Transfer Pricing of Intangibles: An Evaluative Study

under the OECD and the Indian Environment

Author: Kriti Chawla

September 2015
 TABLE OF CONTENTS

ABSTRACT 3
INTRODUCTION 4

I. TRANSFER PRICING: AN INTRODUCTION 7

a. The Foundation
b. India’s alignment with the OECD

II. INTANGIBLE ASSETS: MEANING 12

a. OECD Transfer Pricing Guidelines on Intangibles
b. OECD BEPS Action Plan 8
c. The Indian Tax Legislation on Intangible Assets
d. Intangible Assets: An Accounting Perspective
e. Comparative Table

III. INTANGIBLE ASSETS: OWNERSHIP ISSUES 17

a. Forms of Ownership
b. Legal Ownership
c. Legal Ownership from an Indian Perspective
d. Economic Ownership
e. Economic Ownership from an Indian Perspective
f. The Significant Shift in India

IV. INTANGIBLE ASSETS: VALUATION ISSUES 24

a. Introduction
b. Valuation Methods used by India and the OECD Member Nations
c. Valuation under the ‘Other/ Residual’ Valuation Method
d. Other Important Valuation Techniques

CONCLUSION 36
BIBLIOGRAPHY 38

2
 ABSTRACT

This Dissertation discusses the transfer pricing provisions applicable to Intangible Assets as
per the Indian Transfer Pricing Regime and the guidelines issued by the Organisation for
Economic Cooperation and Development (OECD) in this regard. This study comprises Four
Chapters.
a. The First Chapter addresses the basics to transfer pricing.
b. The Second Chapter is a thorough analysis in identifying an Intangible asset for transfer
pricing purposes. It compares the meaning adopted by the Indian Income Tax Act and the
OECD for this purpose.
c. The Third Chapter describes two types of ownership i.e. Legal and Economic ownership;
the same are discussed with reference to some Landmark Indian Judicial Case Laws. An
important issue related to Marketing Intangibles, specific to India, is also explained in this
chapter.
d. Lastly, the Fourth Chapter identifies the different methodologies concerning valuation of
Intangible Assets.

3
 INTRODUCTION

‘Intangibles are not only the subject of transfer pricing scrutiny, but one of the very reasons
for the existence of the transfer pricing issue in the first place.1’

‘Vodafone wins Rs.3200cr tax case. 2 ’ was the headline in one of the leading Indian
Newspaper3 in October 2014. The Mumbai High Court finally decided supporting Vodafone
in the fame-filled transfer pricing case. The Indian Telecom Minister Mr. Ravi Shankar
Prasad, reported to reporters, ‘The Government wants to convey a clear message to investors
world over that this is a government where decision would be fair, transparent and within the
four corners of law. We have tried to give a positive message to investors.’

Another report by the United Nations Conference on Trade and Development (UNCTAD)
posted ‘Inflows to South Asia rose to USD 41 billion in 2014, primarily owing to growth in
India, the dominant FDI recipient in the region.4’ The report also mentioned about the ‘Make
in India’ initiative by the Government of India with which India associates high hopes to be a
leader and occupy a strong position in the automotive Industry in the world.

‘With about 3500 disputes, India has the third largest number of pending cases related to
transfer pricing in the world, says global consultancy EY.5’

These excerpts say much about transfer pricing in India. Identifying a correlation between
these statements became the underlying foundation of various questions relating to transfer
pricing in India. Any random article talking about India’s presence in the global economy in
terms of transfer pricing would commence stating, ‘India is not a member to the OECD
(Organisation for Economic Cooperation and Development).’ Despite that, India holds an
influential position in transfer pricing through elaborative provisions on the same in the
Indian Income Tax Act. Likewise, the Office of the Director of the Indian Income Tax

1
Jens Wittendorff, 'Valuation Of Intangibles Under Income Based Methods' (2010) September/ October 2010
International Transfer Pricing Journal 1.
2
The Times of India, 'Vodafone Wins Rs.3200Cr Tax Case' (2014).
<http://timesofindia.indiatimes.com/business/india-business/Vodafone-wins-Rs-3200cr-tax-
case/articleshow/44779467.cms> accessed 16 June 2015.
3
This was also published in many others leading newspapers in the city. This case was decided by the Mumbai
High Court on 10th October 2015.
4
UNCTAD, 'World Investment Report 2015: Reforming International Investment Governance' (2015).
<http://unctad.org/en/PublicationChapters/wir2015ch2_en.pdf> accessed 19 June 2015 (Page 48).
5
The Economic Times, 'India Has 3Rd Largest Number Of Transfer Pricing Cases: EY'
(2012)<http://articles.economictimes.indiatimes.com/2012-08-20/news/33288009_1_transfer-prices-e-y-partner-
inter-company-transactions> accessed 21 June 2015.

4
(International Tax) made an appropriate response stating ‘Assessing Officers are to assess the
relevant cases under transfer pricing on the basis of Indian Income Tax Act, Rules and
circulars on the subject.6’ This was in response to an enquiry under the Right to Information
(RTI) Act, 2005 if it was open to the assessee to follow the Indian Income Tax Rules to
determine transfer pricing adjustments without acknowledging the OECD Guidelines.

In the judicial world, there exist varied views on the matter mentioned above. Further, in CIT7
v. Vishakhapatnam Port Trust8, Union of India v. Azadi Bachao Andolan9 and especially in
CIT v. EKL Appliances Ltd.10 reliance was placed on the language, literature and the terms
used in the OECD Model. However, a different view was taken in the case of Maruti Suzuki
India Ltd. v. Additional CIT 11 and/ or Mentor Graphics (Noida) (P.) Ltd. v. Deputy CIT12
wherein the views expressed in the above-mentioned cases were not accepted.

These different views became the foundation of this study, which surrounds Indian Transfer
Pricing Regime and the OECD Guidelines. However, while talking about transfer pricing, it is
believed that it is ‘an art’ that cannot be studied in isolation; an International aspect to this
subject would make it more advanced as well as interesting. With so much happening around
the globe in transfer pricing in particular (Example, OECD ‘Base Erosion and Profit Shifting’
project), it became necessary to understand the extent to which India, as developing nation
aligned to these advancements. This forms the necessary point of departure for this
dissertation.

Intangible assets in this regard, are recognised as major contentious issue in the world of
transfer pricing. ‘Intangible assets contribute significantly to an enterprise’s competitive
advantage, as they often have the potential to generate above-average returns. 13 ’ With
increased globalisation, MNC’s (Multinational Corporations) enter into new markets and
attempt in creating a competitive advantage. This happened in India after liberalization of the
economy in the year 1992. This competitive attempt by the MNC’s can be attributed to the
ownership of Intangible assets in their hands. Hence, this trade between related parties of the
MNC’s creates issues relating to transfer pricing of Intangible assets. This concern on
Intangible assets is also recognised by the OECD mentioning, ‘Particular attention to
Intangible Property Transaction is appropriate because these transactions are often difficult to

6
Indian Income Tax Authority, 'F. No. DIT(Intl Tax) RTI/2007-08/300' (29.06.2007).
7
CIT is the abbreviation for Commissioner of (Indian) Income Tax.
8
[1983] 144 ITR 146/15 Taxman 72 (AP).
9
[2003] Supreme Court of India, 263 ITR 706(SC) (Supreme Court of India).
10
[2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199(Delhi).
11
TPO [2010] 192 Taxman 317 (Delhi).
12
[2007] 109 ITD 101 (Delhi).
13
Lev Baruch, Intangibles: Management, Measurement And Reporting (Brookings Institution Press 2002) 2.

5
evaluate for tax purposes.14’

Looking at all the issues above, it became unquestionable to study transfer pricing of
Intangibles. This dissertation, hence, seeks to explain the position of Indian Transfer Pricing
Regime and the work done by the OECD in this regard. It shall try to establish study of Indian
International Taxation parallel to the OECD guidelines in this area. Though in much depth,
this study has been bifurcated into four distinct Chapters. The First Chapter will focus on the
Indian Transfer Pricing Regime and the OECD Guidelines. The Second Chapter will, in the
absence of a global definition on Intangible Assets, will analyse how the Indian Regulations
and the OECD define Intangible assets. The third chapter, after explaining the different forms
of ownership of Intangible assets, will address the specific contentious issues surrounding
‘marketing intangibles’ that are specific to India. The last chapter while addressing the
important methods of valuation of Intangible assets will also stipulate the methods used for
Transfer Pricing. However, the other techniques used by professionals around the world in
this regard shall also be an important part of this study.

14
Organisation for Economic Cooperation and Development, 'OECD Transfer Pricing Guidelines For
Multinational Enterprises And Tax Administrations' (2010) (para 6.1) 191.

6
 I. INTRODUCTION TO TRANSFER PRICING

‘How would independent/ unrelated enterprises transact?’

The fundamentals of a transfer pricing study are believed to revolve around this basic
question. This Chapter shall focus on evaluating the roots to this question. It shall answer the
‘what’ and the ‘why’ to transfer pricing, before describing the Indian Transfer Pricing Regime
in particular. The interaction between India and the OECD, in terms of the tax literature for
transfer pricing rules, is the foundation and hence would be discussed briefly.

