Case Law Details

Case Name : Maruti Suzuki India Ltd. Vs. Addl. CIT Transfer Pricing Officer (Delhi High Court)
Appeal Number : Appeal No: W. P. (C) 6876/2008
Date of Judgement/Order : 01/07/2010
Related Assessment Year :
Courts : All High Courts (3862) Delhi High Court (1219)
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
RELEVANT PARAGRAPHS

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.

67. We see no justification for the TPO insisting upon payment by Suzuki to Maruti, merely on account of use of the name and/ or logo of Suzuki on the products and parts manufactured and sold by Maruti. It is Maruti which felt the necessity of use of Suzuki’s brand name and logo and that necessity was recognized by the Government of India, by approving the agreement between Maruti and Suzuki. We cannot agree with the TPO that Maruti had become a super brand and, therefore, the petitioner Company did not need to use Suzuki brand name and logo on its products. As noted earlier, on account of liberalization of the economy and de-licensing of the automobile industry, a number of foreign automobile majors had entered India or were contemplating entering the Indian market. Maruti, therefore, was not unjustified in concluding that it was necessary for it to enter into an agreement of this nature with Suzuki, so that it could meet the increased competition, posed to it on account of entry of these foreign majors, by using the brand name and logo of Suzuki on its products, besides obtaining the technical upgradation, augmentation and assistance from Suzuki. We cannot be oblivious of the fact that Suzuki being an international player, particularly in the segment of small cars, it was in a position to offer newer and better models to Maruti and use of the brand name and logo of Suzuki, therefore, was likely to be beneficial for the business interests of the petitioner. In any case, we can find no objection to the business decision taken by Maruti in this regard.

68. It would be noteworthy here that it was not obligatory for Maruti to use the logo of Suzuki on the products manufactured and sold by it in India, though Maruti in its discretion could use that logo, on those products as well.

69. As noted earlier, all products manufactured and sold by Maruti in India, including the parts manufactured and sold by it, were necessarily required to use the joint brand name ‘Maruti Suzuki’. If a domestic entity, it is discretion, uses a foreign trademark and/or logo or a trademark, which is a combination of its domestic brand name and the brand name of a foreign entity, that by itself would not necessarily entail any payment from the foreign entity to the Indian entity, so long as benefit of such a joint brand name accrues to the Indian entity alone. In fact, such an arrangement would be mutually beneficial to both the entities, since it, while allowing the domestic entity to use a foreign brand name, also enables it to use its domestic brand, alongwith the foreign brand. As a result, from the point of view of the domestic entity, it does not have to kill its own brand, since it may at sometime in future feel no necessity of using the foreign brand in conjunction with its domestic brand and may save payment of royalty by discontinuing the use of the foreign brand. From the point of view of the foreign entity, it permits it to retain the exclusivity of its brand and its products, by distinguishing them from the products manufactured and sold by the domestic entity. Had Maruti been having a discretion to use the joint brand name ‘Maruti Suzuki’, so long as it felt that the use of the joint brand name was beneficial to it on account of association of a reputed foreign brand name with its domestic brand, that, in our view, would not necessarily have entailed payment from Suzuki to Maruti for use of the name ‘Suzuki’ in the joint trademark. In that case, it would have been open for Maruti to use the joint brand name only if and to the extent it felt that the use was in its business interests and was likely to prove beneficial to it. The benefits from the use of the joint trademark, including the expenditure incurred on its marketing, promotion and advertisement would then have accrued solely for the benefit of Maruti and the benefit to Suzuki on account of use of the name ‘Suzuki’ in the joint trademark would only be incidental, for which no payment will ordinarily be payable to Maruti.

