Brand Valuation in India: Relief from Royalty & Excess Earnings Methodology

1. When Is Brand Valuation Required in India?

Brand valuation is not an academic exercise — it is triggered by specific regulatory, transactional, and strategic events. Understanding the trigger determines the applicable standard, the acceptable methodology, and the level of rigour required in the valuation report.

1.1 Regulatory and Transactional Triggers

• Purchase Price Allocation (PPA) under Ind AS 103: When a company acquires another business (asset acquisition or share acquisition resulting in control), Ind AS 103 (Business Combinations) requires the acquirer to recognise all identifiable assets (including intangible assets like brands) at their acquisition-date fair value. The brand is one of the most common intangible assets identified in PPAs, particularly in FMCG, pharmaceutical, and consumer technology acquisitions. The excess of the purchase price over the fair value of all identifiable net assets is recognised as goodwill.
• Impairment Testing under Ind AS 36: Brands with indefinite useful lives (brand names that are maintained through ongoing marketing expenditure and show no foreseeable limit to their economic life) must be tested for impairment annually under Ind AS 36. The recoverable amount is the higher of fair value less costs of disposal and value in use. If the carrying amount exceeds the recoverable amount, an impairment loss is recognised.
• Transfer Pricing — Brand Licensing (Section 92): When an Indian company licences its brand to a related party (domestic or international), the royalty must be at arm’s length under Section 92 of the Income Tax Act read with the Transfer Pricing Rules. The brand must first be valued to establish a fair royalty rate. The Transfer Pricing Officer (TPO) may benchmark the royalty using CUP (Comparable Uncontrolled Price) method with reference to third-party licensing agreements, or may compute the arm’s length royalty based on the brand’s fair value and required rate of return.
• Mergers, Demergers, and Slump Sales (Sections 230-232): When businesses are reorganised, the brand may be one of the assets transferred. The valuation of the brand affects the swap ratio in mergers, the allocation of consideration in demergers, and the net worth calculation in slump sales under Section 50B.
• Trademark Infringement and Litigation: Courts require brand valuation to quantify damages in trademark infringement cases. The valuation establishes the economic loss suffered by the brand owner due to unauthorised use, dilution, or counterfeiting.
• Fundraising and Investor Due Diligence: In sectors where the brand constitutes a significant portion of enterprise value (consumer brands, D2C startups, franchise businesses), investors require an independent brand valuation as part of due diligence. This is particularly relevant for startup valuations where the brand premium justifies valuation multiples above comparable companies.
• FEMA Compliance — Cross-Border Brand Licensing: When a brand is licensed to or from a foreign entity, the FEMA pricing norms and RBI regulations on royalty remittances apply. The current account transaction route under FEMA permits royalty payments for brand use, but the rate must be at arm’s length and properly documented.

2. Ind AS 38 — Recognition and Measurement of Brand as an Intangible Asset

2.1 Recognition Criteria

Ind AS 38 (Intangible Assets), which is converged with IAS 38, sets out three criteria for recognising an intangible asset:

1. Identifiability: The asset must be either (a) separable — capable of being separated from the entity and sold, transferred, licensed, rented, or exchanged, individually or together with a related contract; or (b) arising from contractual or other legal rights, regardless of whether those rights are transferable or separable. A registered trademark satisfies the legal-rights criterion. An unregistered but well-established brand may satisfy the separability criterion if it can be licensed or sold independently.
2. Control: The entity must have the power to obtain future economic benefits from the asset and to restrict others’ access to those benefits. Trademark registration under the Trade Marks Act 1999 provides legal control. Even without registration, common law rights and passing-off actions provide a degree of control, though weaker than registered trademark protection.
3. Future Economic Benefits: The brand must be expected to generate future economic benefits — through revenue, cost savings, or other benefits — that flow to the entity. Evidence includes historical revenue attributable to the brand, price premium over unbranded alternatives, and customer loyalty metrics.

2.2 Internally Generated Brands — The Prohibition

Ind AS 38, paragraph 63, explicitly states that internally generated brands, mastheads, publishing titles, customer lists, and items similar in substance shall not be recognised as intangible assets. The rationale is that expenditure on developing these items internally cannot be distinguished from the cost of developing the business as a whole. Consequently, such items are not recognised as intangible assets even if they clearly generate future economic benefits.

