TMI BlogFirst Report of the Committee to Review Taxation of Development Centres and the IT SectorX X X X Extracts X X X X X X X X Extracts X X X X ..... ss release on July 30, 2012 (Annexure -1), stating that the Hon'ble Prime Minister had constituted a Committee to Review Taxation of Development Centres and the IT Sector under the Chairmanship of Mr. N Rangachary, former Chairman CBDT IRDA. The press release also underlined the following grounds for seeking resolution of tax issues through an arm's length exercise in the form of a review by the Committee: There is a need to address issues relating to the taxation of the IT Sector such as the approach to taxation of Development Centres, tax treatment of "onsife services" of domestic software firms, and also the issue of finalising the Safe Harbour provisions announced in Budget 2010. The reason for large concentration of Development Centres in India is the worldwide recognition of India as a place for cost competitive, high quality knowledge related work. Such Development Centres provide high quality jobs to our scientists, and indeed make India a global hub for such Knowledge Centres. However, India does not have a monopoly on Development Centres. This is a highly competitive field with other countries wanting to grab a share of the pie. There is need for clarity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bhan Kar, Addl. Commissioner of Income Tax (APA), Delhi vide CBDT order No 154 dated 7th August, 2012 (Annexure-III). 1.5 The time limit of August 31, 2012 for submission of recommendations of the Committee on issues other than Safe Harbour was, with the approval of the Finance Minister, extended to 15th Sept. 2012. 1.6 The rationale for setting up the Committee was, inter olio, reiterated in the Press Note issued by the office of Hon'ble Finance Minister, Shri Chidambaram on August 06, 2012 (Annexure-IV). The relevant part is extracted below: "Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution, and an independent judiciary will provide great assurance to investors. We will take corrective measures wherever necessary. We have recently appointed two Committees, one to examine GAAR legal provisions and guidelines and the other to review taxation of the IT sector and Development Centres. I have also directed a review of tax provisions that have a retrospective effect in order to find fair and reasonable solutions to pending as well as likely disputes between the Tax Departments and the Assessees concerned. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived written suggestions/comments from the following: i Shri N.R.Narayana Murthy, Chairman Emeritus, Infosys (forwarded by Department of Revenue) ii. American Chamber of Commerce (Amcham) iii. Baker McKenzie representing the Software Coalition iv. Sonata Software Ltd. v. Coalition on International Taxation in India 1.12 An interactive session was conducted on 19th August, 2012 with the following business/industry chambers: i NASSCOM ii. FICCI iii. ASSOCHAM 1.13 An interactive meeting was also held on 3rd September, 2012 with the following officers of the Income-tax Department/CBDT to ascertain the views of the Revenue: i Chief Commissioners of Income-tax (CCA), Bengaluru, Chennai, Delhi, Hyderabad and Mumbai. ii. Director General of Income-tax (International Taxation), Delhi iii. Joint Secretaries (FT TR-I and II), CBDT iv. Commissioner of Income-tax (ITA), CBDT 1.14 Another round of consultations was held by the Committee with the following business/industry chambers on 12th September, 2012: i. NASSCOM (including E Y) ii. CII (including Microsoft, Yahoo India, Wipro, Deloitte Haskins Sells and Amarchand Mangaldas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 471 27 3,432 2007-08 218 84 39 1,614 2008-09 1,726 670 39 6,140 2009-10 1,830 813 44 10,908 2010-11 2,301 1,138 49 23,237 2011-12 2,638 1,343 52 44,531 2.3 Transfer pricing disputes are a major cause of concern for captive DCs in India. The PMO's Press Note dated July 30, 2012 defines captive DCs as under: "Many MNCs carry out activities such as product development, analytical work, software development, etc. through captive entities in India. They exist in wide variety of fields including IT software, IT hardware, Pharmaceutical R D, other automobile R D and scientific R D. These are popularly called Development Centres." 2.4 Transfer pricing is not an exact science. It is both fact intensive and fact sensitive and does require exercise of judgment on the part of tax administration and taxpayer. Administration of TP provisions relating to transfer pricing documentation, comparability analysis, choosing and, applying most appropriate method to determine arm's length price, continues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the software such as what the software should perform, business logic that processes data, what data is stored and used by the software, and how the user interface should work is decided. Various scenarios to help guide the development team in developing a solution are framed. Product architecture defining the components of the offerings, their relationships and dependencies, the overall design strategy, and resource requirements are finalized in this stage. ii In the Design phase, a value proposition and a product prototype are developed by a software developer based on the results of the Envision and Plan stages, customer feedback from the previous product version, surveys, competitive analysis, the product leader's vision for the future and an overall vision for the product category. The software design and its architecture (hardware and software) are the deliverables of this stage. iii. The Develop stage includes working on requirement activities, implementation activities and verification activities. The entire work project is broken into several modules/ program, each of which is independently developed and coded based on the requirements and the specifications. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute IP or share the costs thereof and have joint ownership of any IP developed going forward Parties jointly share the risks, in their cost sharing ratio Parties agree to jointly share the profits associated with the IP developed, as per mutually negotiated terms The company undertakes the R D on its own account and bears full risk and reward from future R D The company bears the costs of R D and has ownership of IP developed The company enjoys the profits associated with the IP developed Generally, preferred model for the IT industry (software and enabled services) Generally, preferred model for Pharma, Biotech and similar Industries. Generally, preferred model for Pharma, Biotech and similar Industries. 2.9.3 Most software projects follow a "distributed development" model with phases and parts of the projects performed across different sites or departments, with work packages delegated to external vendors (i.e., outsourcing) or transferred to offshore captive service providers, for instance in India. The overwhelming majority of captive IT Development Centers in India and their Principal R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an MNE group to be entitled to intangible related returns, it should in substance- i. Perform and control important functions related to the development, enhancement, maintenance and protection of the intangibles and control other related functions performed by independent enterprises or associated enterprises that are compensated on an arm's length basis; ii. Bear and control the risks and costs related to developing and enhancing the intangible; and, iii. Bear and control risks and costs associated with maintaining and protecting its entitlement to intangible related returns. 2.9.8 In the cases of captive R D centres operating in India, it is not only that the legal and economic ownership lies with the overseas principal R D Company, but it also has to be appreciated that any work product, the patent registration, etc. if any, based on contribution by India cannot be commercially exploited on a standalone basis because its contribution to the overall value chain is insignificant. Such patent registration is only to safeguard the legal rights of the principal against infringement of IP (by competitors), however insignificant these rights be. The principal makes deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities, product and services development, design development etc. It may be seen from presentation that NASSCOM has admitted that services provider also bears the risk of R D activities in case of contracted R D and is not a risk free entity. Accordingly, the remuneration model will vary from case to case depending upon FAR analysis. 2.10.8 A sample analysis in a 2007 in-house report of the tax department noted significant variations in the PLI margins of the taxpayers accepted by the Department in the Software/ITES sectors. 2.10.9 Contractual agreements vary with the companies and it may be difficult to construct a homogenous group on the basis of contractual agreement. 2.10.10 Grouping of off-shore development centre would require a more detailed study and broad categorization as suggested by NASSCOM on the basis of an assumption that all contracts for R D activities are same will generate more litigation. 2.10.11 Decision of creating groups in one industry segment and corresponding margins may be examined in light of international standard and practice because if such grouping and margin are not acceptable to a country which is a party to international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factors. Also, the lifecycle of an R D program tends to be long (average lifecycle of an R D program exceeds two years) with new programs starting regularly. Thus, an MNC looking to setting-up an R D centre would seek a greater degree of certainty of the tax policy applicable in order to meet its long-term objectives. It is therefore imperative that transfer pricing policies for R D centres in India are carefully and pragmatically implemented keeping in view that India would like to retain its competitive edge. 2.13.5 The complex transfer pricing issues need better understanding of the larger R D program of an MNC and a careful study of the functional analysis in most cases would reveal that cost plus method would be applicable. Both taxpayers and tax authorities need to work together to ensure that this understanding increases quickly. In the meantime, the tax authorities need to resist the temptation of using PSM on a generalized basis to drive revenue collection when indeed the some would be grossly incorrect for most contract R D arrangements in India today. 2.14 Views of Revenue 2.14.1 The position of Revenue as per the presentation made by JS, FT TR-I, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of patents. 