Circular No. 01/2013
The Indian Software
Industry has been the beneficiary of direct tax incentives under the provisions
like Sections 10A, 10AA & 10B of the Income -tax Act, 1961 in respect of
their profits derived from the export of computer software. These provisions
prescribe incentives to "units" or "undertakings",
established under different schemes, which are/were deriving profits from
export of computer software subject to fulfilling the prescribed conditions.
2. It has
been represented by the software companies that several issues arising from the
above mentioned provisions are giving rise to disputes between them and the
Income-tax authorities leading to denial of tax benefits and consequent
litigation and, therefore, require clarification. Various issues highlighted by
the Software Industry have been examined by the Board and the following
clarifications are hereby issued -
(i) (a) WHETHER
"ON-SITE" DEVELOPMENT OF COMPUTER SOFTWARE QUALIFIES AS AN EXPORT
ACTIVITY FOR TAX BENEFITS UNDER SECTIONS 10A, 10AA AND 10B OF THE INCOME TAX
ACT, 1961; AND
(b)
WHETHER RECEIPTS FROM DEPUTATION OF TECHNICAL MANPOWER FOR SUCH
"ON-SITE" SOFTWARE DEVELOPMENT ABROAD AT THE CLIENT'S PLACE ARE
ELIGIBLE FOR DEDUCTION UNDER SECTIONS 10A, 10AA AND 10B.
(a) CBDT had earlier
issued a Circular (Circular No. 694 dated 23.11.1994) which provided that a
unit should not be denied tax-holiday under sections 10A or 10B on the ground
that the computer software was prepared 'on-site', as long as it was a
product of the unit, i.e., it is produced by the unit. However, certain
doubts appear to have arisen following the insertion of Explanation 3 to
sections 10A and 10B (vide Finance Act, 2001) and Explanation 2 to section 10AA
(vide Special Economic Zones Act, 2005) providing that "the profits
and gains derived from on site 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", and a clarification has been sought on the impact
of the Explanation on the tax-benefits as compared to the situation that
existed prior to the amendments.
The matter has been examined. In view of the
position of law as it stands now, it is clarified that the software developed
abroad at a client's place would be eligible for benefits under the respective
provisions, because these would amount to 'deemed export' and tax benefits
would not be denied merely on this ground. However, since the benefits under
these provisions can be availed of only by the units or undertakings set up
under specified schemes in India, it is necessary that there must exist a
direct and intimate nexus or connectionof development of software done 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. To this
extent, Circular No. 694 dated 23.11.1994 stands further clarified.
(b) It has also been
brought to notice that it is a common practice in the software industry to
depute Technical Manpower abroad (at the client's place) for software
development activities (like upgradation, testing, maintenance, modification,
trouble-shooting etc.), which often require frequent interaction with the
clients located outside India. Due to the peculiar nature of software
development work, it has been suggested that such deputation of Technical
Manpower abroad should not be considered detrimental to the benefits of the
exemption under sections 10A, 10AA and 10B merely because such activities are
rendered outside the eligible units /undertakings.
The matter has been examined. Explanation 3 to
sections 10A and 10B and Explanation 2 to section 10AA clearly declare that
profits and gains derived from 'services for development of software' outside
India would also be deemed as profits derived from export. It is therefore
clarified that profits earned as a result of deployment of Technical Manpower
at the client's place abroad specifically for software development work
pursuant to a contract between the client and the eligible unit should not be
denied benefits under sections 10A, 10AA and 10B provided such deputation of
manpower is for the development of such software and all the prescribed
conditions are fulfilled.
(ii)
WHETHER IT IS
NECESSARY TO HAVE SEPARATE MASTER SERVICE AGREEMENT (MSA) FOR EACH WORK
CONTRACT AND TO WHAT EXTENT IT IS RELEVANT.
As per the practice prevalent in the software
development industry, generally two types of agreement are entered into between
the Indian software developer and the foreign client. Master Services Agreement
(MSA) is an initial general agreement between a foreign client and the Indian
software developer setting out the broad and general terms and conditions of
business under the umbrella of which specific and individual Statement of Works
(SOW) are formed. These SOWs, in fact, enumerate the specific scope and nature
of the particular task or project that has to be rendered by a particular unit
under the overall ambit of the MSA. Clarification has been sought whether more
than one SOW can be executed under the ambit of a particular MSA and whether
SOW should be given precedence over MSA.
The matter has been examined. It is clarified that
the tax benefits under sections 10A, 10AA and 10B would not be denied merely on
the ground that a separate and specific MSA does not exist for each SOW. The
SOW would normally prevail over the MSA in determining the eligibility for tax
benefits unless the Assessing Officer is able to establish that there has been
splitting up or reconstruction of an existing business or non-fulfilment of any
other prescribed condition.
