Indian ITAT ruling helps justify royalty payments by manufacturers to group companies
22 November 2012
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
The agreement entailed that Enviro Agro only sold its
products to companies approved by SCC.
It also purchased any intermediate ingredients only from
The company to which most of Enviro Agro's products
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