Royalty paid by a taxpayer computed even on sales made to the Associated Enterprise is at arm’s length

Brief : Royalty paid by a taxpayer computed even on sales made to the Associated Enterprise is at arm’s length. Further, a taxpayer paying royalty to its Associated Enterprise can make additional payments for technical services rendered by personnel deputed by the Associated Enterprise.

Citation : ACIT Vs. Sona Okegawa Precision Forging Ltd. [2010-TII-41-ITAT-DEL-TP]

Court : Income-tax Appellate Tribunal, Delhi

Delhi bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of ACIT v. Sona Okegawa Precision Forging Ltd. [2010-TII-41-ITAT-DEL-TP], has upheld that the payment of royalty by a taxpayer to an Associated Enterprise (AE) based on the sales made to the AE itself complies with the arm’s length standard where the taxpayer is not a contract manufacturer and the royalty payment is recovered from the AE as part of the selling price. Further, the Tribunal upheld that a taxpayer, obligated to pay royalty to its AE, can also make payment for technical services rendered by personnel deputed by the AE provided the royalty agreement evidences that the services rendered by the deputed personnel are not the responsibility of the AE.

Facts of the case

Please become a Premium member. If you are already a Premium member, login here to access the full content.