TaxTMI 
TaxTMI 
First Report of the Committee to Review Taxation of Development Centres and the IT Sector
X X X X Extracts X X X X
X X X X Extracts X X X X
....er's Office issued a press release on July 30, 2012 (Annexure -1), stating that the Hon'ble Prime Minister had constituted a Committee to Review Taxation of Development Centres and the IT Sector under the Chairmanship of Mr. N Rangachary, former Chairman CBDT & IRDA. The press release also underlined the following grounds for seeking resolution of tax issues through an arm's length exercise in the form of a review by the Committee: * There is a need to address issues relating to the taxation of the IT Sector such as the approach to taxation of Development Centres, tax treatment of "onsife services" of domestic software firms, and also the issue of finalising the Safe Harbour provisions announced in Budget 2010. * The reason for large concentration of Development Centres in India is the worldwide recognition of India as a place for cost competitive, high quality knowledge related work. Such Development Centres provide high quality jobs to our scientists, and indeed make India a global hub for such Knowledge Centres. However, India does not have a monopoly on Development Centres. This is a highly competitive field with other countries wantin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee sought and was provided assistance of two officers, namely, Shri D. Prabhakar Reddy, Addl. Commissioner of Income Tax, TPO-Il(6), Mumbai and Shri Sobhan Kar, Addl. Commissioner of Income Tax (APA), Delhi vide CBDT order No 154 dated 7th August, 2012 (Annexure-III). 1.5 The time limit of August 31, 2012 for submission of recommendations of the Committee on issues other than Safe Harbour was, with the approval of the Finance Minister, extended to 15th Sept. 2012. 1.6 The rationale for setting up the Committee was, inter olio, reiterated in the Press Note issued by the office of Hon'ble Finance Minister, Shri Chidambaram on August 06, 2012 (Annexure-IV). The relevant part is extracted below: "Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution, and an independent judiciary will provide great assurance to investors. We will take corrective measures wherever necessary. We have recently appointed two Committees, one to examine GAAR legal provisions and guidelines and the other to review taxation of the IT sector and Development Centres. I have also directed a review of tax provis....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Committee received written submissions from most of the above stakeholders. The Department of Electronics & IT primarily supported the position of NASSCOM on various issues. The Department of Commerce generally sought uniform, predictable and fair application of the tax laws apart from supporting some beneficial construction of incentive provisions in respect of certain contentious issues e.g "onsite service", shifting of employees to new unit and MSA vs. SoW. 1.10 The Department of Economic Affairs informed that they had no comments to offer. 1.11 In addition to that, the Committee also received written suggestions/comments from the following: i Shri N.R.Narayana Murthy, Chairman Emeritus, Infosys (forwarded by Department of Revenue) ii. American Chamber of Commerce (Amcham) iii. Baker & McKenzie representing the Software Coalition iv. Sonata Software Ltd. v. Coalition on International Taxation in India 1.12 An interactive session was conducted on 19th August, 2012 with the following business/industry chambers: i ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....RT 2: FIRST TERM OF REFERENCE - APPROACH TO TAXATION OF DEVELOPMENT CENTRES (DCs) Background 2.1 Inter-group pricing arrangements between related business entities including transfer of tangible goods/intangibles/services or lending or borrowing money etc, fall within the ambit of Transfer Pricing. Comprehensive Transfer Pricing (TP) legislation was introduced in India w.e.f. 01-04-2002. 2.2 Eight TP audit cycles have been completed and the transfer pricing adjustments made are as follows': Financial year Number of TP Audits completed Number of adjustment cases % of adjusted cases Amount of adjustment (lNR in crore) 2004-05 1,061 239 23 1,220 2005-06 1,501 337 22 2,287 2006-07 1,768 471 27 3,432 2007-08 218 84 39 1,614 2008-09 1,726 670 39 6,140 2009-10 1,830 813 44 10,908 2010-11 2,301 1,138 49 23,237 2011-12 2,638 1,343 52 44,531 2.3 Transfer pricing disputes are a major cause of concern for captive DCs in India. The PMO's Press Note dated July 30, 2012 defines captive DCs as under: "....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l concept, requirement analysis, functional design, internal design, documentation planning, test planning, coding, document preparation, integration, testing, maintenance, updates, retesting, phase-out, and other aspects. Software life cycle models describe phases of the software cycle and the order in which those phases are executed. The stages of Software Development Cycle, using the simplest model, which are based on sequential phases, are as follows: i. Envision & Plan ii. Design iii. Develop iv. Test v. Deploy & Maintain i. In the Envision and Plan stage, a clear definition of the customer problem is identified by gathering the business requirements. This stage is essential to understand the purpose, requirements, required functionality, system environment, output and such other critical factors. In this stage the functionality of the software such as what the software should perform, business logic that processes data, what data is stored and used by the software, and how the user interface should work is decided. Various scenarios to help guide the development team in developing a solution are framed. Product architecture defining the componen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ployment is ensuring smooth functioning of the software by fixing any defects and providing regular maintenance activities. 