WP.(C).No. 6876/2008 Page 1 of 107 THE HIGH COURT OF DELHI AT NEW DELHI % Judgment reserved on : 02.06.2010 Judgment delivered on: 01.07.2010 + W.P.(C) 6876/2008 „MARUTI‟ SUZUKI INDIA LTD ..... Petitioner versus ADDITIONAL COMMISSIONER OF INCOME TAX TRANSFER PRICING OFFICER NEW DELHI ..... Respondent Advocates who appeared in this case: For the Petitioner : Mr S. Ganesh, Sr Adv. with Mr Arjun Pant For the Respondent : Mr Sanjeev Sabharwal CORAM:- HON‟BLE MR JUSTICE BADAR DURREZ AHMED HON‟BLE MR JUSTICE V.K. JAIN 1. Whether Reporters of local papers may be allowed to see the judgment? Yes 2. To be referred to the Reporter or not? Yes 3. Whether the judgment should be reported in Digest? Yes V.K. JAIN, J. 1. The petitioner before this Court, formerly known as Maruti Udyog Limited (hereinafter referred to as ‗Maruti‘), is engaged in the business of manufacture and sale of automobiles, besides trading in spares and components of WP.(C).No. 6876/2008 Page 2 of 107 automotive vehicles. The petitioner launched ‗Maruti 800‘ Car in the year 1983 and has thereafter launched a number of other models, including Omni in the year 1984 and Esteem in the year 1994. The trade mark/logo ‗M‘ is the registered trade mark of the petitioner-company. 2. Since Maruti 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 License Agreement, with Suzuki Motor Corporation (hereinafter referred to as ‗Suzuki‘) with the approval of Government of India. 3. The Agreement, to the extent, it is relevant for our purpose, provided as under: “1.05 “Licensed Information” ―Licensed Information‖ shall mean any and all technical information whether patented or not, including know- how, trade secrets and other data (including all drawings, prints, machine and material specifications, engineering data and other information, knowledge and advice) which SUZUKI now has or which may come into its possession and control during the term of this Agreement relating to the engineering, design and development, manufacture, quality control, assembly, testing, sale and after- sales service of PRODUCTS and PARTS WP.(C).No. 6876/2008 Page 3 of 107 and which may be supplied by SUZUKI to ‗MARUTI‘ on or after the Effective Date pursuant to this Agreement as well as before the Effective Date. LICENSE AND SUZUKI‟S OWNERSHIP 2.01 scope of License (a) SUZUKI has agreed to provide technical collaboration and license necessary to the engineering, design and development, manufacture, assembly, testing, quality control, sale and after sales service of the PRODUCTS and PARTS, subject to the payment of a lump sum specified in Article 6.01(a) and in accordance with Article 3.01 and other terms and conditions contained in this Agreement. (b) SUZUKI hereby grants to ‗MARUTI‘ during the term of this Agreement, in strict accordance with the terms and subject to the conditions herein set forth, (i) the exclusive right (within the meaning as provided for in Article 5.02 of this Agreement) to use the Licensed Information and Licensed Trademarks for the engineering, design and development, manufacture, assembly, testing, quality control, sale and after-sale service of the PRODUCTS and PARTS within the Territory and (ii) the non-exclusive right to use the same with regard to SH Series only for the sale in such other countries as provided in Article 5.05. (c) SUZUKI declares that if SUZUKI grants a license for manufacturing the PRODUCTS and/or PARTS to any party other than ‗MARUTI‘, such licensee of SUZUKI will not be given the right to sell the PRODUCTS and or PARTS in any country in Europe. (d) ‗MARUTI‘ shall have the right to WP.(C).No. 6876/2008 Page 4 of 107 sub-license the rights granted hereunder to other entities which are directly or indirect6ly owned or controlled by persons of Indian nationality, with the prior written consent of SUZUKI, which SUZUKI will not unreasonably withhold. PROVISIONS RELATING TO LICENSING TECHNIAL ASSISTANCE 3.01 Supply of Licensed Information (a) SUZUKI agrees to make available to ‗MARUTI‘ such Licensed Information which SUZUKI has the right and capacity, and is free, to disclose and/or grant license to ‗MARUTI‘ as contemplated by this Agreement. Notwithstanding the foregoing provision in this Article 3.01, SUZUKI shall make available to ‗MARUTI‘ such Licensed Information as, when properly used by ‗MARUTI‘, will be sufficient and complete for the engineering, design and development, manufacture, assembly, testing, quality control, sale and after- sales service of the PRODUCTS and/or PARTS as contemplated by this Agreement. (b) SUZUKI also agrees to make available to ‗MARUTI‘ upon ‗MARUTI‘‘S request such information required for obtaining National Type Approval in the countries where the PRODUCTS and/or PARTS are intended to be exported which is available to SUZUKI without considerable costs and expenses. 