 "New rules offer safe harbour to IT firms")
Safe harbour prescribes the limit and conditions within which the price of cross-border transactions with a related company declared by an assessee is not questioned by tax authorities.
The rules will give multi-national as well as domestic companies having subsidiaries abroad to come for tax estimation with the authorities in advance. The rules came as disputes under transfer-pricing mechanism surged last year.
The draft norms had said information technology-enabled services (ITeS), information technology services (ITS) and knowledge process outsourcing (KPO) companies with a transaction of only up to Rs 100 crore would be covered by the rules. This ceiling has now been removed, Revenue Secretary Sumit Bose told reporters here on Wednesday.
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The industry had argued that the limit was so low that only a few small players would benefit from it and many large taxpayers who received transfer-pricing orders last year would not be covered. The draft rules had also prescribed minimum operating margins for these rules. For ITeS/ITS sector, it had said only the companies having operating margins of 20 per cent or more in relation to their operating expenses will be covered under the safe-harbour norms.
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The 20 per cent margin is retained for the companies whose transaction is up to Rs 500 crore. Those earning more than Rs 500 crore will have to have operating profit — called safe-harbour margin in technical jargon — of 20 per cent of their operating expenses.
For KPOs, the operating margin has been reduced from 30 per cent in the draft norms to 25 per cent. Also, Indian companies having subsidiaries abroad were sought to be allowed to come under safe-harbour rules if transactions in the nature of corporate guarantee provided by the parent is up to Rs 100 crore. That limit has now been removed. However, safe harbour will be available to companies above Rs 100 crore of transactions only if the subsidiary has been rated to be of the highest rating by a rating agency registered with the Securities and Exchange Board of India. The safe-harbour margin for such transactions will be 1.75 per cent of the amount guaranteed.
Also, the definition of what constitutes a KPO is being streamlined. In draft norms, for example human resource outsourcing is also clubbed under KPO which will mean that BPOs could also be part of KPO, Kartik Rao, tax partner at Ernst & Young, pointed out.
However, Samir Gandhi, partner at Deloitte Haskins & Sells, said it is not practically easy to determine and distinguish between ITS/ITeS and KPO, especially when such determination will require the domain and technical knowledge of the relevant activities involved.
According to Rao, the rules are a positive step forward. However, Rahul Mitra, leader (transfer pricing) at PwC India, said that while the rules still entice small companies, larger players having a cost base of at least Rs 200 crore may not opt for such rules even in the IT and ITeS sector and may opt for advance pricing agreement for obtaining an up-front resolution.
The income tax authorities had sent transfer-pricing notices to these companies for undervaluing transactions with their associates in 2012-13. These included Shell, Vodafone, Essar, Bharti Airtel, HSBC Securities & Capital Markets, Microsoft, Standard Chartered Securities and IBM, among others. Of about 3,200 cases taken up for transfer-pricing auditing in 2012-13, an adjustment of Rs 70,000 crore was made in 1,600 cases. In 2011-12, an adjustment of Rs 44,531 crore had been made in 1,343 cases. This represented an increase of 57 per cent in adjustment.