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CBDT revisits BPO taxation with draft revised circular

Our Bureau

New Delhi , Aug. 9

THE Central Board of Direct Taxes (CBDT) has come up with a draft revised circular on taxation of IT-enabled business process outsourcing (BPO) units in India.

It has also with immediate effect withdrawn its January 2004 circular on the same subject.

The revised circular deals with taxation of the resident (Indian) entity, which has become the permanent establishment (PE) of the non-resident or foreign entity on account of a business connection between the two entities.

The revised circular provides that the profits attributable to the Indian entity constituting the PE of the non-resident entity would be determined on the basis of "arm's length principle".

This latest stance of the CBDT has however left some tax experts worried. They held that the circular has not categorically said that the foreign companies shall not be taxed even if the Indian BPO unit is assessed at `arm's length price'.

In the draft revised circular, the CBDT has dropped the earlier concept of determining the extent of taxation on the basis of "core" or "incidental" activities that are outsourced to the Indian entity constituting PE of the non-resident entity.

In its January 2004 circular, the CBDT had declared that a "considerable portion of the profits" derived by foreign entities from outsourcing of their core revenue generating business activities to India would be taxable under the Income-Tax Act if the Indian entity were to constitute a PE of the non-resident or foreign company in India.

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