Ford India (P.) Ltd. v. Dy. CIT

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The Tax Publishers2013 TaxPub(DT) 2045 (Chen-Trib) : (2013) 156 TTJ 0001 : (2013) 059 SOT 0221 : (2013) 090 DTR 0154 : (2013) 025 ITR (Trib) 0456 sIncome Tax Act, 1961 --Transfer pricing--Computation of ALP International transactions under Chapter X--Assessee was a wholly owned subsidiary of FMC, USA. Business activity of assessee consisted of manufacturing and distribution of vehicles. TPO noted that FMC licensed assessee to manufacture motor vehicles using technical knowledge supplied by it. Assessee was to pay royalty in consideration of such licence. Licenced products were motor vehicles, which had to carry logo of 'Ford' along with model name. In the opinion of TPO, though this 'FMC ensured that its brand name was being developed in India over a period of time. TPO worked out that expenses on advertisement, marketing and publicity (AMP) had been incurred by assessee amounting to Rs. 125.92 crores. As per TPO, intangible benefits were obtained by foreign entity on compulsory use of its trademark, thus, AMP was compared with other similar entities (companies). TPO came to conclusion that assessee had incurred AMP of 5.75 per cent on its sales against an average of 2.58 per cent on sales incurred by such other entities. Further, TPO noted whole amount of Rs. 124.84 crores, that being product development expenditure, would be disallowed. TPO, therefore, considered 1 per cent of total sales effected by assessee during relevant previous year as ALP for development of brand name and logo of FMC in India. As such, addition of 3.75 per cent for AMP expenses being difference between assessee and either entities, was made. Both above additions were thus made by TPO which were confirmed by DRP. Question for consideration was as to whether there was an international transaction between assessee and FMC, USA. *Held:* Rightly so. There was an international transaction between assessee and FMC as In the facts and circumstances of the case, Tribunal cannot, therefore, fault revenue authorities for treating transaction of brand building as an international transaction. This Tribunal does not find anything substantial or material enough to depart from the view taken by Special Bench in this regard. Assessee was bound by the technical collaboration agreement dated 19-8-1996 entered with M/s FMC. By virtue of such agreement, assessee had to sell products licensed by FMC with the badge 'Ford' in India. Two lines of arguments has been taken by the assessee. One is that it was not promoting the brand name 'Ford' by itself, in any of the advertisements, but was on the other hand, promoting various models of its cars. Second is that assessee had not indulged in any independent promotion of 'Ford' brand in India. [Para 35] Tribunal has looked at the two agreements entered by the assessee with M/s FMC, one of which is titled as 'Technical Collaboration Agreement' which is dated 19-8-1996, whereas, the second one titled as 'Name License Agreement' dated 1-2-1999. The former agreement, where assessee is a licensee, gave it a right and license to use technical information and industrial rights in connection with licensed products, namely, cars. It is specified in clause 1.9 of the said agreement that motor vehicles, which were the licensed products, meant finished vehicles manufactured by licensee and badged with Ford trademark. No doubt, there is nothing in the technical agreement, which precluded the assessee from manufacturing and selling any other motor vehicles other than those of FMC or those manufactured using the technical information provided by FMC. Consideration to be paid by the assessee for such technical assistance is given at para 10.1 of the agreement. Thus, assessee had to pay a royalty of 5 per cent on sale price of all licenced products. [Para 36] Coming to the second agreement, which is 'Name License Agreement', what has been bestowed on the assessee through this agreement, is only a license to use the word 'Ford' as its corporate name. Except for the license to use 'Ford' as part of its corporate name, there is nothing in this agreement which enabled the assessee to use the word 'Ford' in any of the products manufactured or marketed by it. [Para 37] Assessee admittedly had advertised its various brands of cars, but each brand started with the logo of 'Ford'. It sold cars called Ford Fugo, Ford Escort, Ford Classic, Ford Fiesta, etc. Thus, 'Ford' is a common factor that appear in all class of cars sold by them. [Para 38] Assessee had simultaneously advertised the logo 'Ford' along with the model name of its own cars. May be it is true that assessee was not legally constrained to manufacture only cars for which technical know how was made available by M/s FMC and it had freedom to do independent manufacturing of cars as well. No doubt, the technical agreement dated 19-8-1996, mentioned above, does not say in so many words that assessee was to exclusively manufacture cars which carried the logo 'Ford' and use only the technical knowledge made available to it by FMC. Such contrived situations cannot and should not blind one to the ground realities. Admittedly assessee was a 100 per cent owned subsidiary of FMC. On a query raised by the Bench, Authorised Representative did admit that its directors were appointed by FMC only. In such a scenario, to say that