Delhi Tribunal rules in Maruti Suzuki Ltd royalty payment case
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Global Tax Alert
9 August 2013
News from Transfer Pricing
Delhi Tribunal rules in Maruti
Suzuki Ltd royalty payment
case
Executive Summary
This Tax Alert summarizes a recent ruling of the Delhi Income-tax Appellate Tribunal
(ITAT) in the case of Maruti Suzuki Ltd [TS-212-ITAT-2013(DEL)-TP]. The issue was
the appropriateness of a transfer pricing adjustment relating to the disallowing of
a royalty paid by Maruti Suzuki Ltd (the Taxpayer) to its Associated Enterprise (AE)
for use of Intangible Property (IP) in the nature of trademark/brandname legally
owned by the AE and for “excessive” advertising, marketing and promotional (AMP)
expenditure, which the Taxpayer is alleged to have incurred for the benefit of its AE.
The adjustments relate to the Financial Year (FY) 2004-05.
The Taxpayer is a licensed manufacturer of passenger cars in India. The Taxpayer
had entered into a licensing arrangement with Suzuki Motor Corporation of Japan
(Suzuki), its AE, under which it paid a bundled royalty for the use of technology and
for use of the brandname. During the course of transfer pricing audit proceedings,
the Transfer Pricing Officer (TPO) made a bifurcation of the royalty between
the technology and brandname based on the proportion of R&D expenses and
advertising expenses incurred by the Taxpayer. The TPO then disallowed the royalty
attributed to the use of the brandname.
According to the TPO, co-branding of the manufactured products as “Maruti Suzuki”
and the piggybacking of the “Suzuki” brandname on the “Maruti” brandname
resulted in the impairment of “Maruti” brand value. Therefore the Taxpayer was not
required to pay a royalty for use of the “Suzuki” brandname. With regard to the AMP
expenses incurred by the Taxpayer, the TPO disallowed the same on grounds that
the expenses enhanced the value of the “Suzuki” brandname that was legally owned
by the AE.The ITAT rejected the TPO’s royalty besides a one-time lump • The Taxpayer challenged the
bifurcation of the royalty payment sum payment for the licensed order by way of writ petition1 in
between technology and brandname. information and the use of the the Delhi High Court (HC). The HC
The ITAT also rejected the licensed trademarks provided by held that mere use of brand/logo
adjustment disallowing the royalty Suzuki. of AE, in advertising, marketing
that was allegedly attributable to the and promotion need not by itself
• Prior to 1993, the Taxpayer was
use “Suzuki” brandname. With regard entail payment by the owner of
using the logo ”M” on the front
to the adjustment relating to AMP such brand/logo. The HC further
of the cars manufactured and
expenses, the ITAT remanded the observed that apportionment
sold by it. From 1993 onwards,
matter back to the TPO for further of the AMP expenditure was not
it started using the logo ”S”
determination in light of principles justified where use of a joint
(which is the logo of Suzuki), on
laid down by the Special Bench of the trademark was discretionary
the front of new models of the
ITAT in the case of LG Electronics [TS- and where such expenses did
cars manufactured and sold by it,
11-ITAT-2013(DEL)-TP]. not exceed those incurred by
although it continued to use the
comparable companies. Thus,
Background and facts trademark ”Maruti” along with
the HC set aside the order of TPO
the word ”Suzuki” on the rear side
• The Taxpayer, a joint venture and directed him to re-determine
of the vehicles manufactured and
company of Suzuki, is engaged the arm’s length price of the
sold by it.
in the business of manufacture transactions in line with the
and sale of automobiles, as well • The Taxpayer during the year on HC’s directions.2 However, the
as trading in spare parts and appeal had entered into various Supreme Court3 directed the TPO
components of automobiles. international transactions with to decide the issue uninfluenced
The trade mark/logo ‘M’ is the its AEs and had adopted the by the observations/directions
registered trade mark of the Transactional Net Margin Method given by the HC.
