Intangibles in Indian Transfer Pricing
Control (legal and economic) is the starting point. DEMPE, assets and risk control determine the arm’s length return.
The central issue is not merely who owns the patent, trademark, technology or customer relationship on paper. The real transfer pricing question is whether the entity claiming the intangible return performs the relevant functions, uses the necessary assets and controls the economically significant risks. A registration certificate or intercompany agreement is important evidence, but it is not a complete transfer pricing answer.
This distinction matters in India because disputes frequently arise around royalty, technology fees, brand promotion, contract research, software development and the migration of valuable rights. In each case, the analysis must begin with the transaction and the evidence—not with a label such as ‘IP owner’, ‘limited-risk entity’ or ‘economic owner’.
What counts as an intangible
For transfer pricing purposes, an intangible is broader than a registered patent or trademark. Section 92B of the Income-tax Act, 1961 expressly covers the purchase, sale, transfer, lease or use of intangible property and gives an extensive list that includes patents, trademarks, licences, franchises, customer lists, marketing channels, brands, know-how, commercial secrets and similar business or commercial rights. The OECD approach is also functional: an item may be an intangible if it is not a physical or financial asset, can be owned or controlled for commercial use, and independent parties would compensate for its use or transfer.
Not every advantage is a separately transferable intangible. Group synergies, an assembled workforce and local market characteristics may affect pricing, but they do not automatically become owned intangibles. The practical task is to identify the specific right or value driver, the entity that controls it, and the transaction through which another entity uses or acquires it.
The identification must be specific. A description such as ‘technology’, ‘brand’ or ‘know-how’ is usually too broad. The taxpayer should identify the relevant patent, process, software, trademark, customer right or licence, explain how it creates value and determine whether independent parties would pay for its use or transfer. The OECD also treats the underlying intangible and a licence over that intangible as separate rights. The owner of a trademark and the holder of an exclusive territorial licence may therefore own different intangibles for transfer pricing purposes.
Legal ownership and economic ownership
Legal ownership identifies who holds the enforceable right. It is usually evidenced by registrations, contracts, licences and applicable law. Legal ownership is therefore the starting point for identifying the parties and the controlled transaction.
Economic ownership is better treated as shorthand, not as a competing title. The OECD Guidelines do not simply replace the legal owner with another entity called the ‘economic owner’. They ask whether group members have performed functions, used assets or assumed and controlled risks connected with the development, enhancement, maintenance, protection and exploitation of the intangible. Those contributions must be compensated at arm’s length.
Where no legal owner can be identified under applicable law or the relevant contracts, the OECD treats the group entity that controls decisions concerning exploitation and has the practical ability to restrict others from using the intangible as the owner for transfer pricing purposes. This is a residual rule. It does not permit taxpayers or tax authorities to ignore a clearly established legal owner merely because another entity contributes more value.
DEMPE in practical terms
DEMPE is an analytical framework, not a mechanical allocation formula. It maps the life cycle of an intangible and tests who performs and controls the important activities. Routine execution under detailed instructions may justify a service return. Strategic control of key risks, unique contributions and ownership of hard-to-replicate assets may justify a share of residual returns.
| DEMPE element | What it covers | Questions for an Indian taxpayer |
|---|---|---|
| Development | Creation of technology, product, content, brand concept or know-how | Who selected projects, approved budgets, controlled failures and owned the resulting work? |
| Enhancement | Improving performance, reach, reputation or commercial potential | Did the Indian entity merely execute, or did it design and control improvements or market strategy? |
| Maintenance | Keeping the intangible relevant and functional | Who approved upgrades, quality standards, renewals and continuing investment? |
| Protection | Registration, defence, confidentiality and infringement action | Who decides whether and where to register, litigate or settle? Who bears the cost and risk? |
| Exploitation | Licensing, manufacturing, distribution or other commercial use | Who sets the business model, pricing, territory, customer strategy and licensing terms? |
Control is the decisive word. Paying the R&D bill does not by itself establish control over development risk. The OECD distinguishes the financial risk attached to providing funds from the operational risk attached to developing the intangible. A funder that controls only the financial risk would generally expect a risk-adjusted funding return; it does not automatically earn the entrepreneurial return from successful development. Conversely, an Indian entity should not claim residual intangible returns merely because it employs engineers or incurs substantial AMP expenditure. It must demonstrate the decisions it makes, its authority over those decisions, its control over risk and the value of its contribution.
Outsourcing does not eliminate ownership but control must be real
The OECD does not require the legal owner to perform every DEMPE activity through its own employees. Development, maintenance, testing, marketing or protection activities may be outsourced to an associated enterprise or an independent service provider. The legal owner can still retain an intangible return where it has the capability to select the service provider, set objectives, control performance, make the key decisions and assume the relevant risks.
The result changes where control is also outsourced. If the legal owner neither performs nor controls the relevant functions, it cannot retain the return attributable to those functions merely because the registration or contract is in its name. The entities performing or controlling the activities must receive arm’s length compensation. Depending on the significance of their contributions, that compensation may be more than a routine cost-plus return.
The most important functions are usually decision functions. These may include designing and controlling research or marketing programmes, setting priorities, approving and managing budgets, deciding whether a development project should continue, protecting the intangible and monitoring work that materially affects its value. Where such functions are performed by more than one entity and reliable comparables are unavailable, a one-sided TNMM may become unreliable. A profit split or an appropriate valuation technique may need to be considered.