2.9.2 NASSCOM has indicated the following three types of contractual structures as being prevalent in India: CONTRACTUAL STRUCTURES Contracted Development Cost Sharing/ Contribution Entrepreneur * Parties of service provider and service recipient have contractual agreement * Service provider has no ownership/ rights on IP associated with work product; does not contribute any IP either. * Service recipient assumes all risks associated with work product * Service provider is generally compensated on commercial basis (hourly/ lump sum for 3rd party, and cost plus for internal) * Parties agree to form partnership to pool respective IP and share risk and reward from future R&D * Both parties contribute IP or share the costs thereof and have joint ownership of any IP developed going forward * Parties jointly share the risks, in their cost sharing ratio * Parties agree to jointly  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....us researchers b) Principal R & D company designs research programmes, makes decisions as to where R & D activities will be conducted, and regularly monitor the progress on all R & D projects. c) Principal R & D Company controls the R & D function for the MNE group and the R & D programme of the group operates under strategic direction of Principal R & D company senior management. d) Contracts between the principal R & D Company and Development Centre specify that principal R & D Company will bear all risks and costs related to R&D undertaken by Development Centre. e) All patents, designs and other intangibles developed by Development Centre research personnel are registered by principal R&D Company, pursuant to contracts between the Development Centre and principal R&D Company. f) Personnel of Development Centre may be involved in planning and design by virtue of giving suggestions for modifications to the research programme and such suggestions are required to be reviewed and approved by the principal R&D Company. 2.9.7 For a member of an MNE group to be entitled to intangible related ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t development (services, design and inputs) is a crucial factor in survival of the group because nowadays products/services are changing so fast that it requires continuous revision or development of design, products and services. Accordingly, the R&D activities are core to the survival of the group in the competing market. 2.10.4 Different companies adopt different models and type of R&D activities and ratio of research and development spending to the revenue varies significantly. High R&D expenses are justified in the light of consequent high gross margins varying from 60 to 90%. 2.10.5 The categorization of off-shore development centres in India may be on the basis of type, model and nature of R&D activity and reason and benefit of off-shoring. It may be very difficult to make exact groupings of R&D development centres because of above parameters which may vary from one industry to another industry segment in each country. 2.10.6 Analysis of the conduct of the parties is more important than the written contract. 2.10.7 The contract development structure as mentioned in NASSCOM presentation will need further examination by analyzing actu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....compensated on a total cost plus basis. A large majority of R & D centres operating in India today would be covered under the fact pattern discussed above. Transactional Net Margin Method would be the only appropriate transfer pricing method to benchmark the transaction of rendering services by Development Centres to the Principal R & D Company with appropriate mark-up on cost. 2.13.3 Application of PSM requires exceptional circumstances, for example i. where an MNC undertakes the R & D under a cost contribution arrangement- Under such an arrangement, all the parties contribute costs and resources and jointly undertake R & D and share the risks and rewards of such R & D. In this arrangement, the participants in the R & D process get part of the legal and economic rights in the intangibles and hence the participants would be entitled to intangible related returns. It is a possibility that some of these arrangements may entail a PSM for compensation to all the participants ;or ii where the principal is located in tax havens/tax shelters with no significant functions performed or decisions taken outside India. 2.13.4 Application of PSM by Ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be distinguished; * business model, nature, reasons and benefits of off-shoring are important factors in determining allocation of risks; * various factors that are to be seen while determining the entity controlling a risk are core functions, key decisions, level of individual responsibility, etc; * the most appropriate method will vary with the functional profile of the Development Centre and there cannot be any straitjacket formula for applying cost plus method / TNMM * undue emphasis on risk, without realizing that the risk is a by-product of function and asset, may give wrong results; * risk is located where the functions and assets are located. However control over risk may be divided between parties. Location savings and location rents also need to be considered. 