Financial Daily from THE HINDU group of publications
Thursday, Aug 12, 2004
Financial Daily from THE HINDU group of publications Thursday, Aug 12, 2004 |
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Info-Tech
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Taxation Mixed reactions to BPO tax circular K.R. Srivats
New Delhi , Aug. 11 THE recent draft circular of the Income-Tax Department on taxation of IT-enabled BPO units in India has evoked mixed reactions from tax experts. While a large section has generally welcomed the decision to adopt the arm's length principle as the basis of taxation, there are some who feel that the draft circular is only sending a diffused message to foreign investors and that there is need for clarity. Speaking to Business Line, Mr Rahul Garg, Executive Director (TRS), PricewaterhouseCoopers (PwC) said that there should be clarification that with respect to activities undertaken by an Indian BPO unit, which is liable to tax under Section 92 of the I-T Act, no tax should be assessable in the hands of the foreign enterprise for the same activities if the Indian BPO unit were to constitute a permanent establishment (PE) of the foreign enterprise. "Thus under all circumstances, where the PE is resulting from activities undertaken by the BPO unit and Sec. 92 of the Income-tax Act requiring the taxation of such BPO unit on an arm's length basis is applicable, no further tax should be levied on the foreign company (i.e PE) for the same activities," Mr Garg said. To illustrate, the activities of a BPO unit constituting a PE may be priced on the basis of arms length principle at say $100. This draft circular provides that the profits attributed to PE resulting from BPO unit shall be computed on the basis of arms length principle i.e. assuming $100 as arms length price of those activities. On the other hand, under section 92 of the Income-Tax Act, the taxation of BPO units itself is to be done following the arm's length principle. The natural corollary under these circumstances, according to Mr Garg, would be that if application of the principle does not result in attribution of any other amount apart from the amounts on the basis of which the BPO unit itself is to be taxed, no further tax should be levied on the foreign enterprise. Mr Gaurav Taneja, National Tax Director, Ernst & Young, said: "While the draft circular broadly confirms the OECD approach of treating the `head office' and the PE as separate and distinct enterprises and applying arm's length/transfer pricing principles for attributing income to the PE, it does not address a number of issues relating to income attribution — such as allocation and use of intangibles, risks, certain specific services etc. — which have been addressed in the OECD Reports," Mr Taneja said.
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