Wipro reiterates to SEC its stance on tax notice

Wipro has reiterated its stand on the recent tax notice of Rs 261.4 crore that it received from the deputy commissioner of Income Tax, Bangalore.

In its filing with the US Securities and Exchange Commission, Wipro has said that the assessing officer's claim is based upon the premise that in order for software development units to qualify for the special tax treatment and corresponding tax deduction, the company should have obtained a licence for each such new unit located in the Software Technology Park of India (STPI).

Responding to this point raised by the income tax department, Wipro has said, "We have instead formed such new units with STPI approval under our original STPI licenses obtained in 1992. The assessment order claims that the disallowance, along with other disallowances, requires us to make a payment of Rs 261.4 crore, or approximately $60 million. Based on our assessment of the merits of the claim, we have made a provision in the amount of Rs 30 crore, or approximately $6.9 million, in our balance sheet. In the opinion of management, the remainder of the amount referred to in the assessment order is without merit."

Wipro has already filed an appeal before the first appellate authority of the relevant tax department, known as the Commissioner (Appeals) on April 22 2004, challenging the assessment order.

"Although we currently believe we will ultimately prevail in our appeal, the results of such appeal, and any subsequent appeals, cannot be predicted with certainty. Should we fail to prevail in our appeal, or any subsequent appeals, in any reporting period, the operating results of such reporting period could be materially adversely affected," Wipro added.

The assessment order disallows a taxable income deduction made by Wipro under Section 10A of the Income Tax Act, 1961 of India pertaining to some of its software development units located in Bangalore.

Section 10A of the Income Tax Act, 1961 provides a ten-year tax holiday for setting up software development units in STPI.

Currently, Wipro benefits from tax holidays the Government of India gives to the export of information technology services from units in designated "software technology parks" in India.

As a result of these incentives, Wipro's operations have been subject to relatively insignificant Indian tax liabilities. For the years ended March 31, 2002, 2003 and 2004, Wipro's tax benefits were Rs 250.6 crore, Rs 226.3 crore and Rs 292.5 crore, respectively, from such tax incentives.

Wipro has said that these tax incentives currently include a 10-year tax holiday from payment of Indian corporate income taxes for the operation of its Indian facilities, all of which are "export oriented undertakings" or located in "software technology parks" or "export processing zones" and an income tax deduction of 100 per cent for profits derived from exporting information technology services.

"The Finance Act, 2000 phases out the 10-year tax holiday over a ten year period from fiscal 2000 through fiscal 2009. Accordingly, facilities set up on or before March 31, 2000 have a 10-year tax holiday, new facilities set up on or before March 31, 2001, have a 9-year tax holiday and so forth until March 31, 2009, after which the tax holiday will no longer be available to new facilities. Our current tax holidays expire in stages by 2009," clarifies Wipro.

Wipro has explained that the Finance Act, 2000 also restricts the scope of the tax exemption to export income earned by software development centres that are "export oriented undertakings" or located in "software technology parks" or "export processing zones" compared with the earlier exemption which was available to business profits earned by them.

According to Wipro, companies opting for the 100 per cent tax deduction for profits derived from exporting information technology services, the Finance Act, 2000 phases out the income tax deduction over a period of five years beginning on April 1, 2000.

Additionally, the Finance Act, 2002 had subjected 10 per cent of all income derived from services located in "software technology parks" to income tax for a one-year period ending March 31, 2003.

For the year ended March 31, 2004, the company's effective tax rate was 13.8 per cent and its Indian statutory tax rate for the same period was 35.9 per cent.