Court Ruling Allows Marketing Intangibles Not to be charged to Overseas Parent Company

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Jul. 9 – The Delhi High Court has decided in favor of overseas parent company Suzuki Motor Corp. (SMC) saying the company should not pay Maruti Suzuki India (MSIL) for increasing brand recognition for Suzuki via marketing campaigns contrary to a previous decision made by tax authorities.

The court’s decision applies to the assessment year 2004-05 and will serve as an example to clarify rules on transfer pricing issues related to branding for foreign investors.

“It (the ruling) recognizes that an increase in the top line or net profitability of the Indian affiliate is adequate compensation for advertising expense incurred towards local brand awareness campaigns and the transfer pricing analysis of the advertising expense would need to take due cognizance of this fact,” said Vijay Iyer, a tax partner at Ernst & Young.

A previous decision by transfer pricing authorities said SMC should have compensated MSIL for its marketing campaigns that improved the reputation of the Suzuki brand in the country. Moreover, a transfer pricing officer told The Economic Times that MSIL incurred higher advertisement expenditure compared to other companies thus carried out adjustments to MSIL’s total income by not allowing 50 percent of royalty and excess advertisement expenditure.

A subsidiary of Suzuki Motor Corp., MSIL is the country’s largest passenger car company with more that 50 percent market share. The company began its joint venture with SMC in 1982 and it was only in 1992 that the Japanese company increased its stake by 50 percent.