It is seen from the Business Line dated July2, 2011 that the Income-Tax Department has come out with a new interpretation of the provisions in Sections 10A & 10AA of the Income-Tax Act, 1961 (Act), giving tax benefits to units engaged, inter-alia, in the export of software from designated locations by deputing its staff for onshore computer software development outside India.

For such software development done by the staff deputed to work abroad, payments by the deputing companies are received in convertible foreign exchange and the salaries and daily allowances of such employees are paid by the Indian companies.

Tax benefit under the aforesaid Sections of the Act is being claimed by the software companies for such services. These, according to the revised view, need to be disallowed on the ground that the receipts are from ‘body shopping' and not exports.

Infosys, it has been reported, has already been sent a notice for a demand of Rs 450 crore, denying deduction of profits from such receipts from income. Notices have also been issued to Wipro and are said to be in the process of being issued to TCS.

The issue that needs consideration regarding such notices is whether these are legally tenable.

Section 10A

Section10A stipulates deduction of profits for computing taxable income in respect of exports, inter-alia, of ‘computer software' produced in Free Trade Zones (FTZs), electronic hardware/software technology parks and Special Economic Zones (SEZs) as per the time schedule prescribed.

‘Computer Software' in this context means any computer programme recorded on any disc, tape, perforated media or other information storage device; or any customised electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means. (vide Explanation 2(1) of s.10A), provided the other conditions stipulated are complied with and the sale proceeds are received in India within six months or within the time extended in convertible foreign exchange.

Explanation 3 of Section 10A is by way of removal of doubts and says that it is hereby declared that the profits and gains derived from onsite development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.

Section 0AA

This is a special provision for deduction to newly established units in SEZs. .The conditions for availing of the deduction are : The assessee should be an entrepreneur as defined in Section 2(j) of SEZ Act, 2005. Entrepreneur is a person, who has been granted a letter of approval by the Development Commissioner to set up a unit in an SEZ.; the unit in SEZ begins to manufacture or produce articles or things or provide services during the financial year 2005-06 or any subsequent year; and the assessee should have income from export of articles or things or from services from such unit.

Explanation 2 in this section is worded on similar lines as Explanation 3 in s.10A (supra).

The two Explanations in Sections 10A & 10AA (as above) clearly show that the proposed notices are misconceived and not in tune with the provisions of the two Explanations, where it has been amply clarified that payments for onshore development of computer software by Indian companies abroad would form part of export turnover for working out the deductible profit.

The historical account regarding export of software also shows that the view now taken/proposed to be taken is wrong.

Section 80HHE of the Act (operative upto 31.03.05), which was on identical terms with the corresponding provisions of Sections 10A & 10AA (supra) in regard to meaning of ‘export of computer software turnover too had an explanation – Explanation 1 – which was similarly worded.

This shows that the legislative intent regarding benefit from tax in regard to onshore development work had always been the same, treating the receipts as part of export turnover.

It is, thus, not understandable how the objections are being raised against the software companies.

The action taken/proposed on the basis of the revised view, will only lead to proliferation of litigation without serving any purpose, in the process, causing hardship and disgruntlement to the taxpayers who are earning considerable foreign exchange for the country.

(The author is a former chairman of CBDT.)

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