Posts Tagged ‘Clarifications’


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.

Source: Income Tax Department- India.


CIRCULAR, CIR/CFD/DIL/2/2013, dated January 3, 2013

To

The Stock Exchanges

1. It has been brought to our notice that certain listed companies have been giving monthly disclosure of their sales/turnover/production figures to their respective trade bodies/industry associations and the same is not disclosed to the stock exchanges.

2. The listed companies are guided by Clause 36 of the Listing Agreement of the stock exchanges which, inter-alia, states that:

“The Issuer will intimate to the Stock Exchanges, where the company is listed immediately of events such as strikes, lock outs, closure on account of power cuts, etc. and all events which will have a bearing on the performance / operations of the company as well as price sensitive information both at the time of occurrence of the event and subsequently after the cessation of the event in order to enable the security holders and the public to appraise the position of the Issuer and to avoid the establishment of a false market in its securities. In addition, the Issuer will furnish to Exchange on request such information concerning the Issuer as the Exchange may reasonably require”.

3. It is therefore, reiterated that all the events or material information which will have a bearing on the performance / operations of the company as well as price sensitive information shall be first disseminated to the stock exchanges as required under Clause 36 of the Listing Agreement.

4. Stock exchanges are advised to take into account the requirements of this Circular and to bring the same to the notice of the listed companies.

5. This Circular is issued in exercise of the powers conferred under Section 11 read with Section 11A of the Securities and Exchange Board of India Act, 1992.

6. This Circular is available on SEBI website at www.sebi.gov.in under the categories “Legal Framework” and “Issues and Listing”.

Click here to download the complete text of the above Circular in PDF Format.

Source: Securities and Exchange Board of India.


Circular No.166/1/2013 –ST, F.No 354/190/2012- TRU, dated 1st January, 2013

To

Chief Commissioner of Customs and Central Excise (All);

Chief Commissioner of Central Excise & Service Tax (All);

Director General of Service Tax; Director General of Central Excise Intelligence; Director General of Audit;

Commissioner of Customs and Central Excise (All);

Commissioner of Central Excise and Service Tax (All);

Commissioner of Service Tax (All)

It has been represented by life insurance companies that in terms of the practice followed, reminder notices/letters are being issued to the policy holders to pay renewal premiums. Such reminder notices only solicit furtherance of service which if accepted by policy holder by payment of premium results in a service.  Clarification has been desired whether service tax needs to be paid on the basis of such reminders.

3. The matter has been examined. Under the Point of Taxation Rules 2011, the point of taxation generally is the date of issue of invoice or receipt of payment whichever is earlier. The invoice mentioned refers to the invoices as issued under Rule 4A of the Service Tax Rules 1994. No tax point arises on account of such reminders. Thus it is clarified that reminder letters/notices for insurance policies not being invoices would not invite levy of service tax. In case of issuance of any invoice, point of taxation shall accordingly be determined.

4. The above clarification is issued only for life insurance sector.

5. Trade Notice/Public Notice may be issued to the field formations accordingly.

6. Please acknowledge the receipt of this circular. Hindi version to follow.

Source: Directorate of Service Tax.


Further Clarification – Non-Applicability of Taxable Services in IPCE-Paper 4: Taxation for November, 2012 Examinations

We have received large number of queries from the students with regard to the BoS’ announcement dated 07.07.2012 relating to the non-applicability of taxable services in IPCE-Paper 4: Taxation for November 2012 examinations. In this regard, it is reiterated that the Examination Committee at its 497th meeting held in September, 2012 has decided that students appearing in November 2012 examinations will not be examined with respect to specific services in the area of service tax laws in Part-II Service Tax and VAT of Paper 4: Taxation (IPCE).

Therefore, it is clarified that ALL the taxable services (including the eight (8) services notified earlier by the BOS through its announcement dated 14.09.2011) will not be relevant for November 2012 exams.

It is further clarified that Unit 2 of Chapter 2 : Taxable Services of Part II: Service tax and VAT of Study Material and Practice Manual for Paper 4: Taxation will NOT be relevant for November, 2012 examinations. However, it may be noted that all other chapters of the Study Material and Practice Manual are relevant for November 2012 examination.

Based on the queries received from the students, the following are further clarified:

(i) Negative list of services and other amendments made vide the Finance Act, 2012 are not relevant for Nov 2012 exams.

(ii) Marks distribution between the two parts namely, Part I : Income Tax (50 marks) and Part II: Service Tax and VAT (25 for Service Tax and 25 for VAT) has not changed.

(iii) All the Chapters on VAT including Chapter 5: Input Tax Credit and Composition Scheme for Small Dealers and Chapter 6 : VAT Procedures given in Part II: Service tax and VAT of Study Material and Practice Manual for Paper 4: Taxation (IPCC) are applicable for November 2012 exams.

Director Board of Studies

Click here to download the above Clarification in PDF Format.

Source: The Institute of Chartered Accountants of India.

 

 

 


Further Clarification – Non-Applicability of Taxable Services in Final-Paper 8: Indirect Tax Laws for November, 2012 Examinations

We have received large number of queries from the students with regard to the BoS’ announcement dated 07.07.2012 relating to the non-applicability of taxable services in Final – Paper 8: Indirect Tax laws for November 2012 examinations. In this regard, it is reiterated that the Examination Committee at its 497th meeting held in September, 2012 has decided that students appearing in November 2012 examinations will not be examined with respect to specific services in the area of service tax laws in Paper 8: Indirect Tax Laws (Final Examination).

Therefore, it is clarified that ALL the taxable services (including the thirty two (32) services notified earlier by the BOS through its announcement dated 14.09.2011) will not be relevant for November 2012 exams.

It is further clarified that Chapter 4 : Gamut and Coverage of Taxable Services of Study Material and Practice Manual for Paper 8: Indirect Tax Laws will NOT be applicable for November 2012 exams. However, it may be noted that all other chapters of the Study Material and Practice Manual are relevant for November 2012 examination.

Based on the queries received from the students, the following are further clarified:

(i) Negative list of services and other amendments made vide the Finance Act, 2012 are not relevant for Nov 2012 exams.

(ii) Marks distribution between the three sections viz. Central Excise (40 marks), Service Tax and VAT (40 marks) and Customs (20 marks) has not changed.

Director Board of Studies

Click here to download the above Clarification in PDF Format.

Source: The Institute of Chartered Accountants of India.