70. If we accept the contention that a foreign entity must necessarily pay to the domestic entity, which is an Associate Enterprise, on account of use of its trademark and logo even where using such trademark/logo is not obligatory for the Indian entity, that would result in the owner of every foreign trademark undertaking making payment to the domestic entity approaching it for use of its trademark and/or logo for the purpose of taking advantage of that reputed, trademark and/or logo on its products. This will result in a situation where, on the one hand, the Indian entity is paying to the foreign entity for use of its trademark/logo, and, on the other hand, it is simultaneously getting paid for carrying that trademark or logo on its products though it is the Indian entity and not the foreign entity which wants the use of the foreign trademark on the products manufactured and sold in India. If that happens, the owners of foreign trademarks may not be willing to permit use of their trademarks/logos by a domestic entities on the products manufactured and sold in India, unless they are more keen than the domestic entities in this regard.

71. The TPO took the view that the value of the trademark ‘Maruti’ which, by the time Maruti entered into this agreement with Suzuki, had become a super brand, got diminished and correspondingly the value of the brand ‘Suzuki’ which was hithereto unknown in India appreciated on account of Maruti deciding to use the logo ‘S’ in place of the logo ‘M’ and use of the brand name ‘Maruti Suzuki’ in place of brand name ‘Maruti’ on the advertisements and promotions undertaken by Maruti. We, however, do not find ourselves to be in agreement with the TPO in this regard. As noted earlier, despite Maruti being a well-known brand of passenger car in the domestic market and only a few people in India being aware of the brand name ‘Suzuki’ at the time of Maruti entering into the agreement with Suzuki, the fact remains that on account of the increased competition, consequent upon the entry of multinationals selling vehicles under reputed and well established brand names, Maruti felt that it did require to use a reputed international brand name/logo in order to meet the competition. It is quite probable that had Maruti not used the name and logo of Suzuki, it might not have been able to face the competition given by these major auto players and would have lost its market share to them. Maruti instead of using the brand trademark of Suzuki, agreed to sell its products under a joint trademark which enabled it to preserve and promote its own brand while simultaneously taking advantage of the reputation associated with the name and logo of Suzuki, which admittedly was a reputed international brand in the automobile industry. In the joint trademark also the name Maruti comes before the name ‘Suzuki’, thereby giving an edge to the domestic trademark. In fact, the benefit from association of a reputed foreign name and logo may in such a case outweigh the loss, if any, in the value of the domestic brand. The test again, to our minds, would be as to what a comparable independent entity placed in the position of Maruti would have done in this regard. There was no material before the TPO from which it could be inferred that Maruti would have been able to achieve the growth which it was able to achieve even if it had not used the name ‘Suzuki’ in the joint trademark or had not used the logo of Suzuki.

72. But, under the Agreement dated 12.12.1992 Maruti is under a contractual obligation to use the joint trademark ‘Maruti Suzuki’ on all the vehicles as well as the parts manufactured and/or sold by Maruti in India. We fail to understand any logic behind Suzuki insisting upon compulsory use of this joint trademark by Maruti, on all its products and parts, rather than leaving such use to the discretion of Maruti, except that Suzuki wanted to popularize its name in India at the cost of Maruti. Compulsory use of the trademark even when the domestic entity does not require it indicates benefit to the non-resident entity in the form of brand building in the domestic market by its display and use on the product as well as its packaging.

73. At some point of time, a domestic entity may continue to need the technical assistance but may not need the foreign brand name. There can be no justification for insisting upon the use of a joint trademark using a foreign brand name unless the owner of the foreign brand feels that he stands to gain by such compulsory use of its name by the Indian entity. In our opinion, if the agreement between two entities which are not independent entities, carries an obligation to use a joint trademark, either some appropriate payment needs to be made or appropriate rebate in the charges payable to it needs to be given by the foreign entity to the Indian entity, for being obliged to carry the name of the foreign entity on all its products even if it does not see any advantage from carrying that name on its products. of course, the Department cannot insist upon such a payment in case the parties entering into the contract are independent parties. The reason why we justify such a payment by the foreign entity to the Indian entity is that, in our opinion, it is quite possible for the foreign entity on account of the managerial/financial control it exercises over the Indian entity, to force an obligation of this nature on the Indian entity. On the other hand, there is no such possibility when the two contracting parties are independent entities, without one having any managerial or financial control over the other.

