9911796707
TMI Blog2010 (7) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... poration (hereinafter referred to as 'Suzuki') with the approval of Government of India. 3. The Agreement, to the extent, it is relevant for our purpose, provided as under: "1.05 "Licensed Information" Licensed Information. shall mean any and 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) which SUZUKI now has or which may come into its possession and control during the term of this Agreement relating to the engineering, design and development, manufacture, quality control, assembly, testing, sale and after-sales service of PRODUCTS and PARTS and which may be supplied by SUZUKI to 'Marut' on or after the Effective Date pursuant to this Agreement as well as before the Effective Date. LICENSE AND SUZUKI.S OWNERSHIP 2.01 scope of License (a) SUZUKI has agreed to provide technical collaboration and license necessary to the engineering, design and development, manufacture, assembly, testing, quality control, sale and after sales service of the PRODUCTS and PARTS, subject to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable to 'Marut' SUZUKI's plant facilities, as designated by SUZUKI, for the purpose of in-plant observation and training of personnel of 'Marut'. 3.08 Despatch of SUZUKI's Personnel (a) SUZUKI agrees, during the term of this Agreement, upon written request from 'Marut', to dispatch its personnel to the factories of 'Marut' to give technical advice and guidance in the use of the Licensed Information for the engineering, design and development, manufactures, assembly, testing, quality control and sale and after-sales service of PRODUCTS or PARTS. PURCHASE OF PRODUCTION MACHINERY AND PARTS 4.01 Purchase of Production Machinery With regard to the production machinery to be purchased by 'Marut' for the manufacture and/or assembly of PRODUCTS and PARTS by 'Marut', SUZUKI shall render advice and assistance to 'Marut' in the selection and purchase of such equipment and machines, at the request of 'Marut'. 5.02 Trademark to be Applied to PRODUCTS and PARTS All PRODUCTS and PARTS manufactures, assembled and sold in Territory by 'Marut' pursuant to this Agreement shall bear the trademark of 'MARUTI-SUZUKI' and 'Marut' shall use and apply the same trademark on containers, packages an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such SH Series and its PARTS in accordance with paragraph (a) of this Article 5.05 and in which neither SUZUKI, nor any of SUZUKI's subsidiaries, nor a SUZUKI'S licensee for any four-wheel motor vehicles or parts thereof having the right of export and sale of such four-wheel motor vehicles or parts to and in such country, has any distributors or dealers. (e) SUZUKI will, subject to its satisfaction on the quality, price and delivery schedule, promote the export of PARTS made by 'Marut' to SUZUKI and/or its overseas manufacturing factories or licensees. ROYALTIES, PAYMENTS AND REPORTS 6.01 Lump Sum As part of the consideration of the technical assistance and license with respect to the SH Series set forth in Exhibit A attached hereto, 'Marut' shall pay to SUZUKI lump sum in the sum of Five Hundred Million Japanese Yen (Y 500,000,000/-) in three instalments. 6.02 Running Royalties (a) 'Marut' hereby further agrees and shall be obliged to pay to SUZUKI not later than sixty (60) days after the end of each Royalty Calculation Period, (i) a running royalty in the sum equivalent to two and one half per cent, (2.5%) of the aggregate of the FOB price of SUZUKI of the Deleted Portio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ples of such part of the said unit of CKD Components and, in the event that any PRODUCTS which do not incorporate any CKD Components imported by 'Marut' from SUZUKI are shipped by 'Marut' during any Royalty Calculation Period, shall mean the CKD Components within the meaning as described in (1) in Article 1.01. 4. 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. 5. A reference under Section 92CA(1) was made by the Assessing Officer of the petitioner, to the Transfer Pricing Officer (hereinafter referred to as TPO for determination of arm's length price for the international transaction undertaken by Maruti with Suzuki in the F.Y.2004-05. A notice dated 27.8.2008 was then issued, by the TPO, to the petitioner with respect to replacement of the front logo 'M', by the logo 'S', in respect of three models, namely, 'Marut' 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r severe attack. It was also submitted that Suzuki had not charged any additional consideration for use of their logo on the vehicles manufactured by Maruti and there was no question of any amount of revenue being transferred from the tax net of Indian exchequer to any foreign tax jurisdiction. It was submitted that Maruti had, in fact, earned significantly larger revenue on account of the cooperation extended by Suzuki and that larger revenue was being offered to tax in India. The jurisdiction of the TPO was thus disputed by 'Marut' in the reply submitted to him. He was requested to withdraw the notice and drop the proceedings initiated by him. 7. Since Maruti did not get any response to the jurisdictional challenge and the TPO continued to hear the matter on the basis of the notice issued by him, without first giving a ruling on the jurisdiction issue raised by it, this writ petition was filed seeking stay of the proceedings before the TPO. 8. Vide interim order dated 19.9.2008, this Court directed that the proceedings pursuant to the show-cause notice may go on, but, in case any order is passed, that shall not be given effect to. 9. Since the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, the respondent has taken a preliminary objection that the merits of the transfer pricing order cannot be examined in a writ petition, since an alternative remedy is available to the assessee by way of appeal before the Commissioner of Income Tax (Appeals). It has also been submitted that the petition itself is not maintainable as the cause of action i.e., the impugned show cause notice was not acted upon. In the counter affidavit filed by him, the respondent has alleged that after considering the reply of the assessee, the TPO had dropped the idea of making adjustment of Rs 4420 crore on account of deemed sale of 'Marut' trademark to Suzuki, as was proposed in the show cause notice. It is further stated that, later on, the TPO had issued a detailed questionnaire clarifying that in this case transfer of economic value of 'Marut' brand, which was a super brand in India, to Suzuki brand, a well known brand in Japan but less known brand in India, was involved, through replacement of the logo fixed on the cars and co-branding of both the trademarks 'Marut' and 'Suzuki'. According to the respondent, the TPO never acted upon the show cause notice in making adjustment to the internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Maruti to Suzuki for use of co-branded trademark because 'Marut' was a super brand in India whereas 'Suzuki' was a weaker brand in India and co-branding of both the trademarks together had resulted in migration of the economic value embedded in the 'Marut' trademark to the 'Suzuki' trademark, for which no compensation was paid to the petitioner. It is also claimed by the respondent that no independent entity will undertake brand promotion of another independent party at its own expense, without any compensation from the third party. 14. The first contention raised before us, by the learned senior counsel for the petitioner, is that while passing the final order dated 30.10.2008 the TPO has completely abandoned the grounds set out in the notice issued by him on 27th August, 2008 for initiating transfer pricing proceedings against the petitioner and no other notice was thereafter issued to the petitioner. On perusing the show-cause notice, we find that the only ground given in the show-cause notice dated 27.8.2008 was that change of the brand logo 'M' of Maruti to Suzuki during the year 2004-05 amounted to sale of the brand 'Marut' to Suzuki. It was for this reason that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional activities undertaken by it. Moreover, the brand name or logo of 'Marut' has not been transferred to Suzuki nor has the same been used by Suzuki either in India or in any other country. 17. In terms of clause 5.02 of the Agreement, all products and parts manufactured, assembled and sold in India by Maruti, pursuant to the Agreement, are required to bear the trademark 'Maruti Suzuki' and Maruti is also required to use and apply the same trademark on containers, packaging and wrappings used for and in connection with the sale of such parts and products in India. Thus, not only does the petitioner continue to use the name 'Marut', it is under a contractual obligation to Suzuki to continue to use that name in conjunction with the name Suzuki. It is true that there is use of the name 'Marut' in the co-brand 'Maruti Suzuki', on the products manufactured and sold by Maruti in India, as well as on their containers, packaging, wrapping etc. But, Suzuki, even if it so wants, cannot use the joint trademark 'Marut Suzuki' either on its products or on the containers packaging, wrapping etc., which may be used by it in connection with its products. There is a provision in the Agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value in Trade Mark .M. had been extinguished in favour of AE's Trade mark 'S'. Therefore, the marketing intangible inbuilt in trade Mark .M. had been extinguished in favour of trademark of 'S'. AR asked to file final submission if any on the above mentioned issue. The case adjourned for final hearing for 16.10.2008 at 11 A.M. on request of ARS. 16.10.2008 The case was discussed at length with AR's on all aspect relating to brand promotion, marketing intangibles, royalty payment modelwise and industry analysis too.. 20. We are unable to accept the contention that the above referred information sought by TPO could be an adequate substitute for the notice required to be issued to the petitioner company. When the show cause notice issued to the petitioner company is based solely on the premise that the trademark 'Marut' had been transferred by the petitioner company to Suzuki and the TPO does not convey, to the noticee that he had abandoned the show cause notice issued by him and was now proceeding on an altogether different ground for the purpose of making adjustments to its income, seeking an information of this nature, without expressly conveying the grounds for the proposed ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore any adverse order is passed against him". In Biecco Lawrie Limited & Another Vs. State of West Bengal & Another: (2009) 10 SCC 32, Supreme Court, inter alia, observed as under: "One of the essential ingredients of fair hearing is that a person should be served with a proper notice, i.e., a person has a right to notice. Notice should be clear and precise so as to give the other party adequate information of the case he has to meet and make an effective defence. Denial of notice and opportunity to respond result in making the administrative decision as vitiated. The adequacy of notice is a relative term and must be decided with reference to each case. But generally a notice to be adequate must contain the following: (a) time, place and nature of hearing; (b) legal authority under which hearing is to be held; (c) statement of specific charges which a person has to meet". Since the query of the TPO as recorded in the above referred proceedings, was confined to use of logo, there was no occasion for the assessee company to assume, on the basis of these proceedings that it was required to justify the use of joint trademark 'Maruti Suzuki' on its products, and in their marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been drawn to any proceedings conveying to the assessee, that (i) the TPO proposed to make adjustment to its income on the grounds that on account of use of the name 'Suzuki' in the joint trademark 'Maruti Suzuki', (ii) some benefit had accrued to Suzuki in the form of building and strengthening of its brand 'Suzuki' and (iii) that the TPO felt that the advantage, which accrued to 'Suzuki' had neutralized the benefit which 'Marut' had obtained by use of the trademark and name of Suzuki, on its products and accordingly, he proposed to make adjustment in its income. Our attention has not been drawn to any proceedings requiring the petitioner-company to produce evidence justifying use of the joint trademark 'Maruti Suzuki' without payment of any compensation by Suzuki to Maruti, while entailing payment of running royalty to Suzuki, by Maruti, for use of the technical assistance from Suzuki, along with permission to use its trademark 'Suzuki'. No proceeding, conveying to the assessee, that the expenses incurred by it on advertising and promotion of its products and parts were higher than what a comparable independent enterprise would have incurred and such higher expenditure on pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uce such evidence as it might have in its possession to show that no such adjustment is called for in its case. If the procedure adopted by the TPO does not meet even this minimum requirement, it cannot be said to be a fair and reasonable procedure required to be followed by an authority exercising quasi-judicial and/or administrative powers, entailing serious consequences for the assessee in the form of not only additional tax liability on account of addition to the income but also on account of the penalty that may be imposed upon it under Section 271 of the Act, Explanation 7 to which specifically provides that in the case of the assessee who has entered into an international transaction, in the event of any amount being allowed or disallowed in the process of computation of its income under sub-Section (4) of Section 92C, will be deemed to represent the income, in respect of which particulars have been concealed, or inaccurate particulars have been furnished, unless the assessee proves that the price charged or paid in such transaction was computed in accordance with the provision contained in Section 92C and the manner prescribed under that Section, in good faith and with due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interfere with orders of subordinate courts and tribunals where (1) there is an error manifest and apparent on the face of the proceedings such as when it is based on clear misreading or utter disregard of the provisions of law, and (2) a grave injustice or gross failure of justice has occasioned thereby. In Sawarn Singh Vs. State of Punjab (1976) 2 SCC 868, Supreme Court, inter alia, observed as under: In regard to a finding of fact recorded by an inferior tribunal, a writ of certiorari can be issued only if in recording such a finding, the tribunal has acted, on evidence which is legally inadmissible, or has refused to admit admissible evidence, or if the finding is not supported by any evidence at all, because in such cases the error amounts to an error of law. He has also referred to Paradip Port Trust Vs. Sales Tax Officer & Others, (1998) 4 SCC 90, where the writ petitions involved interpretation of the words .transfer of the right to use any goods. used in sub-clause (d) of clause (29-A) of Article 366 of the Constitution. It was held by the Supreme Court that since the writ petition involved interpretation of a Constitutional provision and taxability of the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non-resident and referred to a close connection which was not defined and was vague. That Section provided for adjustment of profits rather the adjustment of prices and it was felt that the rule prescribed for estimating profits was not scientific and did not apply to individual transaction such as payment of royalty, which were not part of a regular business carried on between a resident or a non-resident. 30. The trigger behind introducing the Transfer Pricing Regime in the Act, as discerned from the Finance Minister's in his Speech, while introducing the Finance Bill, 2001, was the presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions. As stated in the Memorandum explaining the provisions of the Finance Bill, 2001, it was felt that the profits, derived by the enterprises belonging to the same multinational groups, carrying on business in India, could be controlled by the multinationals, by manipulating the prices charged and paid in such intra group transactions, thereby leading to erosion of tax revenue in India. A statutory framework, therefore, was sought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possible to come across identical transactions and, therefore, the TPO, in such cases, would need to refer to comparable transactions made under comparable circumstances. 33. Section 92 A of the Act, which defines 'associated enterprise', to the extent it is relevant, reads as under: 92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, 'associated enterprise', in relation to another enterprise, means an enterprise- (a) which participates, directly or indirectly, or though one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year;-- (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the entities. If there was a mutual arrangement between Maruti and Suzuki relating to their respective costs and expenses in connection with the services provided by Suzuki to Maruti or by both the entities mutually to each other, that also would come within this definition. 36. Section 92 of the Act, to the extent it is relevant, reads as under: (1) Any income arising from an international transaction shall be computed having regard to the arm's length price. (2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be.. 37. Section 92C, to the extent it is relevant, reads as under: 92C. (1) The arm's length price in relation to an interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credits the data used by the assessee or the methodology applied by him in arriving at arm's length price of the international transaction in question, that the arm's length price declared by the assessee should be rejected and re-determined in terms of Section 92-C of the Act. 42. On the functions to be performed by Suzuki and Maruti, the TPO in the final order passed by him inter alia noted as under:- Functions Performed by SMC in relation to Indian Operations ...SMC provides MUL with all the technical information and know-how in connection with the manufacture, assembly, testing, quality control, sales and after sales service of passenger cars. The technical know-how provided to MUL includes all designs, drawings, standards, machine and material specifications, prints, engineering data and other information, knowledge and advice, etc. Complex Manufacturing SMC is responsible for the manufacturing and supply of complex components to MUL, which the Indian entity cannot manufacture/procure locally. It also purchases components from third party for subsequent resale to affiliates. Core Marketing and Global Brand Management SMC is responsible for core marketin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edly, the assessee had borne the cost of advertisement of Rs 20 Million undertaken to promote Suzuki branded vehicle in European countries i.e., the expenditure was incurred to promote the brand of AE in European countries. However, the assessee was neither reimbursement the cost of advertisement nor was paid any service charge. It is important to clarify here that even on export sale of these Suzuki branded vehicles, the assessee had paid royalty to the AE. These facts lead us to an irresistible conclusion that on the manufacturing and export of Suzuki branded vehicles where the assessee was reduced to merely a contract manufacture it had borne the cost of advertisement and paid royalty to the AE SMC. No independent uncontrolled contract manufacture would ever absorb the cost of another entity. 43. After examining the terms and conditions of the agreement, the TPO inter alia observed as under:- 5.4.12 The above extracted terms and conditions of the agreement have proved the following facts: (a) The assessee has paid royalty to the AE, Suzuki Motor Corporation (in short SMC) for licence for the manufacture, sale and after sale service of Motor vehicles manufactured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products and parts manufactured in India shall bear trademark of "MARUTI-SUZUKI" whether for sale in territory or for export. It is important to clarify here that „MARUTI. or „M. are registered trade mark of the AE, SMC. The assessee vide letter dated 22.08.2008 has informed that "MARUTI-SUZUKI" is not a registered combined trade mark. This puts a question mark on the right of the assessee to receive royalty for trade mark particularly when the trade mark MARUTI as used in co-branded trade mark was registered trade mark of the assessee. (k) This agreement is only related to licensed trademark of SUZUKI and it do not provide any protection and compensation to super trademark of MARUTI even though as per agreement both the trade mark were used together under cobranded trade mark. (l) The brand development was the responsibility of the Maruti without any compensation. Rather royalty paid for promoting the little known 'SUZUKI' owned by the AE. 44. As regards payment of Royalty to 'Suzuki', the TPO inter alia observed as under:- 7.9 Next pertinent issue for examination is to know the reason for changing .M. and 'Marut' logo on the various model cars manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd trade secrets. OECD has made an attempt to differentiate between 'marketing intangibles' such as trademarks, trade names, customer lists and distribution channels from .trade intangible. such as manufacturing know-how and trade secrets... 45. He also relied upon paragraph 6.4 of OECD's .Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations edition 2001, which inter alia reads as under:- 6.4... Marketing intangibles include trademarks and tradenames that aid in the commercial exploitation of a product or service, customer lists, distribution channels, and unique names, symbols, or pictures that have an important promotional value for the product concerned... 46. He also took support from the following OECD guidelines: 6.36 Difficult transfer pricing problems can arise when marketing activities are undertaken by enterprises that do now own the trademarks or trade names that they are promotional (such as a distributors of branded goods). In such a case, it is necessary to determine how the marketer should be compensated for those activities. The issue of whether the marketer should be compensated as a service provider, i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided, it is when the investment crosses the 'bright line' of routine expenditure into the realm of non routine that, economic ownership likely in form of a marketing intangible is created. 