A day after deferring the controversial GAAR rules, the Ministry of Finance (MoF) has now sought to clear its stand regarding tax breaks being offered on software development done ˜Onsite™ i.e. at the client™s offices overseas. The MoF has stated that the Indian IT companies are allowed to claim tax benefits with reference to software projects and onsite manpower deployment at clients™ overseas.
These clarifications have been welcome across the board by a large number of IT companies, who have business interests overseas and have been involved in software development at client sites overseas. In the past, the tax authorities have not allowed the companies to avail tax benefits on revenue earned as a result of software work done by their manpower at client™s offices. This despite the fact that all conditions for a tax break was made available as per guidelines e.g. forex receipt. The IT department had earlier turned down all the benefits by not treating the manpower deployment and the work done by them as software exports. Instead the work was considered to be body shopping.
An expert committee led by former chairman of CBDT Mr. N Rangachary had earlier provided some recommendations to the MoF on this issue. Based on these recommendations, the MoF classified these transactions as deemed exports. They clearly said that the tax benefits hence will not be denied.
The clarifications will assist several Indian software companies who have been involved in legal battles related to denial of tax benefits. Mr. P Chidambaram is on a tour to Asian and European Countries. Senior people from his team are at Davos to meet up with investors.
It may be noted that income tax holiday and its impending benefits under sections 10A – related to eligible units in an STPI (software technology parks) setup and that of 10B – related to Software EOU (export-oriented units) had expired on 31st March 2012.
Despite an all round acknowledgement from the leading organizations in the software industry, Nasscom has however put in a word of caution, stressing on the need for swifter resolution of older pending assessments and tax benefit denials. The industry body indicated that While this is indeed a positive step, it is imperative that the implementation be carried out efficiently.
Lack of clarity in the policy and multiple litigations had given rise to many disputes..
The new definition clarifies that software development centres which are engaged in engineering and design are also eligible for tax deductions. This also helps to resolve the operational difficulties that the software industry was facing. The new directions clarifies that just because there are no separate master service agreements with the client , the tax benefits will not be denied
The service models and execution details with overseas clientele, which is undertaken in a a master services agreement usually details broad agreement terms , fees structures and service details . It is only later that individual scopes of work are signed which are in the form of individual client contracts, all of which are governed under the master services agreement. . The tax authorities were primarily denying the software sservice provider the tax benefits on grounds, such as the master services agreement being entered before the software SEZ unit had come into existence. The current tax circular on software exports, clarifies that the a signed SOW between overseas client and service provider, would prevail over the agreement.