Transfer Pricing Essay
Transfer Pricing litigation may highjack the agenda of “Make in India”
Transfer pricing (TP) has now entered the Board rooms and all strategic business decisions are taken after considering transfer pricing implications. Transfer pricing has also been at the core of tax litigation in India in the past few years. Most of the cases that have made headlines in Indian taxation news have involved transfer pricing issues. The new government showed its resolve to reduce litigation on transfer pricing and provide certainty on the same by bringing in significant amendments in the last Budget. Everyone was taken by surprise - pleasantly though - with these amendments announced by Finance Minister (FM) in July 2014 Budget and were looking forward to
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Maruti Suzuki Ltd. – a landmark case of Transfer Pricing
One of the most challenging issues in Transfer Pricing is the taxation of income from intangible property. The case of royalty payments by Maruti Suzuki Ltd exemplifies the issue.
In July 2013, the Delhi Income Tax Appellate Tribunal (ITAT) ruled in a case of Maruti Suzuki Ltd. The issue was the appropriateness of a transfer pricing adjustment relating to the disallowing of a royalty paid by Maruti Suzuki Ltd (the Taxpayer) to its Associated Enterprise (AE) for use of Intangible Property (IP) in the nature of trademark/ brand-name legally owned by the AE and for “excessive” advertising, marketing and promotional (AMP) expenditure, which the Taxpayer is alleged to have incurred for the benefit of its AE.
During the course of transfer pricing audit proceedings, the Transfer Pricing Officer (TPO) made a bifurcation of the royalty between the technology and brand-name based on the proportion of R&D expenses and advertising expenses incurred by the Taxpayer. The TPO then disallowed the royalty attributed to the use of the brand-name on the grounds that royalty payment by the Taxpayer, that was licensed to use the intangible property, that an inferior “Suzuki” brand name was “piggybacking” on a superior “Maruti” brand-name. This concept of “piggybacking” is not present in the OECD Transfer Pricing
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