48. The TPO recorded the following finding with respect to payment of royalty:- 8.1.4 It is evident from findings of the facts recorded in above para 8.1.2 and 8.1.3 that both the processes of piggybacking of 'Marut' trade mark by the 'SUZUKI' brand of the AE in a big way from F.Y.2003-04. Impairment of 'Marut' or .M. brand has started because 'Marut' was super brand in India as compared to 'SUZUKI' trademark and was developed by incurring several thousand crores of expenditure on advertisement and marketing for a period of two decades. The process of reinforcement of value of "Suzuki" brand has started because "Suzuki" being a very low value brand in Indian market was used along with "Maruti trade mark in cobranding process. This resulted in migration of intangible embedded in "Maruti" brand to "Suzuki" brand due to association of both the brands together. 8.1.5 The assessee ignoring the migration of intangible embedded in 'Marut' brand to the low value brand 'SUZUKI' of the AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promotion and for bearing all the risks. Though, the royalty for Maruti trademark should be much more than Rs.99.3 crore, however, on conservative basis I am holding that as a co-brand partner, Maruti should have also got Rs.99.3 crore from the AE for allowing them to use 'Marut' trademark on cobranded trademark, for impairment of the value of 'Marut' trademark and for reinforcing the brand value of 'SUZUKI' trademark in India during cobranding process. On the basis of above analysis, I am of considered view that royalty of Rs.99.3 crores was due to the assessee for use of Maruti trade mark in cobranded trade mark but it had not received royalty accordingly the payment of royalty of Rs.99.3 crores to the AE for use of Suzuki brand is not at arm.s length, which is held as „Nil. (adjustment of 99.3 crores). 50. As regards promotional and marketing expenditure incurred by Maruti, the TPO inter alia observed as under:- It is a matter of record that the assessee had incurred huge expenditure of Rs 204 crores on advertisement for promotion of brand development and other marketing intangibles for the AE. The brand development included promotion of trade mark of 'SUZU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner in the past 13 years was in the range of 0.8% to 1.47%, whereas as per RBI policy royalty could be upto 5% of the domestic sales and 8% of export sales. The case setup before the TPO was that the petitioner had received a huge subsidy in the royalty paid to Suzuki and no additional benefit was passed on to Suzuki, by Maruti, by using the trademark 'S'. 52. The contention of the petitioner that use of 'S' trademark had assisted it in maintaining its market share in the face of stiff competition from multinational brand was not accepted by the TPO on the ground that Maruti was a 'super' trademark and there was no change in the market share of the petitioner even after the use of Suzuki. 53. The TPO further observed as under:- "(v)(a) Assessee had incurred advertisement expenses, marketing and distribution expenses for promotion of 'SUZUKI' trade mark of the AE in India and abroad. The distribution and the marketing expenditure were also incurred to development of marketing intangible. The advertisement expenses incurred for advertisement on the print and electronic media has resulted in global promotion through satellite television broadcasting. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian vendors did not have any intellectual property rights in respect of patents, designs, copy rights, etc, which were essential for the manufacture and supply of the said parts, whereas all these intellectual property rights are vested in Suzuki and were licensed to Maruti, with a power to grant sub-license to Indian Vendors, in order to enable the procurement of those parts, components, etc. from them and therefore, the prices charged by Suzuki would necessarily be inclusive of the value of intellectual property rights vested in Suzuki. It was also pointed out that in respect of many parts and components even the input materials of the required specifications were procured and made available to the Indian suppliers by Maruti at its own cost and consequently, Indian vendors did not have to incur any expense for the purchase or procurement of those parts and components nor did they have to employ any working capital for maintaining their inventory. It was submitted that the prices of the patented parts particularly those which were imported from abroad were extremely high, mainly because of the value of the intellectual property right embodied in the parts and components. It was fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts and parts, subject to reimbursement of travel expenses etc. by Maruti. Suzuki also agreed to render advice and assistance to Maruti in the selection and purchase of equipments and machines. Suzuki also granted to Maruti, exclusive right to use the trademarks 'Suzuki' and 'Suzuki CCI', which were owned by Suzuki, during the period of licensed information, for the engineering, design and development, manufacture, assembly, testing, quality control, sale and after sale service of the products and parts within India. Suzuki further agreed that it will not give right to sell the models of Suzuki four wheel motor vehicles listed in Ex. 'A', attached to the Agreement, as well as such other serial models of Suzuki four wheel motor vehicles, as might be agreed between the parties from time to time thereafter, with respect to the aforesaid two models, in any country in Europe. Maruti was also given right to sub-licence the rights granted to it under the agreement, to other entities which were directly or indirectly owned or controlled by persons of Indian nationality, with prior written consent of Suzuki, which Suzuki was not to unreasonably withhold. Suzuki was also agreed to use the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, products of which are perceived to be of superior quality and international standards. 