• Automobile Law

  • The Indian automobile industry is poised at the start of a great phase of growth. The potential of alternate-fuel vehicles has not been completely explored yet but holds great promise as research into more efficient electric vehicles and bio-fuels are being carried out at a tremendous pace. These vehicles will be less polluting and will pass on huge cost benefits to the owner of the vehicles. The duty benefits on imports of specific parts of hybrid vehicles can be a huge boost to this sector. India's Automotive Mission Plan 2006-2016, which is a collaborative effort between the Indian Government, the automotive industry and the academia, aims for India "To emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145 billion accounting for more than 10% of the GDP and providing additional employment to 25 million people by 2016." Such progressive steps taken by the Government along with active involvement of the industry stakeholders can ensure the creation of the right environment for growth of this industry at an exponential pace."

    Indian Automotive Industry comprises of the automobile and the auto component segments and is one of the fastest growing manufacturing sectors in the country. Production and distribution of automobiles, trucks, buses, heavy equipments and automotive components have become global ventures involving diverse international relationships and transactions.

    Important Trends In The Industry

    • India's automobile market is quite different from other top automobile markets (except China) in that two-wheelers constitute the bulk of the demand (almost 75%).
    • Growth is driven by factors such as affordability, fuel economy, alternate fuels (like electric cars etc.).
    • The rural market is still relatively untapped and holds great potential for the Indian automotive industry.
    • Large scale acquisitions like Tata-JLR can help bring Indian expertise in supply-chain efficiency and lower production costs to foreign manufacturers, in addition to bringing greater choice for the Indian customer.
    • The commercial vehicle category is poised to take a great leap in the next decade due to the increase in Government spending on public transport which is a result of the strained road infrastructure in most big cities in India.

    Major Players In India

    Leading Indian companies

    • Tata Motors, Mahindra & Mahindra, Hindustan Motors, TVS Motors, Bajaj Auto, Ashok Leyland.

    Leading MNC Companies in India

    • BMW India, Mercedes-Benz India, Ford India, Maruti Suzuki, Volkswagen Group and its subsidiaries (Audi India, Skoda India, Volkswagen India), Hyundai Motor India, General Motors India.

    Important Industry Associations

    • Society of Indian Automobile Manufacturers (SIAM)

    Important Laws Affecting The Industry

    Motor Vehicles Act, 1988 and Central Motor Vehicles Rules 1989

    • Governs emission norms and safety standards in India.
    • Consolidates the law relating to motor vehicles.
    • Lays down law relating to driving license, registration of motor vehicles, control of traffic, construction & maintenance of motor vehicles

    Tax Laws Affecting The Automobile Industry

    Income Tax Act, 1961

    • It is tax on income imposed by Central Government
    • Residents in India are taxed on their worldwide income
    • Non- residents are taxed on Indian source of income
    • The Indian tax rates applicable to non-residents could be up to 40% (excluding applicable surcharge)
    • If the tax payable by any company, including a foreign company taxable in India, is less than 18.5% of its book profits, it will be required to pay Minimum Alternate Tax
    • Interest received by a non-resident from Indian on foreign currency denominated loans may be taxable
    • Payments towards royalty and fees for technical services is taxable
    • Expenditure on scientific research is treated as capital expenditure and is deductible.

    Transfer Pricing Regulations

    • Income tax Act makes provision for taxation of income arising from international transaction between associated enterprises.
    • Transfer Pricing Regulations lay down that any income arising from such an "international transaction" shall be computed having regard to the "arm's length price".
    • The Regulations also lay down methods for calculation of arm's length price

    Research and Development Cess Act, 1986

    • All payments made towards the import of technology are subject to a cess of 5% under the Act.
    • Technology includes any special or technical knowledge or any special service required for any purpose whatsoever by an industrial concern under any foreign collaboration, and includes designs, drawings, publications and technical personnel.

    Custom Duty

    • Customs duty is charged on imports of items into India.
    • Foreign automobile manufacturers who want to avail of lower custom duties and thereby pass on the cost benefit to the customers can import Completely Knocked Down (CKD) kits which are charged customs duty at a concessional rate of 10.
    • At present, a Completely Built Units (CBUs) attract a duty of 105% while Semi-Knocked Down (SKD) units attract an import duty of around 62%.
    • For the purpose of this exemption, a CKD unit is said to exclude "such units which contain a pre-assembled engine or gearbox or transmission mechanism or a chassis where such parts or sub-assemblies is installed." This provision was introduced in the 2012 Budget.
    • Excise duty on diesel engines is higher than on petrol engines.
    • The 2012 Budget has introduced concessions for the import of specified parts of hybrid vehicles like lithium ion batteries – the custom duty on such specified parts has been lowered from 10% to 6%.

