Patent Filing & Advisory

A Chartered Accountant's role in patent advisory is primarily on the financial and commercial side: patent valuation for balance sheet recognition under AS 26 / Ind AS 38 (Intangible Assets), transfer pricing documentation for royalty arrangements under Section 92C of the Income Tax Act 1961, and structuring the IP holding entity for tax efficiency. The technical filing of a patent application under Section 7 of the Patents Act 1970 — drafting claims, responding to examination reports, and representing before the Indian Patent Office — is the domain of a registered patent agent or patent attorney. A CA adds the most value at the intersection of IP and finance: ensuring the patent is capitalised at cost (R&D expenditure qualifying under Section 35(1) or Section 35(2AB) for weighted deduction), advising on licensing structures, and computing royalty income tax obligations under Section 115BBF.

Under Section 35(2AB) of the Income Tax Act 1961, a company engaged in the business of biotechnology, pharmaceuticals, or any article notified by the CBDT can claim a weighted deduction of 150% on expenditure on scientific research (both revenue and capital) incurred on in-house R&D facilities approved by the Department of Scientific and Industrial Research (DSIR). This benefit, which was restored by Finance Act 2023 at 150% (having been reduced to 100% from AY 2021-22 to AY 2024-25), requires the R&D facility to hold a valid DSIR certificate and the company to file Form 3CL certified by the prescribed authority. For AY 2026-27 and earlier under the Income Tax Act 1961, the deduction is available as above; under the Income Tax Act 2025 applicable from TY 2026-27, the position on weighted deductions should be verified against the enacted provisions. Revenue R&D expenditure of other companies not eligible for Section 35(2AB) can be deducted at 100% under Section 35(1)(i).

Section 115BBF of the Income Tax Act 1961 provides a concessional tax rate of 10% (plus surcharge and cess) on royalty income earned by a patent holder that is a resident of India in respect of a patent developed and registered in India under the Patents Act 1970. To be eligible, at least 75% of the expenditure incurred in creating the patent must have been incurred in India by the eligible assessee, and the patent must be registered on or after April 1, 2003. The concessional rate applies only if the taxpayer exercises the option under Section 115BBF in their return of income; once exercised, no deduction of expenses is allowed against such royalty income. This regime, commonly referred to as the Patent Box regime, is designed to incentivise domestic R&D monetisation and aligns India with OECD-compliant IP regimes.

Patents are intangible assets and must be recognised and measured under Ind AS 38 (Intangible Assets) for companies required to follow Indian Accounting Standards, or AS 26 (Intangible Assets) for companies following Companies (Accounting Standards) Rules 2006. Under both standards, a self-generated patent is recognised at cost — comprising all directly attributable expenditure from the point the development phase criteria are met (technical feasibility, intention to complete, ability to use or sell, availability of resources, expected future economic benefits). Internally generated goodwill, brands, and publishing titles cannot be capitalised, but patents resulting from a successful development project can be. Under Ind AS 38, the patent is subsequently measured at cost less accumulated amortisation and impairment losses; the useful life must not exceed its legal life under the Patents Act 1970 (20 years from the filing date under Section 53). For transfer pricing purposes, a patent held by an Indian entity and licensed to a related overseas entity must be valued using the Comparable Uncontrolled Price or the Profit Split method under Rule 10B of the Income Tax Rules 1962.

Transfer of a patent from an Indian company to its overseas subsidiary is an international transaction under Section 92B of the Income Tax Act 1961, and the consideration must be determined at arm's length price (ALP) under Section 92C using one of the prescribed methods in Rule 10B of the Income Tax Rules 1962 — typically the Transactional Net Margin Method or the Comparable Uncontrolled Price method for IP transfers. The taxpayer must maintain contemporaneous transfer pricing documentation under Section 92D and file Form 3CEB (Transfer Pricing Accountant's Report) for transactions exceeding ₹1 crore in a financial year. From the FEMA side, a transfer of a patent (an intangible asset) to a foreign entity constitutes an ODI and must be valued by a SEBI-registered merchant banker or practicing CA under the Foreign Exchange Management (Non-Debt Instruments) Rules 2019; the proceeds must be repatriated within the time prescribed by the AD bank. Undervaluing the patent to shift profits out of India can attract both transfer pricing adjustments under Section 92 and penalty under Section 271AA.