Though the finance ministry has suggested the taxman may still apply the profit-split method (PSM) to local R&D centres of MNCs, albeit in a much more restricted form, the Rangachary committee on this opposed it, saying it is “impracticable to apply PSM”. On Sunday, the CBDT had clarified PSM could be used if the R&D centre was, for instance, sharing risks but Rangachary has said that since it is difficult to ascertain sharing of risks, it is best not to use PSM.
The finance ministry is expected to come out with its view on the report soon.
The committee has also come out against the taxman in a variety of other cases. In several cases, the taxman has opined that on-site work being done by a local IT firm cannot be considered as an export and is therefore ineligible for export benefits. The committee is of the view (see box) that this benefit has to be extended. Since there are several such cases in SEZs where such benefits have not been given, if the government accepts the recommendation, it will come as a big relief to industry.
An even bigger relief applies to the hiring of new employees. The taxman has argued that if new
SEZ units are to be given tax relief, they have to hire new employees — the taxman’s idea was to prevent units whose Software Technology Parks of India (STPI) status had run out to simply declare themselves as SEZs or by moving into SEZs. Rangachary has said that the SEZ law makes no such distinction; so, if the government wishes to do so now, it must amend the law prospectively.
Though the SEZ/STPI/ export-oriented unit Acts had given blanket tax exemptions, the taxman had stopped giving tax benefits to R&D activity. Once again, Rangachary has come down in favour of industry and has said that any cases filed by the taxman must be withdrawn immediately. Since there are cases where this benefit was withdrawn many years ago, Rangachary has said the benefit will be deemed to have been notified from September 2000. In the case of SEZs being sold, the taxman had said the tax benefits would not accrue to the buyer while Rangachary has said the tax benefit applies to the unit, not the owner, and so must continue.
Source : financialexpress.com