2010 (7) TMI 84 - HC - Income Tax

Transfer pricing (TP) - Use of brand name / trademark payment of royalty - arm s length price - Prior to 1993, the petitioner was using the logo M on the front of the cars manufactured and sold by it. From 1993 onwards, the petitioner started using the logo S , which is the logo of Suzuki, in the front of new models of the cars manufactured and sold by it, though it continued to use the Mark Marut along with the word Suzuki on the rear side of the vehicles manufactured and sold by it - TPO came to the conclusion that the trademark Suzuki , which was owned by Suzuki Motor Corporation, had piggybacked on the Maruti trademark, without payment of any compensation by Suzuki to Marut . He also came to the conclusion that the trademark Marut had acquired the value of super brand, whereas the trademark Suzuki was a relatively weak brand in Indian market - TPO noted that Maruti had paid royalty of Rs.198.6 crores to Suzuki in the year 2004-05, whereas no compensation had been paid to it by Suzuki, on account of its trademark having piggybacked on the trademark of Maruti He, thus, made a total adjustment of Rs.2,06,52,26,920/- and also directed that the Assessing Officer of Maruti shall enhance its total income by that amount, for the assessment year 2005-06 - Held that - Procedure for determining arm s length price u/s 92C explained in detail - order dated 30.10.2008 set aside and TPO 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 in this order

Issues Involved:
1. Jurisdiction of the Transfer Pricing Officer (TPO).
2. Alleged sale of the 'Marut' brand to Suzuki.
3. Determination of arm's length price for royalty payments.
4. Apportionment of advertisement and marketing expenses.
5. Compliance with principles of natural justice.

Detailed Analysis:

Jurisdiction of the TPO:
The petitioner challenged the jurisdiction of the TPO, arguing that the TPO did not respond to their jurisdictional challenge and continued proceedings without addressing the issue. The court noted that the TPO must provide clear, precise, and unambiguous notice to the assessee, detailing the grounds for proposed adjustments to income. The TPO failed to convey the grounds for the proposed adjustment adequately, leading to a procedural lapse. The court emphasized that the TPO must follow a fair and reasonable procedure, including issuing a fresh notice if the initial grounds for adjustment are abandoned.

Alleged Sale of the 'Marut' Brand to Suzuki:
The TPO initially alleged that replacing the 'M' logo with the 'S' logo symbolized the sale of the 'Marut' brand to Suzuki. However, the court found no evidence of such a transfer. The agreement between Maruti and Suzuki did not grant Suzuki any rights to use the 'Marut' brand or logo. Maruti continued to use its brand and logo, indicating no transfer of ownership. The court concluded that the TPO abandoned the original grounds set out in the show-cause notice and failed to establish a case of brand sale.

Determination of Arm's Length Price for Royalty Payments:
The TPO apportioned 50% of the royalty paid by Maruti to Suzuki for the use of the trademark, without any material justifying such apportionment. The court criticized this approach as arbitrary and lacking basis. The TPO did not attempt to determine what royalty a comparable independent entity would have paid for similar benefits derived from Suzuki. The court highlighted the need for the TPO to ascertain the price a comparable independent entity would have paid for a transaction of this nature to determine the arm's length price accurately.

Apportionment of Advertisement and Marketing Expenses:
The TPO compared Maruti's advertisement expenses with those of Hindustan Motors Limited, Mahindra and Mahindra Limited, and TATA Motors Limited, concluding that Maruti's expenses were disproportionately high. The court found the comparables chosen and the method adopted by the TPO to be faulty and unjustified. The TPO failed to identify and select entities truly comparable to Maruti. The court emphasized the need for a methodological approach to select appropriate comparables and make necessary adjustments considering individual profiles and other relevant factors.

Compliance with Principles of Natural Justice:
The court underscored the importance of fair hearing and proper notice. The TPO must provide clear, precise, and unambiguous notice to the assessee, detailing the grounds for proposed adjustments. The TPO failed to issue a fresh notice after abandoning the original grounds, violating the principles of natural justice. The court reiterated that the TPO must follow a fair and reasonable procedure, including giving the assessee an opportunity to produce evidence and respond to the grounds for adjustment.

Conclusion:
The court set aside the impugned order dated 30.10.2008 and directed the TPO to determine the appropriate arm's length price for the international transactions between Maruti Suzuki India Limited and Suzuki Motor Corporation, Japan, in accordance with Section 92C of the Income Tax Act and the observations made in the judgment. The TPO was instructed to complete this determination within three months.

← Previous Next →