fiogf49gjkf0d
[Maruti Suzuki India Ltd. v. ACIT, (2011) 335 ITR 121 (SC)]
The petitioner before the Delhi High Court, formerly known as Maruti Udyog Limited (hereinafter referred to as ‘Maruti’), was engaged in the business of manufacture and sale of automobiles, besides trading in spares and components of automotive vehicles. The petitioner launched ‘Maruti 800’ car in the year 1983 and thereafter launched a number of other models, including Omni in the year 1984 and Esteem in the year 1994. The trade mark/logo ‘M’ was the registered trade mark of the petitioner-company.
Since Maturi wanted a licence from Suzuki for its SH model and Suzuki had granted licence to it, for the manufacture and sale of certain other models of Suzuki four-wheel motor vehicles, Maruti, on 4th December, 1992, entered into a licence agreement, with Suzuki Motor Corporation (thereinafter referred to as ‘Suzuki’) with the approval of the Government of India.
Prior to 1993, the petitioner was using the logo ‘M’ on the front of the cars manufactured and sold by it. From 1993 onwards, the petitioner started using the logo ‘S’, which is the logo of Suzuki, in the front of new models of the cars manufactured and sold by it, though it continued to use the mark ‘Maruti’ along with the word ‘Suzuki’ on the rear side of the vehicles manufactured and sold by it.
A reference u/s. 92CA(1) was made by the Assessing Officer of the petitioner, to the Transfer Pricing Officer (hereinafter referred to as ‘TPO’) for determination of the arm’s-length price for the international transactions undertaken by Maruti with Suzuki in the financial year 2004-05. A notice dated 27th August, 2008, was then issued by the TPO, to the petitioner with respect to replacement of the front logo ‘M’, by the logo ‘S’, in respect of three models, namely, ‘Maruti’ 800, Esteem and Omni in the year 2004-05, which, according to the TPO, symbolised that the brand logo of Maruti had changed to the brand logo of Suzuki. It was stated in the notice that Maruti having undertaken substantial work towards making the Indian public aware of the brand ‘Maruti’, that brand had become a premier car brand of the country. According to the TPO, the change of brand logo from ‘Maruti’ to ‘Suzuki’, during the year 2004-05, amounted to sale of the brand ‘Maruti’ to ‘Suzuki’. He noticed that Suzuki had taken a substantial amount of royalty from Maruti, without contributing anything towards brand development and penetration in Indian Market. It was further noted that Maruti had incurred expenditure amounting to Rs.4,092 crore on advertisement, marketing and distribution activity, which had helped in creation of ‘Maruti’ 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 crore. Maruti was asked to show cause as to why the value of Maruti brand be not taken at Rs.4,420 crore and why the international transaction be not adjusted on the basis of its deemed sale to Suzuki.
Maruti, in its reply dated 8th September, 2008, stated that at no point of time had there been any transfer of the ‘Maruti’ brand or logo by it to Suzuki, which did not have any right at all to use that logo or trade mark. It was submitted by Maruti that a registered trade mark could be transferred only by a written instrument of assignment, to be registered with the Registrar of Trade Marks, 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 ‘Maruti’ on its products and even on the rear side of the models Esteem, ‘Maruti 800’ and ‘Omni’ , the ‘Maruti’ trade mark was being used along with the word ‘Suzuki.’ It was further submitted that Maruti continued to use the trade mark/logo ‘Maruti’ in all its advertisements, wrappers, letterheads, etc. It was also submitted by Maruti that Suzuki, on account of its large shareholding in the company and because of strong competition from the cars introduced by multinationals in India, had permitted them to use the ‘Suzuki’ name and logo, so that it could face the competition and sustain its market share, which was under severe attack. It was also submitted that Suzuki had not charged any additional consideration for use of their logo on the vehicles manufactured by Maruti and there was no question of any amount of revenue being transferred from the tax net of the Indian exchequer to any foreign tax jurisdiction. It was submitted that Maruti had, in fact, earned significantly larger revenue on account of the co-operation extended by Suzuki and that larger revenue was being offered to tax in India.