3.07 SUZUKI In-Plant Training SUZUKI agrees, during the term of this Agreement, upon receipt of written request from ‗MARUTI‘ to make available to ‗MARUTI‘ SUZUKI‘s plant facilities, as WP.(C).No. 6876/2008 Page 5 of 107 designated by SUZUKI, for the purpose of in-plant observation and training of personnel of ‗MARUTI‘. 3.08 Despatch of SUZUKI‘s Personnel (a) SUZUKI agrees, during the term of this Agreement, upon written request from ‗MARUTI‘, to dispatch its personnel to the factories of ‗MARUTI‘ to give technical advice and guidance in the use of the Licensed Information for the engineering, design and development, manufactures, assembly, testing, quality control and sale and after-sales service of PRODUCTS or PARTS. PURCHASE OF PRODUCTION MACHINERY AND PARTS 4.01 Purchase of Production Machinery With regard to the production machinery to be purchased by ‗MARUTI‘ for the manufacture and/or assembly of PRODUCTS and PARTS by ‗MARUTI‘, SUZUKI shall render advice and assistance to ‗MARUTI‘ in the selection and purchase of such equipment and machines, at the request of ‗MARUTI‘. 5.02 Trademark to be Applied to PRODUCTS and PARTS All PRODUCTS and PARTS manufactures, assembled and sold in Territory by ‗MARUTI‘ pursuant to this Agreement shall bear the trademark of ―MARUTI-SUZUKI‖ and ‗MARUTI‘ shall use and apply the same trademark on containers, packages and wrappings used for and in connection with the sale of such PRODUCTS and PARTS within the Territory. The parties hereto hereby agree to apply for registration in the Territory of the trademark ―MARUTI- WP.(C).No. 6876/2008 Page 6 of 107 SUZUKI‖ jointly in the name of SUZUKI and ‗MARUTI‘ when the application for such trademark becomes acceptable under the applicable laws of India. ‗MARUTI‘ represents and warrants to SUZUKI that the trademark ‗MARUTI‘ has been registered in the Territory in the name of ‗MARUTI‘ and agrees that it will do everything necessary to maintain such registration in the Territory. ‗MARUTI‘ further agrees to apply forthwith for the registration of the trademark ―MARUTI‖ in those countries where it intends to export certain of the PRODUCTS in accordance with Article 5.05 of this Agreement. No trademark other than the Licensed Trademarks and the above trademark ―MARUTI SUZUKI‖ shall be affixed of stamped by ‗MARUTI‘ on any of the PRODUCTS or PARTS or containers, packages or wrapping for PRODUCTS or PARTS or written consent of SUZUKI thereto. ‗MARUTI‘ may use the notation to indicate that the PRODUCTS and/or PARTS have been manufactures and/or assembled under technical collaboration with SUZUKI, for the purposes of their sale and advertisement. 5.04 Not to Use the Word ―SUZUKI‖ Except as Specifically Authorized It is understood and agreed that, except as specifically authorized by this Agreement, ‗MARUTI‘ is not authorized to use, nor shall ‗MARUTI‘ use, the word SUZUKI or any word similar thereto or any of the Licensed Trademarks as part of its corporate name, trademark, trade name or commercial designation without the prior written consent of SUZUKI. 5.05 Exports of the SH Series WP.