2.14.4 Thereafter, in his comments sent by e-mail, he emphasised that the Issue of attribution of global profit under profit split method needs a careful scrutiny in order to understand extent of the problem. The number of adjustment under profit split method will give some idea about this problem. If problem were confined restricted to one or two companies, then it would be easier to examine reasons of such adjustment and to suggest a solution. 2.15 Recommendations of the Committee 2.15.1 The Committee has noted that TNMM is the methodology adopted by the Revenue for benchmarking for Contract DCs, till date, except in two cases in Delhi, where PSM (Profit Split Method) was applied. In one case, DRP deleted the application of PSM for the AY 2007-08 and reserved the right to apply PSM, if the facts and circumstances so warrant in future. In this case for the AY 2008-09, the TP adjustment was arrived at by adopting TNMM as the most appropriate method due to data inadequacy. In the second case, the TPO adopted PSM for determining ALP, for the AYs 2007-08 2008-09, on the ground that unique intangibles were transferred. In this case, DRP confirmed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the most appropriate method for arriving at the arm's length price for the services rendered by such DC: The critical functions with regard to overall product development lifecycle, including particularly conceptualization and design for the product is driven by the foreign principal. The Indian DC would largely be involved in the actual development, implementation or maintenance of specific features or portions of the product, with limited inputs on design as necessary, within the strategic direction / framework provided by the foreign principal. The principal provides funds/capital for research. The principal bears the risk of failure of the research and will be the owner of the outcome of the research in case of success, while the contract researcher is allocated a guaranteed remuneration irrespective of whether the research is a success or a failure. The DC is required to report back to the principal on a regular basis, e.g. at predetermined milestones. The principal is expected to be able to assess the outcome of the research activities. Any suggestion to the modification of the research programme by the DC is subject to the review and approval by the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nique intangible requires application of PSM: "Profit split method which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so inter-related that they cannot be evaluated separately " 2.16.2 The Committee recognises the following practical difficulties in the application of a profit split method (PSM) in cases of DCs engaged in contract R D services: Determination of unique contribution in an integrated product is a major challenge in R D services. The main problem is faced in identifying the profits arising from the controlled transactions. The foreign principal determines the product in which the outcome of the research is to be used and knows as to how and to what extent that research will add value to the product. This information is important as valuation of intangibles is highly volatile and every R D activity may not lead to creation of an intangible For example, in respect of captive R D centres in India, the data on the combined profit earned by MNC arising out of the products sold, which are arising out of the R D activities carried on India or for that matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant portion of the guidance is as follows: "The expense of discovering and developing valuable intangibles has no direct relation to the price of products manufactured and sold using that technology. If the R D programme cost 100 million, the products will rarely be priced directly to try and recoup those costs over say the next 5 years. There is of course an indirect link; a business will bear in mind the costs of its current R D programmes for future products, and what it would like to spend on that R D in the future, but the pricing of goods and services is subject to a very complex interaction of many commercial factors. While a revolutionary new product will no doubt attract a premium price in some markets, there is generally a limit on what people are prepared to pay". 2.17 Recommendation of the Committee: A proper application of PSM would necessitate the availability of adequate and reliable data with regard to profits attributable to various functions, risks, geographies etc. As a result, one has to apply PSM with extreme care and caution and the lack of data at present makes it impracticable to apply PSM. Thus application of PSM, where appropriate technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions performed by parties. Identification of functions performed to consider the assets -tangible and intangible that are employed or to be employed in actual conduct of controlled transactions The economic substance and commercial realities of transactions need to be examined to find out the true nature and terms of controlled transactions so as to ascertain the actual functions performed, assets used and risks assumed by respective associated enterprises. The allocation of risks should be consistent with the economic substance of the transactions. The functions carried out (taking into account the assets used and the risks assumed) by respective enterprises will determine to some extent the allocation of risks between them and the return each enterprises would expect in arm's length dealings. Each critical process involved in actual conduct of controlled transactions should be examined so as to ascertain actual functions