The US and Indian competent tax authorities have reached a negotiated settlement on transfer pricing dispute in respect of certain captive software development units for the financial year 2004-05. The settlement has been reached through the mutual agreement procedure (MAP) mechanism provided in the Indo-US Double Taxation Avoidance Agreement (DTAA), sources said.
Both the sides have agreed for full cost mark-up of 17.5 per cent for the financial year 2004-05, it is learnt. In the recent past, the Indian tax authorities had assessed the transfer price of contract software service providers, which have been compensated at full cost plus mark up, at a mark up of 25-28 per cent on costs for the financial year 2004-05.
Trendsetter
“This negotiated settlement of 17.5 per cent mark up might be trendsetter for future tax assessments. There is some semblance of relief for the captive software service companies,” Mr Rahul Mitra, National Leader, Transfer Pricing, PricewaterhouseCoopers (PwC), told Business Line here.
Although the competent authorities have reached a negotiated settlement, it is for the concerned taxpayers to decide whether they would go with the settled mark-up or pursue regular appellate route like Tribunal for possible higher relief, Mr Mitra pointed out.
The settlement is binding only for the financial year under dispute and would not apply for either the past or future years.
The MAP is an alternative process of dispute resolution and is an option available to taxpayer in addition to and concurrently with the existing appellate process under the domestic law.
Article 27 of the tax treaty between India and the US provides an option to a taxpayer that suffered a potential double taxation of approaching the Competent Authority for resolution under MAP.
