CBDT amends Circular No 3 on conditions relevant to identify development centres engaged in contract R&D services with insignificant risk
CBDT has laid down guidelines for identifying the Development Centre as a contract R&D service provider with insignificant risk.
The Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the guidelines and shall take a decision based on the totality of the facts and circumstances of the case. In doing so, the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall be guided by the conduct of the parties and not merely by the terms of the contract.
The Assessing Officer or the Transfer Pricing Officer, as the case may be, shall bear in mind the provisions of section 92C of the Act and Rule 10A to Rule 10C of the Rules. He shall also apply the guidelines enumerated above and select the ‘most appropriate method'.
In his 2013 Budget speech, the FM stated, "The Rangachary Committee was appointed to look into tax matters relating to Development Centres & IT sector and Safe Harbour rules for a number of sectors. We have issued a circular covering IT sector exports and will shortly issue a circular covering Development Centres. Rules on Safe Harbour will be issued after examining the reports of the Committee, the last of which is expected by 31.3.2013."
The Committee under the Chairmanship of Shri N Rangachary, former Chairman, CBDT, submitted its First Report on Taxation of Development Centres and IT Sector in September 2012. Based on the Committee's report and after carefully considering the matter, the CBDT issued circular No.2/2013 and circular No.3/2013 on 26th March, 2013.
Representations have been received from the IT industry on the two circulars. It has been pointed out that the R&D Centres set up by foreign companies can be classified into three broad categories based on functions, assets and risk assumed by the centre established in India and these are:
1. Centres which are entrepreneurial in nature;
2. Centres which are based on cost-sharing arrangements; and
3. Centres which undertake contract research and development.
It has been represented that there is a need for providing maximum clarity on the principles for distinguishing each of the three categories and identifying the most appropriate method for determining the arm's length price/transfer pricing.
Responding, the CBDT has rescinded the Circular No. 2 and amended the Circular No.3.
CBDT Circular No. 6/2013, Dated: June 29, 2013