Adds back R448 crore, 27% of Maruti Suzuki?s FY09 profits
Japan’s Suzuki Motor Corporation?s (SMC) brand name has become, according to the taxman, a household name in India as a result of its association with, and later ownership of, India?s auto leader Maruti Suzuki. As a result, for FY09, the taxman has disallowed Maruti expensing of R448 crore and has added this back to its pre-tax income of R1,676 crore for that year.
Given the logic in the transfer-pricing order, a series of similar income adjustment notices will likely be made for later years too.
A Maruti spokesperson declined to comment saying the matter was sub-judice.
The transfer pricing order deals with the R678 crore paid by Maruti to Suzuki in FY09 by way of royalty. Given that, over the years, Maruti has also invested in developing its technological skills and has even done some product development including localisation of technology, the taxman says Maruti has overpaid Suzuki on account of royalty. In the words of the tax order, Suzuki should have compensated ?the assessee for such improvement and modification?.
The taxman adds that Maruti exported R443 crore worth of automobiles in the year under the name Suzuki instead of Maruti or Maruti-Suzuki. This, the transfer pricing order says, means Maruti has been reduced to the role of a contract manufacturer in respect of exports.
Since, the taxman argues, Suzuki was being paid a royalty for ?knowhow, tradename and trademark?, the expenditure made by Maruti on R&D or on advertisement should not all be allowable as expenses.
According to the order, ?the brand development was the responsibility of the Maruti without any compensation. In fact, royalty was being paid for using and promoting the lesser known brand Suzuki?. The fact that Suzuki has started manufacturing two-wheelers in India through a different subsidiary, according to the order, is proof that Suzuki ?has enjoyed the benefit of reinforced value of its Suzuki brand in India?.
Based on Suzuki?s global balance sheet, the taxman says the amount spent by Suzuki on R&D and brand-building is in the proportion of 31:69. The taxman then applies a modified version of this and deducts 46% of the R678 crore paid by Maruti as royalty to Suzuki ? R312 crore ? and says this is payment for the use of the Suzuki brand name and so cannot be shown as an expense.
Though Maruti has justified its R258 crore of advertisement expenditure (1.3% of FY09 turnover) by saying this is comparable to the spend of global auto majors like Toyota and Ford, the taxman says the more relevant comparison would be with Indian auto firms like Hindustan Motors, Mahindra & Mahindra and Tata Motors.
Based on the arithmetic mean (0.67% of turnover) of the ad spend of these firms, the taxman concludes Maruti overspent Rs 122 crore on advertisement ? this, the taxman says, was in a sense spent to promote the Suzuki brand name in India. Since, extending the logic, the taxman says Maruti should have been given a mark-up on the extra spending it did on behalf of Suzuki, a mark-up is added to this Rs 122 crore. Taking a PLR+2.5% as the mark-up, a total of Rs 136 crore of adspend has been added back to Maruti?s pre-tax profits for the year. Including what was disallowed on royalty, a total of Rs 448 crore has been adjusted.
