2013 (8) TMI 594 - AT - Income Tax

Tribunal overturns Transfer Pricing Officer's royalty adjustment, remits AMP expenses issue for reevaluation.

Maruti Suzuki India Ltd. Versus Additional Commissioner of Income Tax

The Tribunal set aside the Transfer Pricing Officer's adjustment of Rs. 98,13,53,745 for the royalty payment concerning the use of the Suzuki brand name. ... Transfer pricing adjustment on account of royalty for brand name Rs. 981,406,624/- - Assessee in this case is a license manufacturer of cars in India of its Associated Enterprise SMC - In terms of the license assessee has paid lumpsum royalty as well as running royalty SMC. TPO was of the opinion that the royalty paid should be split towards technical assistance and brand – TPO concluded Suzuki brand was weak/worthless – Held that:- TPO has imputed a very large T.P. adjustment in respect of AMP expenses on the basis that the said expenses incurred by the assessee year after year since 1982 have resulted in a significant increase in Suzuki's brand value - Suzuki cannot be considered to be a weak brand which is only reinforcing on Maruti's brand and taking away value from it - TPO was not justified in making adjustment of Rs. 98,13,53,745/- Payment of above sum as royalty to SMC was attributable to use of brand name is not sustainable - No disallowance is required in payment of royalty by MSIL to SMC – Decided in favor of assessee. Transfer Pricing Adjustment on account of AMP amounting to Rs. 1,54,12,00,000/- in relation to advertisement, marketing and sales promotion expenses (AMP expenses) incurred by the assessee – Held that:- Relying upon the decision in the case of M/s L.G. Electronics India (P) Ltd. Vs. ACIT [2013 (6) TMI 217 - ITAT DELHI], expenses in connection with the sales do not lead to brand promotion and thus cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction - Assessing officer to exclude the expenses incurred by the assessee in connection with the sales as the same do not fall within the ambit of AMP expenses and hence not to be considered for computing the cost/ value of international transaction - The TPO has to decide the rate of AMP expenses by applying the proper comparables after hearing the assessee, in view of the Special Bench directions in this behalf in the case of of M/s L.G. Electronics India (P) Ltd. (2013 (6) TMI 217 - ITAT DELHI) - Issue remitted with regard to the transfer pricing adjustment in respect of AMP expenses to the file of the TPO. Issues Involved:1. Validity of the assessment order under Section 143(3) read with Section 144C of the Income-tax Act, 1961.2. Addition on account of the alleged difference in the arm's length price of international transactions.3. Transfer pricing adjustment related to advertisement, marketing, and sales promotion expenses (AMP expenses).4. Transfer pricing adjustment related to the international transaction of payment of royalty.Issue-Wise Detailed Analysis:1. Validity of the Assessment Order:The Assessee contended that the assessment order framed by the Assessing Officer (AO) in pursuance of the directions of the Dispute Resolution Panel (DRP) was bad in law, violative of principles of natural justice, and void ab-initio. The Tribunal did not specifically address this issue separately, implying it was not the primary focus of the judgment.2. Addition on Account of Alleged Difference in Arm's Length Price:The AO made an addition of Rs. 248,37,80,296 due to the alleged difference in the arm's length price of international transactions. The Tribunal did not provide a separate analysis for this issue, focusing instead on the AMP expenses and royalty payments.3. Transfer Pricing Adjustment Related to AMP Expenses:The AO made a transfer pricing adjustment amounting to Rs. 154,12,00,000 in relation to AMP expenses incurred by the Assessee. The Tribunal referred to the Special Bench decision in the case of LG Electronics India Ltd. and held that benchmarking of AMP expenses being an international transaction was permissible under the TP Regulations. The matter was remitted to the TPO to re-adjudicate the ALP in light of the factors enumerated in the Special Bench order. The Tribunal directed the AO/TPO to exclude expenses incurred in connection with sales from the ambit of AMP expenses and to consider only the advertisement expenses for benchmarking.4. Transfer Pricing Adjustment Related to Payment of Royalty:The AO made a transfer pricing adjustment amounting to Rs. 92,25,80,296 in relation to the international transaction of payment of royalty. The Tribunal provided a detailed analysis on this issue:a. Independent Decision to Use Co-branded Trademark 'Maruti-Suzuki':The Tribunal found that the decision to use the co-branded trademark 'Maruti-Suzuki' was taken independently by the Assessee in 1982 when it was a 100% Government of India-owned entity. This decision was carried forward in subsequent license agreements, including the 1992 agreement. The Tribunal noted that the continued use of the co-branded name/logo could not be attributed to the dictation of Suzuki from 1992 onwards.b. None of the Prescribed Methods Applied by the TPO:The Tribunal agreed with the Assessee that the TPO had not applied any of the prescribed methods under the Transfer Pricing Regulations for determining the arm's length price of the royalty payment. The Tribunal emphasized that the TPO's mandate is limited to applying one of the prescribed methods.c. Single/Inseverable License for Manufacture and Sale of Products:The Tribunal agreed with the Assessee that the license agreement was a single, inseverable contract for the use of technical assistance and the Suzuki brand name/logo. The Tribunal held that the TPO's action of bifurcating the royalty payment into components for technology and brand name was unjustified and contrary to judicial pronouncements.d. Erroneous Conclusion by TPO that 'Suzuki' Brand was Weak/Worthless:The Tribunal found that the TPO had erred in concluding that the Suzuki brand was weak or worthless. The Tribunal noted that the Suzuki brand was internationally renowned and that the decision to use the Suzuki name/brand was taken to advance the Assessee's commercial interests.e. Effective Rate of Royalty:The Tribunal noted that the effective royalty rate paid by the Assessee was significantly lower than the arm's length royalty rate identified by the Assessee through a search of comparable license agreements. The Tribunal found that the royalty payment was not excessive and that the Assessee had, in fact, received a concession.f. No Four-Wheeler Business of Suzuki in India:The Tribunal noted that Suzuki did not have any four-wheeler sales or business in India, and therefore, the question of promoting the Suzuki brand at the expense of the Maruti brand did not arise.g. License Agreements Approved by Government:The Tribunal noted that the license agreement had received approval from the Secretariat of Industrial Approvals, Ministry of Industry, and the Reserve Bank of India. The Tribunal held that the approval by government authorities implied that the royalty payments were as per industry norms and comparable to payments made by other industries.h. Without Prejudice - Split Based on Advertisement and Marketing Expenditure and R&D Expenditure:The Tribunal found that the TPO's approach of splitting the royalty payment based on SMC's advertisement and marketing expenditure and R&D expenditure was fundamentally erroneous and flawed. The Tribunal held that the split should be based on SMC's standalone financial data and not on consolidated data.Conclusion:The Tribunal set aside the TPO's adjustment of Rs. 98,13,53,745 on account of royalty payment for the use of the Suzuki brand name and remitted the issue of AMP expenses back to the TPO for re-adjudication in light of the Special Bench decision in the case of LG Electronics India Ltd. The appeal filed by the Assessee was partly allowed for statistical purposes.