Taxpayer. (TNMM) using the combined
• During the audit proceedings
transaction approach for testing
• The Taxpayer entered into a after the order of the SC, the
the arm’s length nature of the
License Agreement (Agreement) TPO made certain adjustments
transactions.
with Suzuki in 1992 for the with regard to the royalty paid
manufacture and sale of certain • During the audit proceedings by the Taxpayer to Suzuki on the
models of Suzuki four wheel for the FY 2004-05, the TPO following grounds:
motor vehicles. As per the observed that the taxpayer had
• The license agreement covers
terms of the Agreement, Suzuki incurred huge AMP expenditure
the use of technical assistance in
agreed to provide technical towards promotion of the
the form of license information
collaboration and license trademark ”Suzuki” and held that
and also the use of the licensed
necessary for engineering, design Suzuki should have compensated
trade mark for the technological
and development, manufacture, the taxpayer for assistance
development and sales of
assembly, testing, quality control, provided in developing the
products and parts within the
sale and after-sale service of trademark. Accordingly, non-
territory and outside the territory.
the Suzuki products and parts. routine AMP expenditure was
However, the agreement did not
Suzuki also granted the taxpayer, adjusted using a ”bright-line”
provide a bifurcation of payment
exclusive right to use licensed test, as being the value of the
for technical assistance and
information and the ”Suzuki” marketing intangibles accruing to
licensed trade mark. Also, the
trademark. The Taxpayer was the benefit of Suzuki.
TPO noted that the Taxpayer had
required to pay a recurring
2 Global Tax Alert Transfer pricingpaid a royalty even though it had • The Dispute Resolution Panel length price of an “international
incurred expenditures for research (DRP) affirmed the above actions transaction.” Hence, the mandate
and development and marketing/ of the TPO. Aggrieved with of the TPO is limited to application
brand promotion. Further, the the directions of the DRP, the of any of the five prescribed
tax authority contended that no Taxpayer filed an appeal with the methods as the most appropriate
independent entity would enter ITAT. method to determine the ALP
into an agreement of this nature of an international transaction.
Contentions of the taxpayer
and make composite payments However, the TPO had not applied
before the ITAT
without ascertaining the individual any of the prescribed methods
split towards royalty attributable to The decision to use the co- while computing the ALP of royalty
technical assistance and use of the branded trademark of “Maruti- pay-outs made by the Taxpayer.
brand name. Suzuki” was an independent The Taxpayer also relied on various
decision of the Taxpayer ITAT judgments that support this
• Consequently, the TPO bifurcated
The royalty paid by the Taxpayer proposition.
the royalty pay-outs in proportion
during the subject year was agreed
to the research & development The agreement is a single/
in 1982 when the taxpayer was a
(R&D) and brand promotion inseverable license for
wholly-owned government company
expenses (reduced by sales manufacture and sale of products
and therefore, the two parties
promotion and sales incentive The Taxpayer contended that the
were unrelated. Suzuki was in a
expenses) as per the consolidated royalty paid constituted a single/
position to influence the decision-
financials of Suzuki and determined unseverable/indivisible contract/
making of the Taxpayer only after it
the arm’s length price (ALP) of package, which provided the
acquired a controlling stake in the
the royalty pertaining to the brand Taxpayer the exclusive right and
Taxpayer’s share capital in 2003. As
name as NIL. license to manufacture and sell the
a result, the said license agreement
licensed product for a specified
• The TPO justified the position by entered earlier could be considered
duration. All other rights vested in
stating that the Suzuki brand was to be an uncontrolled license
the license agreement, including
a lesser known brand in India and agreement and could be used as
technology, technical know-how
hence had piggybacked on the a Comparable Uncontrolled Price
and trademark are linked to the
established brand name of Maruti, (CUP) to benchmark the royalty
core right of manufacture and sale
thereby not warranting any royalty paid during subject year. It was also
of licensed products. Consequently,
pay-outs for the use of the Suzuki pertinent to note that the license
the bifurcation done by the TPO
brand name. To further strengthen agreement entered into between
was arbitrary and without any basis.
