Case Law Details
Brief of the Case
Delhi High Court held In the case of Maruti Suzuki India Ltd. (MSIL) vs. CIT that the transfer pricing adjustment is not expected to be made by deducing from the difference between the ‘excessive’ advertisement, marketing and sales promotion (AMP) expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In the present case, the first arrived at the ‘bright line’ by comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the ‘bright line test’ (BLT), the AMP spend of MSIL was found ‘excessive’ the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing ‘adjustment’. This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO “to examine the ‘international transaction’ as he actually finds the same.” In other words the very existence of an international transaction cannot be a matter for inference or surmise.
Facts of the Case
The Maruti Suzuki India Ltd. (MSIL) is engaged in the manufacture of passenger cars in India. It is a subsidiary of Suzuki Motor Corporation, Japan (SMC).MSIL filed its return of income for the AY 2005-06 on 31st October 2005, declaring an income of Rs. 13,46,51,71,140/-. Its case was selected for scrutiny and notices under Sections 143(2) and 142(1) of the Act were issued. During the course of assessment proceedings, the AO invoked the provisions of Section 92CA (1) and referred the case to the transfer pricing officer for determination of ALP in relation to the international transactions undertaken by MSIL with its AE, SMC.
The TPO proposed an addition of Rs.252.26 crores to the returned income of MSIL. The TPO made an adjustment of Rs.98.14 crores as regards the royalty paid by MSIL attributing the same towards payment for use of foreign trademark of SMC on the ground that the brand had no value. The said adjustment was later deleted by the ITAT. The remaining adjustment of Rs.154.12 crores was towards the AMP expenses by imputing a notional/purported arm’s length compensation towards the AMP expenses incurred by MSIL for SMC.
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