In August 2025, the Income Tax Appellate Tribunal (ITAT) of India ruled on a high-profile case between the Indian Tax Authority and Sony India Pvt. Ltd., addressing key issues related to Transfer Pricing and the deductibility of royalty payments. The litigation comprised three appeals referred to as “Income Tax Appellate” (ITA), which correspond to different fiscal years. These were heard and decided jointly, given the similarity of the issues in dispute.
The controversy concerned the nature and quantification of the royalties paid by Sony India to its foreign parent company for the use of trademarks, technology, and know-how, as well as the Transfer Pricing methodology implemented to value these controlled transactions.
Tax Administration’s Position
The Indian Tax Authority questioned the deductibility and market value of the royalties paid, arguing that the percentage applied to sales exceeded the reasonable amount and was not properly supported by comparable documentation. The Transfer Pricing Officer (TPO) determined that the method used by the company did not reflect an Arm’s Length value under Section 92CA of the Income Tax Act and the Transfer Pricing rules in force in India.
The TPO proposed an adjustment reducing the allowable royalty percentage, based on internal and external comparables, as well as the absence of conclusive evidence of proportional tangible profits for the Indian subsidiary. In addition, the Tax Authority emphasized that the taxpayer had to demonstrate that the payment complied with the Arm’s Length Principle.
Arguments of Sony India Pvt. Ltd.
Sony India argued that the royalties paid were an integral part of the business model agreed with its parent company, necessary to access intellectual property, technical processes, ongoing support, and market strategies. It argued that the rate applied aligned with comparable agreements in the industry and that the appraisal should consider not only immediate tangible profits but also the strategic value and continuity of the brand.
The company filed documentation including license agreements, comparability analyses, and market data that, in its view, justified the rate applied. It also pointed out that the royalties had been accepted in previous assessments by the tax authority itself, which should be considered a relevant administrative precedent.
ITAT’s Decision
The ITAT analyzed both the evidence provided by the taxpayer and the TPO’s reasoning. The court acknowledged that royalty payments are frequent in multinational structures and that, if complied with the Arm’s Length Principle, they are deductible as a business expense. Conversely, it stressed that the supporting documentation must be comprehensive and clearly demonstrate the relation between the payment and the benefits obtained.
In this case, the ITAT found that the tax authority had not sufficiently supported that the agreed rate was outside the market range, but also pointed out deficiencies in Sony India’s documentation, recommending methodological adjustments for future years. As a result, the tribunal ruled in favor of the company on most issues, limiting the magnitude of the adjustments proposed by the TPO.
Implications for Multinationals in India
This ruling reaffirms the importance of having solid and up-to-date Transfer Pricing documentation, especially in royalty transactions, where appraisal is often complex and subject to different interpretations. Among the key lessons from this case:
- The tax authority must conclusively demonstrate that the agreed value is not at Arm’s Length.
- Companies must prepare solid comparative studies, considering both internal and external data.
- Previous decisions by the authority on prior years may determine subsequent cases, although they do not guarantee automatic acceptance of Transfer Pricing policies.
Conclusion
The India vs. Sony India Pvt. Ltd. case becomes a key benchmark for multinationals operating in India and making intra-group royalty payments. It also reinforces the need to balance legitimate tax planning with technical documentation supporting each Transfer Pricing adjustment when the tax administration increases its scrutiny of these transactions.
Source: TPCases