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DIRECT TAXES
Tech Companies get transfer pricing relief
Mon, 01 Jul 2013 00:57:00 0530
Tech companies get transfer pricing relief

The Central Board of Direct Taxes (CBDT) has mitigated transfer pricing (TP) litigation for information technology R&D centres operating in India by withdrawing one of the contentious circulars and suitably amending and revising another circular. The earlier circulars were issued on March 26.

The revised circular seeks to put to rest the practical challenges that arose for taxpayers. It recognizes that all R&D centres cannot be painted with the same brush. Such centres will fall into three broad categoriesóentrepreneurial, centres functioning on a cost sharing arrangement and contract R&Ds.

The basis of transfer pricing is that rewards are linked with functions performed, assets held and risks born. Thus, entrepreneurial centres should have a comparatively higher profit margin in India than a low-risk contract R&D centre which performs insignificant functions. This new revised circular, issued on June 29, replaces the one issued earlier. It provides guidelines to TP officers on arriving at a decision, based on the totality of the facts and circumstances of each case. The circular also adds that the TP officer shall be guided by the conduct of the parties to the transaction and not merely the contractual terms.

India is the hub of R&D centres set up by multinational foreign companies. Litigation arose because in many instances, taxpayers insisted that they were contract R&D service providers bearing insignificant risks, whereas the transfer pricing officers held otherwise and sought to attribute higher profits to the Indian operations. "The earlier circular had prescribed six watertight conditions that needed to be cumulatively met for an R&D centre to be classified as a contract R&D centre. Now there is more leeway," said Rajendra Nayak, partner, Ernst & Young.

"The revised circular also specifies that it is not just the foreign principal but other overseas affiliate companies that can provide funds and other assets, including intangibles for carrying out R&D activities in India. Further the R&D centre can be compensated for their work by any of these companies. This will give a fillip to Indian R&D operations," added Hitesh Gajaria, partner, KPMG. Many ambiguous terms existing in the earlier circular such as "low or no tax jurisdiction" have also been defined. Earlier, if the foreign principal was located in a low or no-tax jurisdiction, it was automatically presumed that the risks are borne by the Indian entity - resulting in higher profit attribution and litigation. "Owing to the clarifications in the revised circular, if the principal is located in a treaty country like Singapore where taxes are low, this issue will not arise," said Nayak.

CBDT has withdrawn another circular which seemed to suggest that only a particular methodó the Profit Split Methodówas the most appropriate formula for computing arm's length pricing. "Safe harbour" rules will also be issued shortly, and these will bring further certainty in assessment of R&D centres, a finance ministry release said.

(Times of India)
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