Answer 5 – First, let us discuss the tax benefits and the benefits to Startup/ SMEs:

SECTION 80 IAC: Post getting recognition, a startup may apply for tax exemption under section
80 IAC of the Income Tax Act. Section 80 IAC of Income Tax Act, 1961, provides for Income
tax exemption to recognized startups for any 3 consecutive years out of a block of 7 years (10
years for startups from Bio-Technology Sector) from the date of its incorporation. Eligibility
criteria for applying to income tax exemption (80IAC) are:

 The entity should be a recognized startup

 Only Private limited or a Limited Liability Partnership is eligible

 The startup should have been incorporated after April 01, 2016

Section 56: Angel tax1 - Post getting recognition, a startup may apply for Angel Tax Exemption.
Eligibility criteria for tax exemption under Section 56 of the Income Tax Act are:

 The entity should be a DPIIT recognized startup

 Aggregate amount of paid up share capital and share premium of the startup after the
proposed issue of share, if any, does not exceed INR 25 Crore.

Other Benefits for Intellectual Property for startups:

 Fast tracking of patent applications

 Expedited examination

 90% reduction in official fee

 Waiver of professional fee

SMEs: Support for International Patent Protection in E&IT (SIP-EIT) is a scheme launched by
the Department of Electronics and Information Technology to provide financial support to
MSMEs and Technology start-up units for international patent filing. SIP-EIT scheme captures
the growth opportunities in the area of information technology and electronics. This scheme
encourages indigenous innovation and also recognizes the value and capabilities of global IP.
The reimbursement limit has been set to a maximum of Rs. 15 lakhs per invention or 50% of the
total charges incurred in filing and processing of a patent application, whichever is lesser2.

There are various sections introduced by government in the Income Tax Act, 1961, such as
sections 32(1) (ii), 35A, 35AB, 80 GGA, 80-O, 80OQA, 80QQB, 80RRB etc.

Currently, the manufacturing of an IP includes various transactions which are taxed separately:

 Deduction: The capital used for research and development of an IP which is the pre-
existing stage including the analysis cost, manufacturing cost, etc is treated as an expense
which is to be deducted from the gross income for further calculation of income tax.

 Income: The income received as royalty by transfer of IP is treated and taxed under the
Income Tax Act, 1961. To promote innovation in the country, royalty income is given tax
incentives.

 GST: Tax on Sale/ Transfer/ Licensing/ Assignment of the intellectual property.

Once the IP is created, it can be commercialized either by integrating it into products and selling
them or the right to use the IP can be transferred temporarily or permanently, and is subject to
taxation under the Indian Taxation system of direct and indirect taxes.

 Royalty: Royalties are taxable income and also a business expense. If you receive
royalties from someone for use of your property, you must claim these payments as
business income. Royalty income is taxable in respect of any right, property or
information used or services utilized by a non-resident, in India or for the purposes of
making or earning any income from any source in India. If such income is payable in
pursuance of an agreement made before the 1st day of April 1976, and the agreement is
approved by the Central Government, is not taxable.3

 Depreciation: Section 32(1)(ii) of the Act accounts for depreciation of the intellectual
property as expenditure for the purpose of calculation of income tax.

 Expenditure: Section 35A of the Income Tax Act 1961, explained the expenditure on
acquisition of patents and copyrights rights.
  Depreciation over the acquired patents and copyrights shall be claimed over a period of
time when the consideration is paid in lump sum. In a scenario where the consideration is
paid on periodical timeline, the depreciation can be claimed as expenditure fully incurred
for the purpose of business. Provided any expenditure incurred after the 28th day of
February 1966, but before 1st April 1998, on the acquisition of patent rights or copyrights
for the purpose of business, deductions will be allowed for each of the previous years on
an amount equal to the appropriate fraction of the amount spread over 14 years.

 Deductions are not applicable to amalgamating companies in the case of amalgamations,

if the amalgamating company sells or otherwise transfers the rights to the amalgamated
company (being Indian company).

Section 35AB states that where the assesse has paid any lump sum consideration for acquiring
any know-how for the use of his business, the expenditure for the same shall be deductible in six
equal installments for six years:

 one-sixth of the amount so paid shall be deducted in computing the profits and gains of
the business for that previous year, and
  the balance amount shall be deducted in equal installments for each of the five
immediately succeeding previous years.

