Intangible Asset, Inter-Company Services and Transfer Pricing

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Intangible Asset, Inter-Company Services and Transfer Pricing

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

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