Transfer Pricing: Corporate Fleece Business

Mohan Guruswamy

At one time Suzuki used to insist that Maruti buy all its gearboxes from it, and used to fleece it by padding the transfer prices. Suzuki used to argue that the complex technologies could not be absorbed by Indians.

Like Maruti, Levers, Nestle etc use an item called "head office operations" to also repatriate huge amounts to the parent company. These are allowed as pre-tax expenditures and so the Indian exchequer loses its share to that extent.

Royalty payments are seldom more than 2% of sales all over the world, so the royalty payments also bear scrutiny. MNC royalties usually are twice this. Besides what’s the big knowhow involved on soaps, shampoos, ketchups and noodles to justify the high royalties for such lengths of time. Royalty on a product has to have a length of time to it. Besides better most of these products are sourced from Indian companies, who often have their own brands, so no knowhow is involved. Who makes Maggi noodles? Or a good part of Nestles instant coffee. The Royalty is just for the name. Even cigarettes are often procured from contract manufacturers. The contract manufacturers are often owned by useful politicians.

Indian owned companies too fleece their companies by charging them for use of brand names. Tata Sons takes a fixed percentage of sales from every company controlled by Tata Sons (the other main shareholder being Shapoorji Pallonji Mistry) for the honour of being called a Tata company. This can even be justifiable to some extent. But how does Jindal Steel Works (JSW) justify huge payments for the Jindal name to a company owned by the MD's wife? And what is the Jindal name worth?

The Institutional Investor Advisory Services (IIAS) report questions the purpose of these high royalty payments and the method of calculating them.

Maruti Suzuki India Ltd, Hindustan Unilever Ltd, ABB India Ltd, Nestle India Ltd and Bosch Ltd paid 24% of aggregated pre-tax, pre-royalty profits and 4.4% of aggregated net sales as royalty, IIAS said.

The report came a week after IIAS said in a note that Maruti’s royalty payments had grown by 6.6 times in the past 15 years to Rs.21,415 per vehicle sold in India, raising concerns among investors in India’s largest car maker.

In a recent report, the investors’ advisory service said Maruti paid the highest royalty among companies in the last fiscal year at Rs.2,770 crore. It amounted to 74.6% of the company’s profit after tax and 5.7% of the net sales.

The Ministry of Corporate Affairs (MCA) is tasked with the administration of the Companies Act 2013, the Companies Act 1956, the Limited Liability Partnership Act, 2008 & other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with law. It is supposed to look into the issues raised above. Understandably it is a milch cow ministry and hence prized.

(facebook - 28 October 2020)

Oct 31, 2020

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