(C).No. 6876/2008 Page 7 of 107 (a) SUZUKI grants to ‗MARUTI‘ a non-exclusive right to export subject to and in accordance with the terms and conditions in this Agreement, the SH Series and its PARTS manufactured and/or assembled by ‗MARUTI‘ pursuant to this Agreement to all countries except those where SUZUKI has, at the date of this Agreement or any time thereafter, its own manufacturing facilities or a licensee for any four-wheel passenger cars or parts thereof. (b) For the purpose of export and sale of the SH Series and its PARTS manufactures and/or assembled by ‗MARUTI‘ pursuant to this Agreement, ‗MARUTI‘ shall be free to establish its own distributor and dealership channels in those countries to which ‗MARUTI‘ may export such SH Series and its PARTS in accordance with paragraph (a) of this Article 5.05 and in which neither SUZUKI, nor any of SUZUKI‘s subsidiaries, nor a SUZUKI‘S licensee for any four-wheel motor vehicles or parts thereof having the right of export and sale of such four-wheel motor vehicles or parts to and in such country, has any distributors or dealers. (e) SUZUKI will, subject to its satisfaction on the quality, price and delivery schedule, promote the export of PARTS made by ‗MARUTI‘ to SUZUKI and/or its overseas manufacturing factories or licensees. ROYALTIES, PAYMENTS AND REPORTS 6.01 Lump Sum As part of the consideration of the technical assistance and license with respect to the SH Series set forth in WP.(C).No. 6876/2008 Page 8 of 107 Exhibit A attached hereto, ‗MARUTI‘ shall pay to SUZUKI lump sum in the sum of Five Hundred Million Japanese Yen (Y 500,000,000/-) in three instalments. 6.02 Running Royalties (a) ‗MARUTI‘ hereby further agrees and shall be obliged to pay to SUZUKI not later than sixty (60) days after the end of each Royalty Calculation Period, (i) a running royalty in the sum equivalent to two and one half per cent, (2.5%) of the aggregate of the FOB price of SUZUKI of the Deleted Portion of CKD Components ascertained in the manner provided hereinbelow in the same number of units in respect of each model of PRODUCTS as the number of the PRODUCTS shipped by ‗MARUTI‘ during the immediately preceding Royalty Calculation Period (whether for sales in the Territory or for exports) and (ii) a running royalty in the sum equivalent to two per cent (2%) of the aggregate sum (translated into Japanese Yen at the exchange rate or rates (Via exchange rate or rates against the United States dollar where appropriate) between Japanese Yen and Indian rupees or other currencies in which the ex-factory prices referred to below are denominated, publicly quoted by the Bank of Tokyo, Ltd. New Delhi Office, on the date of remittance) of the ex-factory prices (net of excise tax) of ‗MARUTI‘ of the PARTS shipped by ‗MARUTI‘ during the immediately preceding Royalty Calculation Period (whether for sales in the Territory or for exports). In the event that any PRODUCTS and/or PARTS are shipped by ‗MARUTI‘, directly or indirectly, to any country other than the Territory during any Royalty Calculation Period, ‗MARUTI‘ WP.(C).No. 6876/2008 Page 9 of 107 shall, in addition to the above sum of running royalties, pay to SUZUKI not later than sixty (60) days after the end of each Royalty Calculation period, an additional running royalty in the sum equivalent to one half of one per cent (0.5%) of the sum of (i) the aggregate of the FOB price of SUZUKI of the Deleted Portion of CKD Components referred to in (i) above in this paragraph (a) multiplied by a fraction in which the denominator is the FOB sales price of SUZUKI multiplied by the number of units of the PRODUCTS shipped by ‗MARUTI‘ during the said Royalty Calculation Period (whether for sales in the Territory or for exports) and the numerator is the FOB sales price of SUZUKI multiplied by the number of units of the PRODUCTS exported by ‗MARUTI‘ during the same Royalty Calculation Period and (ii) the aggregate sum (translated into Japanese Yen as aforesaid) of the ex-factory sales prices (net of excise tax) of ‗MARUTI‘ of those PARTS exported by ‗MARUTI‘ during such Royalty Calculation Period. ―Deleted Portion of CKD Components‖ shall mean a part of one unit of the CKD Components within the meaning as described in (1) in article 1.01 which is, together with the CKD Components as described in (2) of Article 1.01, to be assembled into one unit of PRODUCTS or any multiples of such part of the said unit of CKD Components and, in the event that any PRODUCTS which do not incorporate any CKD Components imported by ‗MARUTI‘ from SUZUKI are shipped by ‗MARUTI‘ during any Royalty Calculation Period, shall mean the CKD Components within the meaning as described in (1) in Article 1.01. WP.(C).No. 6876/2008 Page 10 of 107 4. 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. 5. A reference under Section 92 CA(1) was made by the Assessing Officer of the petitioner, to the Transfer Pricing Officer (hereinafter referred to as ‗TPO‘) for determination of arm‘s length price for the international transaction undertaken by Maruti with Suzuki in the F.Y.2004-05. A notice dated 27.8.2008 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, symbolized 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 WP.(C).No. 6876/2008 Page 11 of 107 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 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 crores 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 crores. Maruti was asked to show cause as to why the value of Maruti Brand be no taken at Rs.4,420 crores and why the international transaction be not adjusted on the basis of its deemed sale to Suzuki. 6. Maruti, in its reply dated 8.9.2008, stated that at no point of time had there been any transfer of ‗Maruti‘ brand or logo by it, to Suzuki, which did not have any right at all to use that logo or trademark. It was submitted by Maruti that a registered trademark could be transferred only by a written instrument of assignment, to be registered with the Registrar of Trademarks, and no such instrument had been executed by it, WP.(C).No. 6876/2008 Page 12 of 107 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 models Esteem, ‗Maruti 800‘ and ‗Omni‘, the ‗Maruti‘ trademark was being used along with the word ‗Suzuki‘. It was further submitted that Maruti continued to use the trademark/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 Indian exchequer to any foreign tax jurisdiction. It was submitted that Maruti had, in fact, earned significantly larger revenue on account of the cooperation extended by Suzuki and that larger revenue was being offered to tax in India. The jurisdiction of the TPO was thus disputed by WP.(C).No. 6876/2008 Page 13 of 107 ‗Maruti‘ in the reply submitted to him. He was requested to withdraw the notice and drop the proceedings initiated by him. 7. 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, this writ petition was filed seeking stay of the proceedings before the TPO. 8. Vide interim order dated 19.9.2008, this 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. 9. 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. 10. In the final order passed by him, the TPO came to the conclusion that the trademark ‗Suzuki‘, which was owned by Suzuki Motor Corporation, had piggybacked on the Maruti trademark, without payment of any compensation by Suzuki to ‗Maruti‘. He also came to the conclusion that the trademark WP.(C).No. 6876/2008 Page 14 of 107 ‗Maruti‘ had acquired the value of super brand, whereas the trademark ‗Suzuki‘ was a relatively weak brand in Indian market and the promotion of the co-branded trademark ‗Maruti Suzuki‘ had resulted in: ―(a) Use of ―Suzuki‖ – trademark of the AE (b) Use of ―Maruti‖ – trademark of the assessee. (c) Reinforcement of ―Suzuki‖ trademark which was a weak brand as compared to ―Maruti‖ in India. (d) Impairment of value of ―Maruti‖ trademark due to cobranding process.‖ 11. The TPO noted that Maruti had paid royalty of Rs.198.6 crores to Suzuki in the year 2004-05, whereas no compensation had been paid to it by Suzuki, on account of its trademark having piggybacked on the trademark of Maruti. Since Maruti did not give any bifurcation of the royalty paid to Suzuki towards licence for manufacture and use of trademark, the TPO apportioned 50% of the royalty paid in the year 2004- 05, to the use of the trademark, on the basis of findings of piggybacking of ‗Maruti‘ trademark, use of ‗Maruti‘ trademark on co-branded trademark ‗Maruti Suzuki‘, impairment of ‗Maruti‘ trademark and reinforcement of ‗Suzuki‘ trademark, through co-branding process. The arm‘s length price of royalty WP.(C).No. 6876/2008 Page 15 of 107 paid by Maruti to Suzuki was held as Nil, using 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 cost, 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 crores, 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 assessment year 2005-06. 