assessee could manufacture cars other than those branded as 'Ford', will be hard to digest. At the best this was only a remote possibility, and in the nature of agreement entered by the assessee with M/s FMC, never contemplated by both the parties and would probably never to materialize. That the assessee is not a simple contract manufacturer but, had 90 per cent of its revenue generation from sale of cars, is not disputed. All the cars sold by it had the logo 'Ford' along with particular nomenclature given to the model. Therefore, there can be a direct inference about a tacit understanding between assessee and FMC that the logo of 'Ford' had to appear on every car manufactured by it. [Para 39] On every advertisement placed by the assessee, it had to give the name of the car model with the logo 'Ford' prefixed. Even a corporate advertisement placed by the assessee will have the name of 'Ford' specifically mentioned since, its name itself consisted the logo 'Ford'. Thus assessee had made a simultaneous promotion of cars and 'Ford' logo. Authorised Representative was not able to point out even a single advertisement which would show a marketing effort of a product manufactured by the assessee in which 'Ford' logo was not there. When the control over the assessee was totally exercised by the parent company M/s FMC, it cannot, at the same breath, say that the AMP expenses incurred were not according to the plan and strategy of FMC. In the transfer pricing documentation submitted by the assessee to TPO it is mentioned. [Paras 40 & 41] When seen along with the total ownership and control exercised by FMC over the assessee, it can be clearly inferred that AMP expenses incurred were based on a corporate plan of FMC and not through any independent decision taken by the assessee in India, without the inputs and direction of M/s FMC. This also, clearly implies that there was a transaction between assessee and FMC for promotion of the brand 'Ford' in India. [Para 41] Submission of Authorised Representative that Mr. Henry Ford had manufactured the first car and 'Ford' as a brand was developed over hundred years and had a substantial value even prior to their entry in India. But this cannot be so interpreted to mean that every Indian knew 'Ford' before assessee sold the cars in India. Ford might have been known among middle class and upper middle class strata, but, without doubt, there would be a substantial number of persons in India, who would have become aware about the brand 'Ford' through the advertisements placed by the assessee and its marketing efforts in India. [Para 42] Assessee has itself admitted its market share for relevant previous year as 1.9 per cent only. Therefore, its claim that it had a head-start over others by using the 'Ford' logo appears to be on a weak footing. (Para 42] Even if Tribunal presumes there indeed was any such advantage in the initial stage, after a particular point of time, it had to penetrate the market and reach people, who were not acquainted with 'Ford' brand, and this indeed required marketing efforts. So, the piggybacking concept, strongly argued by the Authorised Representative, could at the best have been an initial phenomena. Even if this Tribunal accepts the contention of Authorised Representative that advantage was derived by the assessee by piggybacking on the 'Ford' logo, for achieving a head-start over its competitors, this would have been short-lived, which got obliterated after first few years of its existence. Admittedly, assessee had started its commercial operation as early as 1999. Therefore, any initial advantage assessee had, by using the name of 'Ford', even if one presume there was any, would have translated itself into sales in the few initial years, but, later on, assessee had to stand on its own feet to get a foot hold in the class of markets in India, where 'Ford' name would not have had much relevance. At least for this class of market, there was indeed a brand building of 'Ford' logo when assessee sold cars, which carried such logo. When FMC fixed the royalty payable by the assessee on sale of cars at 5 per cent, they would have definitely considered the advantage they would eventually derive from their brand promotion done by the assessee in India. [Para 43] Agreement between assessee and FMC was not exclusive, in that it did not preclude either party from going solo or having other arrangements. There was a remote possibility of FMC giving the know how to any other company or person in India and they could also market products carrying 'Ford' logo through any other person in India. Had it done so, can one say that there was no intangible benefit derived by it, by virtue of the earlier AMP expenses incurred by the assessee which promoted the 'Ford' logo? The answer is obviously 'No'. There was an international transaction for creating and improving the marketing intangible comprised in the logo 'Ford' by the assessee for and on behalf of FMC. FMC was a non-resident and such transaction was of the nature of 'provision of service' as held by Special Bench in the case of L.G. Electronic's case. In the facts and circumstances of the case, this Tribunal cannot, therefore, fault the revenue authorities for treating the transaction of brand building as an international transaction this Tribunal dues not find anything substantial or material enough to depart from the view taken by the Special Bench in this regard. [Para 44] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 2045 (Chen-Trib) : (2013) 156 TTJ 0001 : (2013) 059 SOT 0221 : (2013) 090 DTR 0154 : (2013) 025 ITR (Trib) 0456

