Section 92B of the Act – Accretion to brand value, resulting from use of brand name of foreign AE under technology use agreement; since that agreement was accepted as an arrangement at an arm’s length price, an aspect covered by that agreement did not result in a separate international transaction requiring benchmarking.

13. [2017] 81 taxmann.com 5 (Chennai – Trib)

Hyundai Motor India Ltd vs. DCIT

A.Ys.: 2009-10 to 2011-12,

Date of Order: 27^th April, 2017

Facts

The Taxpayer was a fully owned subsidiary of a South Korean
automobile company (“FCo”). It was engaged in the business of manufacturing
cars in India. The Taxpayer and FCo had entered into agreement for use of
technology (“the agreement”). Under the agreement, the Taxpayer was mandated to
use the trademark owned by FCo (“the trademark”) on every vehicle manufactured
by it.

According to the TPO, by using the trademark, the Taxpayer
had significantly contributed to its development in Indian market and thereby
FCo had ‘benefited due to brand promotion activity carried out by the
Taxpayer’. Hence, The TPO opined that FCo should have compensated the Taxpayer
with arm’s length amount for the benefit acquired at the cost of the Taxpayer
which was deprived of developing its own brand name and logo.

The TPO took a view that the increase in brand value each
year could be attributed to every vehicle manufactured by all the group
companies. Since sales of the Taxpayer was 18.07 % of the global sales of FCo
group, 18.07% of the global appreciation in the brand value should be
attributed to the Taxpayer. This amount was quantified at Rs. 198.66 crore and
added to ALP of the Taxpayer.

The DRP confirmed the addition.

Held

Whether increase in brand value constitutes ‘international
transaction’? 

–   The TPO has emphasised on the benefit
accruing to FCo from increased brand valuation as a result of the Taxpayer selling
cars in India, and not as a result of conscious brand promotion by the Taxpayer
such as, incurring of advertising, marketing and sales promotion expenses.

–  According to the TPO, the trigger for the
impugned ALP adjustment is not the expense incurred by the Taxpayer, or any
efforts made by the Taxpayer, for brand building for FCo, but the mere fact of
the sale of cars made by the Taxpayer. Though the Taxpayer had not rendered any
services, it should be compensated for the increase in brand valuation, proportionate
to sale of cars by the Taxpayer vis-à-vis the global sale of cars of
that brand, as the increase in the brand valuation is, to that extent, due to
sale of cars by the Taxpayer.

–  The difference is that while AMP is a
conscious effort, brand building by sales simplictor is a subliminal exercise
and by-product of the economic activity of selling the cars in India.

     Whether use of brand name was privilege or
obligation of the Taxpayer?

–   FCo owns a valuable brand name which has
respect and credibility globally including in India. Hence, the use of brand
name owned by FCo is a privilege, a marketing compulsion and of direct and
substantial benefit to the Taxpayer.

Whether mere
use of brand name results in AEs?

–   U/s. 92A(2)(g) of the Act, two enterprises
are deemed to be AEs if “the manufacture or processing of goods or
articles or business carried out by one enterprise is wholly dependent on the
use of know-how, patents, copyrights, trade-marks, licences, franchises or any
other business or commercial rights of similar nature, or any data,
documentation, drawing or specification relating to any patent, invention,
model, design, secret formula or process, of which the other enterprise is the
owner or in respect of which the other enterprise has exclusive rights”.

–   Hence, there can never be a comparable
controlled price for the kind of transaction between the Taxpayer and FCo
because, the moment use of an intangible like brand name is involved, the
entities entering into the transactions will become AEs.

     Whether incidental benefit to AE could be
‘international transaction’?

–   It is a fact that the use of brand name,
owned by FCo, in vehicles manufactured by the Taxpayer does amount to
incidental benefit to the AE of the Taxpayer since increased visibility to the
brand name does contribute to increase in its valuation.

–   In terms of section 92B of the Act, an
international transaction includes a mutual agreement or arrangement between
two or more AEs for the allocation or apportionment of, or any contribution to,
any cost or expense incurred or to be incurred in connection with a benefit,
service or facility provided or to be provided to anyone or more of such
enterprises.

–   This is not a case of allocation of,
apportionment of, or contribution to, any costs or expenses in connection with
a benefit, service or facility. There is no dealing in money in the present
case. Therefore, this limb of the definition is not relevant.

–   In respect of intangible property, only
purchase, sale or lease of intangible property is covered within ‘international
transaction’. However, in this case there is no purchase, sale or lease of
intangibles.

–  Even extended definition in Explanation
(i)(b) to section 92B(2), does not cover accretion to the value of intangibles.
Further, the TPO has also not raised the issue that the consideration paid for
the transactions under this agreement is not an arm’s length consideration.

–     Accretion in brand value due to use in
products of the Taxpayer cannot be treated as service either. A service should
be a conscious activity. A passive exercise cannot be a service. What is
benchmarked is not the accrual of ‘benefit’ but rendition of ‘service’. The
expressions ‘benefit’ and ‘service’ have different connotations, and what is
relevant, is ‘service’ and not the ‘benefit’. In this case, there is no
rendition of service.

–   For determination of arm’s length price, mere
rendition of service is not sufficient; it should be intended to result in such
benefit for which an independent enterprise would pay. Thus, two aspects need
to be present – first, rendition of service and second, benefit accruing from
such service. In the present case, since the first condition is not satisfied,
there is no question of benchmarking the benefit.

–   Unless a transaction affects profits, losses,
income or assets of both the enterprises, it cannot be an ‘international
transaction’. If the assets of one of the enterprises increase unilaterally,
without any active contribution by the other enterprise, such increase in
assets cannot amount to an ‘international transaction’.

–  The Taxpayer has not incurred costs, nor has
it made conscious efforts, for accretion in value of brand owned by FCo. Such
accretion also does not have any impact on profit, losses, income or alteration
in assets of the Taxpayer. Therefore, it cannot result in an ‘international
transaction’ qua the Taxpayer.