[Opinion] DEMPE and Intangibles Transfer Pricing Under India’s New Tax Framework

Piyush Baid – [2026] 187 taxmann.com 237 (Article)

A Critical Examination of the Legislative Gap, the 2025 Restatement, and the Path to a Coherent Intangibles Regime

With Reference to the Income-tax Act, 2025 (effective 1 April 2026), BEPS Actions 8–10, and Current Judicial Trends

1. Abstract

Transfer pricing for intangibles has emerged as the most technically demanding and institutionally contested frontier of Indian international tax law. The framework enacted in 2001—comprising Sections 92 to 92F of the Income-tax Act, 1961, and Rules 10A to 10E of the Income-tax Rules, 1962—was designed for a world of tangible goods and routine services. It contains no dedicated comparability standards for intangibles, no mechanism for addressing hard-to-value intangible transfers, and no codification of the OECD’s DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) framework introduced through BEPS Actions 8 to 10 in 2015 and absorbed into the OECD Transfer Pricing Guidelines in 2017.1 The new Income-tax Act, 20252—a consolidation exercise that comes into force on 1 April 2026—retains this structural gap. Its transfer pricing provisions (Sections 161 to 173) reorganise and restate the 1961 regime without introducing intangibles-specific methodology, HTVI rules, or a DEMPE framework. This article examines the intellectual architecture of DEMPE and the OECD intangibles comparability standards; maps the precise legislative deficit in Indian law; evaluates the five live battlegrounds in Indian transfer pricing litigation; analyses why the 2025 Act falls short of what the moment demands; and suggests the specific provisions that a genuinely effective intangibles regime for India would need to contain.

2. Introduction

It is a notable feature of India’s transfer pricing history that the legislative framework has remained structurally unchanged for nearly a quarter of a century, even as the economic reality it purports to regulate has been transformed beyond recognition. When Chapter X of the Income-tax Act, 1961, was inserted by the Finance Act, 2001,3 the Indian economy was just entering its high-growth phase. The major Indian-associated enterprises of multinational groups were manufacturers, distributors, and service providers—entities whose transactions were, in the main, capable of being benchmarked by reference to observable market prices or publicly available margin data. Intangibles—patents, software, algorithms, brand value, customer data, proprietary processes—were, in that era, a secondary consideration.

Twenty-five years on, the position is entirely reversed. India’s largest transfer pricing disputes are today almost exclusively centred on intangibles – royalties paid for brand licences, software licences, and process know-how; marketing intangibles allegedly created by Indian subsidiaries through advertising expenditure; cost contribution arrangements for joint software and pharmaceutical development; the pricing of early-stage technology transferred out of India before commercialisation; and the allocation of profits between Indian and overseas entities in digital business models where the locus of value creation is contested. Yet the statute governing these disputes—now recodified as the Income-tax Act, 2025—still contains no DEMPE framework, no hard-to-value intangibles (HTVI) mechanism, and no intangibles-specific comparability standard. The 2025 Act reorganises the furniture but does not repair the structural deficiency in the room.

This article proceeds in seven parts.

• Part II sets out the OECD framework—both the DEMPE concept and the comparability standards for intangibles—that India has absorbed in principle through its BEPS-aligned policy commitments but not in practice through domestic legislation.
• Part III undertakes a detailed critique of the 2001 framework’s inadequacy as applied to intangibles.
• Part IV analyses the Income-tax Act, 2025, with particular reference to what it preserves, what it modifies, and—critically—what it omits.
• Part V maps the five live battlegrounds in Indian intangibles transfer pricing litigation, with reference to the most significant judicial pronouncements.
• Part VI identifies the core structural tensions that explain why the controversy is so acute.
• Part VII assesses where matters stand as of mid-2026 and offers specific suggestions for the legislative and regulatory interventions that would constitute a genuinely effective Indian intangibles TP regime.

3. The OECD Framework – DEMPE and Intangibles Comparability Standards

3.1 The Architecture of DEMPE

The DEMPE framework was the centrepiece of BEPS Actions 8 to 10, finalised in October 20154 and absorbed into Chapter VI of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in the 2017 edition.5 Its foundational proposition is deceptively simple – in determining which entity within a multinational group is entitled to profit from an intangible asset, the relevant question is not who holds legal title to the intangible, but which entity actually performs and controls the functions of Development, Enhancement, Maintenance, Protection, and Exploitation.

