Redo Maruti royalty demand: HC to I-T dept

In a ruling affecting the way multinational companies use brand names in India, and the tax demands raised on payments in this regard, the High Court here has laid down some principles in this regard.

It did so while setting aside an order by Income Tax authorities to disallow as a deductible expense the royalty paid by Maruti Suzuki India to its Japanese parent, Suzuki Motor Corporation, for using the latter's 'S' logo on cars sold in India.

While saying money was due from Suzuki, the HC told the tax department to determine an appropriate arm's-length pricing mechanism in this case.

The HC said a foreign company was not required to pay its Indian affiliate for the use of a trademark if such use was optional.

It said payment should be made by the foreign company on account of benefits derived to it from brand promotion only when the domestic affiliate is mandatorily required to use its trademark.

Do your arithmetic

Maruti, it said, was under contractual obligation to use the trademark. It told the tax authorities to determine the arm's-length price of the benefits obtained and obligations incurred by both parties under the agreement.

The tax officials would have to determine if the payment by Maruti was comparable to the payment an independent entity would have made to any other company.

"There are about eight to 10 similar cases which are being heard at different levels. The high court is saying that if the foreign company is charging a lower royalty to enable the Indian company to incur expenses on advertising, then an adjustment is not required," said Vijay Iyer, tax partner, Ernst & Young.

Maruti had moved court after the I-T department passed an order saying that the company had incurred huge advertising, marketing and promotion expenses in order to develop a market for vehicles, which included promotion of trademark 'Suzuki'.

It said Suzuki should have compensated the taxpayer for the assistance provided in developing the marketing intangibles.

The HC said expenses incurred on advertising, marketing and promotion by a domestic enterprise of a brand name or trademark of its foreign associate do not require any compensation by the owner, provided the expenditure incurred is similar to what an unrelated company would have incurred.

Mukesh Butani, partner, BMR Advisors, said marketing tangibles had been an issue with most fast moving consumer goods' companies, but this ruling might not be applied to other cases, as the facts of each would be different.

Sameer Gandhi, leader, transfer pricing, at Deloitte, also said it would be decided case-to-case whether the expense incurred to effect sales or building a brand was factual.

"In the recent past, development and compensation for a marketing intangible is becoming of utmost importance. We have the DHL case and Glaxo case in the US laying down conceptual principles for this topic," he added.

Maruti was earlier using the logo 'M' on the front of its cars. In 1992, it had entered into an agreement with Suzuki for the manufacture and sale of Suzuki automobiles. Since then, it has also been using Suzuki's 'S' logo with its own 'M' on cars manufactured and sold by it.