Case summary, Income Tax

ITAT Visakhapatnam decides: Should royalty payments be aggregated with other international transactions to determine the arm’s length price?

Listen to the case summary DCIT vs M/s. SNF (India) Ltd, ITAT Visakhapatnam here

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Judgment date: October 4,2019

Result: The tribunal held that royalty should not be treated as a separate category of the transaction and excluded when determining the Arm’s Length Price (ALP) in the international transaction at an entity level.

Facts of the case

TNMM – 3500+ Results

CUP – 400+ Results

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  • SNF India Private Ltd. is a 100% subsidiary of SPCM SA, manufactures water-soluble polymers.
  • The prescribed international transaction limit in AY 2008-09 was exceeded by the assessee and therefore, transfer pricing officer (TPO) was appointed for the determination of the Arm’s length price (ALP) of the International Transaction.
  • SNF computed aggregate international transactions basis Transactional Net Margin Method (TNMM) using 13 comparables.
  • The TPO separated royalty from the international transactions and computed royalty using the Comparable Uncontrolled Price Method (CUP) considering royalty as a separate intangible transaction.


  • Can Royalty be included in the aggregate international transaction for the determination of the Arm’s length Price in the transfer pricing?
  • Is TNMM the most appropriate method for determination of the Arm’s length Price? (Not dealt in this Article)

Debate on including Royalty in aggregate transaction

Arguments of the Revenue

  • Under the Income Tax Act and the OECD Guidelines, segregation of royalty from other transactions is necessary as royalty was a separate class of transaction from the other international transactions which were in the nature of trading transactions. The judgment in UCB India Private Limited of ITAT Mumbai Bench holds that for calculation of ALP each class of transaction has to be analyzed separately.
  • The assessee failed to correlate the receipt of intangibles against which it paid royalty and tangible benefits derived by the assessee. Thus, using the CUP method, the ALP for payment made towards royalty should be determined as NIL.

Arguments of Assessee

  • The assessee’s manufacturing activities are interlinked and interrelated with consistent and continuous confidential technical information received by the assessee against which royalty has been paid to SPCM FA, France.
  • The technical information received by the assessee from its parent is the very reason behind the existence of the assessee as this information The assessee is able to manufacture and sell products by relying on the technical information supplied by SPCM FA. Thus payment of royalty in consideration of receiving technical information could not be separated from the trading activities of the assessee.


The Tribunal dismissed the appeal of the Department on the ground that having accepted that technical support of SPCM FA was essential to manufacturing and trading activities of the assessee, the Department could not bring any evidence for unbundling royalty from other international transactions The tribunal strongly relied upon the judgement of the Justice Sanjiv Khanna of the Delhi High Court in Sony India Mobile Communications Ltd vs CIT-III which held that that aggregation of transactions is desirable and not merely permissible, if the nature of transaction(s) taken as a whole is so interrelated that it will be more reliable means of determining the Arm’s length consideration for those transactions.

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