The Foundation
‘Transfer pricing is the general term for the pricing of cross border, intra-firm transactions
between related parties. 15 ’ However, in some Countries (example India), transfer-pricing
impacts ‘specified domestic transactions’ as well. Though, in a more generic sense, it is the
‘setting of prices for transactions between associated enterprises involving the transfer of
property or services (controlled transaction).16’
The Organisation for Economic Cooperation and Development (referred to as the OECD) is a
‘forum in which governments work together so as to promote policies that would improve
economic and social well being of people around the world.17’ In terms of transfer pricing, the
OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
(OECD TP Guidelines) provide guidance on the application of the ‘arm’s length principle’,
the international consensus on transfer pricing.18 These guidelines were issued after being
approved by the OECD Council back in the year 1995. Since then, the guidelines dated 22nd
July 2010 are believed to a major improvement. Chapter VI of these improved guidelines
titled ‘Special Considerations for Intangible Property’ reflect on the tedious issues involving
Intangible assets, and is regarded as the foundation on which this dissertation is based.
The OECD, in 2013 introduced 15 Point Action Plans to address and tackle Base Erosion and
Profit Shifting. It has been stipulated in the OECD Report that, ‘Action Plan on Base Erosion
and Profit Shifting (BEPS) relates chiefly to instances where the interaction of different tax
rules leads to double non-taxation or less than single taxation. 19 ’ In September 2014, the
OECD, working together on an equal footing with the G20 Leaders, released BEPS Action

15
United Nations, 'United Nations Practical Manual On Transfer Pricing For Developing Countries' (2013)(para
1.1.6) 2.
16
ibid
17
Organisation for Economic Cooperation & Development, 'Our Mission' (2015) <http://www.oecd.org/about/>
accessed 25 June 2015.
18
Organisation for Economic Cooperation & Development, 'OECD iLibrary' (2015) <http://www.oecd-
ilibrary.org/taxation/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-
2010_tpg-2010-en> accessed 25 June 2015.
19
Organisation for Economic Cooperation and Development, 'Action Plan On Base Erosion And Profit Shifting'
(2013) 10.

7
Plan 8 on Intangibles named, ‘Guidance on Transfer Pricing Aspects of Intangibles.’ This
guidance is a revised form of Chapter VI from the previously issued OECD TP Guidelines.
OECD BEPS Action Plan 8 provides all the needed clarity to perform this dissertation on
Intangible assets, and has been relied upon in different Chapters of this dissertation.
The United Nations also issued a manual for aspects related to transfer pricing titled,
‘Practical Manual on Transfer Pricing for Developing Countries’ in the May of 2013. The UN
Model also supports the ‘Arms Length Principle’ as does the OECD.
On the other hand, India’s story to transfer pricing emerged after the introduction of Section
92 in the Indian Income Tax Act with effect from 1st April 2001. This insertion was backed
by the Indian Supreme Court decision in an ancient case of Anglo-French Textile Co. Ltd. v.
CIT20 wherein it was held that, ‘there should be allocation of Income between the various
business operations of the assessee demarcating the income arising in the taxable territories
(British India) in the particular year from the income arising without the taxable territories in
that year.21’ However, the implication22 of section 92 later became quite narrow to address
complex International Business Models effectively and hence, The Finance Act 2001 revised
that Section 92 with provisions and amendments so as to introduce new Section 92.
The revised Section 92 of the Indian Income Tax Act, 1961 currently grants operational rights
to the Indian Transfer Pricing Regime. Section 92A to 92F (Chapter X) encompass the entire
Indian Transfer Pricing Regime. Sub-section 1 of Section 92 of Chapter X, titled ‘Special
Provisions relating to avoidance of tax’ states, ‘Any income arising from an international
transaction shall be computed having regard to the arm’s length price.23’ Therefore, India is
also seen in approbation of this principle to effectively manage transfer price issues in
international transactions and also specified domestic transactions.24
Overall, it is unchallenging to establish the importance of ‘Arms Length Principle’ in the
OECD and the UN Transfer Pricing Models and the Indian Transfer Pricing Regime. This
principle has been widely acknowledged and maintained. It is the thrust on which ‘Transfer
Pricing’ is based. Implications of the Arms Length Principle can be found in Article 9 of the
OECD Model Tax Convention on Income and on Capital (OECD Model) and the UN Model
Double Taxation Convention between Developed and Developing Countries (UN Model). In

20
Anglo-French Textile Co Ltd v CIT [1952] Supreme Court, 25 ITR 27 (Supreme Court).
21
MB Rao and Manjula Guru, Joint Ventures In International Business (Vikas Publishing House Pvt. Ltd 2009)
205.
22
According to the section, the Assessing officer was entrusted to make adjustment to the profits accruing to a
Resident, if it appeared, on the basis of ‘close connection’ between the Resident and the Non-Resident, that
arrangements have been made to produce to the resident a situation of absence/ less profits relative to normal and
ordinary profits that might be expected in that particular activity.
23
Indian Income Tax Act 1961-2015 s 92B(1); this section is believed to be the key of Indian Transfer Pricing and
would be an element of discussion in various parts of this dissertation.
24
The Finance Act 2012 extended the scope of Indian Transfer Pricing provisions to ‘Specified Domestic
Transactions’. This was following the judgment of the Supreme Court in ‘Glaxo SmithKline Asia Pvt. Ltd’. [CIT
vs. Glaxo SmithKline Asia (P.) Ltd. [2010] 195 Taxman 35 (SC)]; the scope of this dissertation is, however,
limited to Indian Transfer Pricing in the International Context.

8
India, Section 92(1) of the Income Tax Act, 1961 guides on the computation of ‘Income from
International Transactions’ using the Arms Length Price. Accordingly, Section 92C provides
for the computation of such price. On the whole, Article 9 of the OECD Model Tax
Convention reads, ‘Where conditions are imposed or made between two associated
enterprises in their commercial or financial relations which differ from those which would be
made between independent enterprises, then any profit which would, but for those conditions,
have accrued to one of the enterprises, but, by reason of those conditions, have not so
accrued, may be included in the profits of that enterprise and taxed accordingly 25’. In simple
words, this principle explains that transfer price should be the one as would be deemed to
exist between parties not related or associated i.e. parties not being part of the same corporate
group (Uncontrolled Transactions). Hence, routing us back to the question, ‘How would
Independent/ Unrelated enterprises transact?’
Analysing Section 92B(1) of the Indian Income Tax again, the term ‘International
Transaction’ erupts as one of the most critical amendments demanding attention. While
OECD does not make an elaborate mention to the term, Section 92B of the Indian Income
Tax Act 1961 provides amended definition to the term ‘International Transaction’ in detail.
Identification of ‘International Transaction’ is believed to be the starting point in Transfer
Pricing (of Intangibles), after which, all the requirements and the legal obligations under the
Indian Transfer Pricing Regime would have to be complied with.
International transaction, in the Indian context, means a transaction between two or more
associated/ related entities (wherein either one or both are non-residents in India)26. Finance
Act 2014 through sub-section 2 of Section 92B extended the implication and scope of the
term ‘International Transaction’. Accordingly, any transaction between the taxpayer and an
unrelated party could be within the purview of Indian Transfer Pricing Regulations and hence
be termed as ‘International Transaction’ if:
i. There exists a ‘prior agreement’ 27 between an enterprise/ affiliate related to the
taxpayer and the unrelated party; or
ii. ‘The terms of the relevant transaction’ 28 are identified substantially between this
associated enterprise and the unrelated party.
The amendment in the Finance Act 2014 resolved the controversy on whether or not the
unrelated party would be a non-resident Indian. It has now been clarified29 that the operation
of this section would be maintained ‘regardless of whether such other person (unrelated party)

25
Organisation for Economic Cooperation and Development, 'Model Tax Convention On Income And On Capital'
(2010) 29-30.
26
Indian Income Tax Act, 1961-2015, s 92B(1).
27
Indian Income Tax Act, 1961-2015, s 92B(2).
28
ibid
29
With effect from 1st April 2015.

9
is a non-resident or not.30 This amendment, is believed, has come into effect after the much
talked about Vodafone31 case.
The case of Vodafone involved three entities i.e. Vodafone India Services Pvt. Ltd. (the
taxpayer), Hutchison Whampoa Ltd (HWL) and Hutchison Whampoa (India) Pvt. Ltd. (HWP
India i.e. the Indian Entity and Subsidiary of HWL). The case involved the sale of ‘call centre
business’ by the taxpayer to HWP India. The Mumbai ITAT (Income Tax Appellate Tribunal)
lifted the corporate veil in analysing the transactions to conclude that that transaction between
the taxpayer and HWL contributed to an International Transaction. This conclusion was
achieved despite acknowledging that there existed no legal agreement between the taxpayer
and HWL as regards such sale. It was also observed that the payment for such acquisition was
ultimately made to the bank accounts of HWL through the Indian bank accounts of HWP
India. The Mumbai Tribunal rightly lifted the corporate veil so as to expose this case to
transfer pricing analysis. Hence, the scope of transfer pricing in India widened to include
transactions that were not considered for transfer pricing analysis before.
Another important much needed development in the definition of the term ‘International
Transaction’ happened by amendment in the Finance Act 2012. The term was widened to
include ‘services relating to development of marketing intangibles’ within its scope. It was
also followed in the judicial case of LG Electronics India Pvt. Ltd. 32 that the transaction
undertaken in the instant case was regarded as International Transaction. Also, in the case
involving ‘Sony Ericsson Mobile Communications’33 the Court pronounced that the taxation
department had the authority to consider the ‘AMP’ (Advertising, Marketing and Promotion)
expenditure sustained by the Indian Enterprise for its foreign Parent Company as an
‘International Transaction’ following Section 92B of the Indian Income Tax Act, 1961.
Acknowledging that the discussion on Marketing Intangibles is quite crucial to India, these
cases are also topic of detail discussion in Chapter 2 of this Dissertation.

India’s alignment with the OECD

India is a Non-OECD Member Country. Nevertheless, since 2006, India started participating
in the meetings of the Committee of Fiscal Affairs (CFA) as an observer only. The OECD
maintains a cordial working relationship with India, besides its other member nations. The
OECD has been co-operating with India since 1995. India is also on the Governing Board of
the OECD Development Centre.34

30
Inserted by the Finance (No. 2) Act, 2014, effect from 1-4-2015.
31
Vodafone India Services Pvt. Ltd v ACIT [2014] [TS-422-ITAT-2014 (mum)-TP].
32
LG Electronics India Private Limited v Assistant Commissioner of Income Tax [2013] 140 ITD 41
(Delhi)(Special Bench).
33
Sony Ericsson Mobile Communications India Pvt. Ltd v CIT [2014] (ITA No 16/2014).
34
'India And The OECD' (2015) <http://www.oecd.org/india/indiaandtheoecd.htm> accessed 25 June 2015.

