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Circulars Issued on R&D TP Issues

India

The Central Board of Direct Taxes (CBDT) has recently issued two Circulars on certain transfer pricing (TP) issues involving Indian development centres. Taxand India highlights the key points within each circular.

Circular: Application of Profit Split Method (PSM) to Indian development centres

  • There is no correlation between the costs incurred on R&D activities and the returns on an intangible developed through such R&D activities. Therefore the Transactional Net Margin Method may not be appropriate for the determination of arm's length consideration for such activities
  • Guidance provided under the existing regulations on application of PSM for international transactions which involve transfer of unique intangibles and for inter-related transactions has been reiterated
  • Where the taxpayer is unable to furnish relevant data for its operations and in relation to the Associated Enterprises for application of PSM, the burden of proof is on the taxpayer to provide sufficient reasons for the same

Circular: Identification of Indian development centres bearing insignificant risks
This Circular lays down 5 criteria, the cumulative satisfaction of which shall result in the centre being characterised as a service provider bearing insignificant risks:

  • The centre is engaged in performing economically insignificant functions
  • Foreign principal provides funds/ capital and other economically significant assets required by the centre would not use any other economically significant assets including intangibles in research or product development
  • The centre works under the direct supervision of the foreign principal which controls and supervises the work performed
  • The centre does not assume any economically significant risks
  • The centre centre does not have the ownership right on the outcome of research (legal or economic). Such rights vest with the foreign principal

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010
E. mukesh.butani@bmrlegal.in

Taxand's Take

These Circulars may have a significant bearing on the landscape of TP compliance and controversies in India. The clarifications provided by the Circulars are retrospective in nature and therefore may even impact past litigations. Only transactions involving intangibles developed through R&D activities have been addressed by the Circulars. Accordingly, the transfer of marketing intangibles, human intangibles etc should remain as they are.
 

Taxand's Take Author

Mukesh Butani
Taxand Board member
India