Deduction: Section 80 GGA talks about certain other deductions for scientific research which
are provided under the head "deduction in respect of certain donation for scientific research or
rural development" – Any sum paid for scientific research or to a university, college or
institution to be used for scientific research. The research work for the development of a patent
comes under the umbrella of scientific research.

Under present laws, expense deductions and additional weighted deductions are permitted to all
taxpayers for R&D expenditure. Such weighted deduction is restricted to 150% of the
expenditure from tax year 2017/18 to tax year 2019/20. Thereafter, deduction will be restricted to
100% of the expenditure.

Section 80O provides and that no deduction shall be allowed in respect of the assessment year
beginning on the 1st day of April, 2005, and for subsequent years for income from patents.

Section 80 OQA states that a deduction of 25% shall be allowed from any income obtained by
the author in exercise of his profession on account of any lump sum consideration for the
assignment or grant of any of his interests in the copyright of any of his books or of royalty or
copyright fees.

Exceptions to 80 OQA: No deduction in case of:

 Dictionary

 Thesaurus

 Encyclopedia,

 Any book that has been added as a textbook in the curriculum by any university for
degree of graduate or post graduate course of the university, or

Any book which is written in any language specified in the 8th schedule of the constitution or in
any other language as the Central Government by notification in the official gazette specifies for
the promotional need of the language. Section 80QQB, highlights the deductions to be made in
respect of royalty income of authors of certain books other than textbooks.

Section 88 RRB deals with the deductions on payment of royalties for patents. In some cases, the
total income earned by an individual on a patent can be divided into royalty and additional
income classified not under royalty. In all cases, the income received as royalty alone is eligible
for tax deduction; it states that when income is received as a royalty, the whole income or Rs. 3
lakhs (whichever is lesser) shall be deducted.

When a compulsory license is being granted in respect of any patent, the terms and conditions of
the license agreement shall decide the status of the income by way of royalty. For the purpose of
allowing deduction under this section which shall not exceed the amount of royalty.

Deductions under Section 80 RRB can be claimed only upon satisfaction of a few basic criteria
by the inventor:

 The individual claiming a deduction should be an Indian resident.

 Only patentees can claim this tax deduction.

 Individuals who do not hold the original patent are not eligible for tax benefits.

 The patent under Section RRB in question should be registered under the Patent Act of
1970, either on or after April 1, 2003.

Patent Box Regime: Section 115BBF provides concessional rate of taxation at 10% on royalty
income in respect of exploitation of patents granted under Patents Act, 1970, and is only
applicable to Indian resident who is a patentee (eligible taxpayer). The total income of eligible
taxpayer must include income by way of royalty in respect of patent developed and registered in
India and atleast 75% of the expenditure is incurred in India by eligible taxpayer for invention
No other expenditure is allowed under the tax provisions if concessional tax rate under Section
115BBF is availed.

The eligible taxpayer has an option to avail the benefit of Section 115BBF in any year but he is
required to continue to avail the benefit for next 5 years because in case option is not exercised in
any of such 5 consecutive years, he shall not be eligible to take the benefit under the section for
the next 5 years following such year in which option is not exercised.5

With this tax structure we are very much sure that keeping an IPR as an asset will be a good deal
for the companies. The government is giving huge tax benefits along with redemptions in the
official fees to boost up the IP culture in the country

Answer to the second part -

Startups are becoming very popular in India. The government under the leadership of PM
Narendra Modi has started and promoted Startup India.

To promote growth and help Indian economy, many benefits are being given to entrepreneurs
establishing startups.

1. Simple process

Government of India has launched a mobile app and a website for easy registration for startups.
Anyone interested in setting up a startup can fill up a simple form on the website and upload
certain documents. The entire process is completely online.

2. Reduction in cost

The government also provides lists of facilitators of patents and trademarks. They will provide
high quality Intellectual Property Right Services including fast examination of patents at lower
fees. The government will bear all facilitator fees and the startup will bear only the statutory fees.
They will enjoy 80% reduction in cost of filing patents.

