Section 10A, read with Sections 10AA
& 10B of the Income-Tax Act, 1961- Free Trade Zone- Direct Tax Benefits- Clarification
on Issues relating to Export of Computer Software
Circular No. 1/2013, [F. No.
178/84/2012-ITA.I], dated 17.01.2013
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
extort activity for tax benefits under sections 10A. 10AA and 10B of the
Income-tax Act, 1961; And
(b)
Whether receipts from deputation or 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 section 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
connection of 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 arc rendered outside the
eligible units /undertakings.
The matter has
been examined. Explanation 3 to sections 10A and 10B and Explanation 2 to
section I0AA 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 arc 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 docs 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 26-9-2000 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 section10AA 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 section 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 setup 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.
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