performed, assets utilized and risks assumed by respective parties. Level of expenses and types of expenses should also be scrutinized to identify functions associated with main function, additional function, assets used -intangibles and intangibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the client officers and the staff of the Indian software company; and the second set of activities, called "off-shore" activities, includes activities like functional design, detailed technical design, architecture, database design, programming, testing, etc. 3.3.2 Their submission is that the second set of activities is taken up by scalable, talent-rich, technology-enabled, process-driven and cost-competitive development centres in India. They further claim that, sometimes, the customer may insist that the entire set of activities including both "on-site" and "off-shore" be taken up "on-site" at his premises due to exigencies of speed, uncertainty arising from new technologies and confidentiality. 3.3.3 It is also claimed that sometimes, the talent required for "on-site" tasks may be requisitioned by a company from any of its offices anywhere in the world based on the need of the expertise and this is what the Global Delivery Model is all about. Another assertion is that sometimes, a pilot project may have to be done exclusively "on-site" to establish the credibility of the Indian software export. Therefore, the contention is that "on-site" activities are also expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction has been denied and the taxpayer is before the CIT (A) or DRP, the issue may be allowed to be decided by the CIT(A) or DRP in accordance with the law and the Assessing Officers should be directed to either concede the issue or not contest the same further. In cases where the CIT(A) or ITAT or High Court has decided this issue in favour of the taxpayer, no further appeal should be filed by Revenue. Wherever Revenue has already filed further appeal on this issue before the ITAT, High Court or Supreme Court, as the case may be, the relevant ground of appeal may be withdrawn immediately. 3.6 Issue 2: Whether business receipts from Deputation of Technical Manpower (DTM) are eligible for deduction under Section 10A , I 0AA and 10B ? 3.7 Views of the Industry The Industry representatives have stated that the tax authorities have denied tax holiday to several units by alleging that deployment of manpower to "on-site" locations is a case of "body shopping" and no benefits can be given for such activities. The stakeholders have asserted that Deployment of Technical Manpower [DTM] is for the purpose of software development abroad and receipts from such activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31/3/2011. Thus, STPI units are no longer eligible to claim any tax benefit. On the other hand, SEZ units in the software development segment have a 15 year tax holiday available to them u/s 10AA of the Act . 3.11 .2 The stakeholders from the industry do agree that tax authorities rightly deny the benefit when taxpayers move all their business to the SEZ unit from their existing STPI unit to claim the tax incentives. However, industry has emphatically stated that the movement of personnel from STPI units is necessary as every project needs experienced project managers, analysts, programmers, etc, and it was impossible for a software company to do projects only with freshers. Further, the submission was that re-skilling of employees, addresses underemployment and results in incremental activity which generates economic rewards in the system The view of the industry is that since there is no requirement of the law as contained in Section 10AA to have only new employees in the SEZ unit, tax authorities should not deny the tax benefits on this ground. They have also relied upon Instruction No. 70, dated 9th November, 2010, issued by the Department of Commerce in which the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proposed new condition, if Company ABC either shows 1000 new billable employees in the SEZ unit or is able to demonstrate that it had at least 11,000 billable employees as on 31 /3/2014 for the company as a whole, then it would be considered to have successfully met the proposed new condition. This 50% ratio is being suggested recognising the business environment wherein some shifting of experienced employees may be necessary to maintain the competitive advantage offered by the Indian entity. In cases where deduction has been denied and the taxpayer is before the CIT (A) or DRP, the issue may be allowed to be decided by the CIT(A) or DRP in accordance with the law and the Assessing Officers should be directed to either concede the issue or not contest the same further. In cases where the CIT(A) or [TAT or High Court has decided this issue in favour of the taxpayer, no further appeal should be filed by Revenue. Wherever Revenue has already filed further appeal on this issue before the ITAT, High Court or Supreme Court, as the case may be, the relevant ground of appeal may be withdrawn immediately. 