3. Easy access to Funds

A 10,000 crore rupees fund is set-up by government to provide funds to the startups as venture
capital.  The government is also giving guarantee to the lenders to encourage banks and other
financial institutions for providing venture capital.

4.  Tax holiday for 3 Years   

Startups will be exempted from income tax for 3 years provided they get a certification from
Inter-Ministerial Board (IMB).

5.  Apply for tenders

Startups can apply for government tenders. They are exempted from the “prior
experience/turnover” criteria applicable for normal companies answering to government tenders.

6.  R&D facilities

Seven new Research Parks will be set up to provide facilities to startups in the R&D sector

7.   No time-consuming compliances

Various compliances have been simplified for startups to save time and money. Startups shall be
allowed to self-certify compliance (through the Startup mobile app) with 9 labour and 3
environment laws (for list of white industries which are eligible under self-

8.   Tax saving for investors

People investing their capital gains in the venture funds setup by government will get exemption
from capital gains. This will help startups to attract more investors.

9. Choose your investor

After this plan, the startups will have an option to choose between the VCs, giving them the
liberty to choose their investors.

10.  Easy exit

 In case of exit – A startup can close its business within 90 days from the date of application of
winding up

11.  Meet other entrepreneurs

Government has proposed to hold 2 startup fests annually both nationally and internationally to
enable the various stakeholders of a startup to meet. This will provide huge networking
opportunities.

Startups are being highly encouraged by the government. The benefits enjoyed by them are
immense, which is why more people are setting up startups.
Answer 5 b -

The concept of valuation of intellectual property and other intangible assets of a company is new
as compared to other concepts of intellectual property (IP) law. The value of an IP is a monetary
compensation that is expected to be received from licensing of an IP or from sale or exchange of
other intangible assets. The intangible assets of a company includes goodwill, trademark,
technology, know how, trade secrets etc.

How can we say that IP has a value?

There are various circumstantial evidences to prove the same.

- money and time is spent on registering an IP
- IP protection involves legal and other costs
- A lot of amount is spent on advertising brands- IP contributes to national economic accounts.
What are the areas that require IP valuation?
- purchase and sale of assets
- licensing
- corporate finance
- litigation
- transfer pricing
- financial reporting

How can IP be valued?

There are mainly three methods of valuation of IP.

- cost based method
- market based method
- economic based method
A brief of the valuation methods

Cost based valuation: It can either be based on historic cost or on replacement cost. A historic
cost is the actual cost of creating an IP. This method is not recommended as there is no
correlation between expenditure and subsequent value of asset. E.g. a product promoted at huge
cost does not appeal the customers. Replacement cost is the cost to replace the asset. It is
determined as to what will be the cost of creating a new trademark or a patent. A major
drawback of this method is that it is not possible to determine an exact future cost.

Market based valuation: This method can be based on the market price comparability or on
comparable royal rate. Market price comparability- the value of an IP is determined on the basis
of price of comparable IP products. Comparable royal rate: this requires construction of a
business plan around an IP. The resulting return is then compared to the price of being owner of
the asset. If the price is higher than the return, it is recommended not to buy the asset.

Economic based valuation: This is the most preferred method of valuation. This method requires
identification, separation and quantification of cash flow or royalty fees to IP and then the
capitalization of future cash flow. Quantifying the future revenue stream can be done in view of
exploited or unexploited IP. In case of capitalization, longer the period of money receipt, higher
will be the risk. Risk is described in terms of discount rate which in turn is based on inflation
rate, cost of capital and premium. A cash flow projection is constructed and discounted to derive
a net present value. This estimated present value is the worth of the IP asset.

Limitation of IP valuation: a major limitation is that it is based on estimates, assumptions and

judgments than on facts. Thus it lacks accuracy. Since IP valuation is a new concept and is still at
the stage of development, more experience in this field will help making accurate estimates. It
adds to the value of the company and helps the company make sound economic strategies.

