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].
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