3.14 Issue 4: Hierarchy of documents - Whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew that the SoW should be above the MSA in the hierarchy of legal/commercial documents for the purposes of determining the actual work being done. Since the SoW lays down the actual scope of work and the software development is carried out in accordance with the terms of the SoW, it is the SoW that should be given primary importance and not the MSA for the purposes of tax incentives under Sections 10A , 10AA and 10B . The fact that an SoW has been issued under an existing MSA would not be detrimental to the claim of deduction by an taxpayer. Thus, the Committee recommends that if the work of software development is governed by a new SoW, the taxpayer should be eligible for the tax benefits available under these Sections irrespective of the date of signing of the MSA. However, to address the concerns of the Revenue, if an existing SoW is prematurely terminated in a non-eligible undertaking and the same work is covered under a new SoW in an eligible undertaking, this fact would need to be taken into account by the Assessing Officer as a relevant factor in determining whether the undertaking is new or is formed by splitting up or reconstruction of a business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all such actions should be withdrawn and relief granted to the taxpayers by means of a circular. 3.20 Views of Revenue Sections 10A , 10AA and I0B provide tax benefit for export of articles or things or computer software. Scientific R D does not come within the IT enabled services notified by the CBDT expanding the scope of "customized electronic data or any product or service of similar nature". Besides, original research and development is not included as a part of customized electronic data or services of similar nature. If scientific research and development had been notified as a service similar to export of customized electronic data, it would have been a different matter. 3.21 Recommendations of the Committee: The Committee is of the view that the services covered by the Notification, namely, Engineering and Design services, could potentially include R D activities. However, in order to set at rest any controversy, the Committee recommends that R 8 D services should be notified as being eligible to claim this deduction and should be deemed to have been notified from the original date of notification i.e., 26/9/2000. Pursuant to the amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax holiday under Sections 10A / 10B denied to the transferee on transfer of undertaking under slump sale 3.27 Views of the Industry 3.27.1 The representatives of industry pointed out that tax holiday under Sections 10A / 10AA / 10B is undertaking specific and hence any business reorganisation which results in the transfer of the entire undertaking should entitle the purchaser to claim tax holiday benefits for the unexpired period of tax holiday claim. 3.27.2 They recommend a clarification stipulating that an eligible undertaking, which is transferred as a going concern by way of a slump sale, would be eligible for the tax holiday for the remainder period under the relevant Sections. They seek that clarification should clearly bring out the fact that change in ownership of business/undertaking would not constitute splitting up/reconstruction of an existing business and, therefore, a transfer by way of a slump sale of an eligible undertaking would not disentitle the purchaser of the undertaking to claim the tax holiday. 3.28 Views of Revenue Revenue denies the tax holiday on the grounds that the undertaking is formed by splitting up of an existing business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave to be certified by a Chartered Accountant as per specified audit form. In view of the some, the "eligible undertaking" has to necessarily maintain separate books of account for the profits of the eligible unit to be determined and for the accountant to certify the said profits. Besides, under the STPI rules, separate books of account are required to be maintained. 3.33 Recommendations of the Committee: The Committee is of the view that the Revenue cannot deny deductions under Sections 10A , 10AA or 10B on the ground of non-maintenance of separate books of account for the eligible unit, as there is no requirement in law to maintain separate books of account. The Committee also took note of the provisions of Section 11 of the Act , wherein there is a specific requirement in sub-section (4A) for maintenance of separate books of account by a trust or institution in respect of profits and gains of business, which is incidental to the attainment of the objectives of such trust or institution. The Committee is of the view that in the absence of specific requirements for maintaining separate books of accounts, STPI rules cannot be relied upon to impose any obl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over the seconded employees during the period of secondment. Further, the Revenue claims that since the secondees were employees of overseas affiliates and were providing managerial services to the Indian entities, the payment made by the latter to the former under the secondment agreements constituted 'Fees for technical services' under Section 9(l) (vii) of the Act. The Revenue, therefore, believes that the Indian entities are liable to deduct tax under Section 195 of the Act in respect of reimbursements made to the overseas affiliates under the secondment agreements and where no tax is deducted, the entire payment made by the Indian entities is liable to be disallowed under Section40(a) (i) of the Act . 3.37 Recommendations of the Committee: Each contract governing secondment arrangement is fact specific and the Committee is of the view that no general guidance can be suggested in this matter. 