sIncome Tax Act, 1961

--Transfer pricing--Computation of ALP International transactions under Chapter X--Assessee was a wholly owned subsidiary of FMC, USA. Business activity of assessee consisted of manufacturing and distribution of vehicles. TPO noted that FMC licensed assessee to manufacture motor vehicles using technical knowledge supplied by it. Assessee was to pay royalty in consideration of such licence. Licenced products were motor vehicles, which had to carry logo of 'Ford' along with model name. In the opinion of TPO, though this 'FMC ensured that its brand name was being developed in India over a period of time. TPO worked out that expenses on advertisement, marketing and publicity (AMP) had been incurred by assessee amounting to Rs. 125.92 crores. As per TPO, intangible benefits were obtained by foreign entity on compulsory use of its trademark, thus, AMP was compared with other similar entities (companies). TPO came to conclusion that assessee had incurred AMP of 5.75 per cent on its sales against an average of 2.58 per cent on sales incurred by such other entities. Further, TPO noted whole amount of Rs. 124.84 crores, that being product development expenditure, would be disallowed. TPO, therefore, considered 1 per cent of total sales effected by assessee during relevant previous year as ALP for development of brand name and logo of FMC in India. As such, addition of 3.75 per cent for AMP expenses being difference between assessee and either entities, was made. Both above additions were thus made by TPO which were confirmed by DRP. Question for consideration was as to whether there was an international transaction between assessee and FMC, USA. Held: Rightly so. There was an international transaction between assessee and FMC as In the facts and circumstances of the case, Tribunal cannot, therefore, fault revenue authorities for treating transaction of brand building as an international transaction. This Tribunal does not find anything substantial or material enough to depart from the view taken by Special Bench in this regard.

Assessee was bound by the technical collaboration agreement dated 19-8-1996 entered with M/s FMC. By virtue of such agreement, assessee had to sell products licensed by FMC with the badge 'Ford' in India. Two lines of arguments has been taken by the assessee. One is that it was not promoting the brand name 'Ford' by itself, in any of the advertisements, but was on the other hand, promoting various models of its cars. Second is that assessee had not indulged in any independent promotion of 'Ford' brand in India. [Para 35] Tribunal has looked at the two agreements entered by the assessee with M/s FMC, one of which is titled as 'Technical Collaboration Agreement' which is dated 19-8-1996, whereas, the second one titled as 'Name License Agreement' dated 1-2-1999. The former agreement, where assessee is a licensee, gave it a right and license to use technical information and industrial rights in connection with licensed products, namely, cars. It is specified in clause 1.9 of the said agreement that motor vehicles, which were the licensed products, meant finished vehicles manufactured by licensee and badged with Ford trademark. No doubt, there is nothing in the technical agreement, which precluded the assessee from manufacturing and selling any other motor vehicles other than those of FMC or those manufactured using the technical information provided by FMC. Consideration to be paid by the assessee for such technical assistance is given at para 10.1 of the agreement. Thus, assessee had to pay a royalty of 5 per cent on sale price of all licenced products. [Para 36] Coming to the second agreement, which is 'Name License Agreement', what has been bestowed on the assessee through this agreement, is only a license to use the word 'Ford' as its corporate name. Except for the license to use 'Ford' as part of its corporate name, there is nothing in this agreement which enabled the assessee to use the word 'Ford' in any of the products manufactured or marketed by it. [Para 37] Assessee admittedly had advertised its various brands of cars, but each brand started with the logo of 'Ford'. It sold cars called Ford Fugo, Ford Escort, Ford Classic, Ford Fiesta, etc. Thus, 'Ford' is a common factor that appear in all class of cars sold by them. [Para 38] Assessee had simultaneously advertised the logo 'Ford' along with the model name of its own cars. May be it is true that assessee was not legally constrained to manufacture only cars for which technical know how was made available by M/s FMC and it had freedom to do independent manufacturing of cars as well. No doubt, the technical agreement dated 19-8-1996, mentioned above, does not say in so many words that assessee was to exclusively manufacture cars which carried the logo 'Ford' and use only the technical knowledge made available to it by FMC. Such contrived situations cannot and should not blind one to the ground realities. Admittedly assessee was a 100 per cent owned subsidiary of FMC. On a query raised by the Bench, Authorised Representative did admit that its directors were appointed by FMC only. In such a scenario, to say that assessee could manufacture cars other