The DEMPE framework proceeds from the premise that the arm’s length principle—applied correctly—requires that profits follow economic substance. An entity that registers a patent in a low-tax jurisdiction but outsources all research, all brand management, all enforcement, and all licensing decisions to other group members is not entitled, at arm’s length, to the full profit stream from that patent. It earns, at most, a risk-free return on the capital it has committed. The entities that actually perform DEMPE functions—employing the researchers, managing the brand, enforcing IP rights, making strategic commercialisation decisions—are the entities economically entitled to the corresponding returns, regardless of where the IP sits on the balance sheet.

The practical implications of DEMPE for Indian taxpayers are profound. India is, in the overwhelming majority of MNE structures, the entity that performs the functions—the R&D, the software development, the clinical trials, the marketing—while the IP is legally owned by a parent or holding company in a treaty-favourable jurisdiction. DEMPE logic, if applied consistently, would significantly increase the profit attributable to Indian entities on account of their DEMPE contributions—either through higher royalty receipts, enhanced service fees, or a reallocation of IP ownership itself.

The OECD’s six-step process for transactions involving intangibles requires:

1. identification of the intangibles involved;
2. identification of the full contractual arrangements;
3. identification of the functions performed, assets used, and risks assumed;
4. confirmation of consistency between contracts and conduct;
5. delineation of the actual transaction; and
6. determination of arm’s length conditions.6

This six-step process presupposes a level of functional analysis and documentation discipline that goes substantially beyond what India’s current TP framework formally mandates.

3.2 Comparability Standards for Intangibles

The OECD’s comparability framework for intangibles introduced in the 2017 Guidelines differs fundamentally from the general comparability framework applicable to routine transactions. The key differences are as follows:

OECD Comparability Framework for Intangibles – Key Features

• Broad, Function-Based Definition – An intangible is any non-physical, non-financial asset that can be owned or controlled and for which independent parties would pay in comparable circumstances. This covers patents, software, trade secrets, customer lists, brand value, and goodwill—including self-generated goodwill that may not appear on any balance sheet.
• Substance over Legal Form – Legal ownership establishes only the right to receive returns after satisfying arm’s length obligations to entities performing DEMPE functions. The economic return to a legal owner with no substance is a risk-free return, not the full IP profit stream.
• Hard-to-Value Intangibles (HTVI) – Where an intangible is transferred at a developmental stage and future cash flows are highly uncertain, tax authorities are empowered to use ex-post outcomes as evidence of what the ex-ante price should have been. This reverses the burden: the taxpayer must demonstrate that the divergence between projected and actual outcomes was caused by genuinely unforeseeable developments, not by undervaluation at the time of transfer.
• Profit-Based Methods as Primary Tools – For unique, hard-to-compare intangibles, traditional CUP searches are rarely adequate. The preferred methods are the Profit Split Method (where both parties make unique, valuable contributions) and income-approach DCF valuations. TNMM benchmarking of the whole entity is a last resort that loses sight of the specific intangible transaction.

The comparability standards also address cost contribution arrangements (CCAs)—multilateral arrangements under which group entities share the costs and risks of developing intangibles and receive a proportionate ownership stake in the resulting IP. Under the OECD framework, participants must make buy-in payments reflecting the fair market value of existing IP contributed, and the ongoing cost allocation must reflect each participant’s proportionate anticipated benefit.7 India currently has no domestic rules governing CCAs.

3.3 Why These Standards Matter for India Specifically

India’s position in global value chains makes DEMPE and intangibles comparability standards disproportionately significant for Indian taxpayers relative to most other jurisdictions. India is, for most MNE groups, the primary locus of R&D execution, software development, clinical trial management, and business process engineering. It is also, in many structures, the entity that has historically borne the AMP expenditure that built the brand in the Indian market over decades. The DEMPE framework—if applied by the department—would justify substantial upward adjustments to Indian profits. Conversely, Indian companies making royalty payments overseas for IP they helped develop, or transferring partially-developed software and drug candidates to offshore holding companies, are equally exposed to DEMPE-based challenges from the department.

The controversy is therefore bidirectional. It is not simply that the department wants more Indian profit—which is the usual framing. It is that the absence of a clear DEMPE framework creates equal and opposite uncertainty – Indian entities that should be earning higher returns for their DEMPE functions cannot assert that entitlement without a statutory basis, and Indian entities paying royalties for IP to which they have contributed cannot challenge the quantum of those payments without a framework for valuing their contribution. The legislative gap injures both the fisc and the taxpayer.

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