Court : Supreme Court
Citation : Maruti Suzuki India ltd. Vs. ADIT [Civil Appeal No. 8457 of 2010].
Brief :In the recent decision, the Supreme Court (“SC”) disposed off a civil appeal arising out of a special leave petition (“SLP”) involving a transfer pricing dispute, in the case of Maruti Suzuki India ltd. Vs. ADIT [Civil Appeal No. 8457 of 2010].
The Delhi High Court (“HC”), in the taxpayer’s case, had earlier, inter-alia held that the obligatory use of brand/logo of a foreign associated enterprise should be accompanied either by an appropriate payment by the foreign trademark owner or by a rebate to the Indian licensee. Furthermore, the HC also held that if the advertisement, marketing and promotion (“AMP”) expenses incurred by a domestic enterprise, being even an entrepreneurial licensed manufacturer, which mandatorily uses the brand/logo of a foreign associated enterprise, are more than those incurred by independent domestic comparables, the foreign associated enterprise should provide arm’s length compensation to the domestic enterprise. Such compensation would be required for brand building and increased brand awareness in the domestic market, i.e., for creation of marketing intangible for the foreign associated enterprise.
The SC directed the Transfer Pricing Officer (“TPO”) to carry out the transfer pricing audit in accordance with law, without being influenced by the observations/directions given on merits by the HC.
Facts- The taxpayer manufactures and sells cars as well as trades in spares and components of vehicles. The taxpayer had entered into a license agreement with Suzuki Motor Corporation (“SMC” or “the Associated Enterprise”) for use of licensed information and licensed trademark for the manufacture and sale of the products and parts in specified territories. The taxpayer paid composite royalties for the licensed trademark as well as for the technology license. Prior to 1993, the taxpayer was using the WV logo on the front of the cars which it manufactured and sold. However, from 1993 onwards, for various business and commercial reasons, the taxpayer started using the ‘S’ logo (logo of SMC), on the front of new models of cars, though it continued to use the trademark `Maruti-Suzuki’ on the rear side of the vehicles.
During Transfer Pricing audit proceedings, a show-cause notice was issued by the TPO to the taxpayer wherein the revenue proposed that there was a ‘deemed transfer’ of `Maruti’ brand name to Suzuki for which the taxpayer should receive an arm’s length consideration based on the fair market value of the brand. Accordingly, the revenue proposed an adjustment.
However, subsequently, the revenue abandoned this approach and proposed to make an adjustment by disallowing the royalty paid to Suzuki for use of trademark; and also the non-routine AMP expenses incurred in promoting the ‘Suzuki’ brand name, through the issuance of a fresh show-cause notice.
The taxpayer filed a writ petition with the HC against the said show-cause notice issued by the TPO. The HC, while disposing off the writ petition, referred the case back to the TPO with certain observations/directions, as follows:
