Tribunal sets aside I-T order on Maruti

Order stated that revenue authorities cannot split the agreement when the parties to the agreement considered the royalty and technical know how as a single package

The Income Tax Appellate Tribunal (ITAT) has ruled in favour of Maruti Suzuki, stating the auto major was not liable to pay tax under the transfer pricing regulation. It also said the income tax department was wrong in slapping tax on the auto major for payment of royalty to its parent Suzuki Motor Corporation for the use of brand name and technical assistance.

The order, which came on Monday, stated that revenue authorities cannot split the agreement when the parties to the agreement considered the royalty and technical knowhow as a single package.

“The ruling of Delhi ITAT is welcome and we believe it might strengthen and benefit the tax position of companies in pharma, industrial equipment, electronics, etc, where there exists a bundled license agreement for transfer of technology,” said Rakesh Nangia, managing partner at Nangia & Co Chattered Accountants

The judgement stated that royalty paid by Maruti Suzuki India is a single contract which provided the Indian company exclusive rights and licence to manufacture and sell the lincensed products for the specified duration.  ITAT in its judgement said the primary intent of the license agreement was to transfer technology and not for trademark usage.

The judgement also said the agreement cannot be split when the two companies considered it as an entire package.

Another aspect of the company's submissions in this regard is that the transfer pricing officer (TPO) has erroneously concluded that the Suzuki brand was weak. ITAT said Maruti Suzuki India has submitted that the TPO has erred in failing to appreciate Suzuki Motor Corporation (SMC)’s stature, standing and reputation in the small care segment of the motor car industry not only in Japan, but all over the world. The SMC’s brand mark has a well established value in the small car segment.

“We agree with the assessee’s submission that the decision to use Suzuki’s name was taken by the assessee in order to advance its own commercial interest. No question arises of the assessee company having conferred any benefit on Suzuki Motor Corporation Japan by using its name in conjunction with Maruti nor of any transfer pricing adjustment on this basis. We agree with the assessee’s submission of the assessee that the Suzuki brand is an internationally renowned global brand,” ITAT Delhi said in its judgement.

Another realm of Maruti Suzuki India's submission is that as long as an item of expenditure has been incurred wholly and exclusively for the purpose of business of the company, whether or not such expenditure actually benefits them is an irrelevant consideration for the purpose of determination of arms length pricing. In this regard, the case laws referred above by the the company in its submission are germane and supports the case of Maruti Suzuki India.

“The honourable ITAT's judgment is expected to bring relief to taxpayers having composite inter-company technology and brand license arrangements. The decision recognizes commercial realities and endorses the long standing principle that it might not be appropriate for the tax authorities to re-write transactions contrary to the intent of the contracting parties. It yet again underscores the importance of having robust documentation supporting the relevant transaction,” said Anuj Khorana, a partner at Ernst & Young.