starts at inception of the
trademark. Trademark owners can and should select a conceptually strong mark (i.e., one that is
suggestive, arbitrary or fanciful) and should avoid generic or descriptive marks. In addition to a
conceptually strong mark, trademark owners should adopt a commercially strong mark (i.e., one
that is not commonly used in the industry) and one that may allow for expansion to other product
and service categories down the road. These pre-adoption considerations will help ensure strong
value and goodwill in the marketplace.

Trademarks are vital symbols of goodwill and reputation. In fact, goodwill and reputation are
indeed very tightly interconnected. It includes the value to a business by reason of customer
situation, name and reputation, connection with consumers, among other things.

The concept and definition of goodwill is often difficult to understand; to state it simply,
goodwill may be defined as the value within a business that is left over after all other assets, both
tangible and intangible, have been accurately valued.  As assets, trademarks and service marks
have become ever more important to the financial success or failure of the businesses with which
the trademark is associated. It means consumer willingness to purchase a good or service over
and over again. When a consumer recognizes a product, he or she will likely have a previously
formed opinion regarding that product and/or service. This may be positive, neutral, or negative.
This opinion will influence his decision whether to purchase the product or not. If the
consumer’s opinion is positive, the trademark has come to symbolize the goodwill of the mark’s
owner to encourage the continued use of the product and/or service.

'The goodwill which has been the subject of sale is nothing more than the probability that the old
customer will resort to the old place.' The definition cited above is of course the very simplistic
and rather laymen meaning of what goodwill results in. It has been more elaborately defined in
Trego v. Hunt by Lord McNaughton as: ‘often it happens that goodwill is the very sap and life of
the business, without which the business would yield little or no profits. It is the whole advantage
whatever it may be , of the reputation and connection of the firm , which may have been built up
by years of honest work or gained by lavish expenditure of money.'

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Goodwill is also an intangible asset that cannot be easily defined. In the words of Lord
Macnaghten, in the case of Commissioner of Inland Revenue v, Muller & co's Margarine Ltd can
be described as "it is a thing very easy to describe, very difficult to define. It is the benefit and
advantage of the good name, reputation and connection of a business. It is the attractive force
which brings in customers. It is the one thing that distinguishes an old-established business from
a new business at its first start. The goodwill of a business must emanate from a particular center
or source. However widely extended or diffused its influence may be, goodwill is worth nothing
unless it has the power of attraction sufficient to bring customers home to the source from which
it emanates."1

The question whether Goodwill is an IPR was answered in the case of M/S. HYUNDAI
MOTOR INDIA LTD. VERSUS COMMISSIONER OF GST & CENTRAL EXCISE
CHENNAI OUTER COMMISSIONERATE 2018 (12) TMI 866 - CESTAT CHENNAI,
wherein the facts were:

 The appellants are engaged in the manufacture of cars and parts thereof and are registered
with the Central Excise Department. They also had an independent spares parts division
with separate central excise registration. In addition to the manufacture of spare parts,
this division used to procure parts from vendors also. The items manufactured and
procured were sold by the spare parts division to their dealers.
 The appellants sold the spare parts business division to Mobis India Ltd. under a Business
Transfer Agreement dated 26.4.2007 as a going concern with effect from 1.5.2007. The
consideration for the said transfer was agreed at ₹ 425.25 crores. A separate Trade Mark
Licensing Agreement was executed on 30.4.2007 as per which Mobis India Ltd. would
pay 8.5% of their annual domestic sales to the appellant as the fee for trademark license
granted to them for a period of 10 years commencing from 1.5.2007 till 30.4.2007.
 During the audit of Mobis India Ltd. conducted by the internal audit wing of LTU,
Chennai, it was noticed that in their auditor’s report for 2007 – 08, fixed assets, current
assets and current liabilities had been mentioned as acquired at book values and that the
1
Role Of Goodwill In Transfer Of Trademark
https://www.mondaq.com/india/trademark/310330/role-of-goodwill-in-transfer-of-trademark?
login=true
9
 company had also paid consideration towards vendors and dealer network and goodwill
based on the valuation carried out by an independent evaluator.
 The valuation indicated goodwill value at ₹ 80.29 crores. These amounts were also
indicated under “Related party disclosure” and under “fixed assets” in the annual report
of Mobis India Ltd.
 Based on the valuation indicated in the accounts of Mobis India Ltd., the department was
of the view that the amount of ₹ 425.25 crores received as consideration for the transfer
of the business included the transfer of goodwill also.
 Thus goodwill was all along part of the consideration for the sale of spare parts division
of appellant to Mobis India Ltd. Goodwill is the intangible property and classified as
intellectual property and the transfer of the same would fall within section 65(105)(zzr)
of the Finance Act, 1994.
 Further, the same has been clarified by the Board vide Circular No.80/10/2004-ST dated
17.9.2004. Even though the value of goodwill was shown as ₹ 80.29 crores by Mobis
India Ltd. in their balance sheet, the notional value of goodwill was fixed at 8.5% of the
total sale consideration (₹ 425 crores) on the basis of the agreement dated 30.4.2007 and
this worked out to be ₹ 33.31 crores.
 Thus, according to the department, out of ₹ 425 cores paid as consideration for the sale
of an ongoing business to Mobis India Ltd., ₹ 33.31 crores appears to be the value of
goodwill transferred to Mobis India Ltd. Show cause notice was issued proposing to
demand service tax on the value of ₹ 33.31 crores to the tune of ₹ 3,66,47,575/- along
with interest and also for imposing penalties.

