While the CBDT may not have cleared all controversies related to taxing software export, it does settle major principles on onsite development, manpower deputation and R&D among others.
The information technology and IT-enabled services sector has been receiving tax benefits under Section 10A, 10AA and 10B of the Income-Tax Act for export of software, but tax authorities have been withholding it on account of several disputed issues, giving rise to litigation. The Central Board of Direct Taxes recently issued a circular based on the N. Rangachary Committee report on 'Taxation of Development Centre and IT Sector' to clarify seven issues currently under litigation in the area of software export.
Onsite software development and manpower deputation: It is clarified that the software developed abroad at a client's place (onsite development) amounts to 'deemed exports' and tax benefits cannot be denied. However, there should exist a direct and intimate nexus or connection between the onsite development and the eligible unit's setup in India, and it should be pursuant to a contract between the client and the eligible unit. Also, profits earned from deployment of technical manpower at the client's place for software development, pursuant to a contract between the client and the eligible unit, would enjoy tax benefits. The same applies to deputation of manpower for software development if all the prescribed conditions are fulfilled.
Separate master service agreement not needed: The tax benefits cannot be denied merely on the ground that there is no separate and specific master service agreement for each statement of work, unless the Assessing Officer can establish that an existing business has been split or reconstructed, or any other prescribed condition is unfulfilled.
Eligibility of R&D for tax benefits: The notified category of eligible services includes "engineering and design" but research and development is not mentioned specifically. It is clarified that as "engineering and design" services have inbuilt elements of R&D, they would be eligible for tax benefit.
Successor unit purchased as a slump sale: For slump sale of a unit, it has been clarified that mere change of ownership cannot be enough to deny tax benefits if the unit is otherwise eligible for the unexpired period.
Separate books not mandatory: There is no legal requirement to maintain separate books of account. However, the assessing officer may ask for details or information pertaining to different units, to verify the claim and quantum of exemption.
Relocation from one SEZ to another: Tax holiday should not be denied merely on grounds of physical relocation of an eligible unit from one SEZ to another in accordance with Instruction No. 59 of the Department of Commerce, if all prescribed conditions are satisfied.
New unit in the same place as an existing one: When a fresh unit is located where an eligible unit already exists, that in itself cannot make the unit ineligible for tax benefits so long as it is set up after necessary clearances, and has not been formed by splitting or reconstructing an existing business.
A CBDT circular is binding on the tax authority, and is a useful aid for the taxpayer in interpreting provisions and defending tax positions during assessments and appeals. While the circular may not put to rest all controversies with regard to software exports, it has to some extent settled several major issues and is heartily welcomed.
Sunil M. Lala is Partner - Tax Dispute Resolutions, KPMG in India
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