Intangible Asset, Inter-Company Services and Transfer Pricing
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Intangible Asset, Inter-Company Services and Transfer Pricing

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Intangible Asset, Inter-Company Services and Transfer Pricing Intangible Asset, Inter-Company Services and Transfer Pricing Presentation Transcript

  • Key Learning's from Recent ConcludedTransfer Pricing Audit
    2nd Annual International Tax
    &
    Transfer Pricing Conference
    Feb 13, 2010, New Delhi
    By:
    CA.Gaurav Garg
    JGarg Economic Advisors
  • After Effect of TPO’s Order
    2
    JGarg Economic Advisors Pvt. Ltd.
  • Transfer Pricing Additions
    3
    JGarg Economic Advisors Pvt. Ltd.
  • As per estimate, in past 5 years Government is able to mom-up around 23,000 cr. through transfer pricing additions.
    For FY 2005-06, out of the companies selected for scrutiny, 60% received transfer pricing bill.
    Reason for transfer pricing addition
    Recommendation of higher margin at net operating level.
    Disallowance of fees paid to associated enterprises for use of intangibles.
    Transfer Pricing Addition
    4
    JGarg Economic Advisors Pvt. Ltd.
  • Payment for intercompany services to associated enterprises disallowed.
    Indian company treated as creator of intangibles asset owned by associated enterprises, thereby addition on account of notional income.
    Transfer Pricing Addition
    5
    JGarg Economic Advisors Pvt. Ltd.
  • Intangible Asset
    &
    Transfer Pricing
    6
    JGarg Economic Advisors Pvt. Ltd.
  • Case Study 1
    Facts of the Case
    NR Parent Co. provided know how to manufacture particular finished product to its Indian Subsidiary, The Assessee.
    The Assessee, manufactured the finished goods and sold the same in India and Outside India.
    As per “Technical Know-how” agreement between the Assessee and NR Parent Co., the Assessee needs to pay royalty of 5% on sales.
    All the exports were made to NR Group Companies.
    NR Parent Co.
    The Assessee
    NR Group Company
    7
    JGarg Economic Advisors Pvt. Ltd.
  • Case Study 1
    Revenue’s Stand
    The Assessee is acting as a contract manufacturer.
    Royalty on sales made to NR Group Companies amounts to collecting royalty on sales to itself.
    Such payment of royalty is not at arm’s length and hence disallowed in full.
    NR Parent Co.
    The Assessee
    NR Group Company
    8
    JGarg Economic Advisors Pvt. Ltd.
  • Case Study 2
    NR Parent Co.
    Facts of the Case
    The Assessee is the subsidiary company of NR Parent Co.
    The Assessee uses trade mark of NR Parent Co.
    TNMM is used to justify the transaction.
    The Assessee
    9
    JGarg Economic Advisors Pvt. Ltd.
  • Case Study 2
    NR Parent Co.
    Revenue’s Stand
    Trademark owned by NR Parent Co. is not valuable.
    All the royalty paid to NR Parent Co., accordingly disallowed.
    The Assessee
    10
    JGarg Economic Advisors Pvt. Ltd.
  • Steps to be Followed
    Identify the IP
    Define Ownership
    Find value/ price
    Document it
    11
    JGarg Economic Advisors Pvt. Ltd.
  • Four vital, somewhat interrelated questions;
    Is there actually any intangible property needing to be considered ?
    If there is, who owns it ?
    If there is, would the property have any value at at arm’s length ?
    If so, what would an independent pay to use it ?
    To Put the Same in Q
    12
    JGarg Economic Advisors Pvt. Ltd.
  • Meaning of Intangible Asset
    Non physical asset of an enterprise i.e. non-financial or non-physical source of value resulting from claims of future benefit.
    As per OECD guidelines, Intangible Property are of two types
    Trade intangible (also referred technical or manufacturing) intangibles
    Patents, know-how, designs etc.
    Marketing Intangible
    Trade-marks, trade-names, customer lists, distribution channel etc.
    Meaning
    13
    JGarg Economic Advisors Pvt. Ltd.
  • Legal ownership
    Control over IP
    Economic ownership
    Ownership
    14
    JGarg Economic Advisors Pvt. Ltd.
  • CUP
    Comparable agreement between independent party
    RPM
    Where intangible is embedded in the goods transferred
    PSM
    Where no CUP is available and intangibles owned by both the AEs
    TNMM
    Tested party does not own intangible
    TP Methods
    15
    JGarg Economic Advisors Pvt. Ltd.
  • Cost Approach
    Cost of creating and transferring
    Higher the development cost, higher the value of intangible
    Several approaches to measure cost – historical cost, replacement cost and inflation adjusted cost
    Can any one tell me historical cost for creating brands like Dell, Nokia, Coca-Cola, Pepsi, Microsoft, Toyota, Sony etc ?
    Valuation
    16
    JGarg Economic Advisors Pvt. Ltd.
  • Market Approach
    Price paid for same or similar intangibles in comparable transactions among unrelated parties.
    Existence of market, comparable transaction, timings of the transaction etc.
    Valuation
    17
    JGarg Economic Advisors Pvt. Ltd.
  • Income Approach
    Value of an intangible with reference to future economic benefits of buyer or lessee
    Economic benefit should only include benefits generating directly from the use of intangible
    Present value of economic rent
    Example:
    Expected benefits Rs.100,000
    Expected growth rate 10%
    Estimated discount rate 20%
    Effective I.Tax 30%
    Valuation
    18
    JGarg Economic Advisors Pvt. Ltd.
  • Income Approach
    Valuation
    19
    JGarg Economic Advisors Pvt. Ltd.
  • Intercompany Services
    &
    Transfer Pricing
    20
    JGarg Economic Advisors Pvt. Ltd.
  • Case Study 1
    Facts of the Case
    NR Parent Co. provided management services to its Indian Subsidiary, The Assessee.
    Pricing policy on Cost plus basis.
    NR Parent Co.
    The Assessee
    21
    JGarg Economic Advisors Pvt. Ltd.
  • Case Study 1
    Revenue’s Contention
    Inadequate documentation to prove receipt of services and benefits from the same.
    Officer disallowed 100% of the management fee paid to NR Parent Co.
    NR Parent Co.
    The Assessee
    22
    JGarg Economic Advisors Pvt. Ltd.
  • Have intra-group services been provided ?
    Would an independent company pay for the services ?
    Are the services, shareholder services ?
    What is the arm’s length price of a service ?
    “Q” which require “A”
    23
    JGarg Economic Advisors Pvt. Ltd.
  • Contact Details;
    CA. Gaurav Garg
    JGarg Economic Advisors Pvt. Ltd.
    M: +91 9899994934
    E: gaurav@jgarg.com
    24
    JGarg Economic Advisors Pvt. Ltd.