74. We are unable to agree that there can be no possible benefit to ‘Suzuki’ on account of compulsory use of the joint trademark ‘Maruti Suzuki’ on all the parts and products manufactured and sold by Maruti in India. Once, the name ‘Suzuki’ becomes widely known in the domestic market, nothing prevents Suzuki from refusing to extend its agreement with Maruti or to independently enter the Indian market for manufacture and/or sale of similar products under its own brand name. It is true that Suzuki holds majority share holding in Maruti, but, it is not the only shareholder in Maruti and, therefore, necessarily has to share the profits in the form of dividend and/ or bonus shares etc. with the other shareholders. Moreover, Maruti is taxed in India under Indian laws whereas Suzuki is taxed in Japan under Japanese laws. Hence, there can always be incentive for Suzuki to go solo and manufacture and/or sell four wheel automobiles in India under its own brand name, so that it does not share its income with any other person and does not pay tax under the Indian laws. Though Suzuki has not as yet entered India of its own, nothing prevents it from doing so, if it so decides, at a future date. The tax rate in a foreign country may be low or the exemptions and deductions permissible under the laws of the foreign country may be more than permitted under the Indian laws.

75. As noted earlier, it may not always be possible for the TPO to devise an objective and fair method to assess the monetary value of the benefit obtained by ‘Suzuki’ in the form of marketing intangibles, which would include the benefit on account of compulsory use of the joint trademark ‘Maruti Suzuki’ on all the parts and products manufactured and sold by ‘Maruti’ in India. In such a case, what the TPO has to do is to determine the arm’s length price in respect of benefits obtained and obligations incurred by both the parties under the composite agreement dated 12th December 1992, by finding out what payment, if any, a comparable independent domestic entity would have made in respect of an agreement of this nature.

76. As regards the expenditure incurred by a domestic entity, on promotion, marketing and advertising of its parts and products carrying a foreign trademark/logo, we are of the view that it is not obligatory for the owner of a foreign trademark to make payment to the domestic entity, using the foreign trademark/logo while promoting, marketing and advertising its products, merely because the promotions and advertising of the product carried the foreign brand/logo on it. As noted earlier, if a domestic entity feels the need to use a foreign brand/logo on its products and accordingly uses that brand/logo, with the permission of the owner of the brand/logo, while promoting and advertising its products, it does so in the belief that use of a reputed international brand and/or its logo, while promoting and advertising its products, is likely, to prove beneficial to it, in the form of a larger revenue and/or larger profit, by encashing upon the reputation enjoyed by that international brand/logo amongst the buyers of its products. The intention in such a case is not to benefit the non-resident owner of that brand/logo but is to promote its own product using that name. Unless the domestic entity uses the foreign brand/logo while promoting and advertising its products, the buyer is not likely to give it the preference and premium which that foreign brand commands in the market. The benefit which the owner of the foreign brand/logo gets in the form of increased awareness and goodwill of its brand in the domestic market being purely, incidental and necessarily implicit in the promotion, marketing and advertisement of the Indian product sold under that brand name/logo, no payment is expected to be made by the owner of the brand/logo to its domestic user unless specifically agreed by him. It is on account of need of the domestic manufacturer and not on account of the need of the owner of the brand, that the brand/logo is used on the products manufactured and sold in the domestic market. Even where a foreign brand/logo is used by a domestic entity, which is an Associate Enterprise of a non-resident entity, while promoting and advertising its products, no payment is required to be made by the non-resident entity to the Indian entity unless it is shown that the expenses incurred by the Indian entity towards marketing, promotion and advertisement of its product, using the brand/logo of the foreign entity on the promotions and advertisement, etc. are more than what a comparable independent entity would have incurred. Only in that case it can be presumed that the additional expenses incurred by the domestic entity were aimed at benefitting of non-resident entity and were influenced by it on account of managerial and/or financial control, which it exercised on the domestic entity.

