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This article has been modified. Please see the correction at the end.
IBM has decided to take a legal recourse against the tax department’s demand of Rs 5,357 crore ($865 million) for alleged suppression of its FY09 revenue by the India unit.
An income tax department official told Business Standard a preliminary assessment order was slapped on IBM on Monday for under-reporting its income. He said the company, which is assessed at the Large Taxpayers’ Unit in Bangalore, had the option of challenging the order before appellate authorities.
An IBM spokesperson said in an email: “Fundamental to IBM’s culture and business model is that we act with integrity wherever we do business. We have demonstrated our commitment to integrity since we began operations in India. IBM has taken this tax dispute for judicial recourse.”
The I-T Department had issued the notice after a detailed investigation, during which the department supposedly found that IBM India under-reported its income to evade tax under the export promotion scheme of the Software Technology Parks of India (STPI).
Information technology units in STPI zones enjoy 100 per cent tax exemption on income generated from software exports as defined in the Income Tax Act. These also enjoy a tax holiday under section 10AA of the I-T Act if the units are in a SEZ.
According to a July 2012 Fitch report, IBM India had reported revenues of Rs 15,413 crore with a net profit of Rs 1,290 crore in FY11. According to industry estimates, the company might have crossed the Rs 16,000-crore (around $2.5-billion) mark. The company is one of the largest employers in the country, with its headcount expected to have crossed 120,000.
The fresh tax demand comes at a time when Infosys has agreed to pay $34 million (Rs 210 crore) for a civil settlement of visa misuse-related investigations in the US. Industry experts said this might pave the way for other Indian IT firms to come under the scanner of US authorities over usage of business visas.
IBM has been involved in tax tussles with the government since 2011, when the authorities had sought Rs 1,090 crore as tax obligation for FY09, as IBM India had failed to keep separate books of accounts for income earned from STPI zones and special economic zones. While the company had obtained a stay on the demand from the I-T appellate tribunal, the I-T department had challenged the order in the Karnataka High Court in January. The court had allowed the government agency to collect the amount from IBM India.
IT units located in STPI zones enjoys 100% tax exemption on income generated from software exports as defined in section 10A and 10B of the Income Tax Act 1961. They also enjoy tax holiday under section 10AA of the I-T Act if they are located in a SEZ.
Apart from using India as a base for its global services delivery, India is also a huge market for the New York-headquartered company. According to a Fitch report issued in July 2012, IBM India had reported revenues to the tune of Rs 15,413 crore with a net profit of Rs 1290 crore in FY11. According to industry estimates, the company may have crossed Rs 16,000 crore (around $2.5 billion). Besides, the company is also one of the largest employers in the country with its headcount expected to have crossed 120,000. In India, IBM’s operations include four broad segments including global business services, systems & technology group, software group and global technology services.
Important I-T notices in recent past:
| Gillette | Asked to pay tax of Rs 118 crore |
| Vodafone | Adjustment made of Rs 1,300 crore |
| Hindalco | Adjustment made of Rs 1,063 crore |
| Microsoft | Adjustment made of Rs 5,135 crore |
| Shell | Adjustment made of Rs 15,000 crore |
CLARIFICATION
This article had called the preliminary assessment order as draft assessment order. Also, there was a mention of the Infosys' civil settlement in the US, which was not relevant, and has been removed. The errors are regretted.