10
India has successfully been working on its Transfer Pricing Regime to match the growing
complexity of international standards35. It also recognises the importance of the OECD as an
International tax literature. This importance was established by the High Court of Andhra
Pradesh in the case, ‘CIT v Vishakhapatnam Port Trust’36. It was specified, ‘OECD Model
Conventions and Commentaries constitute international tax language and the meanings
assigned by such literature to various technical terms are to be given due weightage.’ Hence,
it could be observed that the tax literature published by the OECD is given importance in
India in a wide context. Additionally, this importance to the OECD Convention has also been
seen in landmark cases in India including, ‘Union of India v Azadi Bachao Andolan’37 and
‘CIT v EKL Appliances limited’38. In the latter case, the High Court of Delhi had observed,
‘There is no reason why the OECD Guidelines should not be taken as a valid input in the
present case in judging the action of the TPO.’ The Delhi High Court Judge then, in the same
case acknowledged that the guidelines in a different form had been appreciated in the tax
jurisprudence of India before.’

On the whole, this Chapter tried to give an overall analysis of the Indian Transfer Pricing
Regime and the OECD Transfer Pricing guidelines. It tried to explain issues relevant to India
in brief, so as to build foundation for the technical aspects on transfer pricing with special
attention to Intangibles. Also, this Chapter attempted to address how India adopts the
International policies and guidelines laid down by the OECD. Next, this dissertation will
focus primarily on the subject matter of this dissertation i.e. Intangible Assets.

35
This can be evidenced from the amendments in the Indian Income Tax Act, matching the pace of International
best practices and international tax regulations.
36
[1983] 144 ITR 146/15 Taxman 72(AP) (n 8).
37
[2003] 263 ITR 706 (SC) (n 9).
38
[2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199(Delhi) (n 10).

11
 II. INTANGIBLE ASSETS: THE MEANING

An Intangible asset can be identified as ‘a claim to future benefits that does not have a
physical or financial (a stock or a bond) embodiment.39’
‘It is not that easy’, would generally be words of a tax professional dealing with issues
surrounding Intangible assets. An absence of a recognised ‘global definition’ on Intangibles
assets is the underlying reason behind this statement. Hence, this Chapter will make an
attempt to define the term ‘Intangible Assets’ as used by the OECD and India; together with
analysing the extent to which they align. This has also been described by means of a
comparative table at the end of this Chapter. Focus would be placed on the meaning and
clarification of the term ‘Intangible Asset’ for the term for transfer pricing purposes.
Additionally, the views expressed by the accounting world on ‘Intangibles’ would be also
analysed. It is, at this point, to be noted that in tax laws, the word ‘Intangibles’ is used
interchangeably with ‘Intangible Assets’.

OECD Transfer Pricing (TP) Guidelines on Intangibles

Contained in the OECD TP Guidelines, ‘Intangible Property’ means ‘rights to use Industrial
Assets such as patents, trademarks, trade names, designs or models. It also includes literary or
artistic property rights, and intellectual property such as know-how and trade secrets. 40 ’
However, as could be identified, these guidelines are restricted to Business rights41. Next,
OECD Transfer Pricing Guidelines categorises these Commercial Intangibles to Marketing
Intangibles and Trade Intangibles. Marketing Intangibles include trademarks and/ or trade
names that service in the ‘commercial exploitation’ of a product or service, while trade
intangibles are created through risky and expensive research and development (R&D)
activities.42 This definition was restricted and quite narrow in its scope. With complexity and
growing technicalities 43 in business models, there was a need to introduce an advanced
definition to this term. OECD BEPS (Base Erosion and Profit Shifting) was the necessary
improvement that the OECD introduced by means of OECD BEPS Action Plan 8 (Guidance
on Transfer Pricing Aspects of Intangibles).

OECD BEPS Action Plan 8 (Guidance on Transfer Pricing Aspects of Intangibles)

The OECD BEPS refers to Intangible as ‘something that is:

39
Baruch (n 13) 5.
40
OECD (n 14) (para 6.2) 191.
41
Intangible property associated with commercial activities.
42
OECD (n 14) (Para 6.3) 192.
43
Including digitalization of the economy and hence, business structures.

12
a). Not a physical or a financial asset;
b). Which is capable of being owned or controlled for use in commercial activities; and,
c). Whose use or transfer would be compensated had it occurred in a transaction between
independent parties in comparable circumstances.44’

The Indian Tax Legislation on Intangible Assets

The Indian Income Tax Act, 1961 has adopted a much-detailed definition of the term
‘Intangible Property’. The definition became validated by the amendment in the Finance Act
2012, which had retrospective effect from the year commencing 1st April 2001. It has been
provided by means of explanation (ii) to Section 92B(2) of the Indian Income Tax Act, 1961.
The Act divides different items into ten categories, apart from two definable (residual)
categories to define Intangibles for the purpose of Indian Transfer Pricing Regime. The first
five categories, namely, marketing, technology, artistic, data processing and engineering
related intangible assets include incontestable items including, trademarks, brands, logo,
patents, literary works, copyrights and/ or industrial designs, trade secrets that have been
recognised in the revised OECD Chapter VI too. Apart from those, India recognises goodwill
as institutional goodwill, personal goodwill of profession, celebrity goodwill and the like
under Explanation (ii) to Section 92B(2) of the Indian Income Tax Act, 1961 as an Intangible
asset. It can be witnessed how India has incorporated ‘contract and location related
intangible’ viz. favourable supplier, license agreements, mineral exploitation rights, air and
water rights etc. assets within its purview to keep abreast of the changes in the International
tax world currently. It is important here to mention ‘human related intangible assets’
comprising, trained and organized workforce, union contracts etc. that have been
acknowledged by India as an Intangible asset. The last category of Section 92B(2), Indian
Income Tax Act, 1961 is rather residual in nature that reads, ‘any other similar item that
derives its value from its intellectual content rather than its physical attributes.’ This last
category is perceived as self-explanatory; targeting the basic underlying feature of an
Intangible asset i.e. the asset is valued, for it is the result of creativity rather than mere
physical existence. Further, in defining Intangible assets, mention has to be made of ‘location
savings’. Location Savings, as the name suggests, can be described as net ‘cost savings’
owing to relocation from a high to a low cost operation in a jurisdiction. OECD BEPS
(Revised Chapter VI) does not recognise these as Intangible assets. This is because of their
incapability of being owned or controlled45. However, OECD BEPS Guidelines recognise
their importance to be an indispensible part of ‘comparability analysis’. The stand taken by

44
Organisation for Economic Cooperation and Development, 'Guidance On Transfer Pricing Aspects Of
Intangibles', ‘Base Erosion and Profit Shifting Project (OECD BEPS)’ (2014) (Para 6.6) 28-29.
45
Reference here could be made to point (b) of definition of Intangibles, (n 44).

13
India in this context is relatively different. MNC’s enjoy substantial advantages in India due
to the abundant availability of skilled manpower at a relatively low cost. Hence, the tax
authorities stand the view that the benefit must accrue to the jurisdiction where business
activities are performed.

The OECD Guidelines prescribe no distinct compensation for these Intangibles in case of
presence of local comparables. This approach, however, is not in tune with the Indian
Revenue Authorities. It has been stipulated that such a procedure would not give weightage to
proper benefits accruing owing to location savings. A developing country might prefer an
action of resistance, in a matter such as this.

Intangible Assets: Accounting Perspective

For the purposes of Financial Reporting, in the International context, various Accounting
Standards have been developed by International Organisations to define an Intangible. The
International Accounting Standards Board (IASB) issues the IFRS (International Financial
Reporting Standards) which are globally accepted. They are also legally binding on the
Member States who have adopted them. International Accounting Standard 38 on Intangible
Assets was issued in January of 2012. It defines an Intangible Asset as ‘an identifiable non-
monetary asset without physical substance.46’
However, on a more domestic level, the Indian Accounting Standards (IndAS) are
Accounting Standards notified by the Ministry of Corporate Affairs (MCA), Government of
India. These standards notified by the MCA coincide with the IFRS. The Accounting
Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) also
endorses these standards. These standards, notified by the MCA are applicable on all
Companies on a mandatory basis. Further, with specific reference to Intangible assets, MCA
has notified Indian AS (Accounting Standard) 38. This standard lays down three
‘characteristic property for an asset to be qualifies as an Intangible Asset as the following:
a). Identifiability i.e. capable of being separated or divided from the entity.
b). Control over a resource i.e. the power to obtain future economic benefits flowing from the
underlying resource and to restrict the access of others to those benefits.
c). Existence of future economic benefit.47’ from the Intangible Asset.
Though these accounting standards are mandatory for companies in India for the purpose of
financial reporting, however, tax professionals in India extend much reliance on the Indian

46
'IAS 38 Intangible Assets' (2012) <http://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents/IAS38-
English.pdf> accessed 24 July 2015.
47
Ministry of Corporate Affairs, 'Indian Accounting Standard (IndAS)
38’<http://www.mca.gov.in/Ministry/pdf/Ind_AS38.pdf> accessed 25 July 2015.

14
Income Tax Act together with the OECD Guidelines (only in absence of clarity in the Indian
Income Tax Act), in terms of categorising an asset as Intangible.
On the other hand, the OECD disregards the use of accounting characterisations for Intangible
assets, especially for tax purposes. This view has been consistently followed in the revised
Chapter VI of the OECD Guidelines (OECD BEPS Action Plan 8). It expressly mentions,
‘whether an item should be considered to be an intangible for transfer pricing purposes can be
informed by its characterisation for accounting purposes, but will not be determined by such
characterisation only. 48 ’ Hence, the primary reliance for identifying the meaning of
‘Intangible assets’ especially for tax purposes would be placed on domestic taxation rules or
the OECD guidelines on the same.
Next, to conclude, the meaning of ‘Intangible Assets’ has been presented in the following
page by means of a comparative table taking into account the views of the OECD and the
Indian Tax Regime in this regard.

48
OECD BEPS (n 44) (para 6.7) 29.

15
A brief comparative overview of the meaning of Intangibles Assets as per the OECD BEPS
Action Plan 8 guidance and India’s tax legislation under its Transfer Pricing Regulations has
been presented below.

