In July 2012, the Prime Minister constituted a Committee to Review Taxation of Development Centers and the lT Sector under the Chairmanship of Mr. N Rangachary, former Chairman CBDT & IRDA. Several eminent tax professionals are a part of the Committee. The Committee has issued a first report dated 14.09.2012 in which it has dealt with several important issues such as (i) approach to taxation of Development Centres, (ii) whether the TNMM or the Profit Split Method or the Global Profit method should be adopted to determine the arms’ length income of these Centres, (iii) general transfer pricing issues which are not specific to the IT Sector (iv) income-tax issues pertaining to the IT Sector such as (a) whether “on-site” development is an export activity, (b) the impact of retrospective amendment of the definition of royalty with regard to taxation of software and transmission charges. The Committee has made far-reaching recommendations on each of the issues.
It may be noted that pursuant to the said recommendations of the Rangachary Committee, the CBDT has issued a comprehensive Circular No. 01/2013 dated 17.01.2013 in which it has provided clarifications on various issues relating to the export of computer software and the allowance of deduction under sections 10A, 10AA and 10B of the Income-tax Act, 1961. The CBDT has also issued circular No.2/2013 dated 26.03.2013 titled “Circular on application of profit split method” and circular No.3/2013 dated 26.03.2013 titled “Circular on conditions relevant to identify Development Centres engaged in contract R&D services with insignificant risk”. Later a Press Release dated Nil was issued stating that Circular No.2/2013 has been rescinded and that Circular No. 3 has been amended and reissued with a view to clear all ambiguities in the matter. The consequential Circulars are Circular No. 05 /2013 [F. No. 500/139/2012-FTD-I], dated 29.06.2013 & Circular No. 6 dated 29.06.2013.
The recommendations of the Rangachary Committee are a must-read for all tax professionals seeking better understanding of the transfer pricing law.