This prohibition has significant practical implications:

• A company that has spent decades building a powerful brand cannot recognise it on its balance sheet. The brand value is implicitly embedded in the company’s market capitalisation or enterprise value but is not separately identifiable in the financial statements.
• When such a company is acquired, the acquiring entity must recognise the brand at fair value under Ind AS 103. This creates an asymmetry — the brand appears on the acquirer’s consolidated balance sheet but never appeared on the target’s standalone balance sheet.
• For tax purposes, internally generated goodwill (which includes the implicit brand value) is not depreciable following the Finance Act 2021 amendment. Only acquired trademarks and brands qualify for depreciation under Section 32.

2.3 Useful Life — Finite vs. Indefinite

Under Ind AS 38, an intangible asset is assessed as having either a finite or an indefinite useful life:

• Finite useful life: The brand is amortised over its estimated useful life. This applies to brands with limited contractual protection (e.g., a licensing agreement for 10 years), brands in declining markets, or brands associated with a specific product lifecycle. Amortisation is typically straight-line unless another pattern better reflects the consumption of economic benefits.
• Indefinite useful life: The brand is not amortised but is tested for impairment annually under Ind AS 36. A brand has an indefinite useful life when there is no foreseeable limit to the period over which it is expected to generate net cash inflows. This is common for established FMCG brands, luxury brands, and well-maintained corporate brands. “Indefinite” does not mean “infinite” — it means the useful life cannot be determined with reasonable certainty.

3. Relief from Royalty Method — Detailed Methodology

3.1 Conceptual Framework

The Relief from Royalty (RfR) method is the most widely used approach for brand valuation in India and globally. It is based on the premise that a brand owner is “relieved” from paying a royalty to a third party for the right to use the brand. The value of this relief — the present value of the royalty savings over the brand’s useful life — represents the fair value of the brand.

The formula is:

Brand Value = Σ [Revenue_n × Royalty Rate × (1 − Tax Rate)] / (1 + WACC)ⁿ + Terminal Value

Where:

• Revenue_n = Projected revenue attributable to the branded products/services in year n
• Royalty Rate = The arm’s length royalty rate that a willing licensee would pay to use the brand, expressed as a percentage of revenue
• (1 − Tax Rate) = Tax amortisation benefit adjustment; the royalty payments would be tax-deductible, so the after-tax savings are discounted
• WACC = Weighted average cost of capital, adjusted for the risk profile of the brand-specific cash flows
• Terminal Value = Present value of royalty savings beyond the explicit forecast period, calculated using the Gordon Growth Model or an exit multiple

3.2 Step 1 — Revenue Projection

The revenue base must be the revenue specifically attributable to the branded products or services, not the total revenue of the entity. In multi-brand companies, the revenue must be segregated by brand. The projection period typically ranges from 5 to 10 years, with longer periods justified for brands in growth markets. Revenue projections should be based on:

• Historical revenue growth trends (minimum 3-5 years of actual data)
• Management’s business plan and budgets
• Industry growth forecasts from credible sources (e.g., industry reports, RBI data on sectoral growth)
• Market share analysis and competitive dynamics
• Planned geographic expansion, product line extensions, or brand repositioning

3.3 Step 2 — Royalty Rate Selection

The royalty rate is the most critical and often the most contentious input in the RfR method. It must be selected based on arm’s length comparable licensing transactions. Sources for royalty rate benchmarking include:

• RoyaltyStat database: Contains over 20,000 licensing agreements from SEC filings, with royalty rates by SIC code and industry.
• ktMINE database: Provides royalty rate data from licensing agreements globally, with Indian and Asian transaction data.
• Transfer pricing documentation: Related-party brand licensing agreements filed with the Indian tax authorities provide industry-specific royalty rates. The CBDT’s Safe Harbour Rules (Rule 10TD) provide reference points — for example, software development services have prescribed margins, and similar benchmarks exist for brand licensing in certain sectors.
• Industry norms: Typical royalty rates for brand licensing in India by sector:

Industry	Typical Royalty Rate Range	Key Drivers
FMCG / Consumer Goods	3% – 8%	Brand recognition, shelf space advantage, price premium
Pharmaceuticals	2% – 6%	Prescription vs. OTC, doctor loyalty, regulatory approvals
Technology / Software	1% – 5%	Platform stickiness, network effects, B2B vs. B2C
Luxury / Fashion	5% – 15%	Exclusivity, aspirational value, price inelasticity
Automotive	1% – 3%	Brand heritage, safety perception, resale value premium
Hotels / Hospitality	3% – 8%	RevPAR premium, loyalty programme, booking channel control
Food & Beverage	2% – 6%	Franchise model, consumer recall, distribution network tied to brand

The selected royalty rate must be justified with reference to at least 5-10 comparable licensing transactions and adjusted for differences in brand strength, geographic scope, exclusivity, and the licensee’s contribution (e.g., manufacturing, distribution).

3.4 Step 3 — Tax Amortisation Benefit (TAB)

The tax amortisation benefit arises because a hypothetical buyer of the brand would be entitled to amortise the acquisition cost for tax purposes. Under Section 32(1)(ii) of the Income Tax Act, acquired trademarks are depreciable at 25% on WDV basis. This depreciation generates tax savings that enhance the value of the brand to a buyer. The TAB is calculated as:

TAB Factor = Σ [Tax Rate × Depreciation_n] / (1 + WACC)ⁿ

For a 25% WDV depreciation rate and a 25.17% effective tax rate (domestic company under Section 115BAA), the TAB factor is approximately 1.08 to 1.12, meaning the brand value is enhanced by 8-12% due to the tax shield. The TAB is applied as a multiplier to the pre-TAB brand value derived from the RfR calculation.

3.5 Step 4 — Discount Rate

The discount rate for brand cash flows is typically the WACC, adjusted for the specific risk profile of the brand. Brand cash flows are generally considered lower risk than overall enterprise cash flows (because a strong brand provides revenue stability and pricing power), but higher risk than tangible asset returns. In practice:

• The brand-specific discount rate is often set at WACC to WACC + 1-2%, reflecting the intangible nature of the asset.
• For India-specific WACC construction using the 10-year G-sec rate, Damodaran equity risk premium, and Total Beta for unlisted companies, refer to our DCF valuation methodology guide.
• Typical brand-specific discount rates for Indian companies range from 14% to 20% depending on the industry, brand maturity, and revenue volatility.

4. Multi-Period Excess Earnings Method (MPEEM) — Detailed Methodology

4.1 Conceptual Framework

The MPEEM is the primary alternative to RfR for brand valuation, particularly in purchase price allocation under Ind AS 103. While RfR approaches valuation from the “what would you pay to licence it” perspective, MPEEM approaches it from the “what earnings does the brand generate after all other assets are compensated” perspective.

The logic is as follows: total enterprise earnings are generated by the combined contribution of all assets — working capital, fixed assets, technology, assembled workforce, customer relationships, and the brand. Each contributory asset requires a fair return. The “excess” earnings — what remains after deducting the fair return on all contributory assets — are attributable to the primary intangible asset being valued (in this case, the brand).

4.2 Step 1 — Identify All Contributory Assets

The first step is to identify every asset that contributes to the revenue stream associated with the brand. Common contributory assets include:

Contributory Asset	Fair Value Basis	Required Return (CAC Rate)
Net Working Capital	Book value (approximates fair value)	Risk-free rate (6.5% – 7.5%)
Fixed Assets (Plant, Equipment)	Replacement cost or market value	WACC or asset-specific rate (10% – 14%)
Technology / Patents	RfR or cost approach	WACC + premium (14% – 18%)
Assembled Workforce	Replacement cost (recruitment + training)	WACC (12% – 16%)
Customer Relationships	MPEEM or with-and-without	WACC + premium (14% – 20%)
Distribution Network	Cost approach or income approach	WACC (12% – 16%)

4.3 Step 2 — Calculate Contributory Asset Charges (CACs)

The contributory asset charge for each asset is calculated as:

CAC = Fair Value of Asset × Required Return Rate

The CAC represents the minimum return that a market participant would require on the contributory asset. For depreciating assets (technology, workforce), the CAC includes both a return of the asset (amortisation/depreciation) and a return on the asset (economic return). For non-depreciating assets (working capital), only the return on the asset is charged.

