Anurag Agrawal

Anurag AgrawalIntroduction

Over several decades and in step with the globalisation of the economy, intra group transactions have grown exponentially world-wide especially related to intangible assets.

The word “intangible asset” is intended to address something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances.

BEPS[1] Action 8-10 by OECD[2] in its Final report of 2015[3] has raised concerns regarding transfer pricing issues arising due to the transactions involving various types of intangibles, since misallocation of the profits generated by valuable intangibles has contributed considerably to base erosion and profit shifting.

In response to the above identified risk, OECD has developed and incorporated transfer pricing rules or special measures for the most complicated type of intangible – Hard-to-value intangibles (“HTVI”) with the aim to prevent base erosion and profit shifting by moving intangibles among group members.

Decoding – Hard to Value Intangibles

Para 6.1893 of the Action plan 8-10 defines HTVI as those intangibles or rights in intangibles for which at the time of their transfer between the associated enterprises:

a) no reliable comparables exists


b) the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain, making it difficult to predict the level of ultimate success of the intangible at the time of the transfer.

Further the OECD in Para 6.190 of Action Plan 8-10 has laid down non exhaustive list of various possible scenarios where the transaction related to intangible can be categorised as HTVI transaction, which is summarized as follows:

  • The intangible is only partially developed at the time of the transfer.
  • The intangible is not expected to be exploited commercially until several years following the transaction.
  • The intangible does not itself fall within the definition of HTVI in paragraph 6.189 but is integral to the development or enhancement of other intangibles which fall within that definition of HTVI.
  • The intangible is expected to be exploited in a manner that is novel at the time of the transfer and the absence of a track record of development or exploitation of similar intangibles makes projections highly uncertain.
  • The intangible, meeting the definition of HTVI under paragraph 6.189, has been transferred to an associated enterprise for a lump sum payment.
  • The intangible is either used in connection with or developed under a CCA or similar arrangements.

Let us understand HTVI better with the help of an example

ABC Ltd, a resident of India, is a software development company in the field of architecture & interior designing. In financial year 2014-15 the company foresees the requirement of a computer application which can simulate the entire architectural designs.

Based on their vision the company developed the blue prints of the designing software and successfully completed the development of phase 1.

The company then transferred the partially developed version of the software to its foreign parent company ABC Holdings Inc. in the USA.

The parent company is responsible to convert the partially developed version of the software into the final marketable product. The parent company based on the technology constraints estimated that it will take another 3-4 years to convert it into the final marketable product.

Further for the purpose of determining the exchange price for the transfer of the said software the company based on various reasonable assumptions decided to adopt discounted cash flow method since the software is one of its own kind and no comparable software exists for comparable rates. Also the company is not sure what the future holds for this software hence it is not able to predict the level of ultimate success of the intangible at the time of the transfer.

In this regard let us assume that the price so derived is USD 100 based on assumption that it will start generating a revenue of USD 1,000 annually from year 5 and onwards.

Therefore based on the characteristics of the said computer application, the above discussed case can reasonably be categorised as a HTVI.

Further during the course of assessment for Assessment year 2015-16 in the year 2019 it was found out that due to technology advancements the company was able to convert the software into final marketable product in year 2 only and was able to generate a revenue of USD 1500 annually.

However at the time of assessment proceedings the company was not able to demonstrate that its original valuation took into account the possibility that sales would arise in earlier periods, and did not demonstrate that such development was unforeseeable.

In the above discussed type of cases, considering the complexities of the transactions, tax authorities were facing difficulties to determine the arm`s length price of the transfer of intangible made.

Further for the assessee it was becoming difficult to defend the value so adopted by them during assessment proceedings.

Therefore OCED in its Action 8-10 provided guidelines to assist tax authorities to determine the appropriate arm`s length price based on the foreseeable developments or events that are relevant for the valuation and to save the assessee from any unreasonable tax dispute.

Challenges faced by tax authorities:

In order to determine the value of HTVI`s two critical factors are needed to be considered:

  • What events are relevant for pricing and
  • Upto what extent the occurrence of these events are foreseeable

Further in most of the cases the events that are relevant for the valuation of HTVI`s are closely connected to the business environment of the company.

Therefore for the tax authorities it becomes very difficult to identify such events in other than special circumstances because:

  • The limited underlying information that tax departments utilises to examine the taxpayer’s claim under normal circumstances is usually provided by that taxpayer itself.


  • The tax department usually do not have the following:
    • overview of the industry in which the company operates,
    • the future prospects of the industry,
    • technical knowledge required to operate in the required industry,
    • insights into the business & political environment,
    • access to confidential information which may have impact on the pricing among other things

As a result OECD in Para 6.1913 of the Action plan 8-10 acknowledges the existence of information asymmetry between the company and the tax authorities due to which it become`s difficult for tax authorities to perform a risk assessment for transfer pricing to evaluate the reliability of the information on which pricing has been based by the taxpayer.

Guidelines provided by OECD related to approach that should be adopted by the tax authorities:

If there are differences between the value at which the intangible is transferred (“ex ante value”) and the value of the intangible determined at the time of assessment in future years (“ex post value”) which are not due to the unpredictable events, the difference in both the valuations may indicate that the value of intangible determined at the time of transfer of the intangible may have not correctly considered all the events necessary to be taken into account or the events that might have been expected to affect the value of the intangible.

In this scenario the HTVI approach recommends to consider the ex post evidence (evidence that comes into light in the future years)

which provides –

presumptive evidence (the evidence which shows the existence of one fact by proving the existence of another and such evidences are not conclusive in nature but are subject to rebuttal or explanation)


  • the existence of the uncertainties that were there at the time of transaction;
  • if the company has appropriately predicted and identified the events that were necessarily required to value the transaction;
  • the reliability of the information used to determine the transfer price of such intangible

– to verify the appropriateness of the valuation of the transfer of the intangibles made. (“ex ante pricing arrangement”)

Therefore where the tax authorities are not able to satisfy themselves with the reliability of the information on which the original valuation of the intangible made at the time of transfer has been based, then adjustments based on ex post value of the transaction should be made.

However cases covered under HTVI approach should not be mixed up with the situations in which hindsight is used by taking ex post value for tax assessment purposes without considering whether the information on which the ex post values are based could or should reasonably have been known and considered by the associated enterprises at the time the transaction was entered into.

Guidelines provided by OECD related to approach to be adopted by the assessee:

At all times, the assessee has the option to rebut the judgment made by the tax authorities by substantiating the assumptions made and information provided which was used to value the intangible that was transferred to its associated enterprise.


The HTVI approach safeguards the interest of tax authorities as well as the assessee by ensuring that it considers ex post value as presumptive evidence about the appropriateness of the value of the transfer made.

Written by: Anurag Agrawal

Inputs by: Kunal Kadam

[1] Base Erosion and Profit Shifting

[2] Organisation for Economic Co-operation & Development

[3] OECD (2015), Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 – 2015 Final Reports,

Author Bio

Qualification: CA in Job / Business
Company: Deloitte Haskins & Sells
Location: Mumbai, Maharashtra, IN
Member Since: 20 Jan 2019 | Total Posts: 4

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January 2021