India: Valuation of intangibles; only future projections, no hindsight allowed

India: Valuation of intangibles; future projections

The Hyderabad Bench of the Income-tax Appellate Tribunal held that concerning the valuation of intangible assets transferred by the taxpayer to a foreign related party, only future projections can be considered. Valuation cannot be reviewed in hindsight, with actual amounts of income realized at a later date.

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The tribunal held when intellectual property is transferred to a foreign related party at an arm’s length price, such intellectual property becomes the property of the related party, and the taxpayer cannot claim any further benefits from the intellectual property—including the attribution of any revenue derived by the related party from the use of the intellectual property. The case is: DQ (International) Ltd. v. ACIT (ITA No. 151/Hyd/2015)


The taxpayer produces animation, visual effects, game art, and entertainment content. An Isle of Man holding company is the ultimate holding company (there is a Mauritius holding company above the taxpayer, and the taxpayer is the holding company of an entity located in Ireland).

The taxpayer engaged in “international transactions”—including the sale of intangible assets, payment of management charges, and reimbursement of travel expenses incurred on behalf of its related parties. The taxpayer determined the arm’s length price of the international transactions relating to the sale of intellectual property rights (i.e., rights to the “Jungle Book” animation series) that were transferred to the Irish entity, with the arm’s length price being based on an average of the vales arrived at by two independent valuation reports. The valuation was made using relief from the royalty method and discounted cash flow analysis. 

The Transfer Pricing Officer proposed adjustments with respect to the sale of the intellectual property, by applying the profit split method. Other adjustments were also made. The proposed transfer pricing assessment was administratively upheld, and the taxpayer filed for judicial review by the tribunal.

The tribunal found that with respect to a transaction involving the sale of intellectual property, due consideration must be given to the independent valuation report. Also, it was stated that the tax authorities cannot replace projected cash flows with actual revenues reported by the related party at a later date, for purposes of valuing the intellectual property, previously sold to the related party. Also, the tribunal noted that an adjustment cannot be made merely on the grounds the taxpayer had engaged in tax planning, absent evidence of tax avoidance. 


Read a July 2016 report [PDF 327 KB] prepared by the KPMG member firm in India: Future projections alone should be adopted in respect of valuation of intangibles, and such valuation cannot be reviewed with actuals at a later date

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