I-T dept issues circulars on taxing R038;D centres

At stake is whether a cost plus method,currently used for calculating transfer pricing cases for these development centres should prevail or there should be a larger demand in years when the centres make a major breakthrough that affects the bottomline of the parent companies. In the parlance of these sectors it is referred to as profit split.

Kunj Vaidya,associate director of PricewaterhouseCoopers said the establishment of a rule-based tax policy was welcome as it allowed for predictability in estimating how much tax to pay.

A potential source of dispute could,however,be about the application of the profit split method to calculate tax which could result in more tax outgo for the Indian Ramp;D service providers.

Reading the two circulars together,it seems profit split method is being implicitly given a recognition for Ramp;D centre, Samir Gandhi,tax partner,Deloittee,said adding that the move is worrisome because this is the reason why several companies have run up tax disputes with the government.

The Rangachary committee was set up by Prime Minister Manmohan Singh last year to iron out the issues in the sector so that India could compete with other developing nations for a pie in the share of setting up of such centres on contract basis for research and development purposes.

The tax department claims that India has the right to tax the result of Ramp;D activities,but the companies have argued that such intangible belongs to the company providing the contract to them and hence the local entity has no ownership over those. Therefore,cost plus method being used by them should be continued for calculation of the transfer pricing.