77. There is no justification for apportioning the advertising and promotion expenses between a domestic entity and the foreign entity, even if they happen to be Associate Enterprises, merely on account of use of the name and/or logo of the foreign entity in the promotional and marketing activities, unless it is shown that the expenditure incurred on such activities was disproportionate and the benefit which accrued to the foreign entity in the form of increased awareness of its brand in the domestic market was not merely incidental. Mere use of a foreign brand, name and/or logo by an Associate Enterprise in the advertising and promotional activities undertaken by it, therefore, does not by itself entail payment by the owner of the foreign brand name and logo, and the question would always be as to whether a comparable independent entity would have incurred such expenditure or not.

78. The use of the joint trademark has to be viewed in the context that any promotion or advertising of the product would also necessarily carry that joint trademark thereby bringing benefit in the form of marketing intangible to the foreign entity. There will be no justification for apportionment of the cost incurred on promotion and marketing where the use of such a joint trademark is discretionary and not obligatory or where the expenses incurred on marketing promotion and advertising do not exceed the expenditure which a comparable independent entity is expected to incur under these heads. But, this would become relevant where the use of a joint trademark of this nature is obligatory and the expenses incurred by the domestic entity on promotion and advertising exceed the normal expenses, which an independent entity would incur in this regard.

79. As noted earlier, in this case the TPO, compared the advertisement, marketing and promotion expenses incurred by Maruti with the expenses incurred by three other automobile units Hindustan Motors Limited, Mahindra and Mahindra Limited and TATA Motors Limited. Since no expenses on advertisement were incurred by Hindustan Motors and TATA Motors during the relevant period and the expenses incurred by Mahindra and Mahindra were 0.876% of net sales as against expenses of 1.834% incurred by ‘Maruti’, the TPO found no justification for the expenditure incurred by ‘Maruti’ in this regard and was of the view that half of these expenses should be payable by ‘Suzuki’ to ‘Maruti’. In our view the comparables chosen and the method adopted by the TPO in this regard was faulty and unjustified. The order passed by the TPO does not show that Mahindra and Mahindra was manufacturing and selling passenger cars in India during the year 2004-05. On the other hand, ‘Maruti’ admittedly, was primarily engaged in the business of manufacturing and selling passenger cars in that year. To the extent we know, Mahindra and Mahindra was manufacturing and selling Tractors and some SUVs/MUVs during the relevant year. Though probably ‘Maruti’ was also manufacturing and selling MUVs during the year 1994-95 the bulk of its sales came from passenger cars and not from the MUVs. For this reason alone, the expenses incurred by Mahindra and Mahindra on advertising, promotion and marketing, etc. cannot be compared with the expenses incurred by ‘Maruti’ under these heads. The order of TPO does not disclose the level and extent of promotion and advertisement required for the products manufactured and sold by Mahindra and Mahindra. Hence, the expenditure incurred by it on marketing, promotion and advertising of its products cannot at all be compared with that on the products manufactured and sold by ‘Maruti’ in India. As far as tractors are concerned, they require very limited marketing and advertising and that too only among st farmers. The SUVs/MUVs also do not require that much promotion and marketing as is required for passenger cars. Another material aspect in this regard is that the expenditure incurred on promotion, marketing and advertising would also depend upon the territories in which such activities are undertaken and the mediums used for the purpose of promotion and advertising. The advertising for passenger cars needs to be highly visible and extensive, using not only the print media but also the electronic media, which is far more costly than print media. Also the expenditure on marketing, promotion and advertising would depend upon the number of new products launched in the market. Promotion and advertising of an existing products requires much less expenditure, as compared to that of a newly launched products which need extensive coverage so as to make a potential buyer aware of the introduction of the new product in the market. It is, therefore, necessary for the TPO to carefully choose the comparables before undertaking the exercise to compare the expenditure incurred by an Associate Enterprise under these heads with the expenditure incurred by an independent domestic unit for similar purpose. We find from a perusal of the order of the TPO that Maruti had suggested the name of Honda SIEL and Hyundai Motors for this purpose. But, the TPO, without any reasonable ground, did not compare the expenditure incurred by these companies on marketing, promotion and advertising of their respective products with those incurred by Maruti under these heads. The TPO declined to consider Honda SIEL and Hyundai Motors and com parables on the ground that these companies had substantial related period transactions. He, however, did not elaborate what those related period transactions were and how they would have distorted the comparison if taken as independent com parables. In any case, if the TPO did not find HONDA SIEL and Hyundai Motors to be appropriate com parables, he ought to have looked for other entities which could be really compared with Maruti considering the nature of its business, the number of the products launched by it in the market, the territories serviced by it and the turnover and profit achieved by it. There should be functional similarity in the companies chosen for the purpose of comparison. If he was unable to find suitable com parables in the domestic market, he could have looked for com parables in overseas market. But, unless he was able to identify suitable com parables, it was not open to him to conclude that the expenses incurred by Maruti on promotion, marketing and advertising of its products were more than what an independent comparable entity would have incurred and, therefore, exceeded the bright line limit. The appropriate method for the TPO would have been to take all automobile companies manufacturing and selling vehicles in domestic market, eliminate those which were incomparable, adopting a methodological approach, and then carry out comparison with those which were really comparable independent entities. Adjustments wherever needed could then be made, considering individual profiles of those entities.