2.14.3 Further, he asserted, that Offshore Development Centres in India are developing significant intangibles, known by the application for patents filed from India in US and other countries. These are valuable and unique as it can be seen from Indian Patent Act, 1972 that only those inventions, which are valuable and unique, can be patented. Further Indian TP r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the costs (before interest and tax) are reimbursed by the principal, with certain agreed mark-up. The costs that are considered (before interest and tax) for applying TNMM for the captive and the comparables also form the cost base for reimbursement by the principal. Thus, as per industry, appropriate mark-up on costs, in effect refers to the appropriate operating margin under TNMM and cost plus method referred by the industry, in effect is TNMM under the Income Tax Act. • The characterisation of Research and Development function can broadly be in three baskets, i.e., - • Full risk bearing developer • Limited risk bearing developer • Contract R & D service provider with no significant risks 2.15.2 The Committee acknowledges that the Industry stakeholders have unanimously agreed that most of the captive DCs in India were Contract R & D service providers with no significant risks. The Committee has, therefore, focussed on suggesting approach to taxation of such DCs only. The full risk bearing Developers (who are Entrepreneurs) and limited risk bearing Developers (who follow cost sharing/contribution models) need....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stration of any IP arising from such development is made by the foreign principal. Involvement of the Indian personnel to comply with filing requirements, without any underlying rights in the exploitation by the Indian personnel and / or by the Indian DC, is evident from the employee contract and / or contract between DC and its foreign principal. • The patent registration cannot be commercially exploited on a standalone basis because its contribution to the overall value chain is insignificant. R.t • The terms and conditions regarding ownership of intangibles would have been similar if the activities carried on by a DC were or could have been outsourced to a third party DC. 2.15.4 Contract between the principal and the DC is a relevant factor but not the determinant factor. Conduct of the affiliate DC should be consistent with the contractual terms with the Principal. For example, if a contract shows the principal to be controlling the risk but conduct shows that affiliate is doing so, then the contractual terms are not the final determinant of actual activities. In the case of foreign principal being located in a country /territory w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sactions is not easy, use of PSM on some allocation key may lead to claims for splitting the global loss also if the R&D effort globally does not yield desired results. This can cause attribution of losses to the activities by the DC even in situation where the research done by DC is successful • PSM is a highly subjective method, as it requires a subjective analysis of the contributions made by the controlled parties to an intangible asset and its implementation is often not measurable by specific reference to objective data. The contribution analysis can sometimes be hard as the more integrated the company group structure is, the harder it can be to disentangle the underlying contributions and identify the actual performer. Moreover, if different valuable intangible assets are contributed by more than one associated company, it gets even more difficult to attribute values. 2.16.3 The Committee has also taken note of the fact that HMRC, UK has recognised the following problems in application of PSM while issuing the guidance in applying PSM4 i. There is a difficulty in isolating the controlled transactions and establishing what functions add va....
X X X X Extracts X X X X
X X X X Extracts X X X X
....up because he believes that an appropriate comparability analysis is with respect to comparables which also have the some locational savings and advantage and no further adjustments are necessary). 2.18 General Transfer pricing issues which are not specific to the IT Sector The stakeholders have identified some other transfer pricing issues affecting the DCs including those which are not engaged in R&D. These issues are listed in Annexure-VI. 2.19 Response and Recommendations of the Committee 2.19.1 The Committee recognises that these Transfer Pricing (TP) issues impact all sectors and are not peculiar to DCs or IT sector and considers their review beyond its mandate. The Committee acknowledges that these issues do create tax uncertainty but is of the view that most of these arise due to lack of consistency and proper FAR analysis in the application of transfer pricing provisions. Hence, there is certainly an urgent need to have internal clarity and consistency on these issues. 