Transfer pricing transaction in a MNE is done to reduce tax burden and improve
profits of the enterprise. It is usually done by utilizing the complex economic
to their advantage globally. A MNE would transfer its profits form high tax
jurisdiction to associated enterprise in a low tax jurisdiction. This process of
transfer of profits shifts the tax base of the MNE from a high tax jurisdiction
to an associated enterprise in favorable jurisdiction with low tax.
the said conversion without significant loss of profit the MNE would manipulate
the prices of the transaction. The process of shifting profits from one regime
to another significantly effects the jurisdiction whose tax base is getting
converted. In a globalized world the MNE's have wide range of options to do tax
planning and avoid paying minimum taxes but while using transfer pricing the
companies deliberately under value the profits to invoke even less tax.
essence the companies are trying to evade their duty to pay taxes. The use of
transfer pricing is not limited to economic relations with foreign nations and
can also happen domestically. The end goal of the companies is to reduce
their tax burden as much as possible using complex economic situations. One such
situation arises in cases where the transaction involves intangibles assets.
the present paper I will be discussing the transfer pricing of intangibles both
in India and United States of America. Firstly, I will explain the relevant
legislation in both the countries. In the second part of the paper, I will
discuss the problems that arise out of intangibles in both the countries.
Finally conclude the paper and discuss future trends that needs to be kept in
Transfer Pricing of Intangibles practices India:
The Indian tax authorities being one of the signatories to OECD in 2001 had
introduced transfer pricing provisions into Indian income Tax Act. The provisos
are made in line with OECD guidelines but are not explicitly mentioned under the
act. With the global consensus reaching a conclusion that fraudulent transfer
pricing transactions are eroding the tax base, India felt the need to protect
its tax base.
To find whether a transfer pricing is fraudulent or not arm's
length principle is used to find if the transaction between the associated
enterprise is reasonable are not. After the adoption of the transfer pricing
mechanism India became the leading jurisdiction in court cases and jurisprudence
of TP related matters.
Putting aside these the fourth industrial revolution increased the scope for
intangibles to be marketable assets. Intangibles assets a do not have a form but
are just ideas. The intangible assets are hard to compare in the market and also
unpredictable. The OECD tries to define intangible assets as " things not having
physical form and are capable of being owned and controlled for business
purposes. In essence the determining criteria for "intangibles" is that they
must have market value . The UN Manual under para 1.6.5 states that intangible
property are of two types and they are:" trade intangibles and marketing
In the context of the Indian tax levitations the word "intangible property" is
not specifically defined under the Income tax Act with respect to international
transactions. The term "intangibles" is inserted under section 92B of the income
tax Act through the Finance act of 2012 as an explanation proviso. The
explanatory proviso gives out 12 things which can be included under the term
"intangibles property" and does not include what should be excluded. The OECD
had segregated the list into two main categories called : "trade intangibles and
The trade intangibles include the know-how connected to
the products and services which are made through research and development. The
market intangibles on the other hand, refer to trademark names etc. used for
commercial exploitation of product or service. In an international transaction
between related parties of same company do the transfer pricing through transfer
of ownership, licensing, and cost sharing.
As the law relating to the transfer Pricing of Intangibles is evolving a number
of issues arose before the courts of India to adjudicate upon and improve
related jurisprudence. In the case of Sony Ericsson Mobile Communication vs CIT
while the Delhi High court dealing with market intangibles held that
advertisement marketing and promotion (AMP) gives raise to international
transaction if the AMP expenses in a transaction between international MNE and
the associated enterprise cost occurred in India.
The Delhi High court in the
case of Bausch and Lomb stated that AMP cannot be a transaction but a function.
In the case of M/s Sony India Limited and various others, the Delhi high court
held that the tax authorities' does not have any discretion to disregard the
original transaction to substitute it with another transactions. Only in two
exceptional circumstances the discretion could be used. The first is when the
substance of the transaction widely varies from its form. The second is when the
contract made in relation to the transaction differs from a contract that would
have been entered into by independent enterprise.
Transfer Pricing of Intangibles practices United States:
The United States has a huge influence and history in transfer pricing
legislation to influence nations worldwide. The concepts related to TP
originated mostly from U.S. The case of E.I. DuPont de Nemours &co is a
stepping stone to the modern era for utilization of economic data in TP. The
usage of economic analysis to show the difference in the profits earned and
shown to the government for tax purposes.
Later, in 1980s the importance of the
intellectual property coupled with product services showed great synergy and
came to know that they are losing out on substantial amount of tax base. To
these adequate efforts are taken. The US legislative frame work for transfer
pricing for intangiables assests is laid out inf section 482 of Internal Revenue
Comparing the text of United States legislation under section 482 of Internal
Revenue Code to Indian legislation under Section 92B explanation and section
2(11) of the Act, look identical with slight variations. The united States in
2018 had added the word goodwill to the definition of intangible property.
Putting aside the legislation the United States also provided significant
landmark case to the jurisprudence of transfer pricing of intangibles.
In the case of G.D Searle & Co
. the U.S court held that when an ownership of
intangible is transferred to Associate enterprise there must be presence of
business purpose or otherwise the transfer of ownership is not recognized. In
another case of Eily Lily and Co. the court held that the ownership does not
permanently lie with the party who developed the intangible and can be
transferrable to another party.
Challenges faced by both US and India in Transfer Pricing of Intangibles.
The common challenges faced by both the Indian and US tax administrators is as
- While determining the arm's length price or rate for a TP involving
intangible it will be difficult to get data to compare fair market value. This
problem arises most of the times when the intangibles in the transaction are
rarely used for trade purpose in public domain.
- Marketing intangibles are often transferred with other tangible assets,
and this combination gives a synergistic effect to the transaction the boost
the price of the product or service. In these kinds of situations, it is
difficult to differentiate the transaction between tangible and intangible
- In most extreme cases the intangibles assets are hard to detect.
The difference between both the Indian and US at least till 2011 used to be the
ownership of intangible assets. The US tax administration identified that
whoever has the owner ship would hold the profits derived by that product or
service. After 2011, the U.S decided to identify the ownership based on value
creation or addition to the intangible substance. This kind of ownership is
recognized even by India after it followed the OECD Guidelines.
The transfer pricing of intangibles is ever evolving. The jurisprudence of the
subject matter at hand evolved due to landmark cases which dealt with important
issue not covered by the act. The present legislative frame work will not be
enough to solve all the problems and it needs the combined effort or all the
The unified approach to the subject matter and standardization of
certain principles would help improve the subject. It is to be noted that due to
rapid growth in technology more unique intangibles might appear, so the unified
approach must also be fluid enough to allow changes to law and catch up to the
- (Transfer Pricing of Intangibles: A Comparison between the Netherlands
and the United States by Frederik Boulogne :: SSRN, n.d.)
- (Boulogne, 2008)
- (Current Issues in the Taxation of Intangibles: An Attempt to Tax
"Scotch Mist"? | Request PDF, n.d.)
- Sony Ericsson Mobile Communication vs CIT while the Delhi High 16 March,
- M/s Sony India Limited and various others,16 March , 2015
- E.I DuPont de Nemours & Co vs United States , 78-1 USTC (Ct. Cl 1978)
- G.D. Searle & Co. v. Commissioner, 88 T.C. 252, 87 TNT 24-16 (1987)
- Eli Lilly & Co. v. Commissioner of Internal Revenue, 84 T.C. 996 (1985);
aff'd in part, rev'd in part and remanded, 856 F.2d 855 (7th Cir. 1988)
- (Mcgee & Preobragenskaya, 2006)