Delhi Tribunal rules in Maruti Suzuki Ltd. royalty payment case

 

This tax alert summarizes a recent ruling of the Delhi Income-tax Appellate Tribunal (ITAT) in the case of Maruti Suzuki Ltd. 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 bifurcation of the royalty payment between technology and brandname. The ITAT also rejected the adjustment disallowing the royalty that was allegedly attributable to the use “Suzuki” brandname. With regard to the adjustment relating to AMP expenses, the ITAT remanded the matter back to the TPO for further determination in light of principles laid down by the Special Bench of the ITAT in the case of LG Electronics [TS- 11-ITAT-2013(DEL)-TP].