S. No. Nature of Asset OECD BEPS Action Plan 8 Indian Tax Legislation
1. Patents Recognised as Intangible asset Recognised as technology related
within Para 6.19, OECD BEPS Intangible Assets (Section
Action Plan 8. 92B(2)(ii)(b), Indian Income Tax
Act 1961)
2. Know-how, Trade Recognised as Intangible Asset as Know-how as technology related
Secrets per section 6.20, OECD BEPS Intangible Assets, Section
Action Plan 8 92B(2)(ii)(b) and trade secret under
Section 92B(2)(ii)(e), Indian
Income Tax Act 1961 as
engineering related Intangible
Asset.
3. Trade marks, Trade Trade marks and Trade names and Recognised as Marketing Related
names and Brands Brand (as a single Intangible or Intangible Assets under Section
collection of Intangibles) 92B(2)(ii)(a), Indian Income Tax
Recognised as Intangible asset. Act 1961.

4. Government Government Licenses are Under Section 92B(2)(ii)(i),

Licenses Intangibles. However, Income Tax Act 1961 as Location
distinguished from Company related Intangible asset (mineral
Registrations. exploitation rights, water rights
etc.)
5. Rights under Considered Intangible asset (Para Recognised under Section
Contracts 6.25 of OECD BEPS Action Plan 92B(2)(ii)(f) and Section
8) 92B(2)(ii)(g) of the Income Tax
Act 1961 as Customer Related and
Contract Related Intangible Assets.
6. Licenses License or other similar Under Section 92B(2)(ii)(g), Indian
contractual arrangement, whether Income Tax Act 1961 recognised
written, oral or implied, as Contract Related Intangible
recognised as Intangible asset Assets.
(Para 6.26 of OECD BEPS Action
Plan 8)

7. Goodwill and on- As per BEPS, absence of single
going concern value definition of goodwill, hence,
consider whether independent
enterprises would provide
compensation for such intangibles
in comparable circumstance.
8. Group Synergies Not recognised as Intangible
asset, because of the incapability
of being owned or controlled by
an enterprise. However, should be
addressed in comparability factors
in transfer pricing Analysis.
Section 92B(2)(ii)(j), Indian
Income Tax Act 1961 as Goodwill
Related Intangible Assets, example
Institutional Goodwill, and general
business ongoing concern value.
Recognised under Section
92B(2)(ii)(h) of the Income Tax
Act 1961 under human capital
related Intangible Assets (example
trained and organized work force/
union contracts.)

9. Assembled Not considered to be an Intangible Recognised under Section

Workforce for transfer pricing purposes. 92B(2)(ii)(h) of the Income Tax
Act 1961 such as trained and
organized workforce.

16
 III. INTANGIBLE ASSETS: OWNERSHIP ISSUES

It could be easy to judge by now the complexity involved in transfer pricing relating to
intangibles. This complexity takes new heights when determining ownership of Intangible
Assets. India has a lot to say in this context. Hence, this Chapter forms a major part in Indian
Transfer Pricing Context. This Chapter shall first discuss the various forms of Ownership of
Intangibles, before going into details to describe some issues relevant to India, in particular.

Forms of Ownership
One of the most contentious issues in transfer pricing world today is over Ownership of
Intangibles. ‘Ownership implies not only entitlement to the income generated by the
exploitation of the intangible in question, but also the associated tax and transfer pricing
consequences. 49 ’ Hence, the need to determine ownership of the intangible becomes
necessary so as to allocate the returns from the Intangible asset to the associated parties and
also to the relevant operational jurisdiction. This precisely forms the crux of determining
ownership of the Intangible asset for the purposes of transfer pricing. While deducing the
owner of the intangible property is one, allocation of returns from this property is another
aspect. The OECD Guidelines substantiate this element of importance acknowledging, ‘The
determination of the entity or entities within an MNE group which are ultimately entitled to
share in the returns derived by the group from exploiting intangibles is crucial.50’
In Transfer Pricing, the determination of ownership of Intangibles gives rise to two
Principles:
i. Legal Ownership;
ii. Economic Ownership.

Legal Ownership
Legal Ownership stems from the legal title, registration and protection available to the
Intangible Property as per the laws of a particular Nation. Hence, the company that registers
the Intangible under the laws of a Country would be rightfully called the legal owner.
However, only some intangibles are capable of being protected in this manner. Example
includes trademarks, patents, copyrights etc. With Intangibles like know-how, such is not the
case51.
The legal owner retains exclusive rights to use the Intangible and also exercises power to
avert others from using or infringing with the Intangible. However, in the absence of a legal

49
M Przysuski, S Lalapet and H Swanevald, 'Transfer Pricing Of Intangible Property' (2004) 5 Corporate Business
Taxation Monthly.
50
OECD BEPS (n 44) (para 6.32) 38.
51
This is subject matter of intense discussion in the next Paragraph ‘Economic Ownership’.

17
owner, the OECD Guidelines prescribes arrangements wherein the member of the MNE
group who would have control over decisions regarding the exploitation of the intangible and
would also have the practical capacity to prevent others from using the intangible to be
regarded as the legal owner of the Intangible Asset. OECD BEPS states that the legal owner
of the Intangible would qualify to anticipated, ex-ante returns from the Intangible, only if:

i. The legal owner performs and controls all of the functions relating to the
development, enhancement, maintenance, protection and exploitation of
Intangibles;
ii. Provides all assets, including funding, necessary to the development,
enhancement, maintenance, protection and exploitation of Intangibles;
iii. Bears and controls all of the risk related to the development, enhancement,
maintenance, protection and exploitation of Intangibles.52’

In other cases, where another member of the MNE is involved in activities to develop,
enhance, maintain, protect and/ or exploit the Intangible in question, such enterprise must
share in the anticipated returns by receiving an arms length compensation for their functions,
assets and risks. Therefore, the OECD gives entitlement to the party who undertakes majority
functions, bears majority risk and provides maximum assets to the Intangible related return.

Legal Ownership from an Indian perspective

In India, Legal Ownership had received a lot of significance by the Indian Judicial Courts.
Until recently, the Indian Judicial System well supported the idea of legal ownership. The
landmark case here is L.G. Electronics India Private Limited vs. Assistant Commissioner of
Income Tax 53 . LG Electronics Inc. is a Korean Company. LG Electronics India Private
Limited happens to be a 100% owned subsidiary of this Korean Company. The Indian Entity
manages the business of manufacture cum sale of the patented electronic products to
customers in India following the Brand name ‘LG’. In the relevant year, it was found that the
Company had incurred sizable amount of expenses on Advertising, Marketing and Promotion
Expenses (referred to as AMP Expenditure). The Transfer Pricing Officer (TPO) applied the
Bright Line Test54 and held that the expenditure was way beyond the Arms Length range
considering two comparables in this regard, namely, Videocon Appliances Limited and
Whirlpool India Limited. The TPO’s view was that excess AMP Expenditure was towards
creating this brand in India that was legally owned by the associated enterprise in Korea.

52
OECD BEPS (n 44) (para 6.68) 52.
53
L.G. Electronics India Private Limited, (n 32).
54
Originally advocated by the US Transfer Pricing Regulations and first put forward in the case of DHL
Incorporated (2002).

18
Hence, the expenditure should have been reimbursed by this Associated Enterprise. The
Company LG followed the view that it was the economic owner of the brand in India and all
the costs incurred was towards strengthening brand LG in India. The Court dismissed the
concept of Economic ownership in this case. It expressly held, ‘we do not find any weight in
the contention put forth about economic ownership and legal ownership of a brand. It is not
denied that there can be no economic ownership of a brand, but that exists only in commercial
sense. When it comes in the context of the Act, it is only the legal ownership of the brand that
is recognized.55’ This ruling in the LG Case began signaling the proposition that would follow
the views of the tax authority of any developing nation. If the tax authorities began
acknowledging economic ownership, it might result in financial loss in terms of revenue to
the Country, and the tax department in particular. However, this ruling gradually clasped
many Multinationals operating in India in similar circumstances. In this regard, the recent
judgment of the High Court of Delhi in Sony Ericsson Mobile Communications56 is a change.
This has been discussed in the next part of this Chapter in detail.

Economic Ownership
As mentioned above, there are some intangibles that are not protected by the laws of a
Country, like client lists. Therefore, legal ownership is absent these cases. And hence,
Economic Ownership comes into play.
Economic Ownership is related to economic reality and is majorly based on control exercised
by a particular entity. On a very basic level, the OECD reflects that the entity that performs
the functions, bears the risks and the costs associated with the development of the Intangible
in question would be considered to be the economic owner of the asset for the purposes of
transfer pricing. ‘The concept of economic ownership reflects the view that the opportunity to
realise income from an intangible should reside in the same entity that incurred the economic
costs and bore the economic risks to develop the intangible.57’ This seems to be in tune with
the views of the tax authorities of developing nations. Hence, looking at business models in
the world today, it seems that economic ownership is gaining more important than legal
ownership. ‘This type of ownership could override a legal title if a party without legal
ownership had made significant economic or other contribution to the development of the
intangible concerned.58’ It has also been argued that, ‘in transfer pricing, where there is a
huge impetus on the functions, assets and risk analysis, attributing no weightage to economic
ownership which is only established when an entity performs the relevant functions and

55
L.G. Electronics India Private Limited, (n 32).
56
Sony Ericsson Mobile Communication India Pvt. Ltd (n 33).
57
M Pryzsuski, S Lalapet and H Swaneveld, 'Determination Of Intangible Property Ownership In Transfer Pricing
Analysis' [2004] Tax Notes International 285-296.
58
Toshio Miyatake, 'Transfer Pricing And Intangibles' (2007) 92a international Fiscal Association 25-26.