4.4 Step 3 — Compute Excess Earnings Attributable to the Brand

For each projection year:

Excess Earnings_n = Total Earnings_n − Σ CAC_i,n

Where Total Earnings are the after-tax operating earnings from the brand-related revenue stream, and CAC_i,n is the contributory asset charge for each asset i in year n. The excess earnings represent the economic profit attributable to the brand after all other assets have been fairly compensated.

4.5 Step 4 — Discount to Present Value

The excess earnings are discounted at a rate that reflects the risk of the brand-specific cash flows. This rate is typically higher than WACC because the brand’s excess earnings have absorbed all the residual risk not captured by the contributory assets:

Brand Value = Σ [Excess Earnings_n / (1 + r)ⁿ] + Terminal Value

The terminal value is computed using the Gordon Growth Model if the brand has an indefinite useful life, or as the discounted excess earnings over the remaining finite useful life.

4.6 MPEEM vs. RfR — When to Use Which

• Use RfR when: Comparable licensing transactions are available in the industry; the brand is the primary intangible asset being valued; the brand could realistically be licensed to a third party; and the analysis is for transfer pricing purposes (where the royalty rate is the central question).
• Use MPEEM when: The brand is being valued as part of a PPA with multiple intangible assets; comparable licensing data is sparse; the brand’s value is deeply intertwined with other assets (e.g., a technology platform brand where technology and brand are co-dependent); and regulatory or auditor preference dictates MPEEM (which is the case for many Indian statutory auditors conducting Ind AS 103 PPA reviews).
• Use both as cross-checks: Best practice in our valuations is to compute brand value using both RfR and MPEEM independently and reconcile the results. If the two methods produce values within 10-15% of each other, the valuation conclusion is well-supported. Significant divergence indicates an error in either the royalty rate selection or the contributory asset charge computation.

5. Section 32 — Tax Depreciation on Acquired Brands and Trademarks

5.1 Eligibility for Depreciation

Section 32(1)(ii) of the Income Tax Act 1961 provides for depreciation on intangible assets, including:

“Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature”

The depreciation rate is 25% on Written Down Value (WDV) as per Block 6 of the depreciation schedule in the Income Tax Rules. Key conditions:

• The intangible asset must be acquired — purchased from a third party or obtained as part of a business acquisition. Internally developed brands do not qualify for depreciation.
• The asset must be used for the purpose of business during the relevant previous year.
• The actual cost of acquisition forms the basis for depreciation. In a slump sale (Section 50B), the consideration allocated to intangible assets through PPA determines the depreciable value.
• If the asset is acquired after 1 October of the previous year, only 50% of the normal depreciation (i.e., 12.5%) is allowed for the first year (half-year convention).

5.2 Goodwill vs. Brand — Post Finance Act 2021

The Finance Act 2021 excluded “goodwill” from the definition of depreciable intangible assets under Section 32. The Supreme Court in CIT vs Smifs Securities Ltd (2012) had held that goodwill is an intangible asset eligible for depreciation, but this judicial position was legislatively overruled by the 2021 amendment. However, the amendment specifically targets “goodwill” — other intangible assets listed in Section 32(1)(ii), including trademarks and brands, continue to be depreciable at 25% WDV.

This distinction makes proper PPA critical for tax planning in acquisitions. If the purchase price is allocated to “goodwill” as a residual, no depreciation is available. If the same value is allocated to identifiable intangible assets — brand/trademark, customer relationships, technology — each asset qualifies for 25% WDV depreciation. The PPA must be supportable with robust valuation methodologies to withstand scrutiny by the Assessing Officer.

