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In a breather to the IT industry, the Income Tax Department today withdrew a controversial circular and modified another one relating to taxation of R&D centres, which play a key role in software development.
The Central Board of Direct Taxes (CBDT) withdrew the circular relating to Profit Split Method (PSM) as a preferred mode for computation of tax liability and modified another one relating to development centres.
"It is noticed the circular appeared to give the impression that there was a hierarchy among the six method listed in section 92C and that Profit Split Method (PSM) was the preferred method in the case involving unique intangible or in multiple interrelated international transactions.
"....Accordingly, the Central Board of Direct Taxes withdraws circular No 2 dated March 26 2013 with immediate effect," CBDT said.
It further said the other circular (No 3) has been amended and new set of guidelines have been issued for identifying the Development Centre as a contract R&D service provider.
Both the circulars (No 2 and 3) were issued in March based on a report of N Rangachary Committee on 'Taxation of Development Centres and IT Sector'.
The CBDT decisions follow representation from the industry (Nasscom) for greater clarity on two circulars concerning international taxation or transfer pricing.
CBDT said it was brought to it's notice that there is divergence of views amongst the field officers and taxpayers regarding the functional profile of development centres engaged in contract R&D services for the purposes of determining arm's length price/transfer pricing.
Commenting on CBDT decisions consultancy firm KPMG said the new circular pays heed to representations made by the IT industry. "The new circular does appear to be more rational and business friendly," it added.
The tax department by withdrawing the circular has made sure that profit-split method (PSM), which leads to higher taxation, will not be the preferred mode, said said S P Singh, Senior Director, Deloitte Haskins & Sells.
