03 June 2010
As royalty is paid on the profits of the company, is it possible for a loss making company to pay royalty to a company incorporated outside India?
If yes, which method would be rational to calculate the royalty?
Moreover, is there any issue related to transfer pricing in case of calculation of such royalty?
04 June 2010
A loss making company can pay royalty to its parent company. The arm's length nature of the royalty can be justified on a stand alone basis without aggregating it with other controlled transactions. Economic justification for the payment of royalty, negotiations between the parties, satisfaction of the benefit test etc. need to be established at the time of assessments.
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