TMI Blog2010 (7) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - 6876/2008 - - - Dated:- 1-7-2010 - BADAR DURREZ AHMED and V.K. JAIN, JJ. For the Petitioner: Mr S. Ganesh, Sr Adv. with Mr Arjun Pant For the Respondent: Mr Sanjeev Sabharwal V.K. JAIN, J. 1. The petitioner before this Court, formerly known as Maruti Udyog Limited (hereinafter referred to as 'Marut'), is engaged in the business of manufacture and sale of automobiles, besides trading in spares and components of automotive vehicles. The petitioner launched =Maruti 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the sale in such other countries as provided in Article 5.05. (c) SUZUKI declares that if SUZUKI grants a license for manufacturing the PRODUCTS and/or PARTS to any party other than 'Marut', such licensee of SUZUKI will not be given the right to sell the PRODUCTS and or PARTS in any country in Europe. (d) 'Marut' shall have the right to sub-license the rights granted hereunder to other entities which are directly or indirect6ly owned or controlled by persons of Indian nationality, with the prior written consent of SUZUKI, which SUZUKI will not unreasonably withhold. PROVISIONS RELATING TO LICENSING TECHNIAL ASSISTANCE 3.01 Supply of Licensed Information (a) SUZUKI agrees to make available to 'Marut' such Licensed Information which SUZUKI has the right and capacity, and is free, to disclose and/or grant license to 'Marut' as contemplated by this Agreement. Notwithstanding the foregoing provision in this Article 3.01, SUZUKI shall make available to 'Marut' such Licensed Information as, when properly used by 'Marut', will be sufficient and complete for the engineering, design and development, manufacture, assembly, testing, quality control, sale and after-sales s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tends to export certain of the PRODUCTS in accordance with Article 5.05 of this Agreement. No trademark other than the Licensed Trademarks and the above trademark .MARUTI SUZUKI. shall be affixed of stamped by 'Marut' on any of the PRODUCTS or PARTS or containers, packages or wrapping for PRODUCTS or PARTS or written consent of SUZUKI thereto. 'Marut' may use the notation to indicate that the PRODUCTS and/or PARTS have been manufactures and/or assembled under technical collaboration with SUZUKI, for the purposes of their sale and advertisement. 5.04 Not to Use the Word 'SUZUKI' Except as Specifically Authorized It is understood and agreed that, except as specifically authorized by this Agreement, 'Marut' is not authorized to use, nor shall 'Marut' use, the word SUZUKI or any word similar thereto or any of the Licensed Trademarks as part of its corporate name, trademark, trade name or commercial designation without the prior written consent of SUZUKI. 5.05 Exports of the SH Series (a) SUZUKI grants to 'Marut' a non-exclusive right to export subject to and in accordance with the terms and conditions in this Agreement, the SH Series and its PARTS manufactured and/or ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k of Tokyo, Ltd. New Delhi Office, on the date of remittance) of the ex-factory prices (net of excise tax) of 'Marut' of the PARTS shipped by 'Marut' during the immediately preceding Royalty Calculation Period (whether for sales in the Territory or for exports). In the event that any PRODUCTS and/or PARTS are shipped by 'Marut', directly or indirectly, to any country other than the Territory during any Royalty Calculation Period, 'Marut' shall, in addition to the above sum of running royalties, pay to SUZUKI not later than sixty (60) days after the end of each Royalty Calculation period, an additional running royalty in the sum equivalent to one half of one per cent (0.5%) of the sum of (i) the aggregate of the FOB price of SUZUKI of the Deleted Portion of CKD Components referred to in (i) above in this paragraph (a) multiplied by a fraction in which the denominator is the FOB sales price of SUZUKI multiplied by the number of units of the PRODUCTS shipped by 'Marut' during the said Royalty Calculation Period (whether for sales in the Territory or for exports) and the numerator is the FOB sales price of SUZUKI multiplied by the number of units of the PRODUCTS exported by 'Marut' dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Maruti had incurred expenditure amounting to Rs.4,092 crores on advertisement, marketing and distribution activity, which had helped in creation of 'Marut' brand logo and due to which Maruti had become the number one car Company in India. Computing the value of the brand at cost plus 8% method, he assessed the value of the brand at Rs.4,420 crores. Maruti was asked to show cause as to why the value of Maruti Brand be no taken at Rs.4,420 crores and why the international transaction be not adjusted on the basis of its deemed sale to Suzuki. 6. Maruti, in its reply dated 8.9.2008, stated that at no point of time had there been any transfer of 'Marut' brand or logo by it, to Suzuki, which did not have any right at all to use that logo or trademark. It was submitted by Maruti that a registered trademark could be transferred only by a written instrument of assignment, to be registered with the Registrar of Trademarks, and no such instrument had been executed by it, at any point of time. It was also brought to the notice of the TPO that Maruti continued to use its brand and logo 'Marut' on its products and even on the rear side of models Esteem, 'Maruti 800' and 'Omni', the 'Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aruti Suzuki' had resulted in: (a) Use of 'Suzuki' - trademark of the AE (b) Use of 'Maruti' - trademark of the assessee. (c) Reinforcement of 'SUZUKI' trademark which was a weak brand as compared to 'Marut' in India. (d) Impairment of value of 'Marut' trademark due to cobranding process.. 