In a big relief to IT companies, the finance ministry today clarified that software developed aboard at a client’s place would be deemed exports and thus eligible for tax benefits. It also said income from deputation of manpower for such on-site work would be allowed for tax benefits.
The clarification has been provided in the backdrop of IT companies getting tax notices from the government to pay tax on gains derived from export of manpower for onsite software development. Many such cases went into litigation and the companies sought clarification from the government.
The Central Board of Direct Taxes (CBDT), after examining a report of N Rangachary committee which was set up to address the issue, said profits arising out of export of such services are eligible for direct tax benefits under Section 10A, 10AA and 10B of the Income Tax Act.
“The clarification will set at rest controversies and disputes arising due to different interpretations of the Act being made across the country… However, there must exist a direct and intimate nexus or connection of development of software done abroad with eligible units set up in India and such development of software should be pursuant to a contract between the client and the eligible unit,” CBDT Chairperson Poonam Kishore Saxena told a press conference.
Nasscom welcomed the clarifications and expressed hope the assessments and past denials would be suitably resolved taking in to cognizance these clarifications. "While this is a positive step, it is important that the implementation is carried on efficiently. We urge that benefits denied in the past be reviewed in light of this move, and there be swift closure of cases for the Industry to benefit from this," it said.
CBDT also clarified that any research and development activity embedded in ‘Engineering and Design’ would also get tax benefits. In case of a slump-sale of a unit, purely because of change in ownership, the claim of exemption will not be denied to an otherwise eligible undertaking and the tax holiday can be availed of for the unexpired period at the rates as applicable for the remaining years.
It said though the assesses need not maintain separate books of account for units claiming tax benefits, the assessing officer, if required, might call for details or information pertaining to different units to verify the claim and quantum of exemption. Also, tax will not be denied merely due to physical relocation of an eligible SEZ unit from one SEZ to another. The relocated unit will be eligible to avail of the tax benefit for the unexpired period at the applicable rates.
CBDT said setting up of fresh unit where an eligible unit is already existing would not make the unit ineligible for tax benefits, as long as the unit is set-up after obtaining necessary approvals from the competent authorities; has not been formed by splitting or reconstruction of an existing business; and fulfils all other conditions prescribed in the relevant provisions of law.
"These clarifications recognise that tax incentives provisions need to be liberally and harmoniously interpretated to further the objective of earning valuable foreign exchange for the country and will end the ongoing tax controversies plaguing the sector as to what services are covered and constitute exports. The clarification that tax holiday should not be denied merely on the ground of physical relocation of an eligible SEZ unit from one SEZ to another, further resonates the CBDT decision to recognise the ground realities and judicial precendents, the affected units can now can finally enjoy the tax benefits" said Rajiv Chugh, Tax Partner, Ernst & Young.
The Rangachary committee on ‘Taxation of Development Centre and IT Sector’ was set up in August 2012 and it submitted its report in September 2012.
Saxena said recommendations of the Committee in its first report, pertaining to other issues concerning development centres and its subsequent two reports on safe harbour provisions for IT and ITeS sector and safe harbour issues for outbound loans and corporate guarantee are under examination.
Officials said some other recommendations of the committee might need amendments to the Income Tax Act which will be done through the Budget next month.