(iii) WHETHER RESEARCH AND
DEVELOPMENT (R&D) ACTIVITIES PERTAINING TO SOFTWARE DEVELOPMENT WOULD BE
COVERED UNDER THE DEFINITION OF "COMPUTER SOFTWARE" STIPULATED UNDER
EXPLANATION 2 TO SECTIONS 10A AND 10B.
The definition of "computer software"
stipulated under Explanation 2 to sections 10A and 10B includes "any
customized electronic data or any product or service of similar nature, as may
be notified by the Board....". The CBDT had already issued Notification
No. 890(E) dated 26.09.2000 specifying such items. The notification includes
Engineering and Design but does not specifically include Research and
Development activities related to software development in respect of which
clarification has been sought.
After examining the matter, it is clarified that
the services covered by the aforesaid Notification, in particular, the
'Engineering and Design' do have the in-built elements of Research and
Development. However, for the sake of clarity, it is reiterated that any
Research and Development activity embedded in the 'Engineering and Design',
would also be covered under the said Notification for the purpose of
Explanation 2 to the above provisions.
(iv) WHETHER TAX BENEFITS UNDER SECTIONS
10A, 10AA AND 10B WOULD CONTINUE TO REMAIN AVAILABLE IN CASE OF A SLUMP-SALE OF
A UNIT/UNDERTAKING.
The vital factor in determining the above issue
would be facts such as how a slump-sale is made and what is its nature. It will
also be important to ensure that the slump sale would not result into any
splitting or reconstruction of existing business. These are factual issues
requiring verification of facts. It is, however, clarified that on the sole
ground of change in ownership of an undertaking, the claim of exemption cannot
be denied to an otherwise eligible undertaking and the tax holiday can be
availed of for the unexpired period at the rates as applicable for the
remaining years, subject to fulfilment of prescribed conditions.
(v)
WHETHER IT IS NECESSARY TO MAINTAIN SEPARATE
BOOKS OF ACCOUNT FOR AN ASSESSEE IN RESPECT OF ITS ELIGIBLE UNITS CLAIMING TAX
BENEFITS UNDER SECTIONS 10A AND 10B.
Since there is no requirement in law to maintain
separate books of account, the same cannot be insisted upon. However, since the
deductions under these sections are available only to the eligible units, the
Assessing Officer may call for such details or information pertaining to
different units to verify the claim and quantum of exemption, if so required.
(vi)
WHETHER TAX BENEFITS UNDER SECTION 10AA CAN
BE ENJOYED BY AN ELIGIBLE SEZ UNIT CONSEQUENT TO ITS TRANSFER TO ANOTHER SEZ.
This issue relates to cases where an eligible SEZ
unit is shifted from one SEZ to another SEZ on account of commercial
exigencies. This shifting is permissible under Instruction No.59
(F.No.C-4/2/2010-SEZ) issued by Department of Commerce (SEZ Division), provided
approval from the Board of Approvals (BOA) has been obtained. Doubts have been
raised whether such shifting of an eligible unit would deprive the
unit/undertaking of tax benefits, provided there is no splitting or
reconstruction of an existing business.The matter has been examined and it is
clarified that the tax holiday should not be denied merely on the ground of
physical relocation of an eligible SEZ unit from one SEZ to another in
accordance with Instruction No. 59 of Department of Commerce (referred to
above) and if all the prescribed conditions are satisfied under the Income-tax
Act, 1961. It is further clarified that the unit so relocated will be eligible
to avail of the tax benefit for the unexpired period at the rates applicable to
such years.
(vii) WHETHER NEW
UNITS/UNDERTAKINGS SET UP IN THE SAME LOCATION WHERE THERE IS AN EXISTING
ELIGIBLE UNIT/UNDERTAKING WOULD AMOUNT TO EXPANSION OF THE EXISTING
UNIT/UNDERTAKING.
Whether setting up of new unit/undertaking in a location
(covered by sections 10A, 10AA or 10B), where an eligible unit is already
existing, would amount to expansion of such already existing unit is a matter
of fact requiring examination and verification. However, it is clarified that
setting up of such a fresh unit in itself would not make the unit ineligible
for tax benefits, as long as the unit is set-up after obtaining necessary
approvals from the competent authorities; has not been formed by splitting or
reconstruction of an existing business; and fulfils all other conditions
prescribed in the relevant provisions of law.
3. The
above may be brought to the notice of all concerned.
(SURABHI SHARMA)
Under
Secretary (ITA.I) Telefax: 23093070
To,
1. The Chairperson,
Members and all other officers of the CBDT of the rank of Under Secretary and
above.
2. All Chief
Commissioners/Directors General of Income-tax.
3. The Director (PR, PP
& OL), Mayur Bhawan, New Delhi for printing in the quarterly tax bulletin
and for circulation as per usual mailing list (100 Copies).
4. The Comptroller and
Auditor General of India (40 copies).
5. All Directors of
Income-tax, New Delhi.
6. The Director General
of Income-tax, NADT, Nagpur.
7. Guard File.
(SURABHI SHARMA)
Under Secretary
(ITA.I)
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