The jurisdiction of the TPO was thus disputed by ‘Maruti’ in the reply submitted to him. He was requested to withdraw the notice and drop the proceedings initiated by him.
Since Maruti did not get any response to the jurisdictional challenge and the TPO continued to hear the matter on the basis of the notice issued by him, without first giving a ruling on the jurisdiction issue raised by it, a writ petition was filed before the High Court seeking stay of the proceedings before the TPO. Vide interim order dated 19th September, 2008, the High Court directed that the proceedings pursuant to the show-cause notice may go on, but, in case any order is passed, that shall not be given effect to.
Since the TPO passed a final order on 30th October, 2008, during the pendency of the writ petition and also forwarded it to the Assessing Officer of the petitioner, the writ petition was amended so as to challenge the final order passed by the TPO.
In the final order passed by him, the TPO came to the conclusion that the trade mark ‘Suzuki’, which was owned by Suzuki Motor Corporation, had piggy-backed on the Maruti trade mark, without payment of any compensation by Suzuki to ‘Maruti’. He also came to the conclusion that the trade mark ‘Maruti’ had acquired the value of super brand, whereas the trade mark ‘Suzuki’ was a relatively weak brand in the Indian market and promotion of the co-branded trade mark ‘Maruti Suzuki’ had resulted in: “
(a) Use of ‘Suzuki’ — trade mark of the AE.
(b) Use of ‘Maruti’ — trade mark of the assessee.
(c) Reinforcement of ‘Suzuki’ trade mark which was a weak brand as compared to ‘Maruti’ in India.
(d) Impairment of the value of ‘Maruti’ trade mark due to branding process.”
The TPO noted that Maruti had paid royalty of Rs.198.6 crore to Suzuki in the year 2004-05, whereas no compensation had been paid to it by Suzuki, on account of its trade mark having piggy-backed on the trade mark of Maruti. Since Maruti did not give any bifurcation of the royalty paid to Suzuki towards licence for manufacture and use of trade mark, the TPO apportioned 50% of the royalty paid in the year 2004-05, to the use of the trade mark, on the basis of findings of piggy-backing of ‘Maruti’ trade mark, use of ‘Maruti’ trade mark on co-branded trade mark ‘Maruti Suzuki’, impairment of ‘Maruti’ trade mark and reinforcement of ‘Suzuki’ trade mark, through co-branding process. The arm’s-length price of royalty paid by Maruti to Suzuki was held as nil, using the CUP method. He also held, on the basis of the terms and conditions of the agreement between Maruti and Suzuki, that Maruti had developed marketing intangibles for Suzuki in India, at its costs, and it had not been compensated for developing those marketing intangibles for Suzuki. He also concluded that non-routine advertisement expenditure, amounting to Rs.107.22 crore, was also to be adjusted. 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 A.Y. 2005-06.
The High Court set aside the order dated 30th October, 2008 of TPO and the TPO was directed to determine the 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 the judgment and the view taken by it therein. The TPO was to determine the arm’s-length price within three months of the passing of this order [(2010) 328 ITR 210 (Del.)].
On an appeal by Maruti Suzuki India Ltd., the Supreme Court noted that the High Court had remitted the matter to the TPO with liberty to issue fresh show-cause notice. The High Court had further directed the TPO to decide the matter in accordance with the law. The Supreme Court observed that the High Court had not merely set aside the original show-cause notice but it had made certain observations on the merits of the case and had given directions to the Transfer Pricing Officer, which virtually concluded the matter. In the circumstances, on that limited issue, the Supreme Court directed the TPO, who, in the meantime, had already issued a show-cause notice on 16th September, 2010, to proceed with the matter in accordance with law uninfluenced by the observations/directions given by the High Court in its judgment dated 1st July, 2010.
The Supreme Court further directed that the Transfer Pricing Officer would decide this matter on or before 31st December, 2010.
