CBDT amends circular on tax calculation for R&D centres

“It is noticed the circular appeared to give the impression that there was a hierarchy among the six methods listed in section 92C and that Profit Split Method was the preferred method in the case involving unique intangble or in multiple interrelated international transactions… Accordingly,the Central Board of Direct Taxes withdraws circular No 2 dated March 26,2013 with immediate effect,” CBDT said.

It further said the other circular (No 3) has been amended and a new set of guidelines have been issued for identifying the Development Centre as a contract R&D service provider.

Both the circulars (No 2 and 3) were issued in March based on a report of N Rangachary Committee on ‘Taxation of Development Centres and IT Sector’.

The CBDT decisions follow representation from the industry (Nasscom) for greater clarity on two circulars concerning international taxation or transfer pricing.

CBDT said it was brought to it’s notice that there is divergence of views amongst the field officers and taxpayers regarding the functional profile of development centres engaged in contract R&D services for the purposes of determining arm’s length price or transfer pricing.

A note from accounting firm KPMG said that the new circular does appear to be more rational and business friendly in the context of India’s need to attract foreign investment in all possible sectors.

“Rescinding circular no 2 and 3 is a very refreshing and welcome move by the CBDT. It drops the condition that the Indian R&D centres would not use any other than ‘economically significant assets’,a euphemism for human capital,” said Hitesh Gajaria,partner,KPMG in India.