11. The 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. Since Maruti did not give any bifurcation of the royalty paid to Suzuki towards licence for manufacture and use of trademark, the TPO apportioned 50% of the royalty paid in the year 2004-05, to the use of the trademark, on the basis of findings of piggybacking of 'Marut' trademark, use of 'Marut' trademark on co-branded trademark 'Maruti Suzuki', impairment of 'Marut' trademark and reinforcement of 'Suzuki' trademark, through co-branding process. The arm's length price of royalty paid by Maruti to Suzuki was held as Nil, using CUP Method. He also held, on the basis of the terms and conditions of the agreement between Maruti and Suzuki that Maruti had developed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o manufacture and sell under the cobranded trademark 'Maruti Suzuki' and trademark 'Suzuki' and for after-sale service of such vehicles, the transaction between the parties, which were Associate Enterprises, was an international transaction under Section 92B of the Income Tax Act and therefore, the TPO had examined as to whether the payment of royalty to Suzuki was at arm's length price. According to the respondent, it was evident from the agreement between Maruti and Suzuki that the responsibility to develop markets and promote the trademarks 'Marut', 'Maruti Suzuki' and 'Suzuki' was on the petitioner/assessee, which had incurred huge expenditure of Rs 204 crore on advertisement, in order to develop a market for the vehicles, which included promotion of the trademark 'Suzuki', co-branded trademark 'Maruti Suzuki' and the trademark 'Marut', though no part of this expenditure was reimbursed by Suzuki to Maruti. It has been stated that Suzuki had enjoyed all the benefits of such expenditure in the form of dividend income of its share holding in the petitioner company, which was more than 50%, as well as in the form of royalty, which was payable on the basis of sale of vehicles/compon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had been impairment in the value of the trademark 'Marut' or that the use of co-branded trademark had resulted in reinforcement of the trademark 'Suzuki'. There was no reference at all to the joint trademark in the show-cause notice issued by the TPO. Maruti was not asked to show cause as to why the arm's length price in respect of the royalty paid by it to Suzuki be not determined taking into consideration piggybacking on the 'Marut' trademark, and use of 'Suzuki' trademark in the co-branded trademark. In fact, the show-cause notice was based on the sole premise that Maruti had sold its trademark which it had built at the cost of Rs.4,092 crores, to Suzuki, and that there was a deemed sale of that trademark by Maruti to Suzuki. 15. The show-cause notice did not contain any proposal by the TPO to adjust what he termed as expenditure beyond the bright line limit or non-routine advertisement expenditure on the ground that the advertisement expenditure, was in fact incurred on promoting the brand of Suzuki. 16. A perusal of the terms and conditions contained in the agreement between Maruti and Suzuki clearly shows that Maruti has not transferred its brand or logo to Suzuki. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd use of the trademark as well as the logo continues to vest in the petitioner company. In fact the TPO himself noted in para 7.11.3 of the order dated 30.10.2008 that it was nowhere the intention to convey that Maruti had transferred its brand to Suzuki and that the same was being used by Suzuki also. Hence, there is no escape from the conclusion that the case as set up in the show-cause notice was abandoned by the TPO, while passing the final order. In fact, the respondent himself has taken the stand that the show cause notice dated August 27, 2008 was not acted upon and the TPO had made out an altogether new case, far removed from the basis on which the original notice was given by him. 19. The learned counsel for the respondent drew our attention to the proceedings dated 6.10.2008, 13.08.2008 and 16.10.2008 whereby the petitioner was asked to give the following information and contended that by seeking this information the TPO had clearly conveyed to the assessee, the basis and the grounds on which adjustment was made by him in the final order dated 30.10.2008:- 13.08.2008. iv) Assessee is not a legal owner of 'S' Trademark. This trade mark is owned by A.E. How this tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ademark 'Maruti Suzuki', the value of the trademark 'Marut' had been impaired and the value of the trademark Suzuki had gone up. Though it was stated in the proceedings that advertisements and other related expenditure was incurred for promotion of trademark on which the assessee had no legal right, it was not stated that these expenditures were incurred on promoting the joint trademark 'Maruti Suzuki' or that they were not in line with the expenses that are incurred by comparable independent enterprises. It appears that while recording these proceedings, the TPO had only the logos, 'S' of Suzuki and 'M' of 'Marut', in his mind and he was not referring to the joint trademark 'Maruti Suzuki' being used at the rear of the vehicles being manufactured, sold and serviced by Maruti. 