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 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 F Co Entrepreneur Brand Distribution Rights Marketing Intangible created by I Co requiring arm’s length compensation INDIA Flow of Legal title of Goods I Co Distributor Indian 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