I-T trains lens on royalty dues to foreign principals

The income tax department is taking a relook at the supposed surge in payment of royalty by companies to their foreign principals. The surge claim tax officials is in some cases substantially more than the increase in percentage in revenue, but transfer pricing experts say the higher payout is the price companies have to pay for rights to use the technology in the country and has a strong business rationale.

Ever since royalty limits — 3 per cent of sales if made in the country and 5 per cent of sales if made outside the country along with one per cent for brand name use — were done away with in Budget 2010, there has been a surge in payment of royalty by the companies to their parent companies abroad.

Income tax officials claim cases of royalty payment by companies that do not meet the arm's length principle of transfer pricing norms have been on the rise. Since it is shown as an expense by the companies and therefore tax deductible the government, they claim loses out.

However, Shyamal Mukherjee, executive director, PricewaterhouseCoopers, told The Indian Express the comparison of the payment with what prevailed earlier is not a correct way to measure the outflow. "What companies are paying today is the fair price for the technology which they could not pay earlier due to the external limits. Since there is a lack of technology available within the country to exploit in the concerned sectors, more is being imported and that leads to higher payment."

According to a report brought out by advisory firm Institutional Investor Advisory Services (IIAS) last year, though royalty payments of 25 highest royalty paying companies went up significantly, sales and margins did not grow proportionately. The report claimed that total royalty paid by these 25 companies increased to Rs 3,635 crore in 2011-12, up from Rs 1,528 crore in 2007-08.

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