80. The TPO rejected the contention of Maruti that it had benefited from the marketing efforts made by it since it had achieved average growth @ 18% per annum in last 13 years and that the industry average of comparables on advertising was 1.8% which was also the computation in respect of the petitioner for the past 13 years. The growth percentage has to be viewed in the right perspective. If a company selling 10,000 vehicles in a year increases its sale by say 5,000 vehicles, it would mean 50% growth in its revenue. On the other hand, if a company manufacturing 1 lakh vehicles achieved growth of 25,000 vehicles, percentage of its growth would be lower than that of the company selling 10,000 vehicles per year, though if viewed in terms of number of vehicles, the larger company has achieved much more growth than the small company. Therefore, the comparison of growth is to be seen only among st comparable companies. Taking Hindustan Motors Limited, Mahindra and Mahindra Limited and Tata Motors as com parables in this regard, the TPO found that average growth rate of these companies was 19.4%, whereas the average growth rate of the petitioner was 14% and, accordingly, he rejected the contention of the petitioner that extra promotional effort had resulted in higher growth to the petitioner, in comparison to independent comparable companies. As noted earlier by us, Mahindra and Mahindra Limited, Tata Motors Limited and Hindustan Motors Limited cannot be said to be com parables since Hindustan Motors Limited and Tata Motors Limited had not incurred any expenditure on marketing, promotion and advertising during the year in question whereas Mahindra and Mahindra did not have any business in passenger car market in the relevant year. Moreover, Hindustan Motors Limited, as far as we know, was selling only Ambassador Cars and that too in very limited numbers, mostly to Government Departments, which required no extra effort Tata Motors Limited is primarily engaged in the business of manufacture and selling of trucks and buses during the relevant year. It was selling only one or two models of passenger cars in the domestic market and since the vehicle manufactured by it catered to an altogether different segment, their sale in the domestic market hardly required any promotion or advertisement. The TPO, in the absence of any comparison with an appropriate entity, could not have outrightly rejected the contention of the petitioner that it had benefited from substantial expenditure incurred by it in marketing, promotion and advertising, in the form of higher growth in its turnover. The case set up by the petitioner in this regard needs to be considered in the light of the fact that on account of the de-licensing of the automobile industry a number of foreign players had entered the domestic market and they were quite enthusiastic about penetrating the Indian market and grabbing a major chunk of the domestic market. They were also extensively promoting and advertising their products. They were international giants, backed by international brands of repute and strong financial muscle, on account of their deep pockets. They were in a position to incur huge expenditure on marketing, promotion and advertising of their products, even at the cost of incurring huge losses in the initial years of their operations in India. It would have been difficult for Maruti to maintain its market share and achieve further growth, had it not countered the efforts of these automotive giants by incurring adequate expenditure on marketing, promotion and advertising of its products. However, the TPO has not even gone into these aspects of the matter and has not made any sincere effort to arrive at expenditure which an independent comparable entity, placed in the position of Maruti, would have incurred on marketing, promotion and advertising of its products. Though the TPO accepted the contention of the petitioner that the cost benefit analysis should be based on the analysis of independent comparables and the arm’s length expenditure should be based upon the advertising expenditure incurred by the independent comparables, he miserably failed to identify and select the entities which could be said to be really comparable to Maruti. Hence, the order passed by him being based on no evidence at all cannot be sustained.

