Transfer pricing disputes regarding royalty payments are often a crucial point in tax audits, especially when involving distributor entities that the Respondent considers inappropriate to bear intellectual costs. In the appeal case of PT HI (309-PUT-010815.15/2024), the main focus of the debate was whether a trading company has the right to charge license fees for technical know-how embedded in products sold to third parties.
The Respondent made a positive correction of IDR 30,386,871,895.00, arguing that PT HI functions only as a routine distributor. According to the Respondent, know-how costs should be absorbed by the manufacturer, not the distributor. Conversely, the Taxpayer countered by presenting evidence that the products they market have high technical specifications whose licenses are owned by the group. The Taxpayer emphasized that as the party realizing sales at the end of the value chain, the economic benefit of the technology is fully enjoyed by the Taxpayer.
The Panel of Judges held that the benefit test must be viewed holistically within the group's value chain. The Panel found that although PT HI is a distributor, the rights to the technology are essential for the success of product sales in the domestic market. The royalty charging was considered arm's length as it avoids double deduction at the manufacturing level and ensures costs are allocated to the entity that obtains direct income from the use of the IP. The verdict granted the Taxpayer's appeal on this item.
This decision sends a strong message that functional characterization (distributor vs. manufacturer) does not automatically invalidate the Taxpayer's right to charge IP costs, as long as the causal relationship between costs and income can be clearly proven.
A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here
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