Circular 2/2013

Circular on application of profit split method

What this is

Circular 2/2013 was issued by the Central Board of Direct Taxes on 26 March 2013. Its subject is Circular on application of profit split method.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Guides Transfer Pricing Officers on when the profit split method is the most appropriate method. It discourages methods that value an intangible as research and development cost plus a return, on the footing that there is no correlation between spend on research and the return on the intangible it produces. It notes that rule 10B(1)(d) makes the profit split method apt mainly for transfers of unique intangibles or for multiple international transactions so interrelated that they cannot be evaluated separately, and that selection turns on the rule 10C(2) factors, data availability among them. Where the Officer takes the view that the method cannot be applied for want of information and reliable data, he must record reasons for its non-applicability before turning to the transactional net margin method or the comparable uncontrolled price method. He may then select comparables engaged in developing intangibles in the same line of business and make upward adjustments for transfer of intangibles without additional remuneration, and for location savings and location specific advantages.

Why it was issued

It came to the Board's notice that clarification was needed on selecting the profit split method as the most appropriate method, and the Board examined the issue.

Who it reaches

Companies transferring or developing unique intangibles for associated enterprises
Captive research and development centres remunerated on a cost-plus basis
Transfer Pricing Officers selecting the most appropriate method
Transfer pricing documentation preparers under section 92D and rule 10D

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.92D	s.171

The instrument, as the Board published it

The department publishes this one only as a PDF, so the words below were read out of that PDF by machine. That reading can carry its own mistakes — a misread number, a broken line. Check the signed document before you rely on a figure in it.

F No. 500113912012
. Government of lndia
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
(Foreign Tax and Tax Research-l Division)
New Delhi, the 26ftday of March, 2013
Circular No. 02 /2013
Sub: Gircular on application of profit split method
It has beel bloughto the notice of CBDT that clarification isneeded for selection of profit split
method (PSM) as most appropriate method. The issue has been examined in CBDT. lt'is
hereby clarified that while selecting PSM as the most appropriate method, the following points
may be kept in mind:
1. Since there is no correlation between cost incurred on R&D activities and return on an
intangible developed through R&D activities, the use of transfer pricing methods [like
Transactional Net Margin Methodl that seek to estimate the value of intangible based on
cost of intangible development (R&D cost) plus a return, is generally discouraged.
2. Rule 10B (1)(d) of Income Tax Rules 1962 (the Rules) provides that profit split method
(PSM) may be applicable mainly in international transactions involving transfer of unique
intangibles or in multiple international transactions which are so interrelated that they
cannot be evaluated separately for the purpose of determining the arm's length price of
any one transaction. The PSM determines appropriate return on intangibles on the basis
of relative contributions made by each associated enterprise.
3. Selection and application of PSM will depend upon following factors as prescribed under
Rule 10C(2) of the Rules:
o the nature and class of the international transaction;
o the class or classes of associated enterprises entering into the transaction and
the functions performed by them taking into account assets employed or to be
employed and risks assumed by such enterprise;
o the availability, coverage and reliability of data necessary for application of the
method;
o the degree of comparability existing between the international transaction and the
uncontrolled transaction and between the enterprise entering into such
transactions;
o the extento which reliable and accurate adjustments can be made to account for
differences, if any, between the international transaction and the comparable
uncontrolled transaction or between the enterprise entering into such
transactions;
o the nature, extent and reliability of assumptions required to be made in
application of a method.
4. . lt is evident from the above that Rule 10C (2) of the Rules stipulates availability,
coverage and reliability of data necessary for the application of the method as one of the
severalfactors in selection of most appropriate method. Accordingly, in a case, where
the Transfer Pricing Officer (TPO) is of view that PSM cannot be applied to determine
the arm's length price of international transactions involving intangibles due to nonavailability of information and reliable data required for application of the method, he
must record reasons for non-applicability ofPSM before considering TNMM or
comparable uncontrolled price method (CUP) as most appropriate method depending
upon facts and circumstances ofthe case.
5. Application of Profit Split Method requires information mainly about the taxpayer and
associated enterprises. Section 92D of the lncome-tax Act, 1961 provides for
maintenance of relevant information and documents by the taxpayer as prescribed under
Rule 10D of the Rules. Therefore, there should be good and sufficient reason for nonavailability ofsuch information with the taxpayer.
6. Depending upon facts and circumstances of the case, TPO may consider TNMM or CUP
method as appropriate method by selecting comparables engaged in development of
intangibles in same line of business and make upward adjustments taking into account
transfer of intangibles without additional remuneration, location savings and location
speciflc advantages.
The above may be brought to the notice of all concerned. n I
h.o"Jt} ,'V\t\ t)
(Batsala Jha Yadav) " - \ \
DirectorAPA
Central Board of Direct Taxes
Copy to:
1. The Chairperson, Members and all other officers of the CBDT of the rank of Under Secretary
and above.
2. All Chief Commissioners/Directors General of lncome-tax.
3. The Director (PR, PP & OL), Mayur Bhawan, New Delhi for printing in the quarterly tax
bulletin and for circulation as per usual mailing list (100 Copies).
4. The Comptroller and Auditor General of India (40 copies).
5. All Directors of Income-tax, New Delhi
6. The Director General of Income-tax, NADT, Nagpur
7. Guard File.
8. Joint Secretary and LegalAdvisor, Ministry of Law and Justice, New Delhi
9. The lnstitute of Chartered Accountants of India, lP Estate, New Delhi
(Batsala Jha Yadav)
DirectorAPA
Central Board of Direct Taxes

What to watch

A cost-plus return on research spend is what the circular treats with suspicion, which cuts directly against the usual transactional net margin method benchmarking of captive research units.
The Officer cannot simply drop the profit split method — reasons for its non-applicability have to be on record before another method is adopted.
Because section 92D and rule 10D require the taxpayer to maintain the information, there must be good and sufficient reason for it not being available; pleading absence of data is not free.
Location savings and location specific advantages are expressly flagged as grounds for an upward adjustment, so expect them to be raised.

Where you meet it

In transfer pricing proceedings before the Transfer Pricing Officer on an intangibles or captive research and development transaction, and in the objections carried from there to the Dispute Resolution Panel.

What it names

Rules it names. Rule 10B, 10C, 10D of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.

It mentions. Circular No. 02/2013

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 3/2020 [F.No.370142/19/2019-TPL] /GSR 14(E) — Ministry of Finance 6 January 2020

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.