India: Circulars issued providing guidance on issues relating to transfer pricing of development centres and application of profit split method

Tax Controversy & Dispute Resolution ()

The transfer pricing (TP) methodology for research and development (R&D) services has been under the microscope of the Indian Revenue of late, with the Indian Revenue often trying to disregard a “contract R&D service provider” structure with a cost plus model; and substituting the same with the profit split method (PSM). This approach by the Indian Revenue has been on the ground – that the Indian R&D centre had been developing the intangibles through the R&D functions virtually on its own; and thus should be entitled to the entrepreneurial related returns related to the intangibles (e.g. patents).

In view of the increasing dispute and litigation with TP matters surrounding the characterization and remuneration model of the contract R&D service providers, the Rangachary Committee (Committee) was inter alia mandated by the Central Board of Direct Taxes (CBDT) to introduce guidelines for the Indian Revenue and taxpayers.