this claim, the TPO referred to an the Government of India and Suzuki
The Central Government while
extract of the interview with an specifically provided for the use of
approving the royalty payment has
employee of the Taxpayer which co-branded tradename or logo. The
also directed the Taxpayer to pay
indicated that the Taxpayer had decision to use the co-branded logo
R&D cess (payable for import of
carried out a brand asset evaluation was in the best commercial interest
technology) on the entire amount
exercise wherein Maruti was of the Taxpayer since Suzuki was
and has not differentiated between
determined to be a slightly stronger an established international brand
payment for technology and
brand than Suzuki. while Maruti was unknown.
payment for trademark.
• Further, the TPO also made an None of the prescribed methods
The Taxpayer also argued that re-
adjustment for non-routine AMP was applied by the TPO
writing of transactions (i.e., splitting
expenditures incurred by the The Taxpayer contended that
up the royalty pay-outs) undertaken
Taxpayer using the ”bright-line” the tax law provides only five
by the Taxpayer is not only
test. methods4 for determining the arm’s
Global Tax Alert Transfer pricing 3inconsistent with the factual reality The effective royalty rate was • Even for purposes of bifurcating
of the case but is also contrary to lower than the permissible limit the royalty pay-outs, the
various judicial pronouncements. and thus heavily subsidized tax authority should have
The Taxpayer had conducted a relied upon the standalone
Further, it was submitted that the
search for arriving at comparable financials of Suzuki rather than
brand “Suzuki” and the technology
uncontrolled royalty rates in the consolidated financials
which it represented were
relation to the licensing of similar which included the data of
interlinked and interdependent; and
technology and accordingly all subsidiaries including the
hence it would be inappropriate
concluded that the effective rate taxpayer, thereby distorting the
separately to evaluate the royalty
of royalty pay-out by the taxpayer comparison.
pay-outs for use of the technology
was significantly lower than the
and use of the brand name. Ruling of the ITAT
comparable royalty rate. Therefore,
Erroneous conclusion by TPO the taxpayer claimed that it had The ITAT ruled in favor of
that Suzuki brand was weak received a concession on the royalty the Taxpayer and deleted the
The TPO failed to appreciate that rates and this was substantiated by adjustment with regard to the
Suzuki had global stature, standing the fact that overall margins of the royalty. Further, the ITAT observed
and reputation in the small car Taxpayer were significantly higher the following while adjudicating in
segment and its brand/logo/ than the margins of comparable favor of the Taxpayer:
trademark was well established. The companies in India. • The co-branded trademark
Taxpayer accordingly contended
The License agreements were Maruti-Suzuki has been used
that the association of the “Suzuki”
approved by the Government since inception of the company.
trademark with that of the Taxpayer
The Taxpayer contended that At the time of entering into the
not only brought an international
the license agreements were agreement, the Taxpayer was
flavor to the “Maruti” brand,
approved by the Government an independent 100 percent
but also helped the Taxpayer in
and once an approval is granted Government of India entity and
projecting itself as a company
by the Government authorities, the decision to use the trademark
which is associated with a global
it is not appropriate for another of Suzuki was carried forward to
automotive giant.
Department of the Central the license agreements, including
Further, it was submitted that the Government to contend that the the 1992 agreement. Hence,
joint venture (JV) partner was royalty pay-outs were non-bonafide. the decision to continue the
chosen by the Government of India joint trademark was taken in the
Other key contentions of the
and hence it is incongruous for the Company’s business interests and
Taxpayer included the following:
Government of India to choose a JV was not influenced by the need
partner with zero brand value. • Suzuki does not have a four-wheel to manipulate or erode the Indian
business in India and hence the tax base.
