Nasscom okays revised CBDT Circular for BPO

By : |September 30, 2004 0

BANGALORE: The Central Board of Direct Taxes (CBDT) issued a revised circular spelling out the tax treatment of IT-enabled business process outsourcing (BPO) units in India.

The draft of the revised circular was issued in August this year, which has now been given a final shape after factoring in feedback from trade and industry and tax professionals.

IT Industry’s apex body Nasscom welcomes the CBDT Circular of Ministry of Finance on the subject of taxation of ITES-BPO units. This will help clarify the ambiguity, which had been prevailing in the ITES-BPO industry. The Circular incorporates Nasscom’s recommendations to follow the “arm’s length principle” for taxation of captive ITES-BPO units in India.

In a statement, Nasscom said, it is seeking further inputs from the industry in order to assess the impact of the Circular.

The revised Circular has made it clear that the profits attributable to an Indian entity constituting the permanent establishment (PE) of the non-resident or foreign entity would be determined on the basis of “arm’s length principle”. The stance taken in the circular is in consonance with the OECD guidelines, on attribution of income to a permanent establishment.

In a Circular, issued on September 28, 2004 and under signed by Sandeep Goyal, Under Secretary (FT & TR), CBDT, the Board said a non-resident entity might outsource certain services to a resident Indian entity. If there is no business connection between the two, the resident may not be a Permanent Establishment (PE) of the non-resident entity, and the resident entity would have to be assessed to Income Tax as a separate entity. In such a case, the non-resident entity will not be liable under the Income Tax, 1961.

The Board said during the last decade, India has seen a steady growth of outsourcing of business processes by non-residents or foreign companies to IT-Enabled Entities in India. Such entities are either branches or associated enterprises of the foreign enterprise or an independent Indian enterprise.

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