19
incurs the related expenses, is against the very basic principles of economic reality. 59 ’
Therefore, the determination of Economic ownership is seen settled around functional
analysis. An analysis would have to be made to determine the relative contribution to the
Intangible by different group members. ‘In most situations, it needs to be determined what
investments are made by respective parties and how the allocation of functions performed,
risks incurred and assets used is made between the respective parties to determine ownership
and resulting arms length income allocation.60’
Internationally, this issue of economic and legal ownership developed from the decision in the
case of Glaxo SmithKline Holdings (America) vs. Inland Revenue Services. This case
considered the ‘developer-assistor’ relationship rule. The Internal Revenue Service (IRS) had
proposed this developer-assister rule to determine the ownership of the Intangible property as
between related parties. The rules, irrespective of legal ownership, gave recognition to the
party that made notable contribution in the development of the Intangible property. Hence,
these rules applied in cases where ownership was not determined on legal basis.

Economic Ownership from Indian perspective

The concept of economic ownership in India can be seen through judicial cases involving
Advertisement, Marketing and Promotion (AMP) expenses expended by the Indian Enterprise
on behalf of its Foreign Associated/ Parent Company. In a typical scenario that capitalises on
the abundant resources available in India, the Indian subsidiary would act as a distributor/
provider of services for its associated Foreign Parent Company and incur AMP Expenditure
relating to the same.
Hence, the issue concerns the constant dilemma:
The expenditure incurred by the Indian Subsidiary in terms of ‘Advertisement, Marketing and
Promotion’ activity, viewed as ‘non-routine’ expenditure, could be termed as ‘service’ made
to the foreign associated enterprise and hence, the Foreign Parent Company should be obliged
to compensate its subsidiary for the same. This Expenditure could be seen furthering down to
creation of Marketing Intangible of the Brand/ Asset owned by the Foreign Associated
Enterprise (Legal Owner) on account of efforts taken by the Indian Company. These efforts
are often argued to result in enhancement in the value of the Brand/ Trademark owned by the
Foreign Subsidiary. Hence, Marketing Intangible.
The Issue then drips down to two important questions:
i. Does the effort undertaken by the Indian Company in terms of AMP Expenditure
result in enhancing the value of the Intangible, the legal ownership of which is held

59
Karishma Phatarphekar, 'Economic V Legal Ownership Of Intangibles - ITAT Special Bench Perpetuates
Controversy' (2013) February 2013.
60
M. van Herksen and E Visser, 'IFA Cahier' (The Netherlands branch report 2007).

20
 by the Foreign Enterprise?
ii. Should the Indian enterprise be compensated for the above-mentioned efforts rightly
by its foreign parent Company?

It is prescribed to determine the arrangement between the two associated enterprises to

analyse the treatment of the AMP Expenditure. Faud S. Saba61 and Guy Sanschagrin62 have
identified a few possibilities in this regard. ‘A conservative approach would be to have the
associated enterprise incur all of the AMP Expenditure to make it clear that the associated
enterprise should retain the marketing intangible ownership. Else, the distributor may own
some portion of the marketing intangible. Otherwise, in a Limited-Risk Distributor setting
(LRD), AMP expense would be embedded into the distribution activity and the limited-risk
distributor would be compensated by the associated enterprise so as to earn a net arm’s length
margin.63’
In the judicial context, it all started with the concept of the ‘Bright-Line’ Test. The test,
advocated by the US Transfer Pricing Regulations, was first put forward in the case of DHL
Incorporated and Commissioner64. The Court of Appeal discussed the ‘Bright Line approach’
to set apart routine and non-routine expenditure. Hence, AMP expenditure incurred beyond
the ‘Bright Line Limit’ was to be treated as non-routine expenditure and was rather seen as
‘expenditure for the creation of marketing intangible’, in terms of economic ownership. The
US Tax court laid down, ‘bright line test which notes that, while every license or distributor is
expected to spend a certain amount of cost to exploit the items of intangible property to which
it is provided, it is when the investment crosses the 'bright line' of routine expenditure into the
realm of non routine that, economic ownership likely in form of a marketing intangible is
created.65’ Hence, the point of focus became the extent of divergence of ‘Routine’ from ‘Non-
Routine’ expenditure. In case the expenditure follows the path of ‘Non-Routine’ Expenditure,
appropriate compensation would have to be sought.
Again, in the Indian context, the Regulations do not have provisions relating to Marketing
Intangibles emanating from incurring Non-Routine advertisement, marketing and promotion
Expenditure. In the Indian Judicial World, the dominant entry was made by the case involving
the automobile manufacturer giant, Maruti Suzuki India Limited in Maruti Suzuki India
Limited v ACIT.66 Following a typical structure, Maruti Suzuki India Limited (Maruti India)
and Suzuki Motor Corporation held a license agreement wherein Maruti India paid lump sum

61
Managing Director FGMK LLC.
62
Managing Director, WTP Advisors, United States.
63
Faud S Saba and Guy Sanschagrin, 'Global Views On Indian Transfer Pricing Controversy On AMP' (2015)
January 2015 IFA News Letter, Indian Branch.
64
DHL Corporation and Subsidiaries v Comm’r US Court of Appeals [2002].
65
ibid
66
[2010] 328 ITR 210.

21
consideration, including royalty to Suzuki Motor Corporation for the license. Also, Maruti
India incurred AMP Expenditure as part of its promotion strategy. The important principle
was identified in this case relating to the AMP spending made by the Indian Enterprise.
Accordingly, the High Court of Delhi maintained the US ‘Bright-Line’ approach laying down
that the Foreign Company should make appropriate compensation to the Indian Company in
case the expenses incurred by the Indian Company are more than what would be expended in
comparable uncontrolled transactions. The over-spent amount, in this case, is regarded to
taken the shape of ‘Brand Building’ and hence, creation of Marketing Intangibles.
In the same context, looking at the OECD Transfer Pricing Manual, it mentions that ‘the
analysis requires an assessment of the obligations and rights implied by the agreement
between the parties.67’ ‘In arm’s length transactions the ability of a party that is not the legal
owner of a marketing intangible to obtain the future benefits of marketing activities that
increase the value of that intangible, will depend principally on the substance of the rights of
that party.68 ’ Though India is not a member to the OECD, however, the OECD Transfer
Pricing Guidelines are used in interpreting the Legal provisions in India; to the extent they are
consistent with such application.

The Significant Shift in India

The controversy in India surrounding ‘Marketing Intangibles’ became the subject matter of
many Indian Judicial cases involving Daikin Air-Conditioning India Pvt. Ltd. vs. DCIT,
Canon India Pvt. Ltd. vs. DCIT, Reebok India Company vs. ACIT, Haier Appliances India
Pvt. Ltd. vs. DCIT, Casio India Co. Pvt. Ltd. and most importantly, Sony Ericsson Mobile
Communications India Pvt. Ltd. The High Court of Delhi in the case of Sony Ericsson Mobile
Communications India Pvt. Ltd.69 has now pronounced some grave principles and rules to
resolve this on-going issue of Marketing Intangibles. Accordingly, the Bright Line test, as
was established by the DHL case mentioned above, was disagreed by the same High Court.
The Delhi High Court, taking into account the Indian rules and regulations, determined that
the Bright Line featured nowhere. Hence, it rejected its application in the instant case. The
most important target in this case was the variance between ‘brand-building’ and ‘incurring
AMP Expenditure’. It indicated that the existence of diverse reasons (example basic increase
in sales and hence profits) to back the resulting AMP Expenditure. It was held that ‘brand-
building’ was just one to them. Importance here was laid on the ‘distribution function’ to
analyse ‘economic ownership vs. legal ownership’. Much in tune with the OECD Guidelines,
the Court laid emphasis on functional analysis, as part of comparability analysis; i.e. an in

67
OECD (n 14)(para 6.37) 203.
68
Ibid (para 6.38) 203.
69
Sony Ericsson Mobile Communication India Pvt. Ltd. (n 33).

22
depth analysis of the functions performed, assets used and risk assumed.

In order to establish economic ownership, a few indicators were identified by the court.
‘Continued exploitation’ of the intangible by the distributor would be one. Second, the
distinction between ‘entrepreneur distributor’ and ‘pure distributor’ would have to be
clarified. Lastly, observation would have to be made if the brand/ trademark is used by the
foreign parent company for additional benefits. On the whole, this decision is seen to
influence the Consumer Industry in India through the cases that were in store for judgment,
and hence an important shift has been seen in this regard.

On the whole, this Chapter tried to analyse the two principles of ownership of intangible
property. First, attempt was laid to make a general understanding of the concept, post which,
the issue has been analysed from India’s perspective. What became necessary was to identify
the ‘change’ that has been identified through recent case laws. Hence, this Chapter addressed
the case laws in the Indian Judiciary, in this regard.

23
 IV. INTANGIBLE ASSETS: VALUATION ISSUES

Introduction
Selection of the ‘Most Appropriate Transfer Pricing Method70’ for Valuation of Intangibles is
based on Arms Length principle together with Comparability Analysis. Arms Length
Principle as stipulated by Article 9 of the OECD Model together with Comparability Analysis
had been topic of deep discussion in Chapter 1. Hence, this Chapter seeks to discuss the
Valuation methods for Intangibles adopted by the OECD Member Countries and India. Part 1
of this Chapter shall focus on the Methods widely used by India and the OECD Member
Nations. Focus would also be placed on Indian Judicial cases explaining the application of
these methods. Next, the Second sub-part shall throw light on the ‘residual valuation method’
part of the Indian Tax Regime; seldom used by the OECD Member Countries. The Third part
to this Chapter would focus on valuation techniques used in Corporate Finance primarily and
the International tax world by Tax Authorities globally.

Valuation Methods used by India and the OECD Member Nations

Section 92C of the Indian Income Tax Act, 1961 is titled ‘Computation of Arms Length
Price’. This Section prescribes methods for computation of the Arms Length Price.
Specifically, Subsection one71 of the same prescribes the following six methods namely:
i. Comparable Uncontrolled Price Method;
ii. Resale Price Method;
iii. Cost Plus Method;
iv. Profit Split Method;
v. Transaction Net Margin Method;
vi. Such other method as may be prescribed by the Board’72 73
The first five methods listed above are similarly prescribed by the OECD Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations. It categorises the methods
as:

70
Indian Income Tax Rules 1962, Rule 10C describes the Most Appropriate Method. In choosing the Most
Appropriate Method, many factors are to be taken into account mentioned in the Rule. These are no different than
those mentioned in the OECD Transfer Pricing Guidelines. A strict scrutiny of all comparability factors is required
to establish Comparability. In the Indian scenario, it was decided in the case of CIT vs. Mentor Graphics (Noida)
Pvt. Ltd. (n 11) by the Delhi ITAT (Income Tax Appellate Tribunal) that turnover was not a factor to decide
comparability. This was in contrast to the decision in the case of E-Gain Private Limited v Income Tax Officer
wherein factors including the product cycle, details on operations of the business were essential components to
determine comparability.
71
Indian Income Tax act, 1961, s 92C(1).
72
The Board refers to the ‘Central Board of Direct Taxes in India’. CBDT is an important branch of the
Department of Revenue in the Ministry of Finance. It manages Direct Taxes in the Country through the Income
Tax Department of the Government of India.
73
Indian Income Tax Act, 1961, s 92C(1).