2.19.2 The Committee has noted that following significant recommendations for conducting FAR analysis ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ibles ✓ Contract R & D service provider with no significant risks * Service Provider(Software) ✓ Software product developer with all risks ✓ Contract software service provider with limited risks ✓ Manpower service provider with no significant risks 2.19.3 The Committee recommends that CBDT must issue an updated guidance note on FAR analysis taking the recommendations of the earlier committee into account. Further, a circular clarifying the position on other administrative issues listed in Annexure VI should be issued so that there is uniformity in application of provisions across the country, which will also reduce disputes and grievances. A few of these issues listed in Annexure VI raise question about the appropriateness of some of the Transfer Pricing provisions in the Income Tax Act. However, the Committee has, considering its mandate, not examined those. PART 3: SECOND TERM OF REFERENCE - INCOME-TAX ISSUES PERTAINING TO THE IT SECTOR 3.1 The Committee has, after long deliberations and careful consideration of all the issues, arrived at a set of recommendations consistent with its approach summa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....several units by the tax authorities deriving profits from "on-site" services, on the ground that no export has been made out of the unit is also contrary to the express provisions of the statute, as no such restrictive condition is found in the substantive provisions of Section 10A, 10AA and 10B of the Act. They draw support from, Explanation 3 to Section 10A, Explanation 2 to Section 10AA and Explanation 3 to Section I0B. 3.3.5 Additionally, they have contended that CBDT's circular no. 694 of 1994 creates uncertainty since it provides that the "on-site" software development will be considered as export only if the software is 'actually' the product of the unit. 3.4 Views of Revenue The officers of CBDT were of the view that the "on-site" services should have some nexus with the unit claiming the deduction. They opined that 100% onsite work defeats the purpose of exports out of India. They also relied on Circular no. 694 of 1994. 3.5 Recommendations of the Committee: * Explanation 3 to Section 10A and Explanation 3 to Section 10B of the Income-tax Act inserted vide the Finance Act, 2001 and Exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e-tax Act. 3.8 Views of Revenue Revenue has contended that Deployment of Technical Manpower [DTM] is not an eligible activity u/s I0A, I0AA or I0B as the taxpayer companies were not contracted for software development and were responsible only for sending trained manpower abroad. Therefore, the receipts arising from such DTM activity are being held as not being eligible for tax incentives under these Sections. 3.9 Recommendations of the Committee: * The Committee, while interpreting Explanations to Sections 10A, 10AA and 10B (ibid) in the context of industry practice and particularly the words in parenthesis i.e., (including services for development of software), agrees with the view that the Deployment of Technical Manpower [DTM] which has any connection with software development work - which would include up-gradation, testing, maintenance, modification, etc of the software - contracted to the eligible unit should be considered as an eligible activity under Sections 10A, 10AA and 10B. * However, if the DTM is unrelated to the above activities of the eligible unit, then it would not be an eligible activit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Commerce in which the latter has clarified that there was no limitation on the movement of manpower from STPI/DTA units to SEZ units. 3.12 Views of Revenue The officers of CBDT were of the view that there should be a certain percentage of new employees in the new SEZ units to make those units eligible for claiming this deduction. However, they also appreciated that there was no such explicit requirement in the current provisions of Section 10AA. 3.13 Recommendations of the Committee: * As per the provisions of Section 10AA there is no requirement with regard to the employment of new employees in the eligible undertaking in order to claim deduction. Employment of existing employees cannot be considered as splitting up or reconstruction of a business already in existence. Accordingly, the condition of new employees cannot be imposed while examining the eligibility of the taxpayer for the deduction under Section 10AA. If the legislative intent was to impose such a condition, then specific clauses for employment of new and regular employees would have been inserted. In the absence of a specific condition of employing new employees and consid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he relevant ground of appeal may be withdrawn immediately. 3.14 Issue 4: Hierarchy of documents - Whether the Master Services Agreement (MSA or by whatever name called ) or the Statement of Work (SoW or by whatever name called ) should be the deciding document for enabling software exporting units to claim deduction under Sections 10A, 10B and 10AA of the Income-tax Act 3.15 Views of the Industry 3.15.1 The representatives of the industry in the IT sector have stated that when an Indian software exporter is empanelled by a foreign client for developing software from time to time, the first activity that happens is the negotiation of a Master contract between the client and the Indian software exporter. This is known as a Master Service Agreement [MSA]. Generally, this MSA covers issues like duration of the master contract, the rate per hour of work, liability clauses, agreement not to poach each other's staff, loaning of technology, IP protection, etc. This process is a long-drawn process and could take anywhere between two months to one year. Once this MSA is signed, the client informs the business groups that they are now free to