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Indian ITAT ruling helps justify royalty payments by manufacturers to group companies

22 November 2012

Joe Dalton

A recent ruling by India’s Income Tax Appellate Tribunal (ITAT) Mumbai bench should help to justify the payment of royalty by entities undertaking contract manufacturing, toll manufacturing or fully-fledged manufacturing for their group companies.

In the case of SC Enviro Agro India v DCIT the tribunal held that it is not the role of a transfer pricing officer (TPO) to assess whether a technology royalty was payable as a legitimate business purpose. The tribunal said the TPO’s role is to analyse only whether the payment was made at an arm’s-length price, and it is for the assessing officer (AO) to determine whether or not the royalty should have been paid.

SC Enviro Agro case

SC Enviro Agro (Enviro Agro) entered into a technical licence agreement with Sumitomo Chemical Company (SCC) which allowed it to produce certain chemical products commercially as part of its insecticide and pesticide manufacturing business.

The agreement entailed that Enviro Agro only sold its products to companies approved by SCC.

It also purchased any intermediate ingredients only from SCC.

The company to which most of Enviro Agro’s products were...

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