MNCs to get relief under new tax rule

The withdrawal of the circular would also reduce cases of transfer pricing adjustments,i.e. attribution of additional taxable income on companies that have been rising steadily. In FY’13 such adjustments rose to Rs 70,000 crore from Rs 44,500 crore in FY’12.

One of the biggest MNCs that faced this problem was Microsoft. The income tax department added Rs 5,000 crore to Microsoft India’s income between FY’06 and FY’09. Under PSM,the taxman argued that since 4.3 per cent of Microsoft’s global R&D was done in

India,4.3 per cent of its profits were attributable to R&D,and so should be deemed to be the income of the Indian operations.

While the transfer pricing rules prescribed at least five methods of looking at arm’s length pricing — the crux of transfer pricing cases — the Central Board of Direct Taxes (CBDT) said that the March 26 circular appeared to suggest that “there was a hierarchy among the six methods listed in section 92C and that Profit Split Method (PSM) was the preferred method in the case involving unique intangibles or in multiple interrelated international transactions”.

There five other methods are: resale price method,cost plus method,comparable uncontrolled price (CUP) method and transactional net margin (TNM) method.

IT companies use the CUP and TNM to compute tax liability. With the CBDT clarifying that there would be no preferred method,the income tax department can now use more the appropriate method taking into account the circumstance.

Under the PSM,the tax liability was higher for an MNC with an Indian captive unit. This was because,the tax officer assumes that the Indian captive unit has shared significant business risk in the research work and has contributed materially in decision making.

This implies the unit is eligible for a share in the global parent’s profits,not just a margin over the cost of the contracted research.

On the other hand,cost-plus method leads to only taxation of the operational profits of the entity doing contract research.

The circulars were based on a report of N Rangachary Committee on ‘Taxation of Development Centres and IT Sector’.

IT industry body

NASSCOM has consistently raised this issue in its Pre-Budget wish list. It had recommended a three-pronged approach towards ensuring certainty in the future,for transfer pricing issues.

First,for past and current claims,Safe Harbour provisions would be used to resolve all outstanding cases. Second,introduce Advance Pricing Agreements (APA) to help set fair and transparent pricing of transactions. Third,review the structure and procedures of the Dispute Resolution Panel to ensure effectiveness.

“Earlier circular suggested that profit split method should be the default option. The tone of the circular confused the industry resulting in huge complications. Instead of helping the industry,it was worsening the situation,” Bishakha Bhattacharya,director,Nasscom,said.

In a related development the CBDT also said that safe harbour rules are under consideration and will be issued shortly,bringing in certainty in assessment of development centres that are engaged in providing contract R&D services.

LOWER LIABILITY

* The CBDT has revoked the profit split method (PSM) as the preferred means for computing tax liability in transfer pricing

* This move would bring down the tax liability for firms that undertake contract work,as they can use other methods to compute tax payable

* IT companies undertaking contract work would benefit hugely from this change

* NASSCOM had consistently sought clarity and certainty on transfer pricing issues