CBDT has issued two important circulars in relation to identification of development centres engaged in contract ‘R&D Activities’ and application of profit split method
When TPO can prefer TNMM or CUP method over PSM where intangibles are involved, CBDT clarifies
Rule 10B(1)(d) prescribes that the Profit Split Method is applicable mainly in international transaction involving transfer of unique intangibles. However, vide Circular No. 02/2013, the CBDT clarifies that TPO may consider TNMM or CUP method as most appropriate method instead of Profit Split Method for selection of comparables engaged in development of intangibles in same line of business, provided:
1) TPO should be of the view that PSM cannot be applied due to non-availability of information and reliable data required for application of the method;
2) He records reasons for non-applicability of PSM.
How to identify development centres engaged in contract R&D services with insignificant risk, CBDT clarifies
A development centre in India (‘IDC’) may be treated as a contract R&D service provider with insignificant risk if following conditions are satisfied:
1) Foreign principal performs most of the economically significant functions involved in research and development cycle whereas IDC would largely be involved in economically insignificant functions;
2) Economically significant assets including intangibles for R&D activities are provided by principal and IDC would not use any other economically significant assets;
3) IDC works under direct control and supervision of foreign principal;
4) IDC doesn’t assume or has no economically significant realized risks; and
5) IDC has no ownership right (legal or economic) on outcome of research which vests with foreign principal.
Further, the CBDT clarifies that the above conditions should be borne out of the conduct of the parties and not merely by the contractual terms.