Cross-border transaction- TPO/AO, before he determines arm’s length price in relation to income from an international transaction, needs to give appropriate notice to assessee, giving him an opportunity to produce evidence in support of arm’s length price computed by him

In case the TPO/AO proposes to make adjustments to the income of the assessee by revising the arm’s length price computed by him, he needs to give a notice to the assessee, conveying the grounds on which the adjustment is proposed to be made, followed by an opportunity to reply to that notice and produce evidence to controvert the grounds, on which the adjustment is proposed.

CASE LAWS DETAILS

DECIDED BY: HIGH COURT OF DELHI, IN THE CASE OF: Maruti Suzuki India Ltd.  v. Addl. CIT Transfer Pricing Officer, APPEAL NO: W. P. (C) 6876/2008, DECIDED ON July 1, 2010

FACTS

A reference under Section 92 CA(1) was made by the Assessing Officer of the petitioner, to the Transfer Pricing Officer (hereinafter referred to as ‘TPO`) for determination of arm`s length price for the international transaction undertaken by Maruti with Suzuki in the F.Y.2004-05. A notice dated 27.8.2008 was then issued, by the TPO, to the petitioner with respect to replacement of the front logo ‘M`, by the logo ‘S`, in respect of three models, namely, ‘Maruti` 800, Esteem and Omni in the year 2004-05, which, according to the TPO, symbolized that the brand logo of Maruti had changed to the brand logo of Suzuki. It was stated in the notice that Maruti having undertaken substantial work towards making the Indian public aware of the brand ‘Maruti`, that brand had become a premier car brand of the country. According to the TPO, the change of brand logo from ‘Maruti` to ‘Suzuki`, during the year 2004-05, amounted to sale of the brand ‘Maruti` to ‘Suzuki`. He noticed that Suzuki had taken substantial amount of royalty, from Maruti, without contributing anything towards brand development and penetration in Indian market. It was further noted that Maruti had incurred expenditure amounting to Rs.4,092 crores on advertisement, marketing and distribution activity, which had helped in creation of ‘Maruti` brand logo and due to which Maruti had become the number one car Company in India. Computing the value of the brand at cost plus 8% method, he assessed the value of the brand at Rs.4,420 crores. Maruti was asked to show cause as to why the value of Maruti Brand be no taken at Rs.4,420 crores and why the international transaction be not adjusted on the basis of its deemed sale to Suzuki.

Maruti, in its reply dated 8.9.2008, stated that at no point of time had there been any transfer of ‘Maruti` brand or logo by it, to Suzuki, which did not have any right at all to use that logo or trademark. It was submitted by Maruti that a registered trademark could be transferred only by a written instrument of assignment, to be registered with the Registrar of Trademarks, and no such instrument had been executed by it, at any point of time. It was also brought to the notice of the TPO that Maruti continued to use its brand and logo ‘Maruti on its products and even on the rear side of models Esteem, ‘Maruti 800` and ‘Omni`, the ‘Maruti` trademark was being used along with the word ‘Suzuki`. It was further submitted that Maruti continued to use the trademark/logo ‘Maruti` in all its advertisements, wrappers, letterheads, etc. It was also submitted by Maruti that Suzuki, on account of its large shareholding in the company and because of strong competition from the cars introduced by multinationals in India, had permitted them to use the ‘Suzuki` name and logo so that it could face the competition and sustain its market share, which was under severe attack. It was also submitted that Suzuki had not charged any additional consideration for use of their logo on the vehicles manufactured by Maruti and there was no question of any amount of revenue being transferred from the tax net of Indian exchequer to any foreign tax jurisdiction. It was submitted that Maruti had, in fact, earned significantly larger revenue on account of the cooperation extended by Suzuki and that larger revenue was being offered to tax in India. The jurisdiction of the TPO was thus disputed by ‘ Maruti` in the reply submitted to him. He was requested to withdraw the notice and drop the proceedings initiated by him.

Since Maruti did not get any response to the jurisdictional challenge and the TPO continued to hear the matter on the basis of the notice issued by him, without first giving a ruling on the jurisdiction issue raised by it, this writ petition was filed seeking stay of the proceedings before the TPO.

Vide interim order dated 19.9.2008, this Court directed that the proceedings pursuant to the show-cause notice may go on, but, in case any order is passed, that shall not be given effect to.

Since the TPO passed a final order on 30th October, 2008, during the pendency of the writ petition and also forwarded it to the Assessing Officer of the petitioner, the writ petition was amended so as to challenge the final order passed by the TPO.

In the final order passed by him, the TPO came to the conclusion that the trademark ‘Suzuki`, which was owned by Suzuki Motor Corporation, had piggybacked on the Maruti trademark, without payment of any compensation by Suzuki to ‘Maruti`. He also came to the conclusion that the trademark ‘Maruti` had acquired the value of super brand, whereas the trademark ‘Suzuki` was a relatively.