    Sales Tax / Value Added Tax (VAT)

    • Sales tax/VAT is levied by states on sale of goods within its territory.
    • Central Sales Tax is currently higher on diesel vehicles than on petrol vehicles.

    Cenvat

    • Duty imposed by Central Government on manufacture of goods.
    • The government revises the rates of CENVAT from time to time.

    Regulatory Agencies

    The Ministry of Shipping, Road Transport & Highways (MoSRT&H) acts as the central agency for formulation and implementation of various provisions of the Motor Vehicle Act, 1988 (as amended) and Central Motor Vehicle Rules, 1989 (as amended) ("CMVR"). Additionally, the Ministry of Environment & Forest (MoEF), Ministry of Petroleum & Natural Gas (MoPNG) and Ministry of Non-conventional Energy Sources also govern various aspects of the automotive industry. The MoSRT&H has constituted certain standing committees of eminent individuals to advise the MoSRT&H on various issues including safety, standards for regulation of emissions etc. on the basis of which the MoSRT&H may consider modification(s) / amendment(s) to the CMVR:

    CMVR- Technical Standing Committee

    • Advises the MoSRT&H on technical aspects related to CMVR and any amendments that may be required in light of advancement in technology.
    • The Committee comprises of a wide range of stakeholders, from organizations such as the Ministry of Heavy Industries & Public Enterprises, Bureau of Indian Standards, Automobile Research Association of India, Society of Indian Automobile Manufacturers etc.
    • Recommendations are made to the Government regarding international standards / best practices which can be used in lieu of standard notified under the CMVR to permit use of components / parts / assemblies complying with such standards.
    • Additionally, CMVR-TSC is assisted by another committee called the Automobile Industry Standards Committee which advises in drafting the technical standards related to safety.

    Standing Committee on Implementation of Emission Legislation (SCOE)

    • This committee deals with issues relating to implementation of emission norms.
    • The main functions16 of this committee are :
    • to discuss future emission norms;
    • to recommend final norms for current vehicles to MoSRT&H, ;
    • to finalize test procedures and implementation strategy for emission norms;
    • advise MoSRT&H regarding any issue relating to implementation of emission regulations.

    Automotive Research Association of India (ARAI)

    • ARAI is a cooperative industrial research association established by the automotive industry with the Ministry of Heavy Industries & Public Enterprises, Govt. of India.
    • The objectives of the Association are R&D in automotive engineering for industry, testing, certification and homologation of automobiles, automotive equipment and ancillaries and framing of vehicle regulations.

    Hello Counsel’s Legal Team is having a great deal of experience in rendering legal services on various aspects of automobile industry. We advise automobile companies on various issues including regulatory compliances, FDI, industrial licensing, taxes, regulations related to industry and labour, Government and institutional approvals, etc.

    We represent various companies from the automobile sector in the transactional arena including mergers and acquisitions, divestitures, joint ventures, and strategic alliances. Litigation and arbitration matters evolve out of product liability, consumer fraud, supplier relationship, intellectual property, labor relations, antitrust and competition, workplace and employment issues.

    Vital Features Of Automobile Law

    • Arbitration & Litigation- Emanating From- Product liability- Consumer fraud- Supplier relationship- Intellectual property- Labor relations, Workplace and employment issues- Antitrust- Competition
    • Approvals- Government and institutional approvals,
    • Authorities- National Regulatory Authority of India [NRAI]
    • Compliances – Statutory, Mandatory & Regulatory-
    • Foreign Direct Investment [FDI]-
    • Industrial Licensing
    • Projects- Major Govt. Projects- National Automotive Testing and R&D Infrastructure Project (NATRIP), the largest and one of the most significant initiatives in Automotive sector so far, representing a unique alliance between the Government of India, a number of State Governments and Indian Automotive Industry to create a state of the art Testing, Validation and R&D infrastructure in the country.  
    • Production and Distribution- Of automobiles, trucks, buses, heavy equipments and automotive components
    • Regulations- Related to industry and labour
    • Taxes.

    Legislations Governing Automobile Industry

    Judgments: Automobile Laws Involving Various Acts & Statutes

    Judgments: Automobile Laws 

    • Maruti Suzuki India Ltd. Versus Additional Commissioner of Income Tax Transfer Pricing Officer New Delhi, W.P. (C) 6876/2008, Judgment Dated: 01/07/2010, Bench: Badar Durrez Ahmed, J.: V.K. Jain, J., Delhi High Court, Citation: 2010(10) AD(Delhi) 483: 2010(328) ITR 210.- Income Tax Act, 1961- Sections 92 to 92-F- Automobile Laws Involving The Income Tax Act- International transaction- Determination of arm's length price by Transfer Pricing Officer [TPO]- Use of foreign trademark/logo by domestic entity- Justification- Petitioner launched a car using logo `S' of Suzuki alongwith its own logo `M'- Grant of licence by Suzuki in respect of- Admittedly, petitioner was not a distributor for product manufactured by Suzuki- It was a licensed manufacturer of these products and had entered into a long term agreement with Suzuki- Therefore, no justification for TPO insisting upon payment by Suzuki to Maruti merely on account of use trademark/logo of Suzuki on products manufactured and sold by Maruti- Order passed by TPO making adjustment to income of  the company is based on no evidence which amounts to an error of law by him- The procedure followed by him is faulty, the approach adopted by him was erroneous and order passed is arbitrary and irrational- Impugned order of TPO unsustainable and hence set aside with directions to TPO to determine appropriate arm's length price afresh.- HELD: We see no justification for the TPO insisting upon payment by Suzuki to Maruti, merely on account of use of the name and/or logo of Suzuki on the products and parts manufactured and sold by Maruti. It is Maruti which felt the necessity of use of Suzuki's brand name and logo and that necessity was recognized by the Government of India, by approving the agreement between Maruti and Suzuki. We cannot agree with the TPO that Maruti had become a super brand and, therefore, the petitioner Company did not need to use Suzuki brand name and logo on its products. As noted earlier, on account of liberalization of the economy and de-licensing of the automobile industry, a number of foreign automobile majors had entered India or were contemplating entering the Indian market. Maruti, therefore, was not unjustified in concluding that it was necessary for it to enter into an agreement of this nature with Suzuki, so that it could meet the increased competition, posed to it on account of entry of these foreign majors, by using the brand name and logo of Suzuki on its products, besides obtaining the technical upgradation, augmentation and assistance from Suzuki. We cannot be oblivious of the fact that Suzuki being an international player, particularly in the segment of small cars, it was in a position to offer newer and better models to Maruti and use of the brand name and logo of Suzuki, therefore, was likely to be beneficial for the business interests of the petitioner. In any case, we can find no objection to the business decision taken by Maruti in this regard.- It would be noteworthy here that it was not obligatory for Maruti to use the logo of Suzuki on the products manufactured and sold by it in India, though Maruti in its discretion could use that logo, on those products as well- If we accept the contention that a foreign entity must necessarily pay to the domestic entity, which is an Associate Enterprise, on account of use of its trademark and logo even where using such trademark/logo is not obligatory for the Indian entity, that would result in the owner of every foreign trademark undertaking making payment to the domestic entity approaching it for use of its trademark and/or logo for the purpose of taking advantage of that reputed, trademark and/or logo on its products. This will result in a situation where, on the one hand, the Indian entity is paying to the foreign entity for use of its trademark/logo, and, on the other hand, it is simultaneously getting paid for carrying that trademark or logo on its products though it is the Indian entity and not the foreign entity which wants the use of the foreign trademark on the products manufactured and sold in India. If that happens, the owners of foreign trademarks may not be willing to permit use of their trademarks/logos by a domestic entities on the products manufactured and sold in India, unless they are more keen than the domestic entities in this regard- The TPO took the view that the value of the trademark 'Maruti' which, by the time Maruti entered into this agreement with Suzuki, had become a super brand, got diminished and correspondingly the value of the brand 'Suzuki' which was hitherto unknown in India appreciated on account of Maruti deciding to use the logo 'S' in place of the logo 'M' and use of the brand name 'Maruti Suzuki' in place of brand name 'Maruti' on the advertisements and promotions undertaken by Maruti. We, however, do not find ourselves to be in agreement with the TPO in this regard. As noted earlier, despite Maruti being a well-known brand of passenger car in the domestic market and only a few people in India being aware of the brand name 'Suzuki' at the time of Maruti entering into the agreement with Suzuki, the fact remains that on account of the increased competition, consequent upon the entry of multinationals selling vehicles under reputed and well established brand names, Maruti felt that it did require to use a reputed international brand name/logo in order to meet the competition. It is quite probable that had Maruti not used the name and logo of Suzuki, it might not have been able to face the competition given by these major auto players and would have lost its market share to them. Maruti instead of using the brand trademark of Suzuki, agreed to sell its products under a joint trademark which enabled it to preserve and promote its own brand while simultaneously taking advantage of the reputation associated with the name and logo of Suzuki, which admittedly was a reputed international brand in the automobile industry. In the joint trademark also the name Maruti comes before the name 'Suzuki', thereby giving an edge to the domestic trademark. In fact, the benefit from association of a reputed foreign name and logo may in such a case outweigh