After delaying setting up the Rangachary committee on safe harbour rules by over 3 years—the IT Act first talked of such rules in April 2009—and taking over a year to implement the recommendations, what is surprising is that the finance ministry still got it wrong. So while it resolved the issue of the taxman’s over-reach in contract R&D cases like Microsoft by putting in safe-harbour profit margins that the taxman would not question, it went and got it horribly wrong on IT and ITeS sector where, for instance, the safe-harbour profit margins of 20% were applicable for just 2 years and only for firms that had an annual turnover of under R100 crore. After the consultation phase, fortunately, this has been fixed; safe harbour norms will apply for 5 years and a slightly higher 22% profit norm is to be applied to firms with a turnover of over R500 crore. In the case of KPOs, there is greater clarity on the definition and profit norms have been made more reasonable.
This done, a few more follow up procedures are important. For one, all existing transfer pricing cases—the adjustments rose from R44,000 crore in FY12 to R70,000 crore in FY13—have to be cleared on the basis of such norms, and these have to be applied to all cases where assessments are yet to be made. Two, where firms find the norms too high, they have to be allowed to use the advance pricing agreement (APA) method or others including settlement under the mutually agreed procedure (MAP) that India has with various countries—MAP cases have dwindled rapidly in recent years with MNC faith in the taxman hitting rock-bottom. Restoring this will take time, but a start has been made.