59. The TPO himself noted that the Indian automobile industry had seen a number foreign entries, since de-licensing of auto industry and the entry of foreign majors had made the Indian markets more competitive. He also noted that before entry of foreign multinationals Indian car manufacturers lacked in technology, but, with the entry of multinationals, superior and latest technology was being made available in the domestic industry. He also noted that Indian auto manufacturers were likely to face increased competition and risk losing market share to global players, such as General Motors, Toyota and Honda, which were eroding the market share of Indian players. As regards Suzuki, he noted that this Company employed the most modern factory equipments and technologies and its various activities were continually aimed at enhancing productivity, strict quality control, etc. He also noted that it had developed and it possessed technical knowhow and technologies for manufacture of a wide range of passenger cars, parts and components, besides owning patent trademarks etc. as well as valuable intangib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the foreign brand/logo, on account of its use on the products of the domestic entity, is only incidental in such cases, the primary objective being to bring benefit to the domestic entity by using a reputed brand name/logo on its products. In that case, it cannot be said that since the foreign brand and/or logo will be used by the domestic entity, the owner of the brand/logo should also make payment to the domestic entity for carrying the foreign brand/logo on its products. What is important to note is that it is the domestic entity which wants the use of foreign branch/logo on its products as well as on their promotion, marketing and development, so that it may cash upon the reputation associated with the foreign brand/logo, by selling its products under that name/logo. So long as the payment of royalty for use of the foreign brand/logo by a domestic entity is within the limits, if any, prescribed by law in this regard, there can be no reasonable objection to such a payment and it is not open to the Income Tax Authorities to claim payment to the domestic entity merely for using the foreign brand/logo on the domestic products. 62. However, when such an agreed payment is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation provided a significant commercial value to Suzuki. According to the TPO, despite localization, improvements and modifications made by Maruti, it was never compensated by Suzuki in this regard. There is no finding by the TPO that the improvements and modifications made by Maruti benefitted Suzuki in any manner or were of commercial value to it, which it could exploit in other markets. Hence, it cannot be said that Suzuki ought to have paid to Maruti in respect of such improvements and modifications. 65. Admittedly, Suzuki has been supplying various parts and components to Maruti. We do not know whether the price being charged by Suzuki from Maruti for those components and parts is a fair price or not. If Maruti has been paying more than what a comparable independent entity would pay for such parts and components, the benefit which accrues to Suzuki on account of excess payment needs to be taken into consideration while determining arm's length price in respect of the rights and obligations of the two contracting parties, under the Agreement dated 12.12.1992. If Suzuki has been charging less than the amount, which a comparable independent entity would have paid to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite data could be available, since there were other entities selling vehicles under foreign brand names, such as Honda and Hyundai. The TPO could easily have called for relevant information from these companies. Even if no such data in respect of companies operating in the Indian market was available, it could have been obtained data from overseas companies, which were similarly situated and could be compared to Maruti. What he did was to take half of the royalty payment as payment for use of brand name and logo of Suzuki, without having any material before him justifying such an apportionment. The decision of the TPO in this regard, therefore, is absolutely arbitrary and wholly without any basis or rationale. The case of the petitioner is that since it had agreed to pay a composite running royalty to Suzuki, it is not in a position to say how much out of that amount is attributable to the use of the name and logo of Suzuki including the name Suzuki in the joint trademark 'Maruti Suzuki' on its products. In fact, it may not be possible, even for the TPO, to identify an objective and reliable methodology, to compute the economic value of such marketing intangibles, in money terms. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the business decision taken by Maruti in this regard. 68. It would be noteworthy here that it was not obligatory for Maruti to use the logo of Suzuki on the products manufactured and sold by it in India, though Maruti in its discretion could use that logo, on those products as well. 69. As noted earlier, all products manufactured and sold by Maruti in India, including the parts manufactured and sold by it, were necessarily required to use the joint brand name 'Maruti Suzuki'. If a domestic entity, it is discretion, uses a foreign trademark and/or logo or a trademark, which is a combination of its domestic brand name and the brand name of a foreign entity, that by itself would not necessarily entail any payment from the foreign entity to the Indian entity, so long as benefit of such a joint brand name accrues to the Indian entity alone. In fact, such an arrangement would be mutually beneficial to both the entities, since it, while allowing the domestic entity to use a foreign brand name, also enables it to use its domestic brand, alongwith the foreign brand. As a result, from the point of view of the domestic entity, it does not have to kill its own brand, sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factured and sold in India, unless they are more keen than the domestic entities in this regard. 