Transfer Pricing Law for user of foreign trademarks & advertisement expenditure laid down
The assessee manufactured cars using the brand name “Maruti”. It entered into an agreement with Suzuki, Japan, pursuant to which it began manufacturing cars using the brand name “Suzuki”. The TPO issued a show-cause notice in which he alleged that the substitution of the brand name “Maruti” for the name “Suzuki” meant that the assessee had sold the “Maruti” brand to Suzuki. On that basis, he determined the “arms length” sale proceeds at Rs. 4,420 crores. The assessee filed a writ in which the TPO was allowed to pass an order subject to the outcome of the Petition. In the order, the TPO abandoned the theory of “sale” to Suzuki but instead held (without giving the assessee a show-cause notice in this behalf) that as the assessee was using the trademark “Maruti-Suzuki”, the “Suzuki” trademark had “piggybacked” on the “Maruti” trademark without payment of any compensation by Suzuki to the assessee. He alleged that “Maruti” was a “super-brand” while “Suzuki” was a “weak-brand”. He held that the assessee was not liable to pay Suzuki for the trademark “Suzuki” but instead Suzuki was liable to pay the assessee for “piggybacking” on the trademark “Maruti”. He also held that the advertisement expenses incurred by the assessee had gone to benefit Suzuki. He accordingly directed that an adjustment of Rs. 206 crores be made in the hands of the assessee. HELD remanding the matter to the TPO:
(i) While the onus is on the assessee to satisfy the AO/TPO that the arm‘s length price computed by it is in consonance with s.92, the AO/TPO can reject the price computed by the assessee only if he finds that the data used by the assessee is unreliable, incorrect or inappropriate or he finds evidence, which discredits the data used and/or the methodology applied by the assessee;
(ii) The TPO/AO is obliged to give the assessee an opportunity to produce evidence in support of the arm‘s length price and before making adjustments, he is obliged to convey to the assessee the grounds on which the adjustment is proposed to be made and give the assessee an opportunity to controvert the grounds on which the adjustment is proposed;
(iii) Re user of trademark by the domestic entity on discretionary / mandatory basis: If a domestic Associate Enterprise uses a foreign trademark, no payment to the foreign entity on account of such user is necessary in case the user of the trademark is discretionary. However, the “income” arising from such transaction is required to be determined at arm‘s length price;
(iv) If a domestic Associate Enterprise is mandatorily required to use the foreign trademark on its products, the foreign entity should make payment to the domestic entity on account of the benefit the foreign entity derives in the form of marketing intangibles from such mandatory use of the trademark. Even where payment is made by the foreign entity, the arm‘s length price in respect of the international transaction needs to be determined taking into consideration all the rights obtained and obligations incurred by the parties under the international transaction including the value of marketing intangibles obtained by the foreign entity on account of compulsory use of its trademark by the domestic entity. Suitable adjustments in this regards will have to be made considering the individual profiles of these entities and other facts and circumstances justifying such adjustments.
(v) Re advertisement expenditure incurred for the trademark: The expenditure incurred by a domestic Associate Enterprise on advertising of its products using a foreign trademark does not require any payment or compensation by the owner of the foreign trademark/logo to the domestic entity on account of use of the foreign trademark/logo in the advertising undertaken by it, so long as the expenses incurred by the domestic entity do not exceed the expenses which a similarly situated and comparable independent domestic entity would have incurred.
(vi) If the expenses incurred by the domestic Associate Enterprise are more than what a comparable independent domestic entity would have incurred, the foreign entity needs to suitably compensate the domestic entity in respect of the advantage obtained by it in the form of brand building and increased awareness of its brand in the domestic market. The said “arms length price” should be determined by taking into consideration all the rights obtained and obligations incurred by the two entities, including the advantage obtained by the foreign entity.
(vii) In determining whether the advertisement expenses incurred by the domestic Associate Enterprise on advertising the brand trademark/logo of the foreign entity are more than what an independent domestic entity would have incurred, the TPO has to identify appropriate comparables and make suitable adjustments considering the individual profiles of these entities and other facts and circumstances justifying such adjustments.