The Central Board of Direct Taxes (CBDT) recently issued two circulars: Circular 2/2013, on the application of the profit split method (PSM); and Circular 3/2013, on conditions relevant to identify development centres engaged in contract research and development (R&D) services with insignificant risks.
Circular 2/2013 tries to provide guidance on selecting the PSM as the most appropriate method for the purpose of calculating the arm’s length price (ALP) in relation to an international transaction connected with R&D activities. The considerations are discussed below:
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.