Tax sops on software exports to stay: CBDT

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The Central Board of Direct Taxes (CBDT) on Thursday clarified that IT and ITeS providers would continue to enjoy some tax benefits on their profits from software exports under sections 10A, 10AA and 10B of the Income-Tax Act.

This follows the Rangachary committee report and is expected to facilitate settlement of disputes IT firms have with the tax department that are being heard in various tribunals and courts in the country.

The three sections of the Act prescribe incentives to units established under different schemes and deriving profits from software exports subject to certain conditions.

Many firms had brought to the government’s notice that the provisions were causing disputes with the income-tax authorities, leading to denial of benefits and litigation.

The government then set up the Rangachary committee last August; it submitted its report in September. It was not clear on Thursday if the government accepted the committee’s recommendations in toto.

Over the past two years, several disputes with software companies arose after assessing officers argued that they could not claim tax exemption for ‘body shopping’ deals or on earnings from exporting software not developed within software technology parks (STPs), export-oriented units (EoUs) or special economic zones (SEZs).

Citing several such issues, CBDT chairperson Poonam Kishore Saxena said software developed abroad at a client’s place would be eligible for the benefits, as these would amount to be deemed export.

“However, it is necessary that there must exist a direct and intimate nexus of development of software abroad with the eligible units set up in India, and such development of software should be pursuant to a contract between the client and the eligible unit,” she said.

“Also, mere physical relocation of a unit from one SEZ to another will not make it ineligible for exemptions, provided all prescribed conditions are satisfied under the Income-Tax Act,” she added.

In the past IT officials pointed to the need for a company to have a separate master service agreement (MSA) and separate books of accounts in respect of its eligible units. It has now been clarified that tax benefits under the sections will not be denied merely on the ground that a separate and specific MSA does not exist for each statement of work; nor will a software company be required to maintain a separate book of accounts.

“In most of these cases, these exemptions are under dispute for one reason or the other. But today’s clarifications will be immensely beneficial to IT companies and we hope the number of such litigations will come down drastically,” a senior income-tax official who deals with disputes related to IT companies, said.

“We are happy that recommendations of the Rangachary committee have been notified. These were long pending issues and we hope that today’s clarification will put to rest some of the concerns of the industry. We all hope that IT officials will implement them in letter and spirit,” Som Mittal, president of Nasscom said, adding that the industry hopes that the government will also notify safe harbour provisions on transfer pricing.

yogimassharma@mydigitalfc.com

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