Rangachary panel report on taxation of IT sector made public

NEW DELHI; In order to boost the IT sector, Rangachary Committee has recommended that the profit split method ( PSM), which leads to higher taxation, should be used with extreme "care and caution".

A proper application of PSM would necessitate the availability of adequate and reliable data with regard to profits attributable to various functions, risks and geographies, said the first report of the committee made public today.

"As a result, one has to apply PSM with extreme care and caution and the lack of data at present makes it impracticable to apply PSM. Thus application of PSM, where appropriate technically given the general facts of a case, may become inaccurate due to lack of availability or supply of complete data," it said.

In these circumstances, the report said, it would be appropriate for India to seek a higher mark-up under TNMM (transactional net margin method), possibly also factoring in locational savings and locational advantage, with proper comparability analysis rather than depend on an unreliable application of PSM," the report added.

Besides PSM, there are five other methods for computing tax liability under the transfer pricing rules. These include resale price method, cost plus method, comparable uncontrolled price method and transactional net margin method.

Based on the report, the Finance Ministry in March had issued two circulars, one on adoption of PSM as a preferred mode for computation of tax liability and the other one was related to development centres.

Following representations, the Finance Ministry on Saturday withdrew the first circular and suitably modified the other.

Last month, Prime Minister Manmohan Singh had asked Finance Ministry to make public the Rangachary Committee report, which was submitted to the government in September 2012.