India Intellectual Property Collaboration Affects 'Arm's Length' Considerations

by Mary Swire, Tax-News.com, Hong Kong

06 January 2010

Following the issue of the Department of Industrial Policy & Promotion Press Note No.8 (2009 series), the government of India now permits with immediate effect, payments of royalties, one off fees for transfer of technology and payments for use of trademark/brand name without any prior government consent. However intra-group royalty payments and the like could come under closer scrutiny from a transfer pricing point of view.

Previously, the government of India required exchange control approval on the payment of royalties under Foreign Technology Collaboration for foreign technology transfers involving payment of more than USD 2m and/or payments of royalties of more than 5% on domestic sales and 8% on exports.

In addition, where there was no technology transfer involved, royalty payments of up to 2% for exports and up to 1% for domestic sales were allowed under an automatic route on use of trademarks and brand names of the foreign collaborator. A suitable post-reporting system for technology transfer/collaborations and use of trade mark/brand name will be notified separately.

Prior to the relaxation of the rules, the revenue authorities could regard these upper limits as a yardstick for determining whether royalty and other intellectual property fees between related companies were appropriately 'arms length', and it would have been unusual for revenue authority to challenge a controlled transaction which came within government guidelines as not excessive from a foreign exchange control perspective.

However, after the relaxation of controls, it becomes more necessary for companies effecting intra-group payments of this kind to maintain documentation to substantiate that pay-outs equate to technology benefits received from the point of view of the group's transfer pricing policy.

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