The Indian tax authorities aren’t having a great success rate on IP and tax at the moment: earlier this month the Delhi High Court set aside a claim by the Indian tax authorities to disallow (on transfer pricing grounds) a royalty paid by Suzuki India to its parent company, the Suzuki Motor Corporation in Japan. The royalty was paid for the use of the Suzuki ‘S’ logo on cars sold in India, and the tax authority took the view that in an arm’s length transaction between unconnected parties, no royalty would have been paid. This seems somewhat unlikely, and the High Court reached the same conclusion.
In Velankani Mauritius vs. DDIT (ITAT Bangalore) the company supplied shrink-wrap licensed software to Infosys Technologies in India. The Indian tax authorities assessed the profits from the transaction as taxable royalties, rather than business profits which would not be subject to tax as Velankani did not have an Indian permanent establishment. The tax authority’s view was first confirmed by the tax court but has now been overruled on appeal; the appeal court held that the profits from the sale of shrink-wrap licensed software are not royalties.
The OECD has identified transfer pricing issues pertaining to intangibles as a key area of concern to governments and taxpayers, due to insufficient international guidance in particular on the definition, identification and valuation of intangibles for transfer pricing purposes.
The OECD is now considering starting a new project on the Transfer Pricing Aspects of Intangibles which could result in a revision of Chapters VI and VIII of the TPG (which deal with intangibles) and is looking for comments on these issues.