issu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be taken into account by the Assessing Officer as a relevant factor in determining whether the undertaking is new or is formed by splitting up or reconstruction of a business already in existence. Besides, to facilitate the Assessing Officer, the Committee also recommends that a requirement be provided through legislative change that a Chartered Accountant's certificate should be obtained by the taxpayer confirming that the new SoW has not been brought into existence by prematurely terminating an old SoW covering the same work. * In cases where deduction has been denied and the taxpayer is before the CIT (A) or DRP, the Issue may be allowed to be decided by the CIT(A) or DRP in accordance with the law and the Assessing Officers should be directed to either concede the issue or not contest the some further subject to the taxpayer furnishing a certificate from the management to the effect that the new SoW has not been brought into existence by prematurely terminating an old SoW covering the same work. * In cases where the CIT(A) or [TAT or High Court has decided this issue in favour of the taxpayer, no further appeal should be filed by Revenue. Whereve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds that R 8 D services should be notified as being eligible to claim this deduction and should be deemed to have been notified from the original date of notification i.e., 26/9/2000. * Pursuant to the amendment to the Notification, in cases where deduction has been denied and the taxpayer is before the CIT (A) or DRP, the issue may be allowed to be decided by the CIT(A) or DRP in accordance with the law and the Assessing Officers should be directed to either concede the issue or not contest the same further. * Pursuant to the amendment to the Notification, in cases where the CIT(A) or ITAT or High Court has decided this issue in favour of the taxpayer, no further appeal should be filed by Revenue. Wherever Revenue has already filed further appeal on this issue before the ITAT, High Court or Supreme Court, as the case may be, the relevant ground of appeal may be withdrawn immediately. 3.22 Issue - 6: Deduction under Section 35(2AB) of the Income-tax Act should be extended to computer software 3.23 Views of the Industry The industry asserted that since a lot of R & D activity was carried out in the software segment, it may be clarified that beneficial pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d not disentitle the purchaser of the undertaking to claim the tax holiday. 3.28 Views of Revenue Revenue denies the tax holiday on the grounds that the undertaking is formed by splitting up of an existing business or that the assets had been used earlier. They also argue that there is no specific provision in Sections 10A, 10AA or 10B which allows the deduction to be given for the unexpired period post such slump sale, while such a provision is there for amalgamation and demerger. 3.29 Recommendations of the Committee: The Committee is of the view that the tax benefit is attached to the undertaking and not the taxpayer (owner of the undertaking) and is also of the view that the undertaking post slump sale is not one that has been formed by splitting up or reconstruction of an existing business. Several judicial decisions have also upheld these views and disagreed with the Revenue's stance of disallowing the tax benefit to the owner of the eligible undertaking post such slump sale. Therefore, the Committee recommends that in case of a slump sale of an eligible undertaking as a going concern, the tax holiday for the unexpired period should be available to the owner....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on in respect of profits and gains of business, which is incidental to the attainment of the objectives of such trust or institution. • The Committee is of the view that in the absence of specific requirements for maintaining separate books of accounts, STPI rules cannot be relied upon to impose any obligations of compliance for claiming tax benefit under the Income Tax Act. • The Government may amend the Income-tax Act prospectively if it considers necessary that the "eligible undertaking" should maintain separate books of account. • In cases where deduction has been denied and the taxpayer is before the CIT (A) or DRP, the issue may be allowed to be decided by the CIT(A) or DRP in accordance with the law and the Assessing Officers should be directed to either concede the issue or not contest the same further. • In cases where the CIT(A) or ITAT or High Court has decided this issue in favour of the taxpayer, no further appeal should be filed by Revenue. Wherever Revenue has already filed further appeal on this issue before the ITAT, High Court or Supreme Court, as the case may be, the relevant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Act. 3.37 Recommendations of the Committee: Each contract governing secondment arrangement is fact specific and the Committee is of the view that no general guidance can be suggested in this matter. 3.38 Issue - 10: Reduction in tax holiday owing to absence of parity in treatment of the terms "export turnover" and "total turnover" 3.39 Views of the Industry 3.39.1 Industry has pointed out that in the absence of a definition to the term 'total turnover', the Revenue has been ignoring the legal intent of the provisions and does not provide parity of treatment between the term export turnover and total turnover and the items which are excluded from the export turnover are not being excluded from the total turnover. This results in the reduction of the tax holiday available to the IT companies. 