3.38 Issue - 10: Reduction in tax holiday owing to absence of parity in treatment of the terms "export turnover" and "total turnover" 3.39 Views of the Industry 3.39.1 Industry has pointed out that in the absence of a definition to the term 'total turnover', th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant ground of appeal may be withdrawn immediately. 3.42 Issue - 11: Denial of tax holiday on transfer of an eligible SEZ unit from one SEZ to another SEZ 3.43 Views of the Industry 3.43.1 Industry representatives have pointed out that SEZ regulations, in principle, permit the transfer of a unit from one SEZ to another SEZ. In this regard, Instruction Number 59 issued by the Ministry of Commerce and Industry (SEZ Division) provides that shifting of units from one SEZ to another SEZ for various commercial reasons is permitted, provided an approval from the Board of Approvals is obtained. 3.43.2 However, Revenue authorities are construing that the newly shifted unit would be understood to have been formed by way of splitting up or reconstruction of the existing SEZ unit and hence questioning the allowability of the tax holiday claim in such cases. 3.43.3 Industry has requested that it needs to be appreciated that the formation criteria (i.e. whether a unit is formed by way of splitting up or reconstruction of an existing business) should be tested in the initial year of a unit and once this is satisfied, mere shifting of a unit from one SEZ to another should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the existing undertaking and therefore are eligible for tax deduction only for the balance period available for the existing undertaking. 3.49 Recommendations of the Committee: Committee is of the view that there is no presumption in law that only one undertaking can be set up in one STP/EHTP/SEZ or only one undertaking can claim benefits under Sections 10A and 10AA or only one undertaking can operate under one license. The issue as to whether an undertaking is new or expansion or is set up by splitting-up or reconstruction of an earlier business is a matter of fact which must be examined by the assessing officer on the facts of each case to determine eligibility for deduction of the new undertaking. In cases where deduction has been denied by adopting the above presumption and the taxpayer Is before the CIT (A) or DRP, the issue may be allowed to be decided by the CIT(A) or DRP in accordance with the law after ascertaining from the Assessing Officers whether after ignoring the above presumption the taxpayer is eligible for deduction. If the AO is satisfied that taxpayer is eligible he should either concede the issue or not contest the same further. In cases wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployment- playing a leading role in developing an R D and product culture, spearheading initiatives to develop affordable products for emerging markets and creating entrepreneurship opportunities. ER D/SPD segment is the largest segment within the Indian captive landscape with over 200+ ER D captives established in the last 3 years. MNC Development centres accounted for over 1 per cent of India's GDP in FY2010, support indirect employment of 1.4 million people and have played a key role in creating an innovation ecosystem in India. The industry has significantly grown over the last 5 years and currently has representation from most of the verticals like Aerospace Defence, Automotive, BFSI, Bio-Technology, Chemicals, Computer Hardware, Education, Electronic/Electrical Equipment, Energy, Healthcare, Industrial, Semiconductors, Software/Internet, and Telecommunications, etc. Manufacturing focussed verticals such as Automotive and Construction / Heavy Machinery were some of the first industries to engage in ER D off shoring and now have a mature supply base in India. Cost pressure, access to flexible capacity, local market access fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30.2012 New Delhi The Prime Minister has constituted a Committee to Review Taxation of Development Centres and the IT Sector. The Committee will engage in consultations with stakeholders and related government departments to finalise the Safe Harbour provisions announced in Budget 2010 sector-by-sector. It will also suggest the approach to taxation of Development Centres. 2. The Prime Minister had earlier set up an Expert Committee on GAAR under the Chairmanship of Dr. Partho Shome to engage in a widespread consultation process and finalise the GAAR Guidelines. The response has been overwhelmingly positive. 3. While this committee would address concerns on GAAR provisions and would reassure investors about the predictability and fairness of our tax regime, it was felt that there is still a need to address some other issues relating to the taxation of the IT Sector such as the approach to taxation of Development Centres, tax treatment of "onsite services" of domestic software firms, and also the issue of finalising the Safe Harbour provisions announced in Budget 2010. 4. Many MNCs carry out activities such as product development, analytical work, software development, etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xation of Development Centres and suggest any circulars that need to be issued. ii) Engage in sector-wide consultations and finalise the Safe Harbour provisions announced in Budget 2010 sector-by-sector. The Committee will also suggest any necessary circulars that may need to be issued. iii) Examine issues relating to taxation of the IT sector and suggest any clarifications that may be required. 