81. OCED guidelines on which reliance was placed by the TPO, provide that in order to ascertain whether the marketer is entitled to pass a normal return, it would be necessary to assess the obligations and rights implied by the agreement between the parties. The guidelines acknowledge that the marketer could be reimbursed in various forms for the promotion expenditure incurred by it. In the case of a distributor, such reimbursement could come in the form of higher distribution margin or exclusive or long-term distribution rights. Maruti, admittedly, was not a distributor for the products manufactured by Suzuki. It was a licensed manufacturer of these products and had entered into a long-term agreement with Suzuki. Therefore, it was justified in incurring substantial expenditure on marketing, promotion and advertising of its products even under the joint trademark ‘Maruti Suzuki’ and using the logo of Suzuki. Since the products promoted and advertised by Maruti were being manufactured and sold solely by it and Suzuki had no right to sell any product under the joint trademark ‘Maruti Suzuki’, the benefits from the expenditure incurred on marketing, promotion and advertising of Maruti products under the joint trademark ‘Maruti Suzuki’ would accrue to Maruti and the status of Maruti is, therefore, not comparable to that of a distributor or a licensed seller.

82. Even if it is found that Maruti had incurred expenditure on marketing, promotion and advertising of its products, which was more than what a comparable independent entity, placed in the position of Maruti would have incurred, that by itself will not entail payment from Suzuki to Maruti if it is shown that under the terms and conditions of the composite agreement dated 12.12.1992, or some other arrangement, Maruti obtained some concession or subsidy from Suzuki, in one form or the other which can offset the extra expenditure incurred by Maruti on marketing, promotion and advertising of its products. As we said earlier, the TPO has to take an overall view of all the rights obtained and obligations incurred by Maruti, vis-a-vis, Suzuki and then determine appropriate arm’s length price in respect of the international transactions which Maruti had with Suzuki.

83. Since we have come to the conclusion that the order passed by the TPO making adjustments to the income of the petitioner company is based on no evidence which amounts to an error of law by him, the procedure followed by him was faulty, the approach adopted by him was erroneous and the order passed by him is arbitrary and irrational, it will be open to this Court to set aside the order passed by him, in exercise of writ jurisdiction under Article 226 of the Constitution. Also, the Transfer Pricing Provisions being rather new to the tax regime in India and with the entry of more and more multinationals in our country, these provisions are likely to come up frequently for application by the TPOs as well as the Assessing Officers, we deem it appropriate to clarify those aspects of the transfer pricing provisions which come up for our consideration in this case, so that they are able to appreciate the scope of their powers under Transfer Pricing Provisions of the Act as well as the procedure to be followed and approach to be adopted by them while processing such cases.

84. Conclusions

i. The onus is on the assessee to satisfy the AO/TPO that the arm’s length price computed by it, was in consonance with the provisions contained in Section 92 of the Act. The AO/TPO can reject the price computed by the Assessee and determine it only where he finds that the assessee has not discharged the onus placed on it or he finds that the data used by the assessee is unreliable, incorrect or inappropriate or he finds evidence, which discredits the data used and/or the methodology applied by the assessee.

ii. The TPO/AO, before he determines arm’s length price in relation to the income from an international transaction, needs to give appropriate notice to the assessee, giving him an opportunity to produce evidence in support of the 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.

iii. If an independent domestic entity uses a foreign trademark and/or logo on its products or on their containers, packaging, etc., manufactured and/or sold in India, no payment to the foreign entity in this regard is necessary, unless agreed by it, irrespective of whether the use of the foreign trademark and/ or logo is obligatory or discretionary.