21. The purpose of a show cause notice being to enable the assessee to meet the grounds, on which the arm's length price paid by him was sought to be rejected and adjustment was proposed to be made to its income, the grounds to be conveyed to the assessee needed to be clear, cogent, specific and unambiguous. In Uma Nath Pandey Others Vs. State of UP Another: (2009) 12 SCC 40, Supreme Court, inter alia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feels that the arm's length price needs to be determined by the TPO. When such a reference is made, the TPO is statutorily required to serve a notice on the assessee requiring him to produce or cause to be produced any evidence on which the assessee may rely in support of the computation, made by him, of the arm's length price, in relation to the international transaction in question. Unless the assessee knows what are the grounds which impelled the TPO to discard the price disclosed by him and to propose an adjustment in its income, while determining arm's length price in relation to the international transaction made by it, it is not possible for him to meet those grounds and satisfy the TPO that the price agreed by it for the transaction in question was the right arm's length price and there was no justification to make any adjustment in its income. The assessee can produce the relevant information and documents before the TPO only if he knows the precise case which he is expected to meet before the TPO. It is meaningless to give opportunities of leading evidence to the assessee, without first letting him know, what he is expected to meet. In case the TPO, feels the necessity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the assessee knows the grounds on which adjustment to its income is proposed to be made by the TPO while determining arm's length price in respect of international transaction made by it. We would like to note here at the cost of repetition that no notice other than the notice dated 27.8.2008 was given to the petitioner by the TPO. The notice dated 27.8.2008 having admittedly been abandoned and not acted upon, it was obligatory for the TPO to either issue a fresh notice requiring the assessee to produce such evidence as it might be having in its possession, to justify payment of royalty for use of the joint trademark 'Maruti Suzuki' on all its products and their containers, packaging etc as well as such evidence as it might have in its possession, to justify the expenditure incurred on advertisement and promotion of its products under the joint brand name 'Maruti Suzuki'. This notice ought to have been issued at the very threshold of the proceedings initiated by the TPO. In any case, the bare minimum that was expected from TPO, for compliance of the statutory requirement of giving notice envisaged in sub-Section (2) of Section 92CA, and to comply with the principles of natural ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h order after giving the requisite notice and opportunity to produce evidence, followed by oral hearing. On the other hand, it was contended by the learned counsel for the petitioner that since no case for any adjustment to the income of the petitioner is made out even from the facts brought out in the order of the TPO, the proceedings initiated by him ought to be quashed. It was further submitted by him that since the order passed by the TPO has been justified in the counter-affidavit filed by the respondent, no useful purpose will be served from remitting the matter back to the TPO, who is likely only to reiterate the order passed by him. In support of his contention, the learned counsel for the petitioner has referred to State of Andhra Pradesh Vs. P.V.Hanumantha Rao(Dead) through LRs Another (2003) 10 SCC 121, where the Supreme Court, inter alia held that though remedy of writ petition available in the High Court is not against the decision of the subordinate court, tribunal or authority but is against the decision making process, if the court, tribunal or authority deciding the case, in the decision making process, ignored vital evidence and thereby arrived at erroneous conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was further held that in regard to a finding of fact recorded by a tribunal, a writ can be issued if it is shown that the tribunal had refused to admit admissible evidence or had admitted material or erroneous evidence which had influenced the impugned findings. It was also held that if a finding is based on no evidence that would be regarded as an error of law which can be corrected by a writ of certiorari but if there is some evidence which may reasonably support the conclusion, its adequacy or sufficiency and the inference of fact drawn are within the exclusive jurisdiction of the tribunal. 28. It would be appropriate for us to examine the order passed by the TPO in the light of statutory provisions relating to transfer pricing methods, in order to decide whether to altogether quash the proceedings or to remit the matter back to the TPO for a fresh decision. 29. Section 92 of the Act, which was the only Section to deal with cross-border transaction at the time of introduction of the Finance Bill, 2001 provided for adjustment to the profits of a resident, arising from the business carried on between him and a non-resident, if it appeared to the Assessing officer, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the attempt is to cover almost every type of business or activity in which the multinationals are normally engaged. The provisions cover assets, tangible as well as intangible, services, investments, loans and shares/securities. The paramount objective behind enactment of these provisions is that the entities which are connected to each other on account of shareholding or managerial control etc. and thereby are in a position to influence the business decisions of Indian entities, including the payments made to or received by them from the non-resident entity, are not able to shift payment of taxes from India to other countries, by shifting the income which genuinely belongs to the Indian entity, to the non-resident entity, which is not taxed in India. 