Around 900 R&D centres of technology MNCs, that contributed around a third of India?s total IT export revenues of $68 billion in FY12, are all set to get a major relief with the Rangachary committee recommending a maximum mark-up over cost of 20-22%.
The safe harbour norms are likely to be announced within the next fortnight.
What this means is that if an IT R&D centre declares cost of R100, the maximum profit the assessing officer can use for purposes of calculating taxes is R22.
In the case of Microsoft, where the company had indicated a mark-up of 15% on costs for FY09, the taxman had said part of Microsoft?s global profits had to be added back into the Indian R&D centre?s profits ? so, all told, on an R&D spend of R1,067 crore, on which the mark-up should have been R159 crore according to Microsoft India, the taxman has added R1,355 crore to that year?s profits/mark-up. All told, for FY06 to FY09, a sum of R5,135 crore was added back to Microsoft India?s profits by the transfer pricing authorities.
The revenue department had clarified on Saturday that the controversial profit split method (PSM) will not be applied as the preferred method for the development centres (DCs) and had said: ?The Safe Harbour Rules under section 92CB of the Act are under consideration and will be issued shortly by the CBDT and the Safe Harbour Rules will bring further certainty in assessment of development centres that are engaged in providing contract R&D services.?
Finance ministry sources told FE: ?The Rangachary panel tasked with the job of recommending safe harbour rules by Prime Minister Manmohan Singh has recommended this 20-22% range for IT and IT-enabled services and the CBDT panel is currently working out the modalities for implementation of the committee?s recommendations.?
They said IT and IT-enabled services constitute the major portion of revenues pertaining to the development centres in India and once the rules were in place, the number of transfer pricing litigation would go down substantially.
A large number of transfer pricing adjustments are currently landing up in courts because there are no specified rates at present for calculation of arm?s length for taxation. Each case, at present, is handled separately and this is particularly the reason why transfer pricing adjustments ? which have grown from Rs 44,500 crore in FY12 to Rs 70,000 crore in FY13 ? have become litigious. The application of safe harbour norms would bring in transparency, curb litigation and minimise scrutiny.
The Rangachary committee submitted its final report on the safe harbour norms in April this year. There are five reports submitted separately dealing with different areas. Different rates have also been recommended for different sectors which include pharma and auto, but these suggestions have not been put up in public domain as yet.