ONSHORE SOFTWARE DEVELOPMENT NOT ELIGIBLE FOR TAX DEDUCTION AS SOFTWARE EXPORTS. ALSO RAISES CONCERN OF DUAL BENEFIT ISSUES .Tax dept has raised an order of tax for Rs 400 Crore on Infosys Technologies. The order has claimed that deputing software professionals through a Deputation and Technical Manpower Contract (DMT) in other countries (body shopping) for onshore development is not an eligible activity for claiming tax deduction u/s 10A/ 10AA of the IT Act. The sections concerned relate to tax-free incomes arising out of exports.
The Tax demand was based for the assessment year 2007-2008, and similar demands could be raised for more years and for other software exporters as well.
Our readers would recollect that Close to 10 companies, including some of the big names, had received income-tax notices in the last year in about August.
Onshore software development is a standard practice where Indian software firms send their software engineers on 3 to 6 months to work in U.S, Europe and other markets. While the Indian firm, sending such personnel pays a regular salary and a daily allowance, the foreign firm pays the Indian firm for every professional deputed.
For the I-T department however , this is an activity that involves export of manpower and not export of software
Although Trident (Legal Firm), at this stage has not received a copy of the order it is evident that claim on the premise that during these brief assignments, the professionals sent from India are under the “control and supervision” of the company abroad, which also “owns” the services they render or the products they develop.
ET, reports that the order states that such services cannot be done within software technology parks, export oriented units or special economic zones, and further that such services rendered by the employee-professional of the Indian company at locations abroad are “not under the control and supervision of the Indian Company”.
The ET report can be read here
Besides, the tax department says proprietary rights over the output of an employee-professional are only with the overseas company. “The liability of the Indian company is restricted to providing the qualified persons abroad,” said the order.
the tax department’s move is aimed at narrowing down the scope of tax benefits under 10A/B. “Under the circumstances, even if they don’t phase out the relevant sections under the Act, local software firms will have to pay sizeable tax.
Although, Infosysis, terming the order arbitrary, has confirmed an appeal, till the order is operative it could be as serious set back for Indian Sotware exporters that are trying to move up the value chain and position themselves as competitiors like Accenture & IBM, reports ET.
The tax department also said software companies must reduce the expenses incurred in foreign exchange from the total export turnover. By not doing it, they are claiming “dual benefits” as they end up paying a lower tax than they should. What exactly is the department challenging?
Consider a hypothetical case of a company with Rs 100 crore turnover, of which Rs 80 crore is from exports; and, the total profit is Rs 20 crore.
Export Turnover Total Turnover
Then, the tax it has to pay on non-export income is Rs 4 crore. (Since Rs 16 crore is the profit on account of exports, the difference between Rs20 crore and Rs16 crore is the amount on which the company has to pay tax). But suppose, the company spends Rs10-crore foreign currency as per day allowance to professionals sent abroad. After factoring in this expense, the export turnover works out to Rs70 crore (instead of Rs80 crore).
As a result, the quantum of profit on account of export reduces to Rs14 crore from Rs16 crore. Here, the company has to pay tax on Rs6 crore—the difference between Rs20 crore and Rs14 crore—and not on Rs4 crore. The “expenditure incurred in foreign exchange, which is directly related to DTM contract receipts, is also not reduced by the assessee from the export turnover as required by the Act”.
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