The income tax (I-T) department has allowed profit-linked tax deductions to new Special Economic Zone (SEZ) units upon transfer of technical manpower up to 50 per cent from an existing unit — a further relaxation from 20 per cent allowed earlier in July this year. This will provide a major tax relief to software and IT-enabled services companies operating from such units.

In Section 10A/AA of the Income Tax Act, a tax benefit is disallowed if a unit is formed by splitting up or reconstruction of a business already existing, or transfer of machinery previously used for any purpose in excess of 20 per cent in value.

Restrictions on personnel transfer were not specifically mentioned in the I-T Act but, in its July circular, the Central Board of Direct Taxes (CBDT) included this, with a cap of 20 per cent, as tax authorities were disputing claims of tax deductions by taxpayers on such transfers and this gave rise to litigation.

In supersession of its earlier circular, CBDT has now clarified that transfer or redeployment of technical manpower from existing units to new unit in SEZ in the first year will not be construed as splitting or reconstruction of existing business if the number of technical personnel so transferred at the end of year does not exceed 50 per cent (against 20 per cent earlier) of the total technical manpower engaged in the new unit.

“The Rangachary Committee has come to certain conclusions after taking into consideration the views of CBDT and a wide cross section of the IT industry that up to 