'Modification in taxation of R&D centres a positive step'

IT industry body Nasscom today said the government's decision to modify circulars on taxation of R&D centres would send out positive signs to MNCs and bring clarity on issues like transfer pricing. Nasscom welcomes the government's decision to rescind and modify the circulars relating to taxation of R&D centres in India, Nasscom President Som Mittal told PTI.

"When we represent a view to the government, it is willing to listen and this (decision) is a positive step. It will send out a strong message to the MNCs who have R&D units here and were seeking clarity on the tax regime," he said. The Income Tax Department yesterday withdrew a circular relating to 'Profit Split Method' (PSM) as a preferred mode for computation of tax liability while modifying another one related to development centres.

According to the profit-split method, part of the parent company's profit is taken into account while computing the tax liability of its centres. This would have significantly increased tax demand on R&D centres of foreign companies operating in India.

A panel was also formed by the government under former CBDT chairman N Rangachary to address issues like approach to taxation of Development Centres, tax treatment of 'onsite services' of domestic software firms and those related to finalising Safe Harbour provisions announced in Budget 2010.

Nasscom and its members had been engaged in dialogue with the government to provide clarity in taxation norms. "The move is a clear indication of the fact that the government has appreciated IT industry's viewpoint. It has also reiterated its position to issue safe harbour guidelines, thus clearing up the issues on transfer pricing," Mittal said.

Nasscom expects these guidelines on safe harbour to be released in two-three (rpt) two-three weeks. Safe Harbour principles are international disclosure practices to check litigations in transfer pricing - an accounting mechanism undertaken by MNCs to reduce tax liabilities.