Toyota Kirloskar Motor challenged the separate benchmarking of royalty payments to its associated enterprises for FY 2018-19. The Indian tax authorities rejected entity-level TNMM, applying CUP instead and raising a transfer pricing adjustment of Rs. 279.84 crores. The Bangalore Income Tax Appellate Tribunal ruled mostly in favour of the taxpayer in January 2024, finding that royalty was sufficiently integrated with other transactions to justify aggregation under TNMM ... Read more

In a decision issued on March 10, 2022 the Tokyo High Court upheld a 2020 decision from the district court and ruled mostly in favour of NGK INSULTATORS, LTD. in an appeal filed against a transfer pricing correction issued in 2012 by the Japanese tax authorities. The case At issue was whether the royalties received by NGK Insulators, the HQ of a Japanese group, from its Polish subsidiary, were lower than the arm’s length price. Due to the tightening of European emission regulations, only two companies at the European market, the Polish subsidiary and IBIDEN (Ibigawa Electric Power Co., Ltd.), were able to provide parts that complied with those regulations. This resulted in an oligopoly situation and excessive profits in the subsidiary. In regards of the residual profits the tax authority had argued that the split should be based on NGK Insulators’ research and development costs on the one side and the Polish subsidiary specific departmental research and development costs ... Read more

A Japanese manufacturer of diesel particulate filters had licensed know-how and technology to a Polish group company in exchange for royalty payments. Japan's tax authorities challenged the arm's length nature of those payments and issued an additional tax assessment. The Tokyo District Court set aside the assessment in 2020, and the Tokyo High Court dismissed the authorities' appeal in March 2022, confirming that the residual profit-split method had been correctly applied ... Read more

The principles described in Sections D.2.1 to D.2.4 of this chapter should be applied in determining whether the use of intangibles by the tested party will preclude reliance on identified comparable uncontrolled transactions or require comparability adjustments. Only when the intangibles used by the tested party are unique and valuable intangibles will the need arise to make comparability adjustments or to adopt a transfer pricing method less dependent on comparable uncontrolled transactions. Where intangibles used by the tested party are not unique and valuable intangibles, prices paid or received, or margins or returns earned by parties to comparable uncontrolled transactions may provide a reliable basis for determining arm’s length conditions ... Read more

The principles of Chapters I – III apply in determining arm’s length prices for transactions involving the use of intangibles in connection with sales of goods or the performance of services. Two general categories of cases can arise. In the first category of cases, the comparability analysis, including the functional analysis, will reveal the existence of sufficiently reliable comparables to permit the determination of arm’s length conditions for the transaction using a transfer pricing method based on comparables. In the second category of cases, the comparability analysis, including the functional analysis, will fail to identify reliable comparable uncontrolled transactions, often as a direct result of the use by one or both parties to the transaction of unique and valuable intangibles. Transfer pricing approaches to these two categories of cases are described below ... Read more

Where the tested party and the potential comparable have comparable intangibles, the intangibles will not constitute unique and valuable intangibles within the meaning of paragraph 6.17, and therefore no comparability adjustments will be required with regard to the intangibles. The potential comparable will, in these circumstances, provide the best evidence of the profit contribution of the tested party’s intangibles. If, however, either the tested party or the potential comparable has and uses in its business unique and valuable intangibles, it may be necessary either to make appropriate comparability adjustments or to revert to a different transfer pricing method. The principles contained in Sections D.2.1 to D.2.4 apply in evaluating the comparability of intangibles in such situations ... Read more

However, it will often be the case in matters involving transfers of intangibles or rights in intangibles that the comparability analysis (including the functional analysis) reveals that there are no reliable comparable uncontrolled transactions that can be used to determine the arm’s length price and other conditions. This can occur if the intangibles in question have unique characteristics, or if they are of such critical importance that such intangibles are transferred only among associated enterprises. It may also result from a lack of available data regarding potentially comparable transactions or from other causes. Notwithstanding the lack of reliable comparables, it is usually possible to determine the arm’s length price and other conditions for the controlled transaction ... Read more

The principles of paragraphs 3.47 to 3.54 relating to comparability adjustments apply with respect to transactions involving the transfer of intangibles or rights in intangibles. It is important to note that differences between intangibles can have significant economic consequences that may be difficult to adjust for in a reliable manner. Particularly in situations where amounts attributable to comparability adjustments represent a large percentage of the compensation for the intangible, there may be reason to believe, depending on the specific facts, that the computation of the adjustment is not reliable and that the intangibles being compared are in fact not sufficiently comparable to support a valid transfer pricing analysis. If reliable comparability adjustments are not possible, it may be necessary to select a transfer pricing method that is less dependent on the identification of comparable intangibles or comparable transactions ... Read more

In certain instances these Guidelines refer to “unique and valuable” intangibles. “Unique and valuable” intangibles are those intangibles (i) that are not comparable to intangibles used by or available to parties to potentially comparable transactions, and (ii) whose use in business operations (e.g. manufacturing, provision of services, marketing, sales or administration) is expected to yield greater future economic benefits than would be expected in the absence of the intangible ... Read more

The identification of an item as an intangible is separate and distinct from the process for determining the price for the use or transfer of the item under the facts and circumstances of a given case. Depending on the industry sector and other facts specific to a particular case, exploitation of intangibles can account for either a large or small part of the MNE’s value creation. It should be emphasised that not all intangibles deserve compensation separate from the required payment for goods or services in all circumstances, and not all intangibles give rise to premium returns in all circumstances. For example, consider a situation in which an enterprise performs a service using non-unique know-how, where other comparable service providers have comparable know-how. In that case, even though know-how constitutes an intangible, it may be determined under the facts and circumstances that the know-how does not justify allocating a premium return to the enterprise, over and above normal returns earned ... Read more