View of CESTAT:

 From the definition of intellectual property right laid in Section 65(55a), it is clear only
IPR which comes under any law in force would come within the ambit of the definition.
Though goodwill may be in the nature of the intangible right, there is no law that
recognizes it as an intellectual property right. In fact, goodwill is attached to an ongoing
business whereas IPR is not always so.
 The right over IPR may be obtained by an individual also. Goodwill of a company may
include the value of IPR held by him but not the vice versa. According to the department,

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 the words ‘any other similar intangible property’ would include goodwill also. We fail to
agree with this argument.
 The Hon’ble High Court of Karnataka in the case of Associated Electronics and
Electrical Industries (Bangalore) Pvt. Ltd., has observed that ‘trademark and goodwill
are two distinctly separate concepts. That goodwill of business has no existence except
in connection with the continuing businesses.
 The Tribunal in the case of Alstom T&D had occasion to analyze a similar issue wherein
a trademark that was registered/recognized outside India was subject to levy of service
tax under IPR service.
 The Tribunal relied upon various decisions and held that the transfer of such trademark
which has not been recognized or registered within India will not fall within the ambit of
Intellectual Property Right Service. From the above discussion, we are of the
considered opinion that the transfer of goodwill will not fall within the definition of
IPR service as stated in Section 65(55b) of the Finance Act, 1994.

Thus, we see that the present position in law is that, Goodwill is not an IPR as it is not
recognized so under any law in force in India.

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 TRADEMARK & GOODWILL: SEPARABLE OR INSEPARABLE

Goodwill of a trademark is local in character and divisible like in case of business of a brand
situated in different countries. In every country business holds a separate goodwill related to the
particular brand although some part of that goodwill is dependent upon the overall working of
the business around the world. Business of a brand may be closed in a particular country but
closing of that business would not affect the overall goodwill of the business. While the element
of goodwill may be based primarily on earnings, such factors as the prestige and renown of the
business, the ownership of a trade or brand name, and a record of successful operation over a
prolonged period in a particular locality, also may furnish support for the inclusion of intangible
value. This shows that goodwill is inclusive of brand value and based on number of other factors.
While trademark get its value from goodwill associated with products or services.

In case of assignment with goodwill, assigner transfers absolute rights i.e. all the rights and
values associated with trademark which gives absolute authority to transferee to control, to sell
or to improvise or change the quality or structure or completely stop the services of such
products. It is basically that transferor is replaced by transferee in terms of authority, control &
rights & after assignment transferor is completely barred from using such trademark associated
with any products & services in kind. Whereas trademark assigned without goodwill means the
right to use trademark associated with the specific products or services of transferor is transferred
to the transferee & rest of the goodwill lies with transferor. Accordingly, transferee can use such
trademark for specific products & services as per agreement unless and until it is likely to
deceive or create confusion it does not create multiple rights in the same goods or services or if
they are associated with each other.

In Associated Electronics & Electrical Pvt. Ltd. v. DCIT2, Income Tax Appellate Tribunal
held that trademark and goodwill are two different concepts and transfer of trademark does not
mean transfer of goodwill. Therefore, both Goodwill and trademark are different assets.

Similarly in Kwality Biscuit v. Assistant CIT, Bangalore 3, Income Tax Appellate Tribunal
,

court held that right to manufacture biscuits was independent, separate and distinct right from
right to market, distribute and sell biscuits under the brand name 'kwality', That means right to
2
https://vlex.in/vid/associated-electronic-and-electrical-572345486
3
https://indiankanoon.org/search/?formInput=kwality%20biscuits
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manufacture is still with assignor and will continue in the same business but under different
brand name. Trademark and goodwill is separable.

