Case Law Details
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:
- In case there is an agreement between the associated enterprises (“AE”) which carries an obligation on the licensee to use the trademark owned by a foreign entity, such agreement should be accompanied either by an appropriate payment by the foreign enterprise or by a rebate provided to the Indian licensee. Appropriate payment should be made on account of benefit derived by the foreign associate enterprise in the form of marketing intangibles obtained from such mandatory use. However, if the agreement between the AE for the use of brand/logo is discretionary, no payment is required to be made by the foreign entity.
- The HC came to the above conclusion of obligatory usage of trademark by the licensee, merely based on the use of the term “shall” in the license agreement, failing to realise that even third parties use the term “shall” in the context of affixing trademarks under license agreements, without any requirement whatsoever to pay compensation to the licensee.
- Where a domestic AE mandatorily uses the foreign brand name and incurs more AMP expenses than what an independent comparable entity would incur (the bright line), such additional expenses can be said to be incurred for the benefit of the foreign trademark owner in the form of brand building and increased awareness of its brand in the domestic market, requiring an arm’s length compensation by the foreign entity. The HC had also applied the concept of bright line even in the context of an entrepreneurial licensed manufacturer like the taxpayer, when generally such concept is applied in cases of distributors.
- Aggrieved by the order passed by the HC, the taxpayer filed an SLP with the SC.
Supreme Court Ruling- The SC observed that the HC, while adjudicating the writ petition filed by the taxpayer against the show-cause notice issued by the TPO, had made certain observations on the merits of the case through giving directions to the TPO, thus virtually concluding the matter on merits. The SC has directed the TPO to proceed in accordance with law “uninfluenced” by the observations/ directions given by the HC in the impugned order on merits. The SC has directed the TPO to dispose off the case by 31 December, 2010.
Conclusion-The SC has held that the observations and directions of the HC on merits of the matter, in the context of the writ petition, should not influence the TPO, who should undertake the audit in accordance with law. As a result of the SC Order, the observations/ conclusions of the HC on the technical aspects of marketing intangibles, bright line concept, etc, as discussed above, impliedly stand annulled. The disposal of the case by the SC in the manner aforesaid brings relief to numerous taxpayers of India, who were significantly prejudiced by the various general/broad conclusions on complex transfer pricing issues relating to marketing intangibles, bright line concept, etc, given by the HC, which now stand annulled/cancelled, as the SC had itself asked the TPO or the revenue to carry out the transfer pricing audit in the case of the taxpayer without considering or being influenced by the observations or directions of the HC on merits.
The matter relating to marketing intangibles, including the bright line concept, now stands open for adjudication by revenue, Income-tax Appellate Tribunal and Courts on the lines of global best practices of transfer pricing.
