F. No.
178/84/2012-ITA.I
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
New Delhi, the 17th January 2013
Circular No. 01/2013
Subject:
Issues relating to export of computer software-Direct tax benefits- Clarification
reg.
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 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 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)