Thus IP valuation is an important concept that helps a company to get the price of which it is
worth.
Answer to the second part –

Intellectual property is an essential part of a company’s bottom line. It encompasses various

forms, including patents for useful features that make products more desirable or make
manufacturing processes and business methods more efficient and economical; trademarks that
protect the names, logos, and symbols used to identify and distinguish a company and its goods
and services; trade secrets that protect customer lists, vendor lists, formulations, and the like;
copyrights that protect marketing materials, product guides and manuals, audio-visual works,
software, information compilations, and artwork; and design patents or trade dress that protect
the way products look.

The following discussion describes IP audits, explains why they are  essential for good IP
management, and provides information about IP audit costs.

What Is an IP Audit?

An intellectual property audit is a systematic review of a company’s IP assets and related risks
and opportunities. IP audits can help assess, preserve, and enhance IP; correct defects in IP
rights; put unused IP to work; identify risks that a company’s products or services infringe
another’s IP; and implement best practices for IP asset management. A thorough IP audit
involves not only a review of a company’s IP assets, but also the company’s IP-related
agreements, policies and procedures, and competitors’ IP.

Because IP rights are created and defined by law, IP audits are typically conducted by a lawyer
or law firm. The lawyer is often new to the company being audited and has a broad range of
experience with various types of IP and IP valuation matters. The company appoints a point
person for the lawyer to deal with—ideally, someone who knows IP concepts and technical
aspects of the company’s business.  When an IP portfolio’s monetary value is of chief concern,
the team also includes an accountant or economist who has dealt with IP valuation issues.

It can help for the lawyer to begin by providing management and key employees with a general
overview of IP and identifying ways in which a company’s existing IP rights can be preserved
and enhanced. Then the IP audit proceeds with a transfer of IP-related information, which is
requested from company management responsible for research, development, sales, and
marketing. Any key employees who create or know the company’s technology are also asked to
contribute.

For companies with a sophisticated knowledge of IP, the discussions can begin with a survey of
the company’s IP portfolio and competitive position in the marketplace, followed by a more
focused analysis of IP issues of particular interest. The most comprehensive audits include
estimates of the IP’s monetary value, and protocols and detailed recommendations for dealing
with IP in the future.

IP audits can be general in scope or can be focused on a particular event or type of IP. General
purpose audits help start-ups and established companies to not only assess and protect their IP,
but also identify IP development needs, opportunities, and risks. Event- and IP-specific audits
can be triggered by a company’s need to:

 Assess the impact and potential value of obtaining or selling IP, or licensing IP in or out;

 Assess IP rights and risks involving the acquisition or launch of a new product or service;

 Assess IP rights and risks involved in expanding into new markets or channels of trade;

 Determine whether its licensees are complying with the terms of a license;

 Help ensure that an R&D program is designed to best capture future business
opportunities;

 Identify risks involved in adopting a new trademark or new product claims and
warranties;

 Assess the integrity and strength of trade secret protection procedures and agreements;

 Assess the impact of a key employee’s departure on IP rights and value;

 Assess a third party’s infringement claims and the possible consequences;

 Assess and deal with the consequences of the expiration of IP rights;

 Assess and deal with the consequences of a change of status in a competitor’s IP rights;
  Demonstrate the company’s value to obtain or provide financing or investment capital; or

 Demonstrate company value in preparation for a merger, joint venture, or sale.

Why Are IP Audits Important?

Although intellectual property occasionally receives bad press, IP is provided for in the U.S.
Constitution, used extensively by American businesses of all sizes, and is here to stay.
Investment in patent protection is on the upswing, with a record number of new U.S. patents,
approximately 300,000, expected for 2013. The historic America Invents Act became fully
implemented on March 16, 2013, and it has provisions for streamlining the patenting process and
improving the integrity of U.S. patents. An international treaty signed into law in December
2012 makes it easier for U.S. companies to obtain design patents on a global scale. A bill
introduced in Congress in June 2013 will provide stronger federal protection against trade secret
theft. U.S. law allows companies to leverage intellectual property to significant advantage, and
companies that know their IP and how to use it can expect competitive gains over those that
don’t.

