TPO can compute ALP after giving assessee opportunity to produce evidence in support of ALP computed by him

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.

HIGH COURT OF DELHI

Maruti Suzuki India Ltd. Vs. Addl. CIT Transfer Pricing Officer

APPEAL NO: W. P. (C) 6876/2008

DECIDED ON July 1, 2010

66. According to the TPO, Maruti did not tell him how much royalty, out of the total royalty of Rs.198.6 crores paid by it to Suzuki in the year 1994-95, was towards use of the trademark/logo of Suzuki. No data was collected by the TPO in respect of the royalty paid by other entities entering into similar transactions. We feel that the requisite data could be available, since there were other entities selling vehicles under foreign brand names, such as Honda and Hyundai. The TPO could easily have called for relevant information from these companies. Even if no such data in respect of companies operating in the Indian market was available, it could have been obtained data from overseas companies, which were similarly situated and could be compared to Maruti. What he did was to take half of the royalty payment as payment for use of brand name and logo of Suzuki, without having any material before him justifying such an apportionment. The decision of the TPO in this regard, therefore, is absolutely arbitrary and wholly without any basis or rationale. The case of the petitioner is that since it had agreed to pay a composite running royalty to Suzuki, it is not in a position to say how much out of that amount is attributable to the use of the name and logo of Suzuki including the name Suzuki in the joint trademark ‘Maruti Suzuki’ on its products. In fact, it may not be possible, even for the TPO, to identify an objective and reliable methodology, to compute the economic value of such marketing intangibles, in money terms. He needs to keep in mind that such composite agreements being like package deals, it may not be possible to individually quantify the monetary value of each benefit obtained and obligation incurred under such an agreement. He, therefore, must ascertain the price which a comparable independent entity would have paid for a transaction of this nature. Only then he could have known whether Suzuki had given any subsidy to Maruti in payment of royalty as claimed by the petitioner, or it had got more than what it ought to have got. The TPO, therefore, was necessarily required to determine what a comparable independent domestic entity would have paid to Suzuki for the rights and obligation of the nature incurred by Maruti and Suzuki under the Agreement dated 12.12.1992. We, therefore, feel that the approach adopted by the TPO in the matter was erroneous and unsustainable.