The Hindu Business Line : `Change I-T Act to treat BPO cos as independent service providers'

THE Bangalore Chamber of Commerce and Industry (BCIC) has sought suitable changes in the Income Tax Act to treat the Indian Business Process Outsourcing (BPO) companies as independent service provider and not as an agent of foreign principal company for the assessment of tax liability.

The Act can be amended to provide that arm's length price for outsourced work be determined only on the basis of activities performed by the BPO unit in India without attributing any profits to the non-resident outsourcing work to India.

In its pre-budget memorandum submitted to the Union Finance Minister, Mr P. Chidambaram, BCIC said that The Central Board of Direct Taxes (CBDT) had, in a circular issued in September last, not categorically spelt out that payment of arm's length price to an ITeS BPO unit should extinguish the tax liability of the head office or a foreign entity.

BCIC has suggested that CBDT should clarify that payment of service fee to BPO companies at arms length by foreign company will be exempt from payment of tax by the foreign company in India.

This could be in tune with the circular of 1969, which had clarified that "in the assessment of profits, allowance will be made for the expenses incurred, including the agent's commission, in making the sales."

If the agents' commission fully represents the value of the profit attributable to his service, it should prima facie extinguish the assessment.

BCIC also urged that a provision should be made that in case where that payment by the foreign entity to the Indian BPO was at arm's length price, there should be no need for the foreign entity to file tax returns in India.

Referring to the Fringe Benefit Tax vis-à-vis international taxation, BCIC wants the meaning of the term `based in India' be clearly defined based on one or more parameters such as physical presence in India, taxable prescience in India (resident in India), rendering of services in India and being on the payroll of an Indian company.

On the levy of FBT on leave travel assistance, BCIC said CBDT should clarify whether the exempt portion of LTA was liable to FBT or not.

Seeking clarity on the implication of medical reimbursements, it was not clear whether FBT would be applicable on the whole sum of Rs 15,000 as stipulated in CBTD's circular or the sum in excess of it would be liable to FBT.

The Chamber had also sought relief on several other issues to make taxation investor friendly.