INDIA Law and Practice Contributed by: Deepak Chopra, Harpreet Singh Ajmani, Rohan Khare, Pulkit Pandey and Priyam Bhatnagar, AZB & Partners
4. Intangibles 4.1 Notable Rules
To provide flexibility to taxpayers, the CBDT introduced the concept of arm’s length range in place of arithmetic mean, applicable in the case of all transfer pricing methods except PSM and “other methods” . The aforementioned concept has been applicable from April 2014 onwards. For PSM or other methods, the earlier concept of arithmetic mean has to be adopted for calculat - ing the ALP. Also, the range concept applies only when the data set is of at least six comparable companies. The arm’s length range is defined as 35th per - centile and the 65th percentile of the data set of comparable companies arranged in ascending order. If the transaction falls within the aforesaid range, then the transaction is deemed to be at arm’s length. Furthermore, in case of less than six comparable companies, the earlier concept of arithmetic mean must be followed. These amended rules provide a certain flexibility in arriving at the ALP by the taxpayers in India. 3.5 Comparability Adjustments Rule 10B(3) of the IT Rules allows for making reasonably accurate adjustments to an uncon - trolled transaction in order to remove material effect of differences which emerges during the course of its comparison with an international transaction or specified domestic transaction. However, since the obligation is on the taxpayer to maintain proper documentation and informa - tion under Section 92D of the IT Act, the onus to prove “reasonably accurate comparability adjustment” is also on the taxpayer. Thus, com - parability adjustments, if any, cannot be sought as a matter of right and must be substantiated/ backed by contemporaneous data.
At the time of writing, there is no specific provi - sion in the transfer pricing regulations in India, which would cater only to the valuation of Intan - gibles. Having said that, the definition of the term “international transaction” itself makes a specific reference to intangibles. This implies that rules applicable to all international transactions apply mutatis mandis to intangibles. Further, the term “intangible property” is defined under Explana - tion (ii) of Section 92B of the IT Act, including: • marketing-related intangible assets, such as trade marks, trade names, brand names, logos; • technology-related intangible assets, such as process patents, patent applications, techni - cal documentation such as laboratory note - books, and technical know-how; • artistic-related intangible assets, such as liter - ary works and copyrights, musical composi - tions, copyrights, maps, and engravings; • data processing-related intangible assets, such as proprietary computer software, soft - ware copyrights, automated databases, and integrated circuit masks and masters; • engineering-related intangible assets, such as industrial design, product patents, trade secrets, engineering drawing and schematics, blueprints, and proprietary documentation; • customer-related intangible assets, such as customer lists, customer contracts, customer relationship, and open purchase orders; • contract-related intangible assets, such as favourable supplier, contracts, licence agree - ments, franchise agreements, and non-com - pete agreements; • human capital-related intangible assets, such as trained and organised work force, employ - ment agreements, and union contracts;
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