32. The arm's length principle of transfer pricing is based on the premise that the amount charged by one related party to another for a product must be the same as if the parties were not related. An arm's length price in respect of a foreign transaction, therefore, is the price which that transaction would obtain in the open market. Determination of arm's length price, when dealing with proprietary goods and services or intan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for the petitioner, that Suzuki was an 'associated enterprise' in relation to the petitioner Company on account of managerial participation and control as well as on account of 50% or more of the equity of the Maruti being owned by Suzuki. 35. 'International transaction' is defined in Section 92B of the Act and to the extent it is relevant, the provision reads as under: 92B. (1) For the purposes of this section and sections 92, 92C, 92D and 92E, .international transaction' means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to ay one or more of such enterprises. An international transaction, therefore, is essentially a cross-border transaction, between Associated Enterprises, in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich would have been declared by persons entering into similar transaction with unrelated parties, under the same or similar circumstances. The basic intention underlying the new provisions is to prevent shifting of profit by manipulating international transactions, thereby reducing the country's tax base. 40. Rules 10 to 10A, inter alia, provide for the factors which are to be considered in selecting the most appropriate method to determine the arm's length price in respect of an international transaction, the major consideration in this regard being the availability and reliability of data necessary for application of the method, the extent and reliability of assumption required to be made and the degree of comparability existing between the international transaction and the uncontrolled transaction. 41. Under the new provision, the primary onus is on the tax payer to determine an arm's length price in accordance with the rules and to substantiate the same with prescribed documentation. Where such onus is discharged by the assessee and the data used for determining the arm's length price is reliable and correct, there should normally be no intervention by the Assessing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h MUL provides support to the distributors for such marketing efforts. In some cases SMC also organizes events and road-shows showcasing both SMC MUL's products. MUL reimburses the promotional expenses incurred by SMC for displaying MUL's products. It is however worth noting that the Suzuki brand is well recognized worldwide, which helps MUL in entering any export market. Intangibles SMC owns significant intangibles like designs, drawings, patents, trademarks know-how, technical information, research findings, proprietary techniques, standards, etc. that are used by MUL. MUL only employs the intangibles provided by SMC and also uses the trademark 'SUZUKI' owned by SMC. It does not undertake any significant R D that leads to development of non routine intangibles. MUL owns the engineering results and production experience undertaken by it over the years. Technology Risk SMC is responsible for constant upgradation of technology of products and processes. It therefore, bears significant risk on this account. Research Development R D is primarily the responsibility of SMC and hence it bears all the risks associated with this activity. Research and Developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of technology provided by the AE as discussed in para 5.4.5 of this order by incurring huge expenditure on Research and Development activities. However, in reality the AE has never compensated the assessee for such improvement and modification contrary to this it had charged royalty on continuous basis from assessee even on modified and upgraded technology. This view is fortified by a fact that the AE has been charging running royalty at certain percentage of the export and domestic sale (refer article 6 of the agreement) (f) For technical advice personnel of SUZUKI to be paid hefty fee. All taxes to be borne by the MARUTI. Normally in the case of licensed manufacturing, it is the responsibility of licensor to provide this facility as it is already included in lumpsum royalty and free running royalty. (g) Research and development and product enhancement without any compensation in India. (h) As per clause 5.01 of the agreement which reads as under, the assessee was responsible to develop, promote and expand the sale of product and part of the AE within India. .MARUTI shall use its best efforts to develop, promote and expand the sale of PRODUCTS and PARTS within the territory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial reasons that is why it is under transfer pricing scrutiny. 7.10 In this case it is undisputed fact that 'Marut' or .M. trade mark has more brand value as compare to 'SUZUKI' trade mark in Indian market. In other words 'SUZUKI' trade mark has lesser brand value as compared to 'Marut' trade mark. In this context the cobranding has achieved two fold objectives of the AE which had acquired controlling interest in the assessee company since financial year 2003-2004; one to reinforcement of brand value of trade mark 'SUZUKI' which was relatively a weaker brand as compared to Maruti and impairment of brand value of 'Marut' which started migrating to 'SUZUKI' trade mark through cobranding process. However, the AE had charged royalty of Rs.99.03 crores from the assessee for use of its "Suzuki" brand in cobranded trade market but the assessee was not compensated either for use of its trade mark on cobranded trade mark or for impairment of its trade mark and simultaneous reinforcement of "Suzuki" trademark. Concept of Marketing Intangible and its Application to the Facts of the case of the Assessee 7.13.1 While precise meaning of a .marketing intangible. is rather uncl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy activities alone and would not be entitled to share in any return attributable to the marketing intangible. 