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Transfer Pricing for CFOs/ Tax Heads (Learning Byte 04)

Updated: Oct 29, 2022

What is #EconomicOwnership and whether it is recognized under Indian Tax Regulations? #BEPS has put the focus back on the Legal vs Economic Ownership of an intangible asset.

Simply put legal ownership results from ownership of legal title while economic ownership is conferred by active role in development of the intangible asset.

US regulations expressly recognize the concepts of legal and economic ownership and clearly state that where contractual terms are inconsistent with #economicsubstance latter shall prevail (§ 1.482-4(f)(3) (Ownership of intangible property).

OECD advocates that intangible returns must flow to economic as against #legalownership (BEPS Action Plans 8 to 10) and legal ownership by itself does not confer right to intangible returns.

In contrast there is no categoric statement on economic ownership under Indian Transfer Pricing Regulations. It has been left to Courts to develop the concept through Judge made law.

At first in 2013 Delhi Tribunal in LG case Ruled that concept of economic ownership albeit relevant in commercial sense was not recognized under Indian Tax Act.

In 2015 in Sony Ericsson, the LG Ruling was reversed by Delhi High Court and the Court held that Economic ownership of a brand is an intangible asset, just as legal ownership, and would require adequate remuneration if alienated.

An year later in 2016 Delhi High Court took a contrary position in Cub Pty Limited [formerly known as Foster's Australia Ltd v UOI [WP(C) 6902/2008] holding that the situs of legal owner of an intangible asset would be the closest approximation of the situs of intangible asset as there was no specific Indian legislation to contrary.

If one ignores Foster's Ruling - no specific arguments were made before Court on DEMPE functions and Ruling pertained to pre BEPS Era - one could argue that Economic Ownership is real and recognized under Indian Law.

As Indian Regulations are silent, arguments could be made from both standpoints. It would be interesting to see how Economic Ownership concept develops further and whether any express clarifications are introduced by Tax Administration.

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