IT onshore revenue is taxable, says govt

The finance ministry on Friday confirmed that revenues from onshore work done by information technology (IT) companies would not be considered for tax exemption under 10A/10B/10AA of the Income Tax Act, 1961.

“Revenue from software development activity and technical manpower deputed abroad have not been considered as export income eligible for deduction under 10A/10B/10AA of the Income Tax Act, 1961,” said Minister of State for Finance S S Palanimanickam.

The minister made the statement while replying to a query in Parliament. He also said, the Income Tax (I-T) department had slapped a tax demand of over Rs 450 crore on Infosys Technologies. “A notice has been issued to Infosys for the assessment year 2007-08 as the demand for Rs 657.81 crore was created and later revised to Rs 456.38 crore in a rectification order,” Palanimanickam added.

Earlier in January, there were media reports quoting an I-T department order that Infosys had wrongfully claimed tax exemption on onshore services by declaring these as software exports.

Onshore software development is the practice wherein Indian companies send their software engineers on short assignments (3-6 months) to companies based in Europe, the US and other nations.

For Indian IT companies, onshore services account for as much as 40 per cent of the total earnings. Sections 10A/10B/10AA of the Income Tax Act, 1961 provide certain exemptions to IT services companies on their income from exports carried out in free trade zones like Software Technology Parks of India (STPIs) and Special Economic Zones (SEZs).

According to a senior Infosys official, “It was an old case communicated to the company earlier. However, we believe we have a strong case and we are in the process of appealing against the order in the office of commissioner of I-T and if required, we will go to the tribunal or court.”

"The law so far allows for exemption as a person sent abroad for work is part of the company's business. The IT department is just trying to find out instances where it can try and get more taxes. If in future it becomes a law then only it will impact the industry. But that is if the court interprets it in that way," said a law expert on condition of anonymity.

The IT bellwether had claimed that the revenues generated from onshore software development activities and deputation of technical manpower abroad were related to business activities conducted out of its STPI and SEZ units in India, and eligible for income tax deduction.

Responding to the I-T department’s move, Nasscom President Som Mittal had told Business Standard, “This is clearly an interpretation issue culminated largely by the lack of understanding of business models by the tax authorities. It is unfortunate that they have taken this stance to call highly-skilled people to be body-shopping and this is inappropriate. This will only lead to protracted litigation and will not help the government.”