This can be illustrated as follows. Assume that company A manufactures two types of products, P1 and P2, that it sells to company B, an associated enterprise in another country. Assume that A is found to manufacture P1 products using valuable, unique intangibles that belong to B and following technical specifications set by B. Assume that in this P1 transaction, A only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested party for this P1 transaction would most often be A. Assume now that A is also manufacturing P2 products for which it owns and uses valuable unique intangibles such as valuable patents and trademarks, and for which B acts as a distributor. Assume that in this P2 transaction, B only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested party for the P2 transaction would most often be B ... Read more

An Italian manufacturer set below-market royalty rates on trademark licences to foreign subsidiaries, arguing the reduced rates supported US market penetration. The tax authority rejected this justification as time-limited and applied the Resale Price Method to determine arm's length royalties. The Italian Supreme Court upheld the upward adjustment in January 2021, confirming the tax authority's approach to valuing unique intangible assets ... Read more

NGK-Insulators, a Japanese manufacturer of automotive diesel particulate filters, licensed know-how and technology to its Polish group company in exchange for royalty payments. Japan's tax authorities assessed additional taxes, arguing the royalties were not at arm's length. The Tokyo District Court ruled in favour of NGK-Insulators in November 2020, setting aside the tax assessment and upholding the taxpayer's transfer pricing methodology ... Read more

An Indian auto parts manufacturer paid a 5% royalty to its Japanese parent for manufacturing know-how and applied TNMM as the most appropriate method. The Indian tax authorities challenged this, arguing the Profit Split Method was more appropriate. The Bangalore Income Tax Appellate Tribunal disagreed, finding the taxpayer contributed no unique intangibles and upheld TNMM, deciding in favour of Toyota Kirloskar Auto Parts in 2020 ... Read more

A Japanese manufacturer of plating chemicals priced know-how licences and technical support services to foreign group companies using the CUP method based on internal comparables. The tax authority rejected the CUP approach and applied the residual profit split method for FY2007–2012. The Tokyo District Court dismissed the company's appeal in February 2020, confirming that material differences between the controlled and comparable transactions made CUP inappropriate ... Read more

The principles described in Sections D.2.1 to D.2.4 of this chapter should be applied in determining whether the use of intangibles by the tested party will preclude reliance on identified comparable uncontrolled transactions or require comparability adjustments. Only when the intangibles used by the tested party are unique and valuable intangibles will the need arise to make comparability adjustments or to adopt a transfer pricing method less dependent on comparable uncontrolled transactions. Where intangibles used by the tested party are not unique and valuable intangibles, prices paid or received, or margins or returns earned by parties to comparable uncontrolled transactions may provide a reliable basis for determining arm’s length conditions ... Read more

The principles of Chapters I – III apply in determining arm’s length prices for transactions involving the use of intangibles in connection with sales of goods or the performance of services. Two general categories of cases can arise. In the first category of cases, the comparability analysis, including the functional analysis, will reveal the existence of sufficiently reliable comparables to permit the determination of arm’s length conditions for the transaction using a transfer pricing method based on comparables. In the second category of cases, the comparability analysis, including the functional analysis, will fail to identify reliable comparable uncontrolled transactions, often as a direct result of the use by one or both parties to the transaction of unique and valuable intangibles. Transfer pricing approaches to these two categories of cases are described below ... Read more

Where the tested party and the potential comparable have comparable intangibles, the intangibles will not constitute unique and valuable intangibles within the meaning of paragraph 6.17, and therefore no comparability adjustments will be required with regard to the intangibles. The potential comparable will, in these circumstances, provide the best evidence of the profit contribution of the tested party’s intangibles. If, however, either the tested party or the potential comparable has and uses in its business unique and valuable intangibles, it may be necessary either to make appropriate comparability adjustments or to revert to a different transfer pricing method. The principles contained in Sections D.2.1 to D.2.4 apply in evaluating the comparability of intangibles in such situations ... Read more

The principles of paragraphs 3.47 to 3.54 relating to comparability adjustments apply with respect to transactions involving the transfer of intangibles or rights in intangibles. It is important to note that differences between intangibles can have significant economic consequences that may be difficult to adjust for in a reliable manner. Particularly in situations where amounts attributable to comparability adjustments represent a large percentage of the compensation for the intangible, there may be reason to believe, depending on the specific facts, that the computation of the adjustment is not reliable and that the intangibles being compared are in fact not sufficiently comparable to support a valid transfer pricing analysis. If reliable comparability adjustments are not possible, it may be necessary to select a transfer pricing method that is less dependent on the identification of comparable intangibles or comparable transactions ... Read more

This can be illustrated as follows. Assume that company A manufactures two types of products, P1 and P2, that it sells to company B, an associated enterprise in another country. Assume that A is found to manufacture P1 products using valuable, unique intangibles that belong to B and following technical specifications set by B. Assume that in this P1 transaction, A only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested party for this P1 transaction would most often be A. Assume now that A is also manufacturing P2 products for which it owns and uses valuable unique intangibles such as valuable patents and trademarks, and for which B acts as a distributor. Assume that in this P2 transaction, B only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested party for the P2 transaction would most often be B ... Read more