6.38 Where the distributor actually bears the cost of its marketing activities (i.e., there is no arrangement for the owner to reimburse the expenditures), the issue is the extent to which the distributor is able to share in potential benefits from those activities. In general, the arm's length dealings the ability of a party that is not the legal owner of a marketing intangible to obtain the future benefits of a marketing activities that increase the value of that intangible will depend principally on the substance of the rights of the party. For example, a distributor may have the ability to obtain benefits from its investments in developing the value of a trademark from its turnover and market share where it has a long term contract of sole distribution may bear extraordinary marketing expenditures beyond what an independent distributor in such a case might obtain an additional return from the owner of a trademark, perhaps through a decrease in the purchase price of the product or a reduction in royalty rate. 47. Referring to a case pertaining to the DHL incorp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut' trademark for which it had received no compensation but had incurred huge expenditure of several thousand crores to develop 'Marut' or .M. as super brand. Contrary to this the assessee agreed to pay brand royalty for use of 'SUZUKI' trade mark as part of cobranded trademark. 49. The arm's length price in respect of payment of royalty was determined as under:- Determination of arm.s length price of royalty payment licence to sale and after sale service 8.1.8 I am of the considered view that 'SUZUKI' trade mark of the AE had piggybacked 'Marut' trade mark of the assessee without any compensation to the assessee accordingly no royalty could be paid for use of both the trade mark of the assessee and the AE which had resulted in impairment of brand value of 'Marut' and reinforcement of brand value of 'SUZUKI' of the assessee. Accordingly, royalty should be paid to the assessee instead of royalty payment of Rs.99.3 crores to the AE. I have also noted from facts as noted in above para 8.1.7 of this order that on the basis of FAR analysis no royalty was attributable to the AE for licence to sale and other sale services as all the economic cost and risk pertaining to market deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of long terms contract for the use of intangibles, the return of such developer, from the marketing activity, would be embedded in the turnover/market share, where such developer is exclusively operating in the market and in such a case the benefit would meet the arm's length test, if the developer's benefits are similar to what an independent comparable would obtain in such similar situation. It was further submitted by the petitioner that in case there are extraordinary marketing expenses, beyond what an independent distributor with similar rights might incur, an additional return, from the owner of the trademark, should be received either through decrease in the purchase price of the products or through a reduction in the royalty rate. It was also pointed out by the petitioner that its average growth of sales for past 13 years was approximately 18% and that its high growth and the turnover showed that it had benefitted from the marketing efforts made by it and consequently in terms of para 6.38 of OECD guidelines, the return from promotional activities carried out by Maruti was captured in its turnover and margins. It was submitted that its advertisement and marketing expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e royalty rate. I am in full agreement with the concept advanced by the assessee. As stated above if the advertisement expenses incurred by the assessee are above the level of advertisement expenses incurred by the independent entity then the additional amount should be recovered from the associated enterprise. This is a well established concept and in line with the OEDC and also supported by bright line concept. Therefore, this approach would be adopted for determination of arm's length price of the international transactions undertaken by the assessee. 54. The comparables chosen by the TPO were Hindustan Motors Limited, Mahindra and Mahindra Limited and TATA Motors Limited. He found that average growth rate of the comparables on the basis of multiple year data was 19.54%, whereas the average growth rate of the petitioner was 14%. He, therefore, rejected the contention that extra promotional efforts had resulted in higher growth to petitioner in comparison to independent comparable companies. 55. As regards import of components by Maruti from Suzuki, vis- -vis cost of local components, it was submitted by the petitioner before the TPO that the prices at which Indian vendor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra and Mahindra Limited. 57. Under the Agreement, Suzuki had agreed to provide technical collaboration and licence necessary to the engineering, design and development, manufacture, assembly, testing, quality control, sale and after sale service of the products and parts. Suzuki also granted, to Maruti, exclusive right to use licensed information and licensed trademarks for the engineering, design and development, manufacture, assembly, testing, quality control, sale and after sale service of the products and parts within the territory of India. Suzuki agreed to provide requisite information, to Maruti, for obtaining National Type approval, in the countries where the products and/or parts were intended to be exported and which was available to Suzuki without considerable costs and expenses. Suzuki was also under an obligation to sell, to Maruti, parts which were identified as 'Suzuki procured parts'. Suzuki also agreed to provide inplant training to Maruti personnel, at the plant facilities of