24
The Traditional Transaction Method
i. Comparable Uncontrolled Price Method or CUP Method
ii. The Resale Price Method
iii. The Cost Plus Method
Transactional Profit Methods
i. Transactional Net Margin Method
ii. Transactional Profit Split Method.

The United Nations Practical Manual on Transfer Pricing for Developing Countries (UN
Transfer Pricing Manual) works in tune with the OECD Guidelines in prescribing the above
five methods.

‘Unlike the OECD, Indian Transfer Pricing regulations do not prescribe a hierarchy of
methods. 74 ’ In the 1995 OECD Transfer Pricing Guidelines, a definite hierarchy was
maintained by the OECD wherein the transactional profit methods were treated to be ‘last
resort’; however, the hierarchy has now been revised based on the philosophy of the ‘most
appropriate transfer pricing method’. Nevertheless, the Traditional Transaction Methods are
still considered to be the most direct method75 for valuation. The Traditional methods focus
on the price in a controlled transaction that is compared to the price charged in an
uncontrolled transaction, forming the basis for the simplicity of this method. The transactional
profit methods, on the other hand, look at the ‘net profit’ or ‘gross margin’ in a transaction.
‘Where (…) a traditional transaction method and a transactional profit method can be applied
in an equally reliable manner, the traditional transaction method is preferable to the
transactional profit method.76’ However, talking about Intangible assets, this Chapter shall
seek to explain situations in which transactional profit methods would be more useful than
Traditional Transaction Methods. Clearly, the transactional Profit Methods seek to compare
the profits arising in a transaction involving the independent enterprises; and hence are also
referred to as the ‘comparable profits methods’ or the ‘modified cost plus/ resale price
methods.77’

The OECD Guidelines, the UN Transfer Pricing Manual and the Indian Transfer Pricing
Regime do not make express mention of the valuation techniques used specifically for
Intangible Assets. However, OECD BEPS provides clarity in valuation of Intangibles. ‘The

74
Anuschka Bakker, Transfer Pricing And Business Restructurings (IBFD 2009).
75
OECD (n 14) (para 2.3) 59.
76
OECD (n 14) (para 2.3) 59-60.
77
OECD (n 14) (para 2.56) 77.

25
transfer pricing methods most likely to prove useful in matters involving transfer of one or
more intangibles are the CUP method and the transactional profit split methods.78’ ‘The Cost
Plus Method and the Resale price method are primarily used in the valuation of Tangible
transfers. 79 ’ They are seldom used for valuation of Intangible assets. The traditional
transaction methods work with strong focus on Comparability. This aspect becomes
insignificant when involving Intangible Assets; owing to the valuable and unique nature of
Intangibles. Also, ‘Unfortunately, gross profit information for comparable uncontrolled
distributors may neither be available nor reliable as a benchmark for an arms length
standard.80 ’ Hence, this Chapter, concerning valuation of Intangibles, would not focus on
Resale Price Method and Cost Plus Method.

Comparable Uncontrolled Price Method (CUP): All time Classic

CUP Method seems to be the most widely used method for valuation in transfer pricing. CUP
seeks to make a comparison of the price charged in a controlled transaction with the same in a
comparable uncontrolled transaction. ‘Under CUP, the price of a transaction between two
unrelated parties for the same product traded under the same circumstance is used as the
transfer price.81’ Hence, CUP Method uses benchmarking technique wherein the Uncontrolled
Transaction is used as a standard to which the controlled transaction is compared.
‘Comparable’ is the word that gives life to this method. This comparability is subject to the
five comparability factors described in the OECD and the UN Transfer Pricing Guidelines;
i.e. Characteristics of property or services, Economic Circumstances, Business Strategy,
Functional Analysis and Contractual Terms. CUP method makes use of both Internal and
External Comparables. The controlled transaction could be compared to a transaction
involving an associated enterprise and an independent enterprise (internal comparable). Else,
transaction between two independent enterprises could be compared to the controlled
transaction under review (External Comparable). The price under review is generally the
‘Open Market Price’. The biggest obstacle in the case of CUP is to locate an open market that
involves intercompany trading of MNC’s Intangible assets. However, ‘when such markets are
found, these services or assets are generally differentiated by significant variations in design,
functionality, performance or other factors such as brand names or trademarks. 82 ’ The
meaning of ‘price’ has been described in ‘Toll Global Forwarding India Private Limited v

78
OECD BEPS (n 44) (para 6.142) 75.
79
Jaydeep Menon, 'Intangible Asset: A Transfer Pricing Appraisal'
<http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=5431> accessed 19
July 2015.
80
Warner (2002).
81
Eden Lorraine, Taxes, Transfer Pricing And The Multinational Enterprise (The Oxford Handbook in
International Business, Oxford University Press 2001) 591-619.
82
: M Wagdy Abdallah and Murtuza Athar, 'Transfer Pricing Strategies Of Intangible Assets, E-Commerce And
International Taxation Of Multinationals' [2006] International Tax Journal 11.

26
DCIT’. It was held to interpret the term in a very realistic manner. ‘The connotations of
‘price’ as set out in Rule 10B(1)(a) are required to be taken to be something much broader
than the expression ‘amount’ in as much as it is required to cover not only quantification of
price in terms of an amount but also in terms of a formulae according to which the price is
quantified. Such an interpretation is very purposive and realistic interpretation. 83
’
Accordingly, in the case of ‘Nimbus Communications Limited vs. ACIT 84 and Cabot India
Limited v DCIT 85, a very wide scope had been entrusted on this method. Notwithstanding the
price, rate of royalty under licensing agreements of Intangibles was compared to the ‘rate’
that could be picked up from public domains, websites etc. Application of the CUP Method
can also be found in the case of EKL Appliances Ltd.86. The High Court of Delhi had upheld
the decision of Tribunal in the choice of method, in this particular case. The TPO had rightly
used the CUP Method in determining the Arms Length Price for royalty.
An important Indian case law is UCB India Private Limited v. ACIT87. The case focused on
Comparability Analysis in application of CUP Method. The Parent Associated Company in
this case is a Belgian Pharmaceutical Company that is engaged in the manufacturing of
prescriptive drugs. The Indian company is the wholly owned Subsidiary. This Indian
Company owned a huge share in the Indian Pharmaceutical Industry following the sale of a
drug for which it uses ‘Active Pharmaceutical Ingredient’ (API) as a manufacturing element.
API is imported from the Belgian Parent Company (the Inventor of this ingredient). A
Chinese Company also supplies the API to India but is not the Inventor. The taxpayer applied
the Transaction Net Margin Method (TNMM). The TPO’s perspective viewed CUP to be the
most apt method. The API’s imported by the taxpayer from the Parent Company could have
been compared to the API’s imported by comparables from the Chinese Company. The
Mumbai ITAT (Income Tax Appellate Tribunal) held that the application of the CUP Method
depends on the availability of the data for comparability analysis. It also mentioned that CUP
Method requires a very ‘high degree’ of comparability. In the instant case, there was absence
of substantive basis to compare the two transactions. The Revenue merely based the
comparison on rules set by the Government for in terms of general standards of quality and
safety. However, it was found that drugs imported from the Belgian Company had specific
exclusive research certificate that were absent in products imported from the Chinese Market.
However, the Tribunal rejected the matter and the method and passed an order for the assesse
to undertake a new transfer pricing analysis using another method on the basis of added
information from the parent company. Hence, the case was returned to the Revenue. Hence,

83
[2014] TS-383-ITAT-2014(DEL)-TP.
84
[2013] TS-362-ITAT-2013(Mum)-TP.
85
[2011] TS-242-ITAT-2011(Mum).
86
EKL Appliances Limited (n 10).
87
[2009] 121 ITD 131 (Mum).

27
what could be understood from the above case is the importance placed on comparables. If it
was to be applied in case of Intangibles, the focus has to be on intellectual property that could
be comparable to the uncontrolled circumstance. ‘Traditional techniques of valuing Intangible
assets for tax purposes, such as comparable uncontrolled price or resale price methods, might
apply in situations where comparable transactions are available or stable knowledge-induced
cash flows can be identified.88’ ‘Normally, however, tax planners will not have access to such
data and traditional valuation methods fall short.89’ In the commercial world today, it is a
rather seldom possibility. Nevertheless, this does not discourage the use of CUP for
Intangible assets; rather is dependent on the facts of each case. To come to a conclusion, CUP
Method could only be followed in the event of strict comparability similarities. This makes
the application of this method a bit challenging, especially in case of transactions involving
Intangibles.

