Feb 13, 2026 .
Transfer Pricing for Intangibles in India: DEMPE & ITAT
CA Amit Bansal
CA Amit Bansal is a Fellow Chartered Accountant with over a decade of experience in accounting, auditing, and advisory. As Partner at GMCS & Co. and Founder of ABVS Management Consultancy, he leads key assurance and compliance projects across industries. He holds ICAI certifications in Forensic Accounting (FAFD), Concurrent Audit of Banks, ADR, and IND AS, and is a certified Peer Reviewer, known for his commitment to audit quality and integrity.
In transfer pricing, few areas generate as much litigation as intangibles. Unlike tangible assets, intangibles do not sit visibly on the balance sheet; they are embedded in technology, brand value, algorithms, patents, processes, and customer relationships. The valuation of such assets often becomes the battleground between taxpayers and the tax department.
In recent years, jurisprudence and administrative positions in India have evolved significantly—particularly around the application of the DEMPE framework and royalty benchmarking disputes before the Income Tax Appellate Tribunal (ITAT). The focus has shifted from mere contractual ownership to actual conduct and economic substance.
This article examines how DEMPE analysis is being interpreted, how ITAT rulings are shaping royalty benchmarking, and how safe harbour provisions fit into this framework.
1. DEMPE – Moving Beyond Legal Ownership
The DEMPE framework—Development, Enhancement, Maintenance, Protection, and Exploitation—emerged from the OECD BEPS Action Plan to prevent profit shifting through intangible migration.
Indian tax authorities now routinely test:
- Who actually develops the intangible?
- Who bears enhancement risk?
- Who funds and supervises R&D?
- Who performs strategic decision-making?
- Who assumes failure risk?
Mere legal ownership is no longer sufficient to justify residual profits.
Practical Shift Observed
Earlier, multinational groups often structured Indian entities as “limited risk service providers” while key IP ownership remained overseas. However, ITAT rulings increasingly examine:
- Whether Indian employees are engaged in core R&D functions
- Whether the Indian entity exercises control over strategic decisions
- Whether cost-plus compensation adequately reflects functional intensity
If the Indian entity performs economically significant DEMPE functions, tribunals have been reluctant to allow foreign affiliates to retain disproportionate returns.
2. Development vs. Exploitation Risk – Where the Real Dispute Lies
A recurring controversy is the allocation of development risk versus exploitation risk.
Development Risk
This includes:
- R&D failure
- Technology obsolescence
- Regulatory uncertainty
- Market viability
If an Indian subsidiary undertakes substantial R&D with strategic autonomy, it may not qualify as a routine service provider, even if compensated on a cost-plus basis.
Exploitation Risk
This includes:
- Market expansion
- Brand positioning
- Distribution strategy
- Commercial pricing
Several ITAT rulings have drawn a distinction between:
- Contract R&D models (low risk, routine compensation)
- Entrepreneurial R&D models (high risk, residual return entitlement)
The tribunals increasingly rely on actual conduct rather than inter-company agreements.
3. Royalty Benchmarking – CUP vs. TNMM Debate
Royalty payments remain one of the most litigated areas in Indian transfer pricing.
The key disputes revolve around:
- Whether royalty should be benchmarked separately
- Whether the Transactional Net Margin Method (TNMM) at the entity level subsumes royalty
- Whether the Comparable Uncontrolled Price (CUP) is mandatory for royalty
ITAT’s Evolving Approach
Several ITAT benches have held that:
- If royalty is closely linked to manufacturing or distribution activity, and TNMM at the entity level demonstrates arm’s length margin, separate benchmarking may not be required.
- However, where royalty is substantial and materially impacts profitability, separate benchmarking using CUP may be justified.
The tribunals have also rejected arbitrary caps (e.g., 1%–3%) imposed by Transfer Pricing Officers without comparable data.
A consistent judicial message emerges: benchmarking must be evidence-based, not perception-driven.
4. Intangible Valuation – Substance Over Formula
Indian litigation has shown that mechanical application of valuation percentages does not withstand appellate scrutiny.
Important factors considered include:
- Industry royalty ranges
- Nature of technology (unique vs. standard)
- Brand strength and geographic market
- Exclusivity rights
- Duration of license
- Whether the royalty is linked to sales, production, or profits
ITAT has repeatedly emphasised functional comparability over numerical similarity.
For example:
- Royalty for high-end pharmaceutical patents cannot be equated with trademark licensing in FMCG.
- Technology transfer in automotive manufacturing differs materially from software algorithm licensing.
Each intangible demands contextual evaluation.
5. Safe Harbour Provisions – Comfort with Limitations
India introduced safe harbour rules to reduce litigation, particularly for certain international transactions.
However, a safe harbour for royalty or intangibles has limitations:
- Threshold-based eligibility
- Prescribed margins or rates
- Mandatory compliance conditions
- No flexibility once opted.
While safe harbour provides certainty, it may not always align with commercial reality—especially in high-value IP cases.
For large multinational groups with complex DEMPE allocation, Advance Pricing Agreements (APA) often remain a more viable route.
6. Key ITAT Themes Emerging
Across various rulings, certain judicial patterns are visible:
1. Economic Substance Prevails
Contracts are relevant but not decisive.
2. Risk Must Be Demonstrated, Not Claimed
Risk assumption without financial capacity or control is disregarded.
3. Royalty Cannot Be Disallowed Merely for Being High
Comparable data must justify adjustments.
4. Aggregation vs. Segregation Depends on Facts
Royalty may be aggregated under TNMM if closely linked to core operations.
5. Revenue Authorities Cannot Impose Subjective Caps
Arm’s length price must be data-driven.
7. Advisory Takeaways for Tax Professionals
For professionals advising multinational groups, the following practical steps are critical:
- Conduct a detailed FAR analysis aligned with DEMPE.
- Document who controls strategic R&D decisions.
- Maintain board minutes and decision trails evidencing risk control.
- Prepare industry-specific royalty benchmarking studies.
- Avoid generic inter-company agreements.
- Evaluate APA vs. safe harbour vs. litigation strategy.
In the post-BEPS landscape, documentation is not a compliance ritual—it is a defence mechanism.
Conclusion: Intangibles Demand Intellectual Discipline
Transfer pricing for intangibles is no longer about fitting numbers into margin ranges. It is about aligning profits with value creation.
DEMPE analysis has fundamentally altered how Indian tax authorities and ITAT view intellectual property structures. The debate has moved from “Who owns the patent?” to “Who actually created and controlled its value?”
For tax professionals, particularly those advising cross-border groups, the message is clear:
Intangibles must be documented, benchmarked, and defended with economic logic—not merely contractual drafting.
In a landscape where value increasingly lies in code, brand, and innovation rather than machinery, transfer pricing for intangibles will remain a high-stakes arena—demanding technical depth, strategic foresight, and litigation readiness.
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