3.39.2 As an illustration, if an eligible unit had no domestic turnover, its entire profits ought to be eligible for relief under Section 10A/10B/10AA of the Act. However, on account of the fact that the Revenue removed some elements (such as say telecommunication expenses) only from the export turnover witho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er, Revenue authorities are construing that the newly shifted unit would be understood to have been formed by way of splitting up or reconstruction of the existing SEZ unit and hence questioning the allowability of the tax holiday claim in such cases. 3.43.3 Industry has requested that it needs to be appreciated that the formation criteria (i.e. whether a unit is formed by way of splitting up or reconstruction of an existing business) should be tested in the initial year of a unit and once this is satisfied, mere shifting of a unit from one SEZ to another should not be a ground for denial of income tax benefits. 3.43.4 Industry has asserted that a unit may intend to shift from one SEZ to another due to certain operational difficulties faced by it such as, availability of people, space, desired location, etc. 3.44 Views of Revenue Revenue denies the tax holiday on the ground that the undertaking is formed by splitting up as the assets have been used earlier. 3.45 Recommendations of the Committee: • The Committee is of the view that the tax benefit is attached to the undertaking and, therefore, movement of an eligible SEZ unit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p or reconstruction of an earlier business is a matter of fact which must be examined by the assessing officer on the facts of each case to determine eligibility for deduction of the new undertaking. • In cases where deduction has been denied by adopting the above presumption and the taxpayer Is before the CIT (A) or DRP, the issue may be allowed to be decided by the CIT(A) or DRP in accordance with the law after ascertaining from the Assessing Officers whether after ignoring the above presumption the taxpayer is eligible for deduction. If the AO is satisfied that taxpayer is eligible he should either concede the issue or not contest the same further. • In cases where the CIT(A) or ITAT or High Court has decided this issue in favour of the taxpayer, after examining the eligibility of the taxpayer for these deductions, no further appeal should be filed by Revenue. Wherever Revenue has already filed further appeal on this issue before the ITAT, High Court or Supreme Court, as the case may be, the relevant ground of appeal may be withdrawn immediately. 3.50 Issue 13: Retrospective amendment of the definitio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thin the Indian captive landscape with over 200+ ER&D captives established in the last 3 years. MNC Development centres accounted for over 1 per cent of India's GDP in FY2010, support indirect employment of 1.4 million people and have played a key role in creating an innovation ecosystem in India. • The industry has significantly grown over the last 5 years and currently has representation from most of the verticals like Aerospace & Defence, Automotive, BFSI, Bio-Technology, Chemicals, Computer Hardware, Education, Electronic/Electrical Equipment, Energy, Healthcare, Industrial, Semiconductors, Software/Internet, and Telecommunications, etc. • Manufacturing focussed verticals such as Automotive and Construction / Heavy Machinery were some of the first industries to engage in ER&D off shoring and now have a mature supply base in India. • Cost pressure, access to flexible capacity, local market access for growth and decreasing time-to-market were some of the key reasons driving off shoring in those industries. But the most important factor is the availabil....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pment Centres and the IT Sector. The Committee will engage in consultations with stakeholders and related government departments to finalise the Safe Harbour provisions announced in Budget 2010 sector-by-sector. It will also suggest the approach to taxation of Development Centres. 2. The Prime Minister had earlier set up an Expert Committee on GAAR under the Chairmanship of Dr. Partho Shome to engage in a widespread consultation process and finalise the GAAR Guidelines. The response has been overwhelmingly positive. 3. While this committee would address concerns on GAAR provisions and would reassure investors about the predictability and fairness of our tax regime, it was felt that there is still a need to address some other issues relating to the taxation of the IT Sector such as the approach to taxation of Development Centres, tax treatment of "onsite services" of domestic software firms, and also the issue of finalising the Safe Harbour provisions announced in Budget 2010. 4. Many MNCs carry out activities such as product development, analytical work, software development, etc. through captive entities in India. They exist in a wide range of fields including IT software....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ations with stakeholders and related government departments to finalise the approach to Taxation of Development Centres and suggest any circulars that need to be issued. ii) Engage in sector-wide consultations and finalise the Safe Harbour provisions announced in Budget 2010 sector-by-sector. The Committee will also suggest any necessary circulars that may need to be issued. iii) Examine issues relating to taxation of the IT sector and suggest any clarifications that may be required. 