Central Board of Direct Taxes lays out rules for captive R&D centres

NEW DELHI: India has streamlined the taxation treatment for the IT sector in a bid to make the country an attractive destination for software development and research and development (R&D).

The Central Board of Direct Taxes has laid down conditions for a development centre in India to be treated as a contract R&D service provider with "insignificant risk".

This will address the problems created by the divergence of views among the field officers and taxpayers regarding the functional profile of development centres engaged in contract R&D services for the purposes of transfer pricing audit.

Taxpayers, at times, insisted that they are contract R&D service providers with insignificant risk while transfer pricing officers treated them as full or significant risk-bearing entities and making transfer pricing adjustments accordingly.

The directive put out by the board has said if foreign principal performs most of the economically significant functions involved in research or product development cycle and Indian development centre is largely by involved in economically insignificant functions it would not be liable to such adjustments.

Indian development centre would work under direct supervision of foreign principal who not only has capability to control or supervise but also actually controls or supervises research or product development through its strategic decisions to perform core functions as well as monitor activities on regular basis, the circular issued on the basis of N Rangachary committee says.