New Delhi: In a relief to the information technology (IT) industry, the income tax (I-T) department on Sunday eased transfer-pricing rules for multinational companies operating in India.
On Sunday, the central board of direct taxes or CBDT modified another circular around taxation of development centres, defining a contract research and development (R&D) centre, a move which will enable foreign firm to outsource more of their research and development activities to India without worrying about tax liability. When an entity is defined as a contract research and development centre, it is deemed to be mainly performing tasks for its foreign entity and, hence, its tax liability in India is limited.
On Saturday, the tax office had revoked a circular that stipulated that the profit-split method was the preferred mode of tax computation from other options available.
Under the profit-split method, profit from a particular transaction is allocated to different group entities using a particular method to determine tax liability of an individual entity.
Earlier, the tax department had stipulated that for an entity to be defined as a contract R&D centre, it should satisfy all the six criteria laid down in the circular.
Among the requirements were that the Indian arm of a foreign IT company perform only insignificant functions and have limited assets while the foreign parent have control of it, take most of the risks, and be the legal owner of the domestic entity.
On Sunday, the tax department clarified that it was not necessary for an entity to satisfy all the criteria to be defined as a contract R&D centre.
This has been a bone of contention between the tax department and the taxpayers, with the former treating such R&D centres as full or significant risk-bearing entities and making transfer-pricing adjustments accordingly.
Hitesh Gajaria, partner at consulting firm KPMG, said no entity can be qualified as a contract R&D centre with rigid definitions since cumulatively satisfying all six conditions would have been restrictive.