Transaction Profit Split Method (PSM)

The most important method to value Intangibles is the Profit Split Method (PSM). This
method finds place in Rule 10B(1)(d) of the Income Tax Rules, 1962. It first mentions two
instances where Profit Split method is applicable90:
i. International Transactions or specified domestic transactions involving transfer of
unique intangibles;
ii. Interrelated transactions that cannot be evaluated separately for determining the arms
length price;
The Indian Transfer Pricing regime shows similarity to the OECD Transfer Pricing
Guidelines in the view taken for Intangibles. The OECD Guidelines clarify, ‘since it is often
hard to find comparable uncontrolled transactions, application of the traditional transaction
methods and the TNMM may be difficult. In these cases, the profit split may be relevant
although there may be practical problems in its application. 91 ’ The UN Transfer Pricing
Manual also advocates PSM mentioning its application in cases where both sides of the
controlled transaction contribute significant intangible property.
This method does not survive on comparable uncontrolled transactions, and relies on the
profits figures available within an Organization. This can be partly why this method does not
receive support from the tax authorities. However, it has also been noticed practically that
how profit split methods receive increasing acceptance for intangible asset transactions. This
could be primarily because it recognizes the ‘value added’ to the Intangibles in the course of

88
Transfer Pricing Strategies of Intangible Assets, E-Commerce and International Taxation of Multinationals (n
78) 10.
89
Marcus Collardin and Alexander Vogele, 'Knowledge Intangibles-Leveraging The Tax Advantages' 7
International Tax Review 59-61.
90
Rule 10B(1)(d), Indian Income Tax Rules 1962.
91
OECD (n 14) (para 6.26) 200.

28
different activities. Also, Profit split method focuses on the profit that has been earned by the
MNE in the course of its activities. ‘In other words, the focus is on profits actually earned,
rather than hypothetical profits.92’ The eternal problem we come across in using any method
for Valuation of Intangibles, particularly for transfer pricing is the absence of suitable
comparables. It is hard to find comparable transaction especially when the case involves
peculiar or specific intangibles. Therefore, practically, it is common to find application of
profit split methods in those circumstances.
In India, The Rangachary Committee was set up ‘to review Taxation of Development Centres
and the IT Sector under the Chairmanship of Mr. N. Rangachary, former Chairman CBDT
and IRDA.93’ Circular 2/ 201394 of the Committee deals with the application of Profit Split
Method on the R&D Centers in India. 95 There were a few important points that were
highlighted. It prescribed the use of PSM to value Intangibles, as also envisaged by Rule
10B(1)(d) of the Income Tax Rules, 1962. The circular obligates the Transfer Pricing Officer
(TPO) to record the reasons in writing, in case the application of PSM is not feasible (due to
non-availability of reliable and accruable comparables or data). The circular was later
rescinded and as such the hierarchy of methods, as stipulated by Section 92C of the Indian
Income Tax Act, 1961 (computation of Arms Length Price) is maintained with PSM being a
preferred method. Also, Absence of correlation between ‘cost incurred on R&D activities
with benefits from an intangible asset established as a result of those R&D activities’ was
viewed as the reason to discourage the use of TNMM. This method was seen to receive added
attention when the Special Bench of the Bangalore Income Tax Appellate Tribunal (ITAT) in
Aztec Software and Technology Services Ltd.96 explained this method in a reasonable manner,
as has been provided by the above mentioned rule of the Indian Income Tax Rules, 1962.
Hence, this method has also been widely accepted in the Indian taxation system.

Transaction Net Margin Method (TNMM)

Reference to this Net Margin Method (TNMM) has been made in Rule 10B(1)(e), Indian
Income Tax Rules, 1962. Transaction Net Margin Method (TNMM) would compare the ‘net
profit’ indicator of a taxpayer in the controlled transaction to an internal or an external

92
Michelle Markham, 'Transfer Pricing Of Intangibles In The US, The OECD And Australia: Are Profit Split
Methodologies The Way Forward' [2004] University of Western Sydney Law Review.
93
N Rangachary, 'First Report Of The Committee To Review Taxation Of Development Centres And The IT
Sector' (2012).
<http://www.incometaxindia.gov.in/Lists/Press%20Releases/DispForm.aspx?ID=252&ContentTypeId=0x0100D6
E46EEC34671248A7B9FB23B2AA8801> accessed 15 August 2015.
94
Government of India, 'Circular On Application Of Profit Split Method' (2013).
<http://www.itatonline.org/info/index.php/transfer-pricing-cbdt-circular-on-application-of-profit-split-method/>
retrieved 15th August 2015.
95
The controversy surrounding R&D Centers in India has been seen in a lot of judicial cases.
96
Aztec Software & Technology Services Ltd v Assistant CIT [2007] 2007] 107 ITD 141/15 SOT 49 (URO)/ 162
Taxman 119 (Mag)(Bang) (SB).

29
comparable. However, this method does not require strict comparability relative to the
traditional methods to compute the arms length price. This method is preferred second in line
to the Profit Split Method and CUP Method for transactions involving Intangibles. In case of
Intangibles, profit margin attributed to the ‘transaction’ involving Intangible should be under
review. In other words, TNMM works on transactional basis, rather than Company wide
basis. This principle was also established in the case of UCB India Private Limited vs.
ACIT 97 , wherein the Tribunal had disapproved the use of entity wide TNMM. Next, the
application of the Transaction Net Margin Method is dependent on the tested party, i.e. the
party for whom profit indicator would be tested. OECD Transfer Pricing Guidelines
prescribes, ‘the tested party is the one to which a transfer pricing method can be applied in the
most reliable manner and for which the most reliable comparables can be found. 98 ’ The
concept of ‘Tested Party’ has always been an area of controversy in India. In cases like
‘Onward Technologies Limited’ 99 and ‘Aurionpro Solutions Limite’ 100 , the Court took the
stance that the Indian enterprise should be regarded as the ‘tested party’ and not the foreign
associated enterprise. ‘The scope of TP Adjustment under the Indian taxation law is limited to
transactions between the assesse and its foreign AE. The contention that the profit earned by
the foreign AE should be substituted for the profits of the comparables is patently
unacceptable. The fact that this may be permissible under the US and UK Transfer Pricing
regulations is irrelevant.101’ However, there are also Indian Case Laws102 involving General
Motors India and Development Consultants where the Court maintained the ‘International
Practice’ in selection of the tested party. It was established in these cases that the tested party
should be the one with the least complex functional analysis and for which comparables could
be easily found.

Valuation under the ‘Other/ Residual’ Method

a. OECD Guidelines
Multinationals are free to apply any other method apart from the five prescribed the OECD
Guidelines only if it could be established that:
i. Application of the ‘Other Method would be consistent with the Arms Length
Principle as mentioned in the OECD TP Guidelines, and,
ii. None of the five methods could be used to reasonably come up with an Arms Length
Price.

97
UCB India (n 87).
98
OECD (n 14) (para 2.59) 78.
99
ITA NO.7985/Mum/2010.
100
ITA NO.7872/Mum/2001.
101
Onward Technologies Limited v DCIT [2010] (ITAT Mumbai) (ITA NO7985/Mum/2010).
102
Development Consultant Pvt. Ltd vs. DCIT (115 TTJ 577 (Kol) 2008), General Motors India P. Ltd. vs. DCIT
[ITA no. 3096/Ahd. 2010 and 3308/ Ahd. 2011.], Global Vantedge Private Limited vs. DCIT (2010-TIOL- 24-
ITAT-DEL).

30
The application of these methods, in the OECD Guidelines, is based on the concept of Arms
Length Range. India, however, has a different view on this matter, which has been mentioned
in detail post the under mentioned topic.

b. Indian Transfer Pricing Regime

The Central Board of Direct Taxes notified103 on the 23rd of May 2012, a sixth method in
calculation of the Arms Length Price that has been incorporated into the Statute. This method
became applicable from the Assessment Year 2012-13. Reference to Rule 10B of the Indian
Income Tax Rules 1962 throws light on the ‘Other Method’. It states that the other method for
the determination of the Arms Length Price shall be ‘any method which takes into account the
price which has been charged or paid, or would have been charged or paid, for the
uncontrolled transaction, between non-associated enterprises, under similar circumstances
considering all the relevant facts.104’ It could be interpreted that the so-called ‘sixth method’
takes into account the price charged by Independent enterprises working in similar
circumstances as a benchmark. Therefore, on a more general note, it could be said that the
‘Other Method’ seems an extension of the Comparable Uncontrolled Price Method. Both the
methods talk about the ‘price’ that would be charged in Similar Uncontrolled Transactions.
However, a deeper look into the ‘Other Method’ draws attention to the words, ‘price (..)
would have been charged or paid for same or similar uncontrolled transactions’. Hence, this
dissimilarity from the CUP Method invites attention to Proposed price or Transaction.
The mention of the ‘Other Method’ in the Indian Transfer Pricing is seen with a positive and
a negative outlook. The provision of the ‘sixth method’ can be seen as an aid in the
application of Arms Length Price to transactions involving assets for which comparables are
difficult to find. Example for such a transaction could include Unique Intangibles. This is
especially the case when efforts to value theses Intangibles using the methods listed in the
Guidelines go in vain. On the other side, it could be construed to be an Open Ended Method.
‘One could say that an open-ended method cuts both ways. While one would never face the
problem of lack of a method for benchmarking a transaction, the open-endedness is bound to
breed its own set of disputes and controversy.105’
Also, as could be seen in the Chapter dealing with ‘Ownership of Intangibles, there has been
much controversy in India relating to the Advertisement, Marketing and Promotion expenses
being spent by the Indian Enterprise on behalf of its foreign Associated Enterprise. Transfer
Pricing adjustments are generally made by the Transfer Pricing Officer contending that the

103
Government of India, 'Insertion Of Rule 10AB [Notification No. 18/2012 [F. NO. 142/5/2012-TPL] S.O.
1169(E)](2015) <www.incometaxindia.gov.in> retrieved 11th August 2015.
104
Indian Income Tax Rules, 1962.
105
Ashutosh Mohan Rastogi, 'Analysing The Sixth Transfer Pricing Method – Implications Et Al' (2012) June
2012 <http://www.tp.taxsutra.com/experts/column?sid=58#content-bottom> accessed 4 August 2015.

31
quantum of the expenditure was in excess of what would reasonably be expended by a party
in similar circumstances. However, the taxpayer’s argument had always been to target the
Bright-Line test with the view that the Bright-Line Test does not feature in the Indian
Transfer Pricing regime. However, the introduction of this ‘Other Method’ would
accommodate the taxpayer’s arguments in peace.

