In a move that would bring relief to Wipro and Infosys and provide clarity on a key tax issue to the Indian software industry at large, the Central Board of Direct Taxes (CBDT) said on Thursday that software developed abroad at a client site will be eligible for tax benefits. Also, all such software will be deemed as exports and the profit earned from the deployment of manpower at a client’s overseas site for software development won’t be denied tax benefits under Sections 10A, 10AA and 10B of the Income Tax Act of 1961.
In mid-2012, many software giants including Wipro and Infosys had received I-T notices (aggregating about R600 crore) for claiming tax exemption on onshore services by declaring them software exports. The department's clarification comes at a time a tribunal decision on the dispute is awaited.
The seven clarifications issued by the CBDT in this regard are clearly in conformity with court judgments that in case of bona fide exports, “nature of services” could be liberally defined so as not to deny tax benefits (export incentives). Said Ernst & Young tax partner Rajiv Chug: “There are judicial precedents to the effect that as long as the export claims are certified by the designated authority (the directorate of STP), tax benefits can be given. This will help reduce litigation and is in sync with the judicial precedents on the issue.”
Apex software body Nasscom termed this clarification a “huge relief”.
Sangeeta Gupta, vice-president, Nasscom said: “It will ease the issues in the industry and will enable companies to bring in integrated models. There will be no additional benefit in monetary terms but it has been clarified in favour of the industry which is a huge relief.”
The clarifications come ahead of finance minister P Chidambaram's visit to Hong Kong and Singapore to attract investments. Chidambaram is scheduled to leave on the two-nation tour on the night of January 21. He is also expected to visit Germany and the UK later in the month.
CBDT chairperson Poonam Kishore Saxena said: “These clarifications will address the disputes or concerns of software industry arising out of interpretation of existing provisions of tax structure in the IT Act (with respect to Sections 10A, 10AA and 10B).”
These clarifications, Saxena said, follow the recommendations of the N Rangachary committee constituted by the Prime Minister last year. They should lead to a reduction in disputes between the information technology industry and the income tax department.
Onshore software development is the practice wherein Indian companies send their software engineers on short assignments (3-6 months) to overseas companies. Doubts have been raised on whether units taking up such production of software at the client’s premises would be eligible for the tax holiday.
The government had contended revenue from software development activity and technical manpower deputed abroad are not considered as export income eligible for deduction under 10A/10B/10AA of the Income-Tax Act, 1961.
The government had said that Infosys had claimed the revenues generated from onshore software development activities and deputation of technical manpower abroad as related to business activities conducted out of its Software Technology Park and Special Economic Zone units in India as eligible for income-tax deduction.
Infosys, Wipro and many other software export firms claimed tax benefits for software export income under Section 10A of the Income Tax Act. This section provides for a five-year tax holiday to industrial undertakings which manufacture or produce any article or thing and are set up in notified Free Trade Zones (FTZs). The tax holiday under section 10A to industrial units in approved Electronic Hardware Technology Parks (EHTP) or Software Technology Parks (STP). Similarly, section 10B of the Income-tax Act allows a five-year tax holiday to approved 100% export-oriented undertakings (EOUs) which manufacture or produce any article or thing.
The government circular further clarifies that the tax holiday should not be denied on grounds of physical relocation of an eligible SEZ unit from one to another in accordance of instruction by Department of Commerce and conditions prescribed by Income- tax act. The circular says, the unit relocated will be eligible to avail tax benefit for the unexpired period at the applicable rates.
The government also clarified that engineering and design can be considered research and development. Saxena said the government is still examining the Rangachary committee’s recommendations on safe harbour regulations.