The Taxpayer also submitted
question of promoting the brand
that the TPO had not placed any • Since, the same agreement is in
of Suzuki at the expense of Maruti
empirical evidence or material place during the subject year and
does not arise.
on record to show that there has earlier years, the tax authorities
been any impairment of the Maruti • Benefits are irrelevant for ALP could not take a different view
brand or that there was any benefit determination if the expenses are without any change in facts and
accruing to Suzuki from the use of incurred wholly and exclusively circumstances.
Suzuki’s name conjointly with that for the purposes of business.
of Maruti in India.
4 Global Tax Alert Transfer pricing• The act of re-writing the • In respect of the AMP adjustment, Guidelines, the question is the
transaction by the TPO was the ITAT followed the Special amount that the transferee would
erroneous, as the primary intent Bench ruling in the case of LG be willing to pay the transferor for
of the licence is the transfer of Electronics India Limited5 and use of the intangible property, i.e.,
technology and not trademark remanded the issue back to the what a party should pay for the use
usage. However, all other rights TPO to quantify the adjustment of intangible property to the extent
vested in the license agreement based on the observations made that the party does not own or
including technology, technical by the Special Bench in the did not develop it. The ITAT ruling
know-how and trademark aforementioned ruling. affirms this principle.
are linked to the core right of
Comments The ruling also recognizes that
manufacture and sale of licensed
a taxing authority should not
products. Thus, the royalty paid One of the most challenging issues
substitute its judgment for a
by the Taxpayer constituted a in transfer pricing is the taxation of
taxpayer’s sound or reasonable
single/unseverable/indivisible income from intangible property.
judgment. This concept is also
contract/package and the TPO In this case, the TPO attempted to
embedded in the OECD Guidelines
has arbitrarily divided the license disallow a royalty payment by the
(Para 4.9), which recognize that
agreement. Taxpayer that was licensed to use
transfer pricing examinations
the intangible property under the
• Imputing an adjustment for should consider the taxpayers’
theory that an inferior “Suzuki”
AMP expenditure contradicted judgment in conducting their
brandname was “piggybacking” on
the TPO’s position that Suzuki business affairs. The judgment also
a superior “Maruti” brandname.
was a weak brand, which when recognizes commercial realities
reinforced on Maruti’s brand, This concept of “piggybacking” is and emphasizes the importance of
has resulted in impairment in the not present in the OECD Transfer strong documentation supporting
value of the latter. Pricing Guidelines. Under the the inter-company arrangements.
Endnotes
1. WP (C) 6876/2008.
2. Please refer to the EY Tax Alert dated 5 July 2010, titled Delhi High Court ruling on transfer pricing aspects
of marketing intangibles.
3. Civil Appeal No.8457 Of 2010.
4. Sixth Method under Rule 10AB was introduced only with effect from 1 April 2011.
5. ITA No. 5140/Del/2011. Also, please refer the EY Tax Alert dated 23 January 2013, titled Ruling by SB of
Tribunal on TP aspects of marketing intangibles.
Global Tax Alert Transfer pricing 5For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), Bangalore
• Rajendra Nayak +91 80 4027 5454 rajendra.nayak@in.ey.com
Ernst & Young LLP (India), New Delhi
• Vijay Iyer +91 11 6623 324 vijay.iyer@in.ey.com
Ernst & Young LLP (India), Noida
• Anuj Khorana +91 120 671 7150 anuj.khorana@in.ey.com
EY Transfer Pricing
• Global Transfer Pricing, Germany • Japan, Tokyo
Thomas Borstell, +49 211 9352 10601 Kai Hielscher, +81 3 3506 1356
• Americas, United States • Global Markets, United Kingdom
Purvez Captain, +1 713 750 8341 John Hobster, +44 207 951 6438
• EMEIA, Germany • TESCM, Amsterdam
Oliver Wehnert, +49 211 9352 10627 Victor Bartels, +31 88 4071378
• Asia Pacific, Singapore
Luis Coronado, +65 6309 8826
6 Global Tax Alert Transfer pricingEY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2013 EYGM Limited. All Rights Reserved. EYG No. CM3720 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com
You can also read
