Delhi Tribunal rules on overlapping duplicative inter-company services
October 27, 2010
The Delhi bench of the Income-tax Appellate Tribunal in the case of Sona Okegawa Precision Forging Ltd (2010-TII-41-ITAT-DEL-TP), has examined the issue of duplicative services and whether royalty can be paid to the associated enterprise (AE) for sales made to the AE itself.
The case related to FY2003-2004 during which Sona Okegawa paid royalty to its AE which was benchmarked under the comparable uncontrolled price (CUP) method. For applying the CUP method, the company relied on the ceiling under the foreign exchange management regulations as the arm’s length price. During the course of transfer pricing audit, the transfer pricing officer (TPO) rejected the CUP method, observing that Sona Okegawa had not entered into any agreement for payment of royalty to an independent third party and so any comparable uncontrolled data did not exist. The TPO further observed that the royalty paid to the AE, computed based on the sales made to the AE itself, did not comply with the arm’s length standard.
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