9. The Committee will work to the following time schedule: i) Finalise the approach to taxation of Development Centres and suggest any necessary clarifications by 31 August 2012. ii) Suggest any necessary clarifications that may be needed to remove ambiguity and improve clarity on taxation of the IT Sector by 31 August 2012. iii) Finalise Safe Harbour Rules individually sector-by-sector in a staggered manner and submitting draft Safe Harbour provisions for three sectors/sub-activities each month beginning with the first set of suggestions by 30 September 2012. All Safe Harbour provisions can be finalised by 31 December 2012. 10. The Department of Revenue will provide all necessary support to the Committee to facilitate its work including office assistance and assistance to fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubrahmanyam, Joint Secretary to PM. 6..PS to FM 7. PPS to secretary(Revenue). 8. Chairman,CBDT 9. DS(Admn), Department of Revenue with the request to provide all Necessary support to the Committee to facilitate its work including office_ assistance and assistance to facilitate consultations. Annexure III F. No. A 35915 29/2012-Ad.VI Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes New Delhi, Dated 7 th August 2012 ORDER No. 154 of 2012 With the approval of the Competent Authority, the services of the following officers are placed at the disposal of the Committee to Review Taxation of Department Centre and the IT Sector under the Chairmanship of Shri N. Rangachary former Chairman. CBDT IRDA with immediate effect and until further orders. S. No. Name of Officer / Post (S/ Shri) Civil Code 1. Sobhan Kar, Additional Commissioner APA, Delhi 99018 2. D. Prabhakar Reddy, Additional Director of Income Tax, TPO2(6), Mumbai 99011 (A. K. Chaturvedi) Director Ad. VI Copy to: 1. Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholders. Obviously, where necessary, our policies have to be modified or fine-tuned in order to meet the expectations of different stakeholders. We intend to unveil, shortly, a path of fiscal consolidation. I would like to make it clear that the burden of fiscal correction must be shared, fairly and equitably, by different classes of stakeholders. The poor must be protected and others must bear their fair share of the burden. Obviously, adjustments must be made both on the revenue side and on the expenditure side. We have asked Dr. Vijay Kelkar, Dr. Indira Rajaraman and Dr. Sanjiv Misra to assist the Government in formulating the path of fiscal consolidation and we expect that the work will be completed in a few weeks. Price stability is an important objective. In fact, it is more important for the poor. There has been pressure on prices, and inflation - especially food inflation - is high. The causes are well known: some are beyond our control, such as prices of crude oil and imported commodities, but some others can be addressed by determined action. We will take steps to remove the constraints on the supply side. We will also use our stocks of food grain to moderate prices. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dwill for India and most people continue to keep faith with the India growth story. It is natural that they look closely at certain economic indicators, one of them being the exchange rate. Volatility of the exchange rate has reduced in recent weeks. A reassurance on the investment climate, continued inflow of remittances, and a rise in capital flows -both FDI and FII - will bring further stability to the exchange rate. We intend to fine tune policies and procedures that will facilitate capital flows into India. A high level of savings is a pre-condition to a high level of investment. In 2007-08, savings touched 36% of GDP. It is now down to 32% of GDP. One of the reasons may be a perceived lack of attractive investment opportunities and instruments. Hence the attraction of gold, but gold is not a productive asset and the demand for gold worsens the current account deficit. Both the mutual fund industry and the insurance sector have turned sluggish. In the next few weeks, we will announce a number of decisions to attract more people to invest in mutual funds, insurance policies and other well-designed instruments. Manufacturing and exports are two key drivers of the economy. Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moderate inflation and rise in human development indicators that we achieved during 2004-08. Let us remember that we had faced similar challenges in 1991, 1997 and 2008 and we overcame them. It is widely acknowledged that, today, the Indian economy is stronger and better prepared to face the challenges. Moderate growth in two out of eight years should not dent our confidence. Several legislative proposals have gone through the full deliberative process and are ripe for debate and passing in Parliament. I seek the cooperation of all political parties represented in Parliament to pass these Bills. With the cooperation of political parties, civil society, farmers and workers, service providers, producers and consumers, and scientists and technologists, I am confident that we will prevail and we will return to the path of high growth, inclusive development, and economic and social justice for all." Annexure V Government of India Ministry of Finance Department of Revenue (foreign Tax and Tax Research Division) Dated 08.08.2012 Office Memorandum A concern has been raised regarding the application of global profit method in taxation of companies engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