the loss, if any, in the value of the domestic brand. The test again, to our minds, would be as to what a comparable independent entity placed in the position of Maruti would have done in this regard. There was no material before the TPO from which it could be inferred that Maruti would have been able to achieve the growth which it was able to achieve even if it had not used the name 'Suzuki' in the joint trademark or had not used the logo of Suzuki- But, under the Agreement dated 12.12.1992 Maruti is under a contractual obligation to use the joint trademark 'Maruti Suzuki' on all the vehicles as well as the parts manufactured and/or sold by Maruti in India. We fail to understand any logic behind Suzuki insisting upon compulsory use of this joint trademark by Maruti, on all its products and parts, rather than leaving such use to the discretion of Maruti, except that Suzuki wanted to popularize its name in India at the cost of Maruti. Compulsory use of the trademark even when the domestic entity does not require it indicates benefit to the non-resident entity in the form of brand building in the domestic market by its display and use on the product as well as its packaging- There is no justification for apportioning the advertising and promotion expenses between a domestic entity and the foreign entity, even if they happen to be Associate Enterprises, merely on account of use of the name and/or logo of the foreign entity in the promotional and marketing activities, unless it is shown that the expenditure incurred on such activities was disproportionate and the benefit which accrued to the foreign entity in the form of increased awareness of its brand in the domestic market was not merely incidental. Mere use of a foreign brand, name and/or logo by an Associate Enterprise in the advertising and promotional activities undertaken by it, therefore, does not by itself entail payment by the owner of the foreign brand name and logo, and the question would always be as to whether a comparable independent entity would have incurred such expenditure or not- The use of the joint trademark has to be viewed in the context that any promotion or advertising of the product would also necessarily carry that joint trademark thereby bringing benefit in the form of marketing intangible to the foreign entity. There will be no justification for apportionment of the cost incurred on promotion and marketing where the use of such a joint trademark is discretionary and not obligatory or where the expenses incurred on marketing promotion and advertising do not exceed the expenditure which a comparable independent entity is expected to incur under these heads. But, this would become relevant where the use of a joint trademark of this nature is obligatory and the expenses incurred by the domestic entity on promotion and advertising exceed the normal expenses, which an independent entity would incur in this regard- Maruti, admittedly, was not a distributor for the products manufactured by Suzuki. It was a licensed manufacturer of these products and had entered into a long-term agreement with Suzuki. Therefore, it was justified in incurring substantial expenditure on marketing, promotion and advertising of its products even under the joint trademark 'Maruti Suzuki' and using the logo of Suzuki. Since the products promoted and advertised by Maruti were being manufactured and sold solely by it and Suzuki had no right to sell any product under the joint trademark 'Maruti Suzuki', the benefits from the expenditure incurred on marketing, promotion and advertising of Maruti products under the joint trademark 'Maruti Suzuki' would accrue to Maruti and the status of Maruti is, therefore, not comparable to that of a distributor or a licensed seller- Even if it is found that Maruti had incurred expenditure on marketing, promotion and advertising of its products, which was more than what a comparable independent entity, placed in the position of Maruti would have incurred, that by itself will not entail payment from Suzuki to Maruti if it is shown that under the terms and conditions of the composite agreement dated 12.12.1992, or some other arrangement, Maruti obtained some concession or subsidy from Suzuki, in one form or the other which can offset the extra expenditure incurred by Maruti on marketing, promotion and advertising of its products. As we said earlier, the TPO has to take an overall view of all the rights obtained and obligations incurred by Maruti, vis-a-vis, Suzuki and then determine appropriate arm's length price in respect of the international transactions which Maruti had with Suzuki- Since we have come to the conclusion that the order passed by the TPO making adjustments to the income of the petitioner company is based on no evidence which amounts to an error of law by him, the procedure followed by him was faulty, the approach adopted by him was erroneous and the order passed by him is arbitrary and irrational, it will be open to this Court to set aside the order passed by him, in exercise of writ jurisdiction under Article 226 of the Constitution. Also, the Transfer Pricing Provisions being rather new to the tax regime in India and with the entry of more and more multinationals in our country, these provisions are likely to come up frequently for application by the TPOs as well as the Assessing Officers, we deem it appropriate to clarify those aspects of the transfer pricing provisions which come up for our consideration in this case, so that they are able to appreciate the scope of their powers under Transfer Pricing Provisions of the Act as well as the procedure to be followed and approach to be adopted by them while processing such cases- For the reasons given in the preceding paragraphs, the impugned order dated 30.10.2008 is hereby set aside and the TPO is directed to determine appropriate arm's length price in respect of the international transactions entered into by the petitioner Maruti Suzuki India Limited with Suzuki Motor Corporation, Japan, in terms of the provisions contained in Section 92C of the Income Tax Act and in the light of the observations made and the view taken by us in this order. The TPO shall determine the arm's length price within three months of the passing of this order.

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