IP audits help companies get ahead in the following ways:

They identify what IP is owned.  A successful business is well-managed. Intellectual property is

part of a business and requires management just as does equipment, inventory, and accounts
receivable. If a business does not know what intellectual property it owns, it cannot manage that
property and protect it from damage or loss. So lies a first important value of an IP audit … to
inform the company about the intellectually property it owns so that it can make decisions as to
the IP’s protection, development, and sometimes licensing and exploitation. An audit may also
reveal defects in chains of title and outline steps to correct them. Any existing IP-related
agreements, such as licensing agreements, assignments, employment and independent contractor
agreements, joint venture agreements, tech transfer agreements, and settlement agreements, can
be reviewed to help ensure that IP rights have not been encumbered or compromised.

They preserve and enhance the value of existing IP. Intellectual property is protected by a matrix
of federal and state laws. These laws provide a level of protection for trademarks, trade secrets,
and copyrightable materials without the need to file a formal application for protection with a
government agency, but a company can unknowingly make missteps that diminish or destroy this
protection. In the case of trademarks and copyrights, a company can strengthen its intellectual
property rights by applying for and obtaining trademark and copyright registrations from the
federal government. On the other hand, to protect inventions by patent and product designs by
design patent, formal patent applications must be filed, and patent rights are irretrievably lost if a
company mishandles the invention or application. An audit identifies these and other kinds of
actions that can be addressed to avoid IP loss and enhance the value of a company’s existing IP.

Audits identify new opportunities to profit from IP. Intellectual property law has many nooks and
crannies and is not well understood. A high percentage of non-IP lawyers and business people do
not know the difference between patents, trademarks, and copyrights, much less whether their
companies own those types of IP. Many do not know the level of inventiveness required to
obtain a U.S. patent or the kinds of things that can be patented, the extent of and limitations on
rights accorded by a patent, and the good IP value accorded by design patents and copyright
registrations and what they protect. They are not aware that new commercial opportunities in
domestic and foreign markets can be exploited via IP licenses, and that their competitors’ efforts
to obtain IP can be monitored and sometimes stopped. An additional value of an IP audit is that it
teaches decision makers, innovators, and marketers about IP and how to proactively protect IP
opportunities before they are lost.

They identify roadblocks and prevent costly disputes.  Intellectual property litigation is typically
complex and expensive, and the sad truth is that small companies must sometime forgo litigation
and capitulate, even when they have meritorious and winnable positions. An IP audit can assist
companies in anticipating possible disputes and planning successful avoidance and resolution
strategies. An audit may identify a need for a freedom-to-operate study, which identifies
competitors’ conflicting intellectual property rights and options such as designing around,
licensing, or anonymously challenging competitors’ rights. An audit can identify weaknesses in
the audited company’s intellectual property rights that can be addressed with timely corrective
action, resulting in stronger rights that are less likely to be challenged when those rights are
asserted.

They facilitate and optimize business transactions. IP has figured more prominently in business
deals ever since the dot-com boom of the 1990s, and this is especially true of patents. The
monetary value of IP can be estimated by accounting and economics methods, such as assessing
the cost of developing alternative technology, isolating the amount of profits generated by IP-
protected features, and determining third party royalties being paid for similar IP assets. Because
an IP audit gives a company a current understanding of its IP assets and their estimated value, the
company’s owners are better prepared to deal with opportunities that might arise, such as a third-
party offer to buy the company, or a new sales or expansion opportunity that may require
financing.

In conducting IP audits, the following kinds of helpful information are most often identified:

 Valuable product and process features that could be but were not as yet patented;

 Correctable defects in existing patents;

 Missing and deficient employee agreements that risked competitors’ access to trade
secrets;

 Trademarks central to companies’ identities that were not adequately protected from
copying;

 Product configurations that could be but were not yet protected by design patents;

 Patent and trademark royalty payment terms that were being ignored;

 Missing notices of patent, trademark, and copyright that were limiting the company’s
ability to enforce IP rights and claim damages; and

 Valuable opportunities for licensing IP in new markets and channels of trade.

IP audits have directly resulted in quantifiable benefits to many companies, including payments
of millions of dollars for the use of patented technology that was not originally thought to be
patentable.

Conclusion

Management and enhancement of intellectual property assets may seem a daunting task for
companies that have not done it before and for companies whose IP is in major disarray. But
effective management of intellectual property is important and often critical to business success.
An IP audit is a best first step toward achieving that goal.