5.3 Transfer Pricing and Brand Royalties — Section 92

When an Indian company licences its brand to a foreign associated enterprise (or vice versa), the royalty must be at arm’s length under Section 92 read with Rules 10A-10E. Common scenarios include:

• Indian parent licensing brand to foreign subsidiary: The royalty income is taxable in India. The TPO will benchmark the royalty rate against comparable uncontrolled licensing transactions (CUP method). If the royalty rate is below arm’s length, the TPO can make an upward adjustment to the Indian parent’s income.
• Foreign parent licensing brand to Indian subsidiary: The royalty payment by the Indian subsidiary is a deductible expense (subject to Section 37(1) business purpose test). Withholding tax at 10% applies under most DTAAs (or 10% under Section 115A for non-treaty jurisdictions). The TPO will examine whether the royalty rate is excessive — if so, the excess is disallowed as a deduction.
• Brand development services: If the Indian entity contributes to brand development (through local marketing expenditure), the TPO may argue that the Indian entity has developed marketing intangibles and should receive compensation for brand enhancement, reducing or eliminating the royalty payable to the foreign brand owner. This is the “marketing intangibles” dispute that has generated significant litigation in India, including landmark cases before the Income Tax Appellate Tribunal.

6. Brand Strength Analysis — Qualitative Factors

A robust brand valuation is not purely quantitative. The qualitative assessment of brand strength informs the selection of royalty rates, growth projections, and discount rates. Key factors to analyse:

6.1 Brand Strength Scorecard

Factor	Assessment Criteria	Impact on Valuation
Market Leadership	Market share rank, growth trajectory, competitive moat	Higher revenue projection, lower discount rate
Brand Awareness	Aided and unaided recall, top-of-mind status, digital presence	Higher royalty rate justified
Price Premium	Price differential vs. unbranded/private-label alternatives	Directly increases royalty rate and margin assumptions
Customer Loyalty	Repeat purchase rate, NPS score, switching costs	Supports longer useful life, lower attrition in projections
Geographic Reach	National vs. regional, urban vs. rural penetration, export markets	Wider reach supports higher revenue base
Legal Protection	Registered trademark status, IP enforcement history, domain portfolio	Stronger protection reduces risk, supports indefinite useful life
Brand Extensibility	Ability to extend into adjacent categories, new geographies, digital channels	Higher growth assumptions in projections
Marketing Investment	Brand maintenance spend as % of revenue, consistency of investment	Sustained investment supports indefinite useful life assumption

7. Purchase Price Allocation — Brand Valuation Under Ind AS 103

7.1 The PPA Process

Under Ind AS 103 (Business Combinations), the acquirer must, within the measurement period (not exceeding 12 months from the acquisition date), allocate the purchase price to all identifiable assets acquired and liabilities assumed at their acquisition-date fair values. The steps for brand-related PPA are:

1. Identify the brand as a separate intangible asset: Determine whether the brand meets the identifiability criteria under Ind AS 38 (separability or contractual/legal rights).
2. Determine fair value: Apply RfR or MPEEM (or both as cross-checks) to determine the brand’s fair value on the acquisition date.
3. Assess useful life: Determine whether the brand has a finite or indefinite useful life, which determines the subsequent accounting treatment (amortisation vs. impairment testing).
4. Recognise on the balance sheet: Record the brand as a separately identifiable intangible asset at fair value.
5. Compute residual goodwill: The excess of the purchase consideration over the fair value of all identifiable net assets (including the brand) is recognised as goodwill.

7.2 Common PPA Allocations by Sector

The proportion of the total purchase price allocated to the brand varies significantly by industry:

• FMCG / Consumer Goods: Brand typically represents 30-60% of the total intangible asset value and 15-40% of the purchase price. Example: in acquisitions of Indian FMCG brands, the brand and related trade dress often constitute the largest identifiable intangible asset.
• Pharmaceuticals: Brand (product brands) typically represent 10-25% of intangible asset value, with technology/formulations and regulatory approvals taking a larger share.
• Technology / SaaS: Brand typically represents 5-15% of intangible value, with technology platform and customer relationships dominating. See our SaaS valuation guide for technology-specific PPA considerations.
• Retail / Hospitality: Brand typically represents 25-50% of intangible asset value, particularly for franchise-based business models.