71. The TPO took the view that the value of the trademark 'Marut' which, by the time Maruti entered into this agreement with Suzuki, had become a super brand, got diminished and correspondingly the value of the brand 'Suzuki' which was hithereto unknown in India appreciated on account of Maruti deciding to use the logo 'S' in place of the logo 'M' and use of the brand name 'Maruti Suzuki' in place of brand name 'Marut' on the advertisements and promotions undertaken by Maruti. We, however, do not find ourselves to be in agreement with the TPO in this regard. As noted earlier, despite Maruti being a well-known brand of passenger car in the domestic market and only a few people in India being aware of the brand name 'Suzuki' at the time of Maruti entering into the agreement with Suzuki, the fact remains that on account of the increased competition, consequent upon the entry of multinationals selling vehicles under reputed and well established brand names, Maruti felt that it did require to use a reputed international brand name/logo in order to meet the competition. It is quite pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot independent entities, carries an obligation to use a joint trademark, either some appropriate payment needs to be made or appropriate rebate in the charges payable to it needs to be given by the foreign entity to the Indian entity, for being obliged to carry the name of the foreign entity on all its products even if it does not see any advantage from carrying that name on its products. Of course, the Department cannot insist upon such a payment in case the parties entering into the contract are independent parties. The reason why we justify such a payment by the foreign entity to the Indian entity is that, in our opinion, it is quite possible for the foreign entity on account of the managerial/financial control it exercises over the Indian entity, to force an obligation of this nature on the Indian entity. On the other hand, there is no such possibility when the two contracting parties are independent entities, without one having any managerial or financial control over the other. 74. We are unable to agree that there can be no possible benefit to 'Suzuki' on account of compulsory use of the joint trademark 'Maruti Suzuki' on all the parts and products manufactured and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As noted earlier, if a domestic entity feels the need to use a foreign brand/logo on its products and accordingly uses that brand/logo, with the permission of the owner of the brand/logo, while promoting and advertising its products, it does so in the belief that use of a reputed international brand and/or its logo, while promoting and advertising its products, is likely, to prove beneficial to it, in the form of a larger revenue and/or larger profit, by encashing upon the reputation enjoyed by that international brand/logo amongst the buyers of its products. The intention in such a case is not to benefit the non-resident owner of that brand/logo but is to promote its own product using that name. Unless the domestic entity uses the foreign brand/logo while promoting and advertising its products, the buyer is not likely to give it the preference and premium which that foreign brand commands in the market. The benefit which the owner of the foreign brand/logo gets in the form of increased awareness and goodwill of its brand in the domestic market being purely, incidental and necessarily implicit in the promotion, marketing and advertisement of the Indian product sold under that bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the use of such a joint trademark is discretionary and not obligatory or where the expenses incurred on marketing promotion and advertising do not exceed the expenditure which a comparable independent entity is expected to incur under these heads. But, this would become relevant where the use of a joint trademark of this nature is obligatory and the expenses incurred by the domestic entity on promotion and advertising exceed the normal expenses, which an independent entity would incur in this regard. 79. As noted earlier, in this case the TPO, compared the advertisement, marketing and promotion expenses incurred by Maruti with the expenses incurred by three other automobile units Hindustan Motors Limited, Mahindra and Mahindra Limited and TATA Motors Limited. Since no expenses on advertisement were incurred by Hindustan Motors and TATA Motors during the relevant period and the expenses incurred by Mahindra and Mahindra were 0.876% of net sales as against expenses of 1.834% incurred by 'Marut', the TPO found no justification for the expenditure incurred by 'Marut' in this regard and was of the view that half of these expenses should be payable by 'Suzuki' to 'Marut'. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred by an Associate Enterprise under these heads with the expenditure incurred by an independent domestic unit for similar purpose. We find from a perusal of the order of the TPO that Maruti had suggested the name of Honda SIEL and Hyundai Motors for this purpose. But, the TPO, without any reasonable ground, did not compare the expenditure incurred by these companies on marketing, promotion and advertising of their respective products with those incurred by Maruti under these heads. The TPO declined to consider Honda SIEL and Hyundai Motors and comparables on the ground that these companies had substantial related period transactions. He, however, did not elaborate what those related period transactions were and how they would have distorted the comparison if taken as independent comparables. In any case, if the TPO did not find HONDA SIEL and Hyundai Motors to be appropriate comparables, he ought to have looked for other entities which could be really compared with Maruti considering the nature of its business, the number of the products launched by it in the market, the territories serviced by it and the turnover and profit achieved by it. There should be functional simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince Hindustan Motors Limited and Tata Motors Limited had not incurred any expenditure on marketing, promotion and advertising during the year in question whereas Mahindra & Mahindra did not have any business in passenger car market in the relevant year. Moreover, Hindustan Motors Limited, as far as we know, was selling only Ambassador Cars and that too in very limited numbers, mostly to Government Departments, which required no extra effort Tata Motors Limited is primarily engaged in the business of manufacture and selling of trucks and buses during the relevant year. It was selling only one or two models of passenger cars in the domestic market and since the vehicle manufactured by it catered to an altogether different segment, their sale in the domestic market hardly required any promotion or advertisement. The TPO, in the absence of any comparison with an appropriate entity, could not have outrightly rejected the contention of the petitioner that it had benefited from substantial expenditure incurred by it in marketing, promotion and advertising, in the form of higher growth in its turnover. The case set up by the petitioner in this regard needs to be considered in the light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was justified in incurring substantial expenditure on marketing, promotion and advertising of its products even under the joint trademark 'Maruti Suzuki' and using the logo of Suzuki. Since the products promoted and advertised by Maruti were being manufactured and sold solely by it and Suzuki had no right to sell any product under the joint trademark 'Maruti Suzuki', the benefits from the expenditure incurred on marketing, promotion and advertising of Maruti products under the joint trademark 'Maruti Suzuki' would accrue to Maruti and the status of Maruti is, therefore, not comparable to that of a distributor or a licensed seller. 82. Even if it is found that Maruti had incurred expenditure on marketing, promotion and advertising of its products, which was more than what a comparable independent entity, placed in the position of Maruti would have incurred, that by itself will not entail payment from Suzuki to Maruti if it is shown that under the terms and conditions of the composite agreement dated 12.12.1992, or some other arrangement, Maruti obtained some concession or subsidy from Suzuki, in one form or the other which can offset the extra expenditure incurred by Maruti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, conveying the grounds on which the adjustment is proposed to be made, followed by an opportunity to reply to that notice and produce evidence to controvert the grounds, on which the adjustment is proposed. iii. If an independent domestic entity uses a foreign trademark and/or logo on its products or on their containers, packaging, etc., manufactured and/or sold in India, no payment to the foreign entity in this regard is necessary, unless agreed by it, irrespective of whether the use of the foreign trademark and/or logo is obligatory or discretionary. iv. If a domestic entity, which is an Associate Enterprise of a foreign entity within the meaning of Section 92A of the Act, uses a foreign trademark and/or logo on its products or on their containers, packaging, etc., manufactured and/or sold in India, no payment to the foreign entity on account of such user, is necessary, in case the use of the foreign trademark and/or logo is discretionary for the domestic entity. However, the income arising from such international transaction(s) needs to be determined at arm's length price, in terms of Section 92C of the Act. v. If the domestic entity which is an Associate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oting its products, are more than what a similarly situated and comparable independent domestic entity would have incurred, the foreign entity needs to suitable compensate the domestic entity in respect of the advantage obtained by it in the form of brand building and increased awareness of its brand in the domestic market. x. In case the foreign entity is liable to compensate in terms of clause (ix) above, the TPO needs to determine the arm's length price in respect of the international transaction made by the domestic entity, with the foreign entity, which is its Associate Enterprise within the meaning of Section 92A of the Act, taking into consideration all the rights obtained and obligations incurred by the two entities, including the advantage obtained by the foreign entity. xi. In order to ascertain whether the expenses incurred by the domestic entity, which is an Associate Enterprise of a foreign entity, on the marketing, promotion and advertising of its products using the brand trademark/logo of the foreign entity, are more than what a similarly situated and comparable independent domestic entity would have incurred, or not, it would be necessary to identify ..... X X X X Extracts X X X X X X X X Extracts X X X X
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