1. 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

2. 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?

3. 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 (
US Transfer Pricing Regulations (Section 482-4)
OECD’s draft guidelines on intangibles (released in June 2012) - emphasis on FAR for intangible related returns

4. 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

5. 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

6. 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?

7. 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

8. 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’

9. 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
Revenue can challenge Dispute Resolution Panel (“DRP”) directions
TPO can review international transactions not reported by taxpayer
Stringent penalties for failure to report transactions

10. ANNEXURE

11. 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)

12. 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;

13. 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

14. ANNEXURE 3: SOURCE OF DEFINITION OF INTANGIBLE PROPERTY

15. 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