8. Impairment Testing of Brands Under Ind AS 36

8.1 When Is Impairment Testing Required?

Under Ind AS 36 (Impairment of Assets), brands with indefinite useful lives must be tested for impairment annually, regardless of whether there is any indication of impairment. Brands with finite useful lives are tested only when there is an indication of impairment. Indicators of potential brand impairment include:

• Significant decline in brand-related revenue or market share
• Adverse changes in the competitive or regulatory environment
• Reputational damage due to product recalls, safety issues, or negative publicity
• Reduction or cessation of marketing investment in the brand
• Loss of key distribution channels or customer relationships associated with the brand
• Adverse legal developments affecting trademark protection

8.2 Recoverable Amount Computation

The recoverable amount is the higher of:

• Fair value less costs of disposal: The price at which the brand could be sold in an arm’s length transaction, less the costs of disposal (broker fees, legal costs, etc.). This is typically estimated using the RfR method with current market inputs.
• Value in use: The present value of the future cash flows expected to be derived from the brand. This is calculated using the same methodology as MPEEM but with entity-specific assumptions rather than market participant assumptions.

If the carrying amount of the brand exceeds its recoverable amount, an impairment loss is recognised in profit and loss. For brands with indefinite useful lives, the impairment loss can be reversed in subsequent periods if the recoverable amount increases (Ind AS 36 permits reversal of impairment losses for intangible assets other than goodwill).

9. Brand Valuation for Mergers and Demergers

9.1 Brand Contribution to Swap Ratio

In mergers and amalgamations under Sections 230-232 of the Companies Act 2013, the swap ratio (exchange ratio of shares) is determined based on the relative values of the merging entities. For brand-heavy companies — particularly in FMCG, retail, and consumer businesses — the brand value can constitute 30-60% of the total enterprise value. An undervaluation of the brand directly disadvantages the shareholders of the brand-owning entity in the swap ratio determination.

The SEBI Circular on schemes of arrangement (SEBI/HO/CFD/DIL2/CIR/P/2023/78) requires listed companies to disclose the valuation report and the basis for the swap ratio, including the treatment of intangible assets. The valuation committee appointed by the board (typically comprising independent directors) must satisfy itself that the brand valuation methodology is appropriate and consistently applied across the merging entities.

9.2 Brand Transfer in Demergers

In a demerger (Section 2(19AA) of the Income Tax Act for tax-neutral treatment), the brand may be transferred to the resulting company along with the business division to which it relates. The brand valuation affects:

• The allocation of consideration between the demerged and resulting companies
• The computation of net worth of the transferred undertaking for Section 2(19AA) compliance
• The stamp duty payable on the transfer of the brand (where the state stamp duty act applies to intangible asset transfers)
• The future depreciation available to the resulting company under Section 32 (the brand’s WDV is transferred at the existing carrying amount for tax purposes in a tax-neutral demerger)

10. Practical Considerations and Quality Control

10.1 Data Requirements for Brand Valuation

A comprehensive brand valuation engagement requires the following data from the entity:

• Brand-wise revenue and contribution margin for the last 5 years
• Business plan and revenue projections for the next 5-10 years, segregated by brand
• Marketing expenditure (brand-specific) — advertising, promotions, sponsorships, digital marketing
• Brand awareness and perception studies (if available)
• Trademark registration certificates and IP portfolio details
• Existing licensing agreements (if any) — both as licensor and licensee
• Customer data — repeat purchase rates, customer acquisition cost, lifetime value
• Competitive analysis — market share, pricing comparison with unbranded alternatives
• Legal disputes or threats related to the brand

10.2 Valuation Report Standards

Brand valuation reports prepared by our practice comply with:

• ICAI Valuation Standards: The Institute of Chartered Accountants of India’s guidance on valuation of intangible assets
• IBBI (Registered Valuers) Regulations 2017: All valuation reports prepared by CA V. Viswanathan carry the IBBI registration number IBBI/RV/03/2019/12333 and comply with the reporting standards prescribed by the IBBI
• International Valuation Standards (IVS): The IVS 210 (Intangible Assets) standard provides the global framework for intangible asset valuation that we adopt for cross-border and multinational engagements
• Ind AS 113 (Fair Value Measurement): The fair value hierarchy (Level 1, 2, 3 inputs) and the requirement for market participant assumptions guide our selection of inputs and methodology

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