9. The Committee will work to the following time schedule: i) Finalise the approach to taxation of Development Centres and suggest any necessary clarifications by 31 August 2012. ii) Suggest any necessary clarifications that may be needed to remove ambiguity and improve clarity on taxation of the IT Sector by 31 August 2012. iii) Finalise Safe Harbour Rules individually sector-by-sector in a staggered manner and submitting draft Safe Harbour provisions for three sectors/sub-activities each month beginning with the first set of suggestions by 30 September 2012. All Safe Harbour provisions can be finalised by 31 December 2012. 10. The Department of Revenue will provide all necessary ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nment of India Copy to: I. Shri N. Rangachary, former Chairman, CBDT & IRDA. 2. Ms. Anita Kapur, Director General (IT). 3. Ms. Rashmi Saxena Sahni, DIT(TP). 4. Shri.Dinesh Kanabar, Tax Expert. 5. Shri. B.V:R. Subrahmanyam, Joint Secretary to PM. 6..PS to FM 7. PPS to secretary(Revenue). 8. Chairman,CBDT 9. DS(Admn), Department of Revenue with the request to provide all Necessary support to the Committee to facilitate its work including office_ assistance and assistance to facilitate consultations. Annexure III F. No. A 35915 29/2012-Ad.VI Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes New Delhi, Dated 7^th August 2012 ORDER No. 154 of 2012 With the approval of the Competent Authority, the services of the following officers are placed at the disposal of the Committee to Review Taxation of Department Centre and the IT Sector under the Chairmanship of Shri N. Rangachary former Chairman. CBDT & IRDA with immediate effect and until further orders. S. No. Name of Officer / Post (S/ Shri) Civil Code 1. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the office of Finance Minister on Wednesday, August 1, 2012. It is a position of great honour, it is also a position of great responsibility. In the last few days, I have been briefed by senior officials of the Ministry of Finance on the state of the economy. It is true that the economy is challenged by a number of factors, but it is also true that with sound policies, good governance and effective implementation, we would be able to overcome these challenges. Uppermost in my mind is the duty to re-gain the confidence of all stakeholders. Obviously, where necessary, our policies have to be modified or fine-tuned in order to meet the expectations of different stakeholders. We intend to unveil, shortly, a path of fiscal consolidation. I would like to make it clear that the burden of fiscal correction must be shared, fairly and equitably, by different classes of stakeholders. The poor must be protected and others must bear their fair share of the burden. Obviously, adjustments must be made both on the revenue side and on the expenditure side. We have asked Dr. Vijay Kelkar, Dr. Indira Rajaraman and Dr. Sanjiv Misra to assist the Government in formulating the path of fiscal cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and the other to review taxation of the IT sector and Development Centres. I have also directed a review of tax provisions that have a retrospective effect in order to find fair and reasonable solutions to pending as well as likely disputes between the Tax Departments and the Assessees concerned. With these measures, and some other measures that we hope to take in the short term, it is our intention to raise the level of investment to 38% of the GDP that was achieved in 2007-08. I believe that, around the world, there is enormous goodwill for India and most people continue to keep faith with the India growth story. It is natural that they look closely at certain economic indicators, one of them being the exchange rate. Volatility of the exchange rate has reduced in recent weeks. A reassurance on the investment climate, continued inflow of remittances, and a rise in capital flows -both FDI and FII - will bring further stability to the exchange rate. We intend to fine tune policies and procedures that will facilitate capital flows into India. A high level of savings is a pre-condition to a high level of investment. In 2007-08, savings touched 36% of GDP. It is now down to 32%....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y to build durable assets that will provide employment to the poor as well as help in drought-proofing agriculture in the affected districts. As I said at the outset, the Indian economy faces many challenges. We are challenged by the global economy. We are challenged by the crisis that has afflicted several leading banks of the world. We are challenged by natural calamities such as floods in one part of the country and drought in other parts of the country. Above all, we are challenged by our own record of fiscal consolidation, high growth, moderate inflation and rise in human development indicators that we achieved during 2004-08. Let us remember that we had faced similar challenges in 1991, 1997 and 2008 and we overcame them. It is widely acknowledged that, today, the Indian economy is stronger and better prepared to face the challenges. Moderate growth in two out of eight years should not dent our confidence. Several legislative proposals have gone through the full deliberative process and are ripe for debate and passing in Parliament. I seek the cooperation of all political parties represented in Parliament to pass these Bills. With the cooperation of political parties, c....