Arms Length Range

a. OECD Guidelines
The OECD Transfer Pricing Guidelines advocates the concept of ‘Range’ in Transfer Pricing.
The art of transfer pricing requires judgment at each stage, and hence applying even the ‘most
appropriate method’ to a transaction may result in more than one Arms Length Price. This is
primarily because ‘the application of the Arms Length Principle only produces an
approximation of conditions that would have been established between independent
parties. 106 ’ In case of intangibles, an Arms Length Range must normally be ‘established,
defined by a minimum price which is equal to the profit potential of the transferor plus the
amount of any closing costs, and a maximum price which is equal to the profit potential of the
transferee. There is a rebuttable presumption that the arm’s length price is equal to the middle
value of the range.107’ Much likely, no adjustment would be caused if the taxpayer seemed
well within the Range.
b. Indian Transfer Pricing Regime
Indian Transfer Pricing Regime, however, works differently in this area. The First proviso to
Section 92C states, ‘Provided that where more than one price is determined by the most
appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such
prices. 108 ’ However, a minute variation is well permissible here. The tolerance level is
currently 3%. Other concepts such as the Interquartile range are not provided in the
legislation. It is believed that avoiding the hassles by simply calculating the arithmetic mean
might not spare the Indian Tax Authorities from the other issues. ‘This (usage of Arithmetic
Mean) has been a bone of contention between the Indian and US Competent authorities when
seeking alternate dispute resolution under the mutual agreement procedure of the India-
United States tax treaty. 109 ’ The closest case decided in this regard is CIT vs. Mentor
Graphics (Noida) Pvt. Ltd.110 (Delhi High Court). Two important decisions were made in this
case. First, ‘the question of applying the OECD Guidelines does not arise because there are
specific provisions of Rule 10B(2) and (3) and the first proviso to Section 92C(2) which

106
OECD (n 14)(para 3.55) 123-124.
107
Jens Wittendorff, 'Transfer Pricing And The Arms Length Principle In International Tax Law' [2010].
International Transfer Pricing Journal.
108
Indian Income Tax Act, 1961-2015, Proviso to s 9C(2).
109
Anuschka Bakker and Belema Obuforibo, Transfer Pricing And Customs Valuation (IBFD 2009).
110
Mentor Grpahics (n 12).

32
apply111’. It also held that the ‘arithmetic mean’ as stipulated by the Indian regulations would
be required even if ‘profit level indicator of a comparable were lower than the profit level
indicator of the taxpayer112’.
Very recently, the Finance Minister, as part of the Union Budget 2014-15, showed interest in
adopting the range concept for Transfer Pricing in India. However, application of arithmetic
mean would continue. The Indian Regulations are awaiting amendment of the Indian Tax
Rules to witness the ‘range concept’.

Other Important Valuation Techniques

Arms Length Principle is not the only principle for the Valuation of Intangible Property. This
part of the Last Chapter will discuss how various other valuation techniques are used for
Intangibles. In the Indian Context, this discussion would be deemed incomplete without the
mention of the Landmark Judicial case of Tally Solutions Private Limited (Tally Solutions)113.
Hence, detailed discussion would feature on the Tribunal’s decision in the case later in this
Chapter.
The Valuation Approaches that follow are generally recognised in the fields of Corporate
Finance or Accountancy. In India, the following methods are well recognised for valuation of
Intangible assets:
a. The income Approach;
b. Market Approach; and
c. Cost Approach.
OECD BEPS recognises the ‘Income based valuation technique’ in particular. However, it
also disclaims to use the techniques with due regard to the ‘Arm’s Length Principle’ and the
‘Principles in the Guidelines 114 ’. These approaches have been discussed in detail. In a
hierarchy structure, the Income based Methods are preferred to the other two. The reason for
the presence of the hierarchical structure has been discussed in the following.

The Income Approach

The Income based valuation technique is premised on future earnings from the Intangible
asset in question. These earnings are measured over the ‘useful economic life’ of the
Intangible. The ‘earnings’ in this context mean the revenue earned or the costs saved from the
exploitation of the Intangible. In corporate finance, the commonly applied approaches are
i. The relief-from-Royalty Method;
ii. The Incremental Income Method;

111
ibid
112
ibid
113
Tally Solutions Private Limited v DCIT [2011] TS-576-ITAT-2011(Bang).
114
OECD BEPS (n 44)(para 6.151) 78.

33
 iii. The Excess Earnings Method.115

The OECD TP methods i.e. the Profit Split Method and the ‘Transaction Net Margin’ Method
could be categorised under the Income Approach. However, the revised Chapter VI, as
mentioned, provides two categories of Income approach in this regard. The ‘valuation
technique is based on the calculation of the discounted value of projected future income
streams or cash flows derived from the exploitation of the intangible being valued may be
particularly useful.116’

In the Indian Context, the excess earning method is heavily relied upon by the Indian Tax
Authorities. It is believed to be a scientific method for such valuation. ‘The excess earnings
method determines the value of an intangible as the present value of the profits attributable to
the intangible after excluding the proportion of the profits that are attributable to all other
assets (contributory assets).117’ These contributory assets help the underlying Intangible asset
in generating cash flows for the company.
In the case involving Tally Solutions118, the Indian Tax Authorities established how the Indian
tax system does not balk away from the application of complex valuation techniques,
especially in cases involving Intangible property. The case involved Tally Solutions and Tally
FZ LLC, Dubai (Associated enterprise of Tally Solution). Tally Solutions sold intellectual
property under the brand name ‘Tally’ to Tally Dubai. The TPO officer applied the excess
earning method in computing the arms length price to such transfer. On appeal by the
aggrieved, the Bangalore Income Tax Appellate Tribunal upheld the decision of the TPO on
the application of the excess earning method. The tribunal essentially focused on this method
to predict the future cash flows basis past performance. It was also held for this method to
apply projected sales (and not actual sales) because ‘when an intangible is sold, the risk of
future income potential lies with the buyer.119’

The Market Approach

This approach inputs the market’s value to the intangible asset. ‘Market Value’ has been
defines by the International Valuation Standards Council as ‘the estimated amount for which
a property should exchange on the date of valuation between a willing buyer and a willing

115
Para. 4.20 Guidance Note No. 4 [London: International Valuation Standards Council (IVSC), 2010].
116
OECD BEPS (n 44) (para 6.150) 78.
117
IVSC (n 105) para. 4.33.
118
Tally Solutions (n 113).
119
ibid

34
seller in an arm’s length transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently, and without compulsion.120’
Though being direct, this approach is not preferred because of the non-availability of input
transactions i.e. transactions dealing in similar (if not same) intangibles for which requisite
market price information would be available.

The Cost Approach

The cost approach relies on the ‘replacement cost’ in valuing an Intangible. Meaning, cost
that would be incurred in replacing an Intangible by a similar one providing similar use
relying on the relevant price available at the time of valuing the Intangible Asset. The OECD
BEPS does not advocate the usage of this method since ‘cost is not the same as value.’ Hence,
this method might produce erratic results for some Intangibles.

Apart from the methods described by the OECD guidelines and the Indian tax regulations, the
above explained valuation techniques are also useful in some cases, especially in cases
involving intangible property. Hence, appropriate judgment must be placed on all the facts
and circumstances of the transaction before valuing the underlying Intangible in a transaction.

120
IVSC (n 105) para 3.10.

35
 CONCLUSION

The issues described in this dissertation attempted to present clarity in the complex issues
involved in transfer pricing related to Intangible assets. However, expectation of a clear-cut
solution to complex issues surrounding Intangibles would not be reasonable enough.
However, ‘Transfer pricing is not an exact science.121’; it encompasses various subject matters
in its study. It is an ‘economic, legal and a statistical issue.122’ that can be elaborated and
resolved using judicial pronouncements.

The four Chapters of this study were attempted to clarify the meaning of the term transfer
pricing as well as Intangible assets. Further, it was also an attempt to discuss the various
methods and techniques available to a business enterprise under the OECD Guidelines and
the Indian Tax Regime.

The First Chapter discussed the widely acknowledged and maintained, ‘Arms Length
Principle’. It displayed how the Indian Taxation Regime has incorporated the Arms Length
Principle in their transfer pricing regulations, both for International transactions and specified
domestic transactions. It is indistinguishable to what the OECD follows in terms of pricing of
intercompany transactions. A basic similarity is seen here.

The Second Chapter, forming the key to this dissertation, is the starting point in transfer
pricing of Intangibles. The meaning of the term, ‘Intangible assets’ was explained as per the
OECD BEPS Action 8 and also, the Indian International Tax regulations. The comparative
table at the end of the Chapter summarised the position in clear understandable terms.

The Third Chapter, describing ownership, looked at the Indian case laws to describe the
position in India. It has attempted to describe the chapter into two by way of amendment in
the Indian Income Tax Act. At first, it has been reflected how the Indian Tax Administration
disregarded the concept of Economic Ownership before amendment. However, economic
ownership came to be recognised through some landmark Indian judicial cases described in
the Chapter.

The Fourth and the Last Chapter described the valuation methodologies useful specifically for
Intangible assets. This includes some valuation techniques used in finance and transfer

121
OECD (n 14) (para 1.13) 36.
122
Hari Om Jindal, Transfer Pricing In Relation To International Transactions (Young Global 2015) 9.

36
pricing methodologies. Out of five methods advocated by the OECD, it looks at three
methods specific to this study. India shares similarity in adopting the same methods for
Intangibles. Hence, how these methods are used in India have been explained vide Indian case
laws. Differences have also been highlighted in terms of the ‘sixth method’ expressly
mentioned in the Indian regulations, together with the use of ‘mean’ concept still active in
India.

As an overall summary, Indian Transfer Pricing regulations do not differ much as compared
to the principles prescribed by the OECD and followed by the OECD Member Countries. The
prime reason is the application of the Arms Length Principle. There are some minor
differences in terms of meaning of the term ‘Intangible Asset’. These difference, on a
personal belief, stem from the economic structure of the differing nations. In terms of
ownership of Intangible assets, India can be seen on moving to International Standards,
adapting economic ownership.

For valuation purposes, similar methods are seen as adopted by the OECD and the Indian Tax
Regime. India, being a developing economy, is acknowledging developments in its taxation
structure by means of significant amendments. It is a strong belief that the on going vision
will steer India to unprecedented levels of development, in years to come.

37
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