12. In the Counter Affidavit, the respondent has taken a preliminary objection that the merits of the transfer pricing order cannot be examined in a writ petition, since an alternative remedy is available to the assessee by way of appeal before the Commissioner of Income Tax (Appeals). It has also been submitted that the petition itself is not maintainable as the cause of action i.e., the impugned show cause notice was not acted upon. In the counter affidavit filed by him, the respondent has alleged that after considering the reply of the assessee, the TPO had dropped the idea of making adjustment of Rs 4420 crore on account of deemed sale of ‗Maruti‘ WP.(C).No. 6876/2008 Page 16 of 107 trademark to Suzuki, as was proposed in the show cause notice. It is further stated that, later on, the TPO had issued a detailed questionnaire clarifying that in this case transfer of economic value of ‗Maruti‘ brand, which was a super brand in India, to Suzuki brand, a well known brand in Japan but less known brand in India, was involved, through replacement of the logo fixed on the cars and co-branding of both the trademarks ‗Maruti‘ and ‗Suzuki‘. According to the respondent, the TPO never acted upon the show cause notice in making adjustment to the international transactions and that in the fresh queries to the petitioner company with regard to quantum of transfer of economic value, embedded in ‗Maruti‘ trademark, to ‗Suzuki‘ trademark, and justification for making royalty payment to ‗Suzuki‘, he had also raised the issue of non-reimbursement of the expenditure, incurred by the petitioner, on brand promotion of Suzuki. It has also been stated in the counter affidavit that the issues raised in the order sheets of the TPO were replied by the petitioner and were duly considered before taking the decision. 13. On merits, it has been stated that since the petitioner had paid running royalty of Rs 198.6 Crore to Suzuki in the year under consideration, for licence to manufacture and sell WP.(C).No. 6876/2008 Page 17 of 107 under the cobranded trademark ‗Maruti Suzuki‘ and trademark ‗Suzuki‘ and for after-sale service of such vehicles, the transaction between the parties, which were Associate Enterprises, was an international transaction under Section 92B of the Income Tax Act and therefore, the TPO had examined as to whether the payment of royalty to Suzuki was at arm‘s length price. According to the respondent, it was evident from the agreement between Maruti and Suzuki that the responsibility to develop markets and promote the trademarks ‗Maruti‘, ‗Maruti Suzuki‘ and ‗Suzuki‘ was on the petitioner/assessee, which had incurred huge expenditure of Rs 204 crore on advertisement, in order to develop a market for the vehicles, which included promotion of the trademark ‗Suzuki‘, co-branded trademark ‗Maruti Suzuki‘ and the trademark ‗Maruti‘, though no part of this expenditure was reimbursed by Suzuki to Maruti. It has been stated that Suzuki had enjoyed all the benefits of such expenditure in the form of dividend income of its share holding in the petitioner company, which was more than 50%, as well as in the form of royalty, which was payable on the basis of sale of vehicles/component, in addition to a lump sum component. The case of the respondent, in the counter affidavit, is that an WP.(C).No. 6876/2008 Page 18 of 107 amount of Rs.99.3 Crore, out of the total royalty of Rs.198.6 crore paid to Suzuki in the year in question, could be attributed to use of co-branded trademark ‗Maruti Suzuki‘ and the trademark ‗Suzuki‘. The respondent claimed that since the trademark ‗Suzuki‘ as well as the trademark ‗Maruti‘ were used in the co-branded trademark ‗Maruti Suzuki‘, no royalty could be paid by Maruti to Suzuki for use of co-branded trademark because ‗Maruti‘ was a super brand in India whereas ‗Suzuki‘ was a weaker brand in India and co-branding of both the trademarks together had resulted in migration of the economic value embedded in the ‗Maruti‘ trademark to the ‗Suzuki‘ trademark, for which no compensation was paid to the petitioner. It is also claimed by the respondent that no independent entity will undertake brand promotion of another independent party at its own expense, without any compensation from the third party. 14. The first contention raised before us, by the learned senior counsel for the petitioner, is that while passing the final order dated 30.10.2008 the TPO