Posts Tagged ‘Income Tax Act’


Section 90 of the Income Tax Act, 1961- Double Taxation Agreement- Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Foreign Countries- Netherlands- Amendment in Notification No. GSR 382(E) dated 27.03.1989

Notification No. 2/2013, [F.NO.501/02/1983-FTD-I], dated 14.01.2013

WHEREAS a Protocol for amending the Convention between the Republic of India and the Kingdom of the Netherlands for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on Income and on Capital was signed at the Hague on the 10th day of May, 2012;

AND WHEREAS, the date of entry into force of the said Protocol is the 2nd day of November, 2012, being the date of later of the notifications of satisfaction of all legal requirements and procedures for entry into force of the Agreement, in accordance with Paragraph 2 of Article 3 of the said Protocol;

AND WHEREAS, Paragraph 2 of Article 3 of the said Protocol provides that the amending protocol, which shall form an integral part of the convention shall enter into force on the date of the later of the notifications referred to in paragraph 1 of said Article and its provisions shall have effect forthwith;

NOW, THEREFORE, in exercise of the powers conferred by section 90 of the Income-Tax Act, 1961 (43 of 1961), the Central Government hereby directs that all the provisions of the said Protocol, as set out in the Annexure hereto, shall be given effect to in the Union of India in respect of income and on Capital arising from the 2nd November, 2012.

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

Source: Income Tax Department- India.

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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.


Section 80-IA, Sub-clause (iii) of sub-section (4) of the Income-tax Act, 1961 – Deductions – In respect of profits and gains from Industrial Undertakings, or Enterprises Engaged in Infrastructure Development, etc. – Notified Undertakings

Notification No. 1/2013, [F.NO. 178/02/2008-ITA-I], dated 08.01.2013

Whereas the Central Government in exercise of the powers conferred by clause (iii) of sub-section (4) of section 80-IA of the Income-tax Act, 1961 (43 of 1961) [hereinafter referred to as the said Act), has framed and notified a scheme for industrial park, by the notifications of the Government of India in the Ministry of Commerce and Industry (Department of Industrial Policy and Promotion) vide number S.O. 193(E), dated the 30th March, 1999 for the period beginning on the 1st day of April, 1997 and ending on the 31st day of March, 2002 and vide number S.0.354(E), dated the 31st day of March, 2006;

And whereas M/s. Ganesh Housing Corporation Ltd. having its registered office at 1st Floor, “Samudra”, Near Klassic Gold Hotel, C.G. Road, Ellisbridge, Ahmedabad-380006, is developing an Industrial Park at International Pharma and Biotech Park, Matoda-Sari, Ahmedabad, Gujarat.

And whereas the Central Government has approved the said Industrial Park vide Ministry of Commerce and Industry letter No. 15/21/04-IP&ID, dated 5-11-2004 subject to the terms and conditions mentioned therein;

And whereas the Hon’ble Gujarat High Court in its order dated 10.8.2011 in Special Civil Application 15962 of 2012 has directed the Central Board of Direct Taxes and the Ministry of Commerce to take consequential steps to ensure that necessary notification of the aforementioned industrial park is issued for the benefits under section 80-IA in terms of Rule 18C(4) of the Income Tax Rules, 1962.

Now, therefore, in exercise of the powers conferred by clause (iii) of sub-section (4) of section 80-IA of the said Act, the Central Government hereby notifies the undertaking, being developed and being maintained and operated by M/s. Ganesh Housing Corporation Ltd., as an industrial park for the purposes of the said clause (iii) subject to the terms and conditions mentioned in the annexure of the notification.

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

Source: Income Tax Department- India.


Section 197A of the Income-Tax Act, 1961 – Deduction of Tax at Source – No Deduction in Certain Cases – Specified Payment under Section 197A(1f)

Notification No. 56/2012, [F. NO. 275/53/2012-IT(B)], Dated 31.12.2012

In exercise of the powers conferred by sub-section (1F) of section 197A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that no deduction of tax under Chapter XVII of the said Act shall be made on the payments of the nature specified below, in case such payment is made by a person to a bank listed in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), excluding a foreign bank, namely:-

(i) bank guarantee commission;

(ii) cash management service charges;

iii) depository charges on maintenance of DEMAT accounts;

iv) charges for warehousing services for commodities;

(v) underwriting service charges;

vi) clearing charges (MICR charges);

vii) credit card or debit card commission for transaction between the merchant establishment and acquirer bank.

2. This notification shall come into force from the 1st day of January, 2013.

Source: Income Tax Department- India.


Section 132, read with Section 132A of the Income-Tax Act, 1961- Search & Seizure- Assessment of Preceding Years in Search Cases during Election Period.

Circular No. 10/2012, [F. NO. 282/22/2012-IT (INV. V)], dated 31.12.2012

As per provisions contained in section 153A and 153C of the Income Tax Act, 1961, the Assessing Officer is required to issue notice for assessing or reassessing the total income for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made.

2. In consequence of the powers conferred by clauses (64) and (66) of the Finance Act, 2012 the Central Government amended the Income Tax Rules, 1962, to insert a new Rule 112F after the existing Rule 112E, specifying the class or classes of cases in which the Assessing Officer shall not be required to issue notice for assessing or reassessing the total income for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made.

3. The aforesaid amendment was introduced with a view to reduce infructuous and unnecessary proceedings under the Income Tax Act, 1961 in cases where a search is conducted u/s 132 or requisition made u/s 132A and cash or other assets are seized during the election period, generally on a single warrant, and no evidence is available, or investigation required, for any assessment year other than the assessment year relevant to the previous year in which search is conducted or requisition is made.

4. In such cases, the officer investigating the case, with the approval of the Director General of Income Tax, shall certify that –

(i) the search is conducted under section 132 or the requisition is made under section 132A of the Act in the territorial area of an assembly or parliamentary constituency in respect of which a notification has been issued under section 30, read with section 56 of the Representation of the People Act, 1951; or

(ii) the assets seized or requisitioned are connected in any manner to the ongoing election process in an assembly or parliamentary constituency; and

iii) no evidence is available or investigation is required for any assessment year other than the assessment year relevant to the previous year in which search is conducted or requisition is made.

5. The certificate of the investigating officer shall be communicated to the Commissioner of Income Tax and the Assessing Officer having jurisdiction over the case of such person.

Source: Income Tax Department- India.