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 DOES TRADEMARK ACT, 1999 PROVIDE PROTECTION TO GOODWILL

As per The Indian Trade Marks Act, 1999 (hereinafter "Act"), a trademark can be assignable
with or without of goodwill of the business either in respect of all the goods or services or part
thereof. Indian law according to Sec. 37 of the Act recognize the right of proprietor in trademark
& in Sec. 38, 39 of the Act by which registered or unregistered trademark can be assignable and
transmissible with or without goodwill subject to restrictions laid down in Sec. 40 of Trade
Marks Act, 1999. On the other hand, U.S. legislation under Sec. 10 of Trademark act (Lanhman
Act) 1946, recognize only assignment of trademark with goodwill and assignment without
goodwill is termed as assignment in gross and invalid, therefore assignee acquire no rights in
such transfer.

It is to be noted that rights holders face a number of challenges when it comes to maintaining
brand equity. With changing consumer preferences, various features must be updated to keep
brands fresh and interesting. For budgetary reasons, the first priority for rights holders is to seek
protection of the primary mark, followed by secondary marks and elements including colour,
representation and tag lines. In some cases, these additional elements may not qualify for
protection at the time of adoption, but are capable of attaining secondary meaning over time.

Where trademarks and their features attain popularity, copycats are not far behind. Typically, a
rights holder may face direct infringement of its mark through use of an identical mark on
competing products, unauthorised use of elements of the mark or use of the mark on completely
different products.

 Passing off is a part of the law of contract apart from protection against infringement of
registered trademarks owners, which can be used to enforce unregistered trademark
rights. The tort of passing off protects the goodwill of a trader from a misrepresentation
that causes damage to goodwill.4
The law of passing off prevents one person from misrepresenting his or her goods or
services as being the goods and services of the claimant, and also prevents one person
from holding out his or her goods or services as having some association or connection
with the plaintiff when this is not true.
4
Passing off and Concept of Goodwill
http://www.legalservicesindia.com/article/227/Passing-off-&-the-Concept-of-Goodwill.html
14
A cause of action for passing off is a form of intellectual property enforcement against the
unauthorised use of a mark which is considered to be similar to another party's registered or
unregistered trademarks, particularly where an action for trademark infringement based on a
registered trade mark is unlikely to be successful (due to the differences between the registered
trademark and the unregistered mark).

Passing off and the law of registered trademarks deal with overlapping factual situations, but
deal with them in different ways. Passing off does not confer monopoly rights to any names,
marks, get-up or other indicia. It does not recognize them as property in its own right.

Instead, the law of passing off is designed to prevent misrepresentation in the course of trade to
the public, for example, that there is some sort of association between the business of defendant
and that of the claimant. Another example of passing off is where the defendant does something
so that the public is misled into thinking the activity is associated with the claimant, and as a
result the claimant suffers some damage, under the law of passing off it may be possible for the
claimant to initiate action against the defendant.

 Elements of Passing Off

There are three elements, often referred to as the Classic Trinity, in the tort which must
be fulfilled.
These are:
1) Goodwill owned by a trader
2) Misrepresentation
3) Damage to goodwill

Plaintiffs have the burden of proving goodwill in its goods/services, get-up of goods, brand,
mark and/or itself per se.

The Plaintiff also has the burden of proof to show false representation (intentional or otherwise)
to the public to have them believe that goods/services of Defendant are that of the Plaintiff; thus,
there must be some connection between Plaintiff’s and Defendant’s goods/services/trade. They
must show likelihood and/or actual deception/confusion in the public. Deception/confusion,
however, does not consider a ‘moron in a hurry’. (See Morning Star Cooperative Society v
Express Newspapers Limited [1979] and Newsweek Inc. v. British In relation to the element of
damage to goodwill, there may be loss/diversion of trade or dilution of goodwill. The Plaintiff

15
need not prove actual or special damage; real and tangible probability of damage is sufficient.
This damage should however be reasonably foreseeable. It is insufficient to simply show
likelihood/actual deception and/or confusion. Ultimately, the Court must use common sense in
determining the case, based on evidence and judicial discretion, and not witnesses.

