Earlier this year, Central Board of Direct Taxes, India
("CBDT") issued Circular no. 1 of 2004
("Circular"), on taxation of the profits
made by non-resident companies engaged in BPO activities. This
Circular sought to tax a portion of the global profits of the
foreign companies, if they had outsourced core activities to India.
The Circular had distinguished between core revenue generating
services and incidental services that generate negligible revenues
in India.
The new Finance minister of India Mr. P Chidambaram has been
advised to withdraw the aforementioned Circular proposing to tax
profits from outsourcing of core activities to India. The Circular
was likely to be challenged, as there is no concept of core
services in international tax treaties. Also, this Circular gives
the income tax officers discretion to decide, on a case-to-case
basis, what portion of the parent company's profits can be
attributed to Indian BPO operations and taxed in India.