than those branded as 'Ford', will be hard to digest. At the best this was only a remote possibility, and in the nature of agreement entered by the assessee with M/s FMC, never contemplated by both the parties and would probably never to materialize. That the assessee is not a simple contract manufacturer but, had 90 per cent of its revenue generation from sale of cars, is not disputed. All the cars sold by it had the logo 'Ford' along with particular nomenclature given to the model. Therefore, there can be a direct inference about a tacit understanding between assessee and FMC that the logo of 'Ford' had to appear on every car manufactured by it. [Para 39] On every advertisement placed by the assessee, it had to give the name of the car model with the logo 'Ford' prefixed. Even a corporate advertisement placed by the assessee will have the name of 'Ford' specifically mentioned since, its name itself consisted the logo 'Ford'. Thus assessee had made a simultaneous promotion of cars and 'Ford' logo. Authorised Representative was not able to point out even a single advertisement which would show a marketing effort of a product manufactured by the assessee in which 'Ford' logo was not there. When the control over the assessee was totally exercised by the parent company M/s FMC, it cannot, at the same breath, say that the AMP expenses incurred were not according to the plan and strategy of FMC. In the transfer pricing documentation submitted by the assessee to TPO it is mentioned. [Paras 40 & 41] When seen along with the total ownership and control exercised by FMC over the assessee, it can be clearly inferred that AMP expenses incurred were based on a corporate plan of FMC and not through any independent decision taken by the assessee in India, without the inputs and direction of M/s FMC. This also, clearly implies that there was a transaction between assessee and FMC for promotion of the brand 'Ford' in India. [Para 41] Submission of Authorised Representative that Mr. Henry Ford had manufactured the first car and 'Ford' as a brand was developed over hundred years and had a substantial value even prior to their entry in India. But this cannot be so interpreted to mean that every Indian knew 'Ford' before assessee sold the cars in India. Ford might have been known among middle class and upper middle class strata, but, without doubt, there would be a substantial number of persons in India, who would have become aware about the brand 'Ford' through the advertisements placed by the assessee and its marketing efforts in India. [Para 42] Assessee has itself admitted its market share for relevant previous year as 1.9 per cent only. Therefore, its claim that it had a head-start over others by using the 'Ford' logo appears to be on a weak footing. (Para 42] Even if Tribunal presumes there indeed was any such advantage in the initial stage, after a particular point of time, it had to penetrate the market and reach people, who were not acquainted with 'Ford' brand, and this indeed required marketing efforts. So, the piggybacking concept, strongly argued by the Authorised Representative, could at the best have been an initial phenomena. Even if this Tribunal accepts the contention of Authorised Representative that advantage was derived by the assessee by piggybacking on the 'Ford' logo, for achieving a head-start over its competitors, this would have been short-lived, which got obliterated after first few years of its existence. Admittedly, assessee had started its commercial operation as early as 1999. Therefore, any initial advantage assessee had, by using the name of 'Ford', even if one presume there was any, would have translated itself into sales in the few initial years, but, later on, assessee had to stand on its own feet to get a foot hold in the class of markets in India, where 'Ford' name would not have had much relevance. At least for this class of market, there was indeed a brand building of 'Ford' logo when assessee sold cars, which carried such logo. When FMC fixed the royalty payable by the assessee on sale of cars at 5 per cent, they would have definitely considered the advantage they would eventually derive from their brand promotion done by the assessee in India. [Para 43] Agreement between assessee and FMC was not exclusive, in that it did not preclude either party from going solo or having other arrangements. There was a remote possibility of FMC giving the know how to any other company or person in India and they could also market products carrying 'Ford' logo through any other person in India. Had it done so, can one say that there was no intangible benefit derived by it, by virtue of the earlier AMP expenses incurred by the assessee which promoted the 'Ford' logo? The answer is obviously 'No'. There was an international transaction for creating and improving the marketing intangible comprised in the logo 'Ford' by the assessee for and on behalf of FMC. FMC was a non-resident and such transaction was of the nature of 'provision of service' as held by Special Bench in the case of L.G. Electronic's case. In the facts and circumstances of the case, this Tribunal cannot, therefore, fault the revenue authorities for treating the transaction of brand building as an international transaction this Tribunal dues not find anything substantial or material enough to depart from the view taken by the Special Bench in this regard. [Para 44]