Delhi High Court Ruling: Transfer Pricing – Sec 92 – An important ruling by the Hon’ble High Court wherein it has been held that the methodology to be adopted by the Revenue Authorities for making an adjustment should be equitable and fair, and has ruled on the payment for the use of intangible assets and attributing arm’s length consideration for activities carried out by the licensee, etc. [Maruti Suzuki India Limited – W.P. 6876/2008]
Facts:
Maruti Suzuki India Limited (‘Petitioner / Maruti’) is engaged in manufacture and sale of automobiles. Maruti is also engaged in trading in spares and components of automotive vehicle. Trademark / Logo ‘M’ was registered in the name of Maruti. Maruti had entered into license agreement with Suzuki Motor Corporation (‘Suzuki’) with prior approval from Government of India for manufacture and sale of certain SH Series of Suzuki four wheel motor vehicles on December 4, 1992. Suzuki held more than 50% of the share capital of Maruti.
According to the license agreement, Suzuki was to provide all technical information whether patented or not, including know-how, trade secrets and other data (including all drawings, prints, machine and material specifications, engineering data and other information, knowledge and advice) to Maruti relating to engineering, design and development, manufacture, quality control, assembly, testing, sale and after-sales service of products and parts by Suzuki to Maruti. Based on the terms and conditions of the agreement, all the products and parts sold by Maruti in India had to bear the trademark of ‘Maruti-Suzuki’ and Maruti was to use the same trademark on containers, packages and wrappings used for and in connection with the sale of such products and parts. Both Maruti and Suzuki had agreed to apply for registration of the trademark ‘Maruti Suzuki’ jointly in India. Further, as per the terms of the agreement no other trademark other than ‘Maruti- Suzuki’ was to be affixed by Maruti on all the products or parts or containers, packages or wrappings for the products and parts manufactured and sold by Maruti. For the consideration and license with respect to SH Series Maruti was required to pay Five Hundred Million Japanese Yen in three installments. Further, Maruti was required to pay a running royalty of 2.5% of the aggregate FOB price of Deleted Portion of CKD Components and a running royalty of 2% of the aggregate sum on the ex-factory price of the Maruti parts shipped by Maruti (whether for sales in India or exports) for the Royalty Calculation Period. An additional running royalty of 0.5% of the aggregate of FOB price of Deleted Portion of CKD Components for exports of parts by Maruti.
Prior to 1993, Maruti was using the ‘Logo M’ on the front of the cars manufactured by it. From 1993 on wards, Maruti started using ‘Logo S’ which is the Logo of Suzuki in the front of the new models and continued to use the Mark ‘Maruti’ along with the word ‘Suzuki’ on the rear of the car manufactured and sold by it.
A reference was made by the Assessing Officer (‘AO’) under section 92CA(1) to the Transfer Pricing Officer (‘TPO’) for the determination of the Arm’s Length Price (‘ALP’) for the international transaction undertaken by Maruti with Suzuki in Financial Year (‘FY’) 2004-05. TPO issued the notice on Maruti in respect of the replacement of the front ‘Logo M’ by ‘Logo S’ in respect of its three models viz. Maruti 800, Maruti Omni and Maruti Esteem. According to the TPO the change of brand logo from ‘Maruti’ to ‘Suzuki’ amounted to sale of the brand ‘Maruti’ to ‘Suzuki’. TPO observed that substantial amount of royalty was by Maruti to Suzuki for no contribution of Suzuki towards brand development and penetration in the Indian market. TPO further noted that Maruti had incurred expenditure amounting to INR 4,092 crores on advertising, marketing and distribution activity, which helped in creation of ‘Maruti’ brand logo and due to which Maruti had become number one car in India. Accordingly computing the value of ‘Maruti’ brand at cost plus 8 % at INR 4,420 crores, TPO issued a show-cause notice as to why the value of ‘Maruti’ brand not be taken at INR 4,420 crores and why the international transaction not be adjusted on the basis of deemed sale to Suzuki.
Maruti in its reply stated that there was no transfer of ‘Maruti’ brand or logo by it. It was also submitted that ‘Maruti’ had a registered trademark which could be transferred only by a written instrument of assignment, to be registered with the Registrar of Trademarks and that no such instrument had been executed by Maruti at any point of time. It was further submitted that it continued to use the trademark / logo ‘Maruti’ in all its advertising, wrappers, letterheads, etc. It was because of the large holding by Suzuki in Maruti and stiff competition from the foreign multinationals that Suzuki had allowed to use the ‘Suzuki’ name as the logo. Further, Suzuki had not charged any additional consideration for the use of such logo on the vehicles manufactured by Maruti.
Jurisdiction of the TPO was challenged by Maruti however, Delhi High Court vide interim order dated 19.9.2008 directed that proceedings pursuant to the show- cause notice may go-on but no effect to order shall be given incase the order is passed by the TPO
Actions of the TPO:
· Issued a detailed questionnaire and clarified that this is a case of transfer of economic value of ‘Maruti’ brand to ‘Suzuki’ brand through replacement of logo fixed on the cars and co-branding of both the trademarks ‘Maruti’ and ‘Suzuki’;
· In the final order passed by the TPO on 30.10.2008, TPO concluded that ‘Suzuki’ trademark which was owned by the Suzuki had piggybacked on ‘Maruti’ trademark without payment of any compensation by Suzuki to Maruti. TPO further concluded that Maruti was a super brand in India whereas Suzuki was relatively weaker brand and that the promotion of the co-brand trademark ‘Maruti-Suzuki’ had resulted in
-Use of Suzuki trademark by Maruti;
