Almost three months ago, the Central Board of Direct Taxes of India (CBDT) had issued two circulars: (i) Circular 3 Circular 3/ 2013 (dated March 26, 2013) on identification of contract R&D service provider with insignificant risk and (ii) Circular 2 Circular 2/ 2013 (dated March 26, 2013) on application of profit split method (PSM). The stated purpose of the circulars was to provide additional guidance to the first level assessing officers, so that there is certainty and uniformity in assessments of development centres that are engaged in providing contract R&D services. This initiative was intended to design a fair tax system in line with international best practices so as to promote India as an investment destination.
However, instead, it turned out that the circulars generated more controversy and confusion than providing clarity.
Based on representations received from the industry on the two circulars, the CBDT has now issued revised guidance (Circular 5 Circular 5/ 2013 (dated June 29, 2013) and Circular 6 Circular 6/ 2013 (dated June 29, 2013)) on contract R&D centres. Quite evidently, representations from the industry have been seriously considered and alterations have been made so as to provide the clarity that was lacking.