 Extended passing off

One of the instances where passing off is actionable is the extended form of passing off,
where a defendant's misrepresentation as to the particular quality of a product or services
causes harm to the plaintiff's goodwill. An example of this is Erven Warnink v J
Townsend & Sons (Hull) Ltd [1979] AC 731, in which the makers of advocate sued a
manufacturer of a drink similar but not identical to advocate, but which was successfully
marketed as being advocate.
The extended form of passing off is used by celebrities as a means of enforcing their
personality rights in common law jurisdictions. Common law jurisdictions (with the
exception of Jamaica) do not recognize personality rights as rights of property.
Accordingly, celebrities whose images or names have been used can successfully sue if
there is a representation that a product or service is being endorsed or sponsored by the
celebrity or that the use of the likeness of the celebrity was authorized when this is not
true.
 Reverse passing off
Another variety, somewhat rarer is so-called 'reverse passing off'. This occurs where the
defendant markets the plaintiff's product as being the defendant's product (see John
Roberts Powers School v Tessensohn5. It will be recalled that orthodox passing off entails
the defendant representing that his product is the plaintiff's product. In many cases,
reverse passing off can be explained under the ordinary rules: for example where a
defendant may represent that he or she made goods which were in fact made by the
plaintiff so as to pass off his own business as a branch of the plaintiff's.
 The Case of Perry v Truefit6: Perry v Truefitt (1842) 6 Beav. 66 is a famous English
case where the tort of passing off was first articulated. Leathart made a hair treatment
5
[1995] FSR 947; https://rajnisinhablog.wordpress.com/2016/03/18/passing-off-action-unfair-
competition/
6
 (1842) 6 Beav. 66; https://www.encyclo.co.uk/meaning-of-Perry_v_Truefitt

16
 product. He had shown the mixing process to Perry, a perfumer and hair-dresser, who
decided to call the mixture "Medicated Mexican Balm". Perry marketed the mixture
under the title "Perry's Medicated Mexican Balm". Truefitt, one of Perry's competitors,
made a product that was very similar to Perry's mixture, which he marketed it under the
name "Truefitt's Medicated Mexican Balm", and used bottles and labels that looked like
Perry's product. Perry filed a bill against Truefitt, arguing that the name "Medicated
Mexican Balm" was valuable to his business and that he should have exclusive right to
prevent others from using it. The Court denied Perry the right to the name. However,
Lord Longdale held that misrepresentation can be grounds for an injunction, stating that
"a man is not to sell his own goods under the pretence that they are the goods of another
man".

CONCLUSION

While wrapping up, it can be stated that the transfer of proprietary rights in trademark is similar
to any other asset, the difference, however, comes in reference to the goodwill attached to it. It is
the goodwill which creates the value of a trademark and in the contemporary period same is also
a separable part of trademark. Goodwill provides bargaining power in the hand of the seller and
therefore same is been recognized under the law in reference to the transfer of rights in a

17
trademark. A trademark which is transferred with goodwill will get much higher value in
comparison to the trademark which is transferred without goodwill.

Certainly the value of the goodwill associated with a trademark has a direct impact on licensing,
enforcement efforts and litigation. The stronger the brand, the more likely it is to open doors for
licensing opportunities, which may include opening new markets to the trademark owner. In
addition, the value of the goodwill associated with the trademark will provide the trademark
owner with leverage during license negotiations, which can lead to stronger royalty rates for the
trademark owner.

From an enforcement perspective, the goodwill associated with a particular trademark will help
to broaden the scope of enforcement efforts and give additional credence to demand letters and
other enforcement efforts. It will also carry significant weight with a court and the Trademark
Trial and Appeal Board for litigation proceedings.

Like any assets, trademark owners need to protect trademarks in order to preserve (and generate)
goodwill. A key way trademark owners can protect the goodwill associated with trademarks is
by establishing a strong enforcement program. In fact, trademark owners have a duty to police
infringing uses, therefore instituting a strong enforcement plan at the early stages of adopting a
trademark is critical.

BIBLIOGRAPHY

 Role Of Goodwill In Transfer Of Trademark

https://www.mondaq.com/india/trademark/310330/role-of-goodwill-in-transfer-of-
trademark?login=true

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 Passing off and Concept of Goodwill
http://www.legalservicesindia.com/article/227/Passing-off-&-the-Concept-of-
Goodwill.html
 (1842) 6 Beav. 66; https://www.encyclo.co.uk/meaning-of-Perry_v_Truefitt
 [1995] FSR 947; https://rajnisinhablog.wordpress.com/2016/03/18/passing-off-action-
unfair-competition/
 https://indiankanoon.org/search/?formInput=kwality%20biscuits
 https://vlex.in/vid/associated-electronic-and-electrical-572345486

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