The Delhi High Court delivered the judgment in the case of Maruti Suzuki India, an automobile manufacturer. The decision will provide direction for determining the arm's-length price when marketing intangibles are created in India.
The taxpayer entered into a licence agreement with Suzuki Motor Corporation for the manufacture and sale of cars. Under the agreement, the taxpayer agreed to pay a lump sum amount as well as a running royalty to Suzuki for technical assistance and the licence.
Maruti then started using the Suzuki logo on the front side of the cars and continued using Maruti along with Suzuki on the rear side of the vehicles.
During assessment, the transfer pricing officer issued a show cause notice to Maruti, on the basis that using Suzuki's logo symbolised that the Maruti logo had changed and that this change should be regarded as sale of the Maruti brand to Suzuki. The notice proposed an adjustment of Rs4,420 crore ($935,000) for total advertisement expenditure incurred by Maruti until the year under audit plus a mark up of 8%.
This argument was eventually dropped by the officer and instead the final order held that Suzuki failed to compensate Maruti for using its trade mark, which according to him, was then a weaker brand than Maruti in India.
Maruti dismissed this argument claiming that its average growth of sales for the past 13 years was about 18% which justified the marketing expenditure and the return from promotional activities was captured in its turnover and margins.
"It was also argued that its advertisement and marketing expenses were in line with that of the industry," said Sriram Seshadri of BMR Advisors – Taxand.
The court, while appreciating the business needs of Maruti to use Suzuki's brand name, held that the approach adopted by the transfer pricing officer was "erroneous and unsustainable".
There would be no obligation, the court added, for Suzuki to pay if the use of logo is at the discretion of Maruti. However, if Maruti is mandatorily required to use the foreign trade mark/logo, appropriate payment should be made by Suzuki for the benefit it derives in the form of marketing intangibles, obtained from such mandatory use of its trade mark/logo.
It was held that if the cost incurred by an Indian entity for the use by an associated enterprise of a foreign brand trade mark or logo is more than what a similarly situated and comparable independent Indian company would have incurred, then the entity is required to suitably compensate the Indian entity for the advantage obtained by it in form of brand building.
"One hopes that this decision is interpreted by the facts of the case and is not read so broadly as to paint the complete canvas of all marketing spends," said Vispi Patel of Vispi Patel and Associates.
The decision of the court has not dismissed the TPO's final order but has instead asked the officer to compute the arm's length price based on the points made by Maruti.