The OECD analysis in six connected steps
The OECD framework begins by identifying the intangible and the economically significant risks with specificity. It then examines the full contractual framework, including registrations, licences and the contractual allocation of rights and risks. The analysis next identifies which parties actually perform functions, use assets and manage or control the relevant risks.
The contractual position must then be tested against conduct. The entity contractually assuming a risk must control that risk and have the financial capacity to bear it. Based on those findings, the actual controlled transaction is accurately delineated. Only after completing this exercise should the arm’s length remuneration be determined for each contribution. Starting directly with a royalty percentage or database range skips the most important part of the analysis.
What Indian disputes tell us
Indian litigation has not produced a universal formula for intangible returns. It has, however, established useful boundaries.
| Dispute | Principle | Practical lesson |
|---|---|---|
| Sony Ericsson Mobile Communications India (Delhi HC, 2015) | The Bright Line Test is not a prescribed method. Closely linked distribution and AMP functions may require aggregation, and duplication of adjustments must be avoided. | Do not isolate AMP mechanically. Analyse the complete distribution arrangement, functions, comparables and overall compensation. |
| Maruti Suzuki India; Bausch & Lomb; Whirlpool (Delhi HC, 2015) | An international transaction cannot be presumed merely from high AMP spend or incidental benefit to a foreign brand. Revenue must establish an arrangement or action in concert. | Maintain evidence of who controls local marketing, whether the AE directs the spend, and how the Indian entity is compensated. |
| EKL Appliances (Delhi HC, 2012) | The TPO cannot determine ALP on the basis that the taxpayer did not need the payment or received insufficient benefit. ALP must be determined under the prescribed methods, subject to limited grounds for disregarding a transaction. | For royalty and technology fees, prove receipt and use, but also benchmark the controlled transaction with a defensible method. |
These decisions do not mean that AMP, royalty or technology arrangements are protected from adjustment. They mean that an adjustment must rest on an identified international transaction, reliable facts and a method recognised by law. Equally, a taxpayer cannot rely on the absence of a formal agreement where emails, budget approvals, conduct and compensation show a different arrangement.
Where Indian taxpayers should expect scrutiny
Royalty arrangements are vulnerable where the overseas legal owner has limited substance. The issue is not employee count in isolation. The question is whether the entity has people with the capability and authority to make decisions concerning the intangible, whether those decisions are actually made and whether the royalty reflects the rights received by the Indian entity. Proof of use and benefit remains necessary, but it is not a substitute for benchmarking.
Indian R&D and software centres require a closer look than their contractual label. A cost-plus return may be supportable where the Indian entity performs defined work under the foreign principal’s strategy and control. It becomes harder to defend where the Indian team determines product architecture, research priorities, budgets, technical milestones or whether unsuccessful projects should be continued. Those facts may indicate performance or control of important functions.
Marketing intangibles remain an evidence-driven area. A high level of AMP expenditure does not, by itself, establish an international transaction or transfer intangible ownership. The relevant questions are whether there is an arrangement with the foreign AE, who determines the marketing strategy, whether the activity goes beyond the Indian distributor’s own business requirements, and how the Indian entity is compensated under the overall distribution model.
Business restructurings require contemporaneous analysis. Where patents, know-how, customer relationships, contractual rights or specialised teams are moved between group entities, the taxpayer should identify what has actually been transferred, value the transferred rights and consider the realistically available alternatives of both parties. Describing the change as a ‘reorganisation’ does not answer whether compensation is required.
What a defensible intangible file should contain
The file should first identify the intangible and the legal framework. This includes the relevant registrations, development and licence agreements, territorial and time restrictions, exclusivity, termination rights and the distinction between ownership of the underlying IP and ownership of a licence. Generic references to a global brand or technology platform are rarely sufficient.
The functional analysis should be decision-based. It should record who proposes, evaluates, approves and monitors the important activities; who controls outsourced work; who decides how to respond when risks materialise; and who has the capacity to bear the financial consequences. Organisation charts and employee lists help, but meeting records, budget approvals, project-stage decisions and escalation documents usually provide stronger evidence.
Finally, the pricing must follow the delineated transaction. Comparable licence agreements may support a CUP where the rights and economic circumstances are sufficiently comparable. TNMM may be appropriate for a genuinely routine contributor. Profit split or valuation techniques may be more reliable where multiple entities make unique and valuable contributions or where important functions cannot be benchmarked separately.
The practical conclusion
Legal ownership should be respected, but it should not be over-read. It identifies the holder of the right; it does not guarantee the entire intangible-related return. DEMPE does not automatically move ownership either. It identifies contributions that require arm’s length compensation and helps determine whether the legal owner has the substance to retain residual returns.
For Indian taxpayers, the strongest defence is built before the assessment: clear transaction delineation, decision-level evidence, a DEMPE and risk-control matrix, agreements aligned with conduct, and benchmarking that rewards the real contribution. A polished agreement cannot cure weak facts. Equally, significant local expenditure or headcount cannot substitute for proof of control and value creation.
Key sources
- OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, Chapter VI.
- Income-tax Act, 1961, section 92B and the Explanation defining intangible property.
- Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT, Delhi High Court, 16 March 2015.
- Maruti Suzuki India Ltd. v. CIT; Bausch & Lomb Eyecare (India) Pvt. Ltd. v. ACIT; and CIT v. Whirlpool of India Ltd., Delhi High Court, 2015.
- CIT v. EKL Appliances Ltd., Delhi High Court, 2012.
Publication note: The OECD Guidelines are persuasive interpretive guidance in India; domestic statutory provisions and binding judicial decisions prevail. Case outcomes remain dependent on the transaction, assessment year and evidence.