Profits stuck with IT dept, say BPO firms (Livemint - Java Training Courses)

The industry has been grappling with transfer pricing issues for several years, but the problem has escalated in the past two-three years, officials at several BPO firms said. A majority of the BPO contracts are signed by US offices of these companies and the work is subcontracted to their Indian units. The US is the biggest market for India’s information technology (IT) industry, which includes the BPO business.Transfer pricing refers to the pricing of contributions which are transferred within the company. To ensure that a fair price is charged, tax authorities make sure that goods and services are sold at a price the company would seek from an unrelated third party. The purpose is to make companies reflect the fair amount of profit and not avoid tax. Transfer pricing has been misused by some companies to legally avoid income taxes by converting sales in one country to profits in another.BPO executives allege that in order to meet the government’s revenue targets, tax officials have been making unreasonable demands on companies. The chief financial officer of a BPO firm said its margins for several years were questioned by tax officials.Java Training Courses“For so many years, they were fine with it now they say it is too low, which makes us ineligible for tax rebates. There is so much unpredictability,” he said.Until last year, IT companies including BPO firms were eligible for full income tax rebate under the Software Technology Parks of India (STPI) scheme. However, if a transfer pricing query is raised on their assessments, their profit for the particular year are liable to be taxed.“If the industry thinks the demands are unreasonable, there is a fair opportunity for jurisdiction under the law,” said an official in the transfer pricing wing of the income tax department. “These issues are very subjective and they (companies) could be right or they could be wrong; there has to be proper adjudication to decide these issues. All I can tell you is that there is no directive from the top, if at all there are unreasonable demands, they have to be at an individual level.”The chief executive officer of another firm said that when tax officials raise a demand the company has to immediately pay up. The company has appealed against such orders.“There are other issues of tax officials threatening to freeze the company’s bank accounts if the tax demand is not met. Nobody wants that situation so mostly companies pay up,” said another senior official of a BPO firm. “Even if the judgement is in our favour, and we get the refund eventually, there is a cash flow issue in the short-term.”None of the officials cited above wanted to be named because of the sensitive nature of the matter.Rohit Kapoor, president and chief executive of EXLService Holdings Inc., said the company has paid $15 million to tax authorities in such cases over the last few years. “This year’s budget announcement has further narrowed the band of acceptable margin range from 5% to 3%, which could lead to more of such instances in the future.”Although all major BPO firms have a significant amount of money locked up in such cases, the total amount could not be immediately ascertained.The reasoning given by income tax officials is that companies are showing a lower profit in India in an effort to park their profits elsewhere, and therefore evade paying taxes in India.Vikas Srivastava, a partner with law firm Luthra and Luthra, said this is completely unreasonable on their part as until last year, companies were exempt from paying any taxes.“So there was an incentive for them to part all their profits here and not the other way around.” Srivastava, who has been arguing against such cases for many years now, said that such demands hurt the investment climate in the country.Captive centres, or the in-house units of multinational companies based in India, which do research and development, engineering or other technology work for their parent companies, are also affected by these issues. “This uncertainty apart from measures like amending the Income Tax Act all reflect badly,” Srivastava said.He said that these issues could possibly escalate as the government’s fiscal deficit widens and “this is one of the easiest ways to shore up the numbers.”Mukesh Butani, chairman of BMR Advisors, disagreed.“Even though there have been certain unreasonable demands from the department on transfer pricing, it will not be correct to say that it has been pre-ordained by the government solely for the purpose of collecting more revenue,” Butani said.Butani said the transfer pricing law is in its infancy, so there are interpretation issues. “India needs adherence to a set of international guidelines to avoid a lot of litigation.” Java Training Courses Advance pricing agreements, which will be in force from April 2012, may solve some of the issues, he said.IT industry body Nasscom has been lobbying with the government for several years to streamline the transfer pricing legislation. Sangeeta Gupta, vice-president of Nasscom, said that even though advance pricing agreements may help the industry, the decision to bring domestic transactions under the ambit of transfer pricing may lead to a large number of new cases.“The government had set up a dispute resolution panel to resolve such issues, but that has not proved very effective either. There needs to be certainity for businesses to operate in the country,” Gupta said.