Breather for IT firms as CBDT withdraws controversial tax circular

Breather for IT firms as CBDT withdraws controversial tax circular

In a major relief to the IT industry, the Central Board of Direct Taxes (CBDT) today announced the withdrawal of a controversial circular that could have adversely impacted the tax spend for this industry.

The CBDT also modified another circular relating to taxation of R&D centres that also has a crucial role in software development.

The circular (No 2 of 2013) that has been withdrawn related to the adoption of Profit Split Method (PSM) as a preferred mode for computation of tax liability. The decisions were taken following representation from the industry for clarity on two circulars concerning global taxation of transfer pricing.

Tax experts hailed the latest announcements stating that compliance cost will come down and chances of double taxation may be reduced.

"The rescinding of Circular No. 2 is very good news for the industry. This is a positive move and would certainly improve the sentiments of foreign investors who were shying away from investing in R&D in India," said Vijay Iyer, National Transfer Pricing Leader, Ernst & Young India

Safe harbour rules

The Finance Ministry also said that CBDT would soon issue safe harbour rules. Such a move would bring further certainty in assessment of development centres that are engaged in providing contract R&D services.

Safe harbour rules have been defined as circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee.

The Income Tax Department by withdrawing Circular No 2 has made sure that profit-split method, which could lead to higher taxation, will not be the preferred mode.

Besides this method, there are five other methods for computing tax liability under the transfer pricing rules. These include resale price method, cost plus method, comparable uncontrolled price method and transactional net margin method.