Suzuki, for the purpose of inplant observation and training. Nothing was to be paid by Maruti for inplant observation and training. Suzuki further agreed to dispatch its personnel to the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international brand, so as to counter the competition. When multinationals enter the domestic market with a wide range of products manufactured, using latest technology and having advanced features hitherto not available on the products manufactured in India, and those multinationals also command vast material resources, including quality products sold under brand names which are internationally reputed and well-known and are also in a position to offer quality after-sale service, coupled with parts and components of superior quality, it is quite natural that buyers of such products particularly those who look for quality products, may give preference to them over domestic products which do not match the range and quality of the products offered by these multinationals. We need to appreciate that international brands are not built in a day and are the result of tremendous expenditure incurred upon research, development, manufacturing and brand building, and the buyer would normally believe that the quality of these products is superior to that of domestic products, which justifies a higher price for them. It, therefore, becomes necessary for the domestic entity, engaged in the manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, use of a foreign brand name was necessary for it to ward off the competition, posed to its products from the entry of other players in the market, no fault can be found with the domestic entity entering into an agreement, of the nature Maruti entered with Suzuki on 12th December, 1992. In fact, the agreement, admittedly, was entered into with the prior approval of Government of India which shows that Government of India was satisfied of the need of Maruti to enter into such an agreement on payment of royalty in terms thereof. In fact, even the TPO has not said that Maruti did not require the technical collaboration and assistance, which Suzuki provided to it, under the agreement. Maruti, therefore, was justified in entering into an agreement of this nature with Suzuki. 61. If a domestic entity irrespective of whether it is an independent entity or an Associate Enterprise of a foreign entity, feels that the use of a foreign brand name and/or its logo is likely to be beneficial to it, by enabling it to ward off the competition from other players, garner a larger market share or maintain its existing market share despite increase in competition on account of entry of foreign pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an effort to find out how much royalty, fixed and running, would a comparable independent domestic entity have paid in consideration of an agreement of this nature. This becomes important since according to the petitioner even if some benefit on account of promotion and brand building of the brand 'Suzuki' accrued to, Suzuki, in the form of marketing intangibles, that was more than offset by the subsidy which Suzuki granted to Maruti by accepting a lesser royalty. 64. It was noted by the TPO that Maruti had undertaken substantial research and development work for developing, localizing and customizing its products, without any compensation to it in this regard from Suzuki. In his view, normally, such development work, in the case of a licensed manufacturer, is undertaken by the entity which is the licence provider. Since the benefit from the research and development work for localization and customization, etc. would have accrued solely to the benefit of Maruti without bringing any benefit to Suzuki, we are unable to agree that Suzuki should have compensated Maruti in this regard. As per clause 3.02 of the Agreement, an improvement discovered or acquired by Maruti with respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Indian suppliers by Maruti at its own cost. Consequently, the Indian suppliers did not even have to employ any working capital for maintaining their inventory. The correct approach to determine the fair price of such parts and components would be either to ascertain the price at which such components and parts were being exported by Suzuki outside Japan or the price at which they were being sold in Suzuki's domestic market. The other alternative can be to ascertain the price which a comparable independent domestic entity would have paid for importing such parts from Suzuki or from some other comparable foreign manufacturer of repute. Of course, necessary adjustments will have to be made by the TPO wherever required in this regard. Unless the TPO determines the price which an independent Indian entity would have paid for the benefits derived from Suzuki in the form of marketing intangibles, it may not be possible to determine a fair arm's length price, that should have been paid under the agreement between Suzuki and Maruti. 