Transfer pricing methodologies in the BPO industry: capturing intangibles from the taxation perspective

Abstract

This dissertation was conceived of in the light of the explosive growth of the BPO industry in India, the consequential large volume of international transactions involved and, perhaps even more importantly, the commencement of the evolution of the industry from rendering simple transaction-based type services (such as call centre services) to more complex services that would involve significant intellectual content. The issue of transfer pricing relating to intangibles that such complex services may entail seemed to be of great relevance from the taxation perspective. The objective of the dissertation is to formulate an approach (or approaches) to how transfer pricing with respect to intangibles in the BPO industry may be arrived at such that it is representative of an arms length price. The structure followed in the dissertation is as follows: Chapter 1 of the dissertation consists of an introduction to the subject of transfer pricing and the Business Process Outsourcing industry. It also explains the different definitions of intangibles. In Chapter 2, the different methodologies available to arrive at a transfer price that would be representative of an arms length price are covered. This is followed, in Chapter 3, by a review of literature available on the subject particularly with reference to transfer pricing in the case of intangibles so that one ensures that one is not reinventing the wheel. Chapter 4 provides the research framework in terms of explaining the research objectives, the hypothesis framed etc. Chapter 5 summarizes information gathered from the Income tax Dept. with respect to a few cases of BPO companies, the methodology followed by these companies, and the views taken with respect to the methodologies by the Income tax Dept. The information gathered from a few BPO companies through the questionnaire issued is reviewed in Chapter 6.