RECENT TRANSFER PRICING AMENDMENTS
IFA CONFERENCE, MUMBAI
Panelists
Sunil Kothare (Citigroup)
Rahul K. Mitra (PWC)
Vijay Iyer (Ernst & Young)
Mukesh Butani – Moderator (BMR Legal)
July 6, 2012
DEFINITION OF ‘INTERNATIONAL TRANSACTION’
Definition broadened retrospectively (w.e.f from April 1, 2002)
Clarificatory in nature
Financial Transactions (e.g. guarantees, receivables) included
Business restructuring / reorganisation included:

Mere portability of profit potential on flight of functions to attract exit cost?

Transfer of intangibles/ impairment of contractual rights pre-requisite for exit cost?

OECD Model & ATO guidelines vs. German regulations

What would India adopt?
INTANGIBLE PROPERTY
Increased interest of tax authorities regarding:

Economic ownership vs. legal ownership of intangible

Attribution of benefits of intangibles to parties
Disputes in India primarily focus on:

Creation of marketing intangibles by Indian entities manufacturing / distributing branded
products

Contribution of Indian contract software service providers to the overall product development
lifecycle
India legislative developments – Definition of intangibles clarificatory in nature
Source of legislation:

Website (www.valuetech.com)

US Transfer Pricing Regulations (Section 482-4)
OECD’s draft guidelines on intangibles (released in June 2012) - emphasis on FAR
for intangible related returns
MARKETING INTANGIBLES - GENERAL DISPUTE
• F Co owns the brand
• I Co distributes the products of F Co in India
• I Co incurs significant AMP expenditure to promote the sale
of these products in India and is reimbursed for a portion of
it
F Co
Entrepreneur
Brand
Distribution Rights
• Tax Authority Position: AMP expenditure incurred by I Co if
determined to be above a brightline is excessive and
amounts to brand creation
• Suitable compensation needs to be determined under TP
principles to remunerate I Co
• Could be service provider cost plus or portion of global
profits earned by F Co to the extent attributable to India
Marketing Intangible created by I Co requiring arm’s length compensation
I Co
Flow of Legal title of Goods
INDIA
Indian
Distributor
Customer
Physical movement of Goods
MARKETING INTANGIBLES - KEY ISSUES
Contractual terms - analysis of rights, terms of contract, functional and risk allocation
Performance (Significant People Function) and control of important functions related
to the development, enhancement, maintenance and protection of intangibles
Bearing and control of risks and costs related to the above activities
Is the brightline approach an acceptable methodology?
How robust is the brightline test?

Bifurcation of AMP expenditure between routine and non routine expenditure

Different accounting policy and marketing strategies hence there could be different bright
lines
CONTRACT SERVICE PROVIDER - KEY ISSUES
Contractual allocation of functions, risks and assets
Identification of key value driving functions of product lifecycle and location where
they are performed
Capabilities of Indian team (educational profile of employees, years of experience)
versus global team
Is patent filing synonymous with entitlement to greater returns?
ADVANCE PRICING AGREEMENTS
Key features:

APA between tax payer and CBDT for determination of the arm’s length price (‘ALP’) for a
proposed international transaction

APAs to be unilateral and bilateral

ALP under the APA using non-prescribed methods

Validity to be 5 years

Central Committee in Delhi to be followed
Rules to be notified soon
DOMESTIC TRANSFER PRICING
Compliances at par with international transactions
Applicable to transactions for ‘expenditure’ incurred / to be incurred (Section
40A(2)(b))
Applicable to transactions under 80IA(8), 80IA(10), 80A, 10AA – essentially covering
transactions between a taxable entity / unit with a tax exempt entity / unit
Concept of ‘Fair Market Value’ replaced by ‘Arm’s Length Price’
OTHER AMENDMENTS
Sixth transfer pricing method prescribed
Standard deduction of 5 percent (safe harbor) not available (retrospectively)
Safe harbor provision capped at 3 percent from FY 2012-13
Revenue can challenge Dispute Resolution Panel (“DRP”) directions
TPO can review international transactions not reported by taxpayer
Stringent penalties for failure to report transactions
ANNEXURE
ANNEXURE 1: DEFINITION OF INTERNATIONAL
TRANSACTION
Definition broadened retrospectively (w.e.f from April 1, 2002):

purchase, sale, transfer, lease or use of tangible property including building

purchase, sale, transfer, lease or use of intangible property, including the transfer of
ownership or the provision of use of rights regarding land use, copyrights, patents,
trademarks, licenses, franchises, customer list, marketing channel, brand, commercial secret,
know-how , new design or any other business or commercial rights of similar;

capital financing, including any type of long-term or short-term borrowing, lending or
guarantee, purchase or sale of marketable securities or any type of advance, payments or
deferred payment or receivable or any other debt arising during the course of
business;

provision of services, including provision of market research, market development, marketing
management, administration, technical service, repairs, design, consultation, agency,
scientific research, legal or accounting service;

business restructuring or reorganisation (even if there is no bearing on income,
profits, losses or assets at the time of the transaction or at any future date)
ANNEXURE 2: DEFINITION OF ‘INTANGIBLE
PROPERTY’
Marketing – trademarks, trade names, brand names, logos;
Technology – process patents, patent applications, laboratory notebooks, technical
know-how;
Artistic – literary works and copyrights, musical compositions, maps;
Data processing – proprietary computer software, software copyrights, automated
databases, integrated circuit masks;
Engineering – industrial design, product patents, trade secrets, engineering drawing,
blueprints, proprietary documentation;
Customer – customer lists, customer contracts, customer relationship, open
purchase orders;
Contracts – favorable supplier, contracts, license, franchise, non-compete
agreements;
Human capital – trained and organized work force, employment agreements,
union contracts;
ANNEXURE 2: DEFINITION OF ‘INTANGIBLE
PROPERTY’
Location – leasehold interest, mineral exploitation rights, easements, air rights, water
rights
Goodwill – institutional goodwill, professional practice goodwill, personal, celebrity
goodwill, general business going concern value;
Methods, programmes, systems, procedures, campaigns, surveys, studies,
forecasts, estimates, customer lists, or technical data;
Any other item that derives its value from intellectual content rather than its
physical attributes
ANNEXURE 3: SOURCE OF DEFINITION OF
INTANGIBLE PROPERTY
ANNEXURE 3: SOURCE OF DEFINITION OF
INTANGIBLE PROPERTY
US Transfer Pricing regulations [Section 482 – 4]

Patents, inventions, formulae, processes, designs, patterns, or knowhow;

Copyrights and literary, musical, or artistic compositions;

Trademarks, trade names, or brand names;

Franchises, licenses, or contracts;

Methods, programs, systems, procedures, campaigns, surveys, studies, forecasts, estimates,
customer lists or technical data;

Other similar items that derives its value not from its physical attributes but from its
intellectual content