Post the 1991 Indian economic liberalisation, the government introduced transfer pricing regulations in India in 2001 with an aim to curb the possibility of misuse of the country's tax laws through tax leakages from tax avoidance. However it is increasingly found that the Indian authorities have treated transfer pricing as a revenue generation mechanism by aggressively creating tax demands through transfer pricing adjustments. The last few years have witnessed a spate of transfer pricing adjustments on complex issues using new concepts like marketing intangibles (MI). This approach can be gauged from the recently concluded audits for financial year 2007-08 where transfer pricing adjustments on account of the single issue of MI alone were approximately $1 billion across various industry sectors in India.

The Indian experience In the Indian set-up, a typical structure would involve the foreign associated enterprise (AE), which is the legal and commercial owner of the intellectual property (IP)...