Royalty Payment of IDR 10.7 Billion Rejected! No Proof of Know-How

PT SURA is a poultry breeding company engaged in breeding farm activities, including broiler breeder operations, production of day-old chicks (DOC), and hatching egg incubation. In this case, PT SURA filed an appeal against the Directorate General of Taxes (DJP) related to a correction issued through the 2019 Corporate Income Tax Assessment Letter (SKPKB). The key dispute concerns the correction of Other Operating Expenses representing royalty payments to a related party in Singapore, CPNBI Pte Ltd, for the use of intellectual property (IP) in the form of know-how, amounting to IDR 10,790,347,688.

DJP argued that the royalty did not comply with the Arm’s Length Principle (ALP), as the existence of the know-how as an intangible asset could not be proven. According to DJP, the alleged intellectual property was not confidential because similar information could be accessed publicly on the internet at no cost.

PT SURA rejected the correction. First, PT SURA argued that the existence and utilization of know-how were clearly proven through the License Agreement. The agreement stated that PT SURA was granted rights to use IP in the form of know-how, including proprietary technology such as patents, product designs, and trade secrets owned by CPNBI Pte Ltd. Such know-how allowed PT SURA to effectively operate its breeding farm, DOC production, and hatching egg activities, thereby providing real economic benefits.

Second, PT SURA submitted supporting documentation titled “Breeding Farm Poultry Production Operational Technical Procedures” as confidential know-how with economic value, which is not publicly accessible. They emphasized that technical procedures and technology used in breeding farm operations could not be equated with general information available online or conventional poultry equipment.

Third, PT SURA referred to CPNBI Pte Ltd’s 2019 financial statements, which disclosed intangible assets recorded as “Production and Process Know-How,” demonstrating economic ownership of the licensed technology.

Fourth, PT SURA does not maintain an internal Research & Development (R&D) division and performs no research activities related to poultry production or breeding. This is reflected in the absence of R&D expenses in its financial reports, indicating complete dependency on the know-how from CPNBI Pte Ltd.

Fifth, based on the Local Transfer Pricing Documentation, the royalty was determined to be at arm’s length. PT SURA obtained the right to utilize the IP in its production, marketing, distribution, and sales processes, and was obligated to pay a royalty of 2% of net sales of DOC products. PT SURA also provided proof of royalty payments to the related entity.

After reviewing all evidence submitted by both parties, The Tax Court Panel of Judges referred to Article 17(7) PER-32/PJ/2011, which states that royalty payments can be considered arm’s length if: (i) the transaction truly exists, (ii) there is measurable economic benefit, and (iii) the transaction value is reasonable.

However, The Tax Court Panel of Judges found that the submitted know-how document titled “Breeding Farm – Poultry Production Operational Technical Procedures” contained the statement “PT CPI Tbk, Poultry Production, 2023” on its cover page. Audit Report of PT SURA for 2019 confirmed that PT CPI Tbk is PT SURA’s shareholder. Therefore, the document failed to prove that the know-how originated from CPNBI Pte Ltd in Singapore.

Additionally, the Local TP Documentation indicated that PT SURA obtained all production inputs (DOC, feed, medicines, poultry equipment) from related parties. The Court concluded that PT SURA did not require confidential information regarding how to construct or develop production assets, contrary to the company’s claim that such information constituted know-how.

Based on these considerations, The Tax Court Panel of Judges ruled that PT SURA failed to substantiate the intangible asset utilization transaction in accordance with the Arm’s Length Principle. Thus, the appeal was rejected and DJP’s correction was upheld.

This case emphasizes that related-party royalty payments must be supported by strong evidence on the existence of intangible assets, traceable ownership rights, and genuine economic benefits. Transfer pricing documentation alone does not guarantee legal certainty without clear substance and proof of ownership.

If your company engages in related-party royalty transactions or intangible asset utilization, ensure your documentation is robust, aligned with actual business practices, and supported by solid legal and economic substance.

A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here.