iv. If a domestic entity, which is an Associate Enterprise of a foreign entity within the meaning of Section 92A of the Act, uses a foreign trademark and/or logo on its products or on their containers, packaging, etc., manufactured and/or sold in India, no payment to the foreign entity on account of such user, is necessary, in case the use of the foreign trademark and/or logo is discretionary for the domestic entity. However, the income arising from such international transaction(s) needs to be determined at arm’s length price, in terms of Section 92C of the Act.

v. If the domestic entity which is an Associate Enterprise of the foreign entity within the meaning of Section 92A of the Income Tax Act is mandatorily required to use the foreign trademark and/or logo on its products and/or their containers, packaging, etc., appropriate payment in this regard should be made by the foreign entity to the domestic entity, on account of the benefit it derives in the form of marketing intangibles, obtained by it from such mandatory use of its trademark and/or logo.

vi. Even in the cases where payment in terms of clause (v) above is to be made by the foreign entity, to the domestic entity, the arm’s length price in respect of the income, from the international transaction between the two entities, needs to be determined, taking into consideration all the rights obtained and obligations incurred by the parties under the international transaction in question, including the value of marketing intangibles obtained by the foreign entity on account of compulsory use of its trademark and/or logo by the domestic entity. Suitable adjustments in this regards will have to be made considering the individual profiles of these entities and other facts and circumstances justifying such adjustments.

vii. The expenditure incurred by an independent domestic entity on advertising, promotion and marketing of its products using a foreign trademark/logo does not require any payment or compensation by the owner of the foreign trademark/logo to the domestic entity on account of use of the foreign trademark/logo in the promotion, advertising and marketing undertaken by it, unless agreed by the domestic entity.

viii. The expenditure incurred by a domestic entity, which is an Associate Enterprise of a foreign entity, on advertising, promotion and marketing of its products using a foreign trademark/logo does not require any payment or compensation by the owner of the foreign trademark/logo to the domestic entity on account of use of the foreign trademark/logo in the promotion, advertising and marketing undertaken by it, so long as the expenses incurred by the domestic entity do not exceed the expenses which a similarly situated and comparable independent domestic entity would have incurred.

ix. If the expenses incurred by a domestic entity which is the Associate Enterprise of foreign entity, using a foreign brand trademark and/or logo while advertising, marketing and promoting its products, are more than what a similarly situated and comparable independent domestic entity would have incurred, the foreign entity needs to suitable compensate the domestic entity in respect of the advantage obtained by it in the form of brand building and increased awareness of its brand in the domestic market.

x. In case the foreign entity is liable to compensate in terms of clause (ix) above, the TPO needs to determine the arm’s length price in respect of the international transaction made by the domestic entity, with the foreign entity, which is its Associate Enterprise within the meaning of Section 92A of the Act, taking into consideration all the rights obtained and obligations incurred by the two entities, including the advantage obtained by the foreign entity.

xi. In order to ascertain whether the expenses incurred by the domestic entity, which is an Associate Enterprise of a foreign entity, on the marketing, promotion and advertising of its products using the brand trademark/ logo of the foreign entity, are more than what a similarly situated and comparable independent domestic entity would have incurred, or not, it would be necessary to identify appropriate com parables for the purpose of comparison of their expenditure with the expenditure incurred by the domestic entity in this regard. Suitable adjustments will have to be made considering the individual profiles of these entities and other facts and circumstances justifying such adjustments.

HELD:

85. For the reasons given in the preceding paragraphs, the impugned order dated 30.10.2008 is hereby set aside and the TPO is directed to determine appropriate arm’s length price in respect of the international transactions entered into by the petitioner Maruti Suzuki India Limited with Suzuki Motor Corporation, Japan, in terms of the provisions contained in Section 92C of the Income Tax Act and in the light of the observations made and the view taken by us in this order. The TPO shall determine the arm’s length price within three months of the passing of this order.

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