66. According to the TPO, Maruti did not tell him how much royalty, out of the total royalty of Rs.198.6 crores paid by it to Suzuki in the year 1994-95, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogo of Suzuki on the products and parts manufactured and sold by Maruti. It is Maruti which felt the necessity of use of Suzuki's brand name and logo and that necessity was recognized by the Government of India, by approving the agreement between Maruti and Suzuki. We cannot agree with the TPO that Maruti had become a super brand and, therefore, the petitioner Company did not need to use Suzuki brand name and logo on its products. As noted earlier, on account of liberalization of the economy and de-licensing of the automobile industry, a number of foreign automobile majors had entered India or were contemplating entering the Indian market. Maruti, therefore, was not unjustified in concluding that it was necessary for it to enter into an agreement of this nature with Suzuki, so that it could meet the increased competition, posed to it on account of entry of these foreign majors, by using the brand name and logo of Suzuki on its products, besides obtaining the technical upgradation, augmentation and assistance from Suzuki. We cannot be oblivious of the fact that Suzuki being an international player, particularly in the segment of small cars, it was in a position to offer newer and be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k, including the expenditure incurred on its marketing, promotion and advertisement would then have accrued solely for the benefit of Maruti and the benefit to Suzuki on account of use of the name 'Suzuki' in the joint trademark would only be incidental, for which no payment will ordinarily be payable to Maruti. 70. If we accept the contention that a foreign entity must necessarily pay to the domestic entity, which is an Associate Enterprise, on account of use of its trademark and logo even where using such trademark/logo is not obligatory for the Indian entity, that would result in the owner of every foreign trademark undertaking making payment to the domestic entity approaching it for use of its trademark and/or logo for the purpose of taking advantage of that reputed, trademark and/or logo on its products. This will result in a situation where, on the one hand, the Indian entity is paying to the foreign entity for use of its trademark/logo, and, on the other hand, it is simultaneously getting paid for carrying that trademark or logo on its products though it is the Indian entity and not the foreign entity which wants the use of the foreign trademark on the products manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that Maruti would have been able to achieve the growth which it was able to achieve even if it had not used the name 'Suzuki' in the joint trademark or had not used the logo of Suzuki. 72. But, under the Agreement dated 12.12.1992 Maruti is under a contractual obligation to use the joint trademark 'Maruti Suzuki' on all the vehicles as well as the parts manufactured and/or sold by Maruti in India. We fail to understand any logic behind Suzuki insisting upon compulsory use of this joint trademark by Maruti, on all its products and parts, rather than leaving such use to the discretion of Maruti, except that Suzuki wanted to popularize its name in India at the cost of Maruti. Compulsory use of the trademark even when the domestic entity does not require it indicates benefit to the non-resident entity in the form of brand building in the domestic market by its display and use on the product as well as its packaging. 73. At some point of time, a domestic entity may continue to need the technical assistance but may not need the foreign brand name. There can be no justification for insisting upon the use of a joint trademark using a foreign brand name unless the owner of the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be low or the exemptions and deductions permissible under the laws of the foreign country may be more than permitted under the Indian laws. 75. As noted earlier, it may not always be possible for the TPO to devise an objective and fair method to assess the monetary value of the benefit obtained by 'Suzuki' in the form of marketing intangibles, which would include the benefit on account of compulsory use of the joint trademark 'Maruti Suzuki' on all the parts and products manufactured and sold by 'Marut' in India. In such a case, what the TPO has to do is to determine the arm's length price in respect of benefits obtained and obligations incurred by both the parties under the composite agreement dated 12th December 1992, by finding out what payment, if any, a comparable independent domestic entity would have made in respect of an agreement of this nature. 76. As regards the expenditure incurred by a domestic entity, on promotion, marketing and advertising of its parts and products carrying a foreign trademark/logo, we are of the view that it is not obligatory for the owner of a foreign trademark to make payment to the domestic entity, using the foreign trademark/logo whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of managerial and/or financial control, which it exercised on the domestic entity. 77. There is no justification for apportioning the advertising and promotion expenses between a domestic entity and the foreign entity, even if they happen to be Associate Enterprises, merely on account of use of the name and/or logo of the foreign entity in the promotional and marketing activities, unless it is shown that the expenditure incurred on such activities was disproportionate and the benefit which accrued to the foreign entity in the form of increased awareness of its brand in the domestic market was not merely incidental. Mere use of a foreign brand, name and/or logo by an Associate Enterprise in the advertising and promotional activities undertaken by it, therefore, does not by itself entail payment by the owner of the foreign brand name and logo, and the question would always be as to whether a comparable independent entity would have incurred such expenditure or not. 78. The use of the joint trademark has to be viewed in the context that any promotion or advertising of the product would also necessarily carry that joint trademark thereby bringing benefit in the form of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by it on marketing, promotion and advertising of its products cannot at all be compared with that on the products manufactured and sold by 'Marut' in India. As far as tractors are concerned, they require very limited marketing and advertising and that too only amongst farmers. The SUVs/MUVs also do not require that much promotion and marketing as is required for passenger cars. Another material aspect in this regard is that the expenditure incurred on promotion, marketing and advertising would also depend upon the territories in which such activities are undertaken and the mediums used for the purpose of promotion and advertising. The advertising for passenger cars needs to be highly visible and extensive, using not only the print media but also the electronic media, which is far more costly than print media. Also the expenditure on marketing, promotion and advertising would depend upon the number of new products launched in the market. Promotion and advertising of an existing products requires much less expenditure, as compared to that of a newly launched products which need extensive coverage so as to make a potential buyer aware of the introduction of the new product in the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um in last 13 years and that the industry average of comparables on advertising was 1.8% which was also the computation in respect of the petitioner for the past 13 years. The growth percentage has to be viewed in the right perspective. If a company selling 10,000 vehicles in a year increases its sale by say 5,000 vehicles, it would mean 50% growth in its revenue. On the other hand, if a company manufacturing 1 lakh vehicles achieved growth of 25,000 vehicles, percentage of its growth would be lower than that of the company selling 10,000 vehicles per year, though if viewed in terms of number of vehicles, the larger company has achieved much more growth than the small company. Therefore, the comparison of growth is to be seen only amongst comparable companies. Taking Hindustan Motors Limited, Mahindra Mahindra Limited and Tata Motors as comparables in this regard, the TPO found that average growth rate of these companies was 19.4%, whereas the average growth rate of the petitioner was 14% and, accordingly, he rejected the contention of the petitioner that extra promotional effort had resulted in higher growth to the petitioner, in comparison to independent comparable companies. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble entity, placed in the position of Maruti, would have incurred on marketing, promotion and advertising of its products. Though the TPO accepted the contention of the petitioner that the cost benefit analysis should be based on the analysis of independent comparables and the arm's length expenditure should be based upon the advertising expenditure incurred by the independent comparables, he miserably failed to identify and select the entities which could be said to be really comparable to Maruti. Hence, the order passed by him being based on no evidence at all cannot be sustained. 81. OCED guidelines on which reliance was placed by the TPO, provide that in order to ascertain whether the marketer is entitled to pass a normal return, it would be necessary to assess the obligations and rights implied by the agreement between the parties. The guidelines acknowledge that the marketer could be reimbursed in various forms for the promotion expenditure incurred by it. In the case of a distributor, such reimbursement could come in the form of higher distribution margin or exclusive or long-term distribution rights. Maruti, admittedly, was not a distributor for the products manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it appropriate to clarify those aspects of the transfer pricing provisions which come up for our consideration in this case, so that they are able to appreciate the scope of their powers under Transfer Pricing Provisions of the Act as well as the procedure to be followed and approach to be adopted by them while processing such cases. 84. CONCLUSIONS i. The onus is on the assessee to satisfy the AO/TPO that the arm's length price computed by it, was in consonance with the provisions contained in Section 92 of the Act. The AO/TPO can reject the price computed by the Assessee and determine it only where he finds that the assessee has not discharged the onus placed on it or he finds that the data used by the assessee is unreliable, incorrect or inappropriate or he finds evidence, which discredits the data used and/or the methodology applied by the assessee. ii. The TPO/AO, before he determines arm's length price in relation to the income from an international transaction, needs to give appropriate notice to the assessee, giving him an opportunity to produce evidence in support of the arm's length price computed by him. In case the TPO/AO proposes to make adjustments to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al profiles of these entities and other facts and circumstances justifying such adjustments. vii. The expenditure incurred by an independent domestic entity on advertising, promotion and marketing of its products using a foreign trademark/logo does not require any payment or compensation by the owner of the foreign trademark/logo to the domestic entity on account of use of the foreign trademark/logo in the promotion, advertising and marketing undertaken by it, unless agreed by the domestic entity. viii. The expenditure incurred by a domestic entity, which is an Associate Enterprise of a foreign entity, on advertising, promotion and marketing of its products using a foreign trademark/logo does not require any payment or compensation by the owner of the foreign trademark/logo to the domestic entity on account of use of the foreign trademark/logo in the promotion, advertising and marketing undertaken by it, so long as the expenses incurred by the domestic entity do not exceed the expenses which a similarly situated and comparable independent domestic entity would have incurred. ix. If the expenses incurred by a domestic entity which is the Associate Enterprise of foreign e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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