SC directs TPO to conclude the assessment uninfluenced by the Delhi High Court judgment

Background

• During financial year (FY) 1992-93, Suzuki Motor Corporation (SMC) granted a composite license for providing technical know-how and permitting use of Suzuki (S) trademark for which Maruti Suzuki India Limited (MSIL) and SMC entered into a license agreement on 4^th December 1992 with prior approval of Government of India. Based upon this agreement, MSIL started using logo/ monogram “S” on specified car models manufactured and sold by it in India and outside.
• The case pertains to FY 2004-05 where a reference under Section 92CA (1) of the Act was made to the TPO for determination of arm’s length price for the alleged international transactions of royalty payment and non-routine advertisement expenditure entered into by MSIL with SMC. The TPO alleged that the license agreement effectively facilitated SMC to create visibility for its brand “Suzuki” in the Indian market by benefiting from the brand-equity and leadership position established by MSIL in the Indian car market over the years. With respect to the composite license agreement, the TPO allocated 50% of amount of royalty paid during FY 2004-05 to the use of trademark and assigned the arm’s length value as ‘NIL’ using Comparable Uncontrolled Price (CUP) Method.

Writ petition filed by MSIL

• MSIL had filed a writ petition before the Delhi High Court questioning the jurisdiction of the TPO. The same was subsequently amended to challenge the arbitrary and irrational basis on which transfer pricing adjustments were made to the returned income.

Decision of the High Court

• The High Court proceeded to decide the case on merits. The High Court considered the adjustment made by the TPO to be irrational, arbitrary and without any evidence. Thus, the High Court set aside the order passed by the TPO for fresh assessment with reference to the above guidelines within three (3) months from the date of its order.

Directions issued by the Supreme Court

• The Supreme Court observed that the High Court has not merely set aside the original show-cause notice but has made certain observations on the merits of the case and has given directions to the TPO that are in the nature of guiding principles to conclude the matter.
• The Supreme Court has issued directions that the matter be decided by the TPO in accordance with law and uninfluenced by the observations/directions given by the High Court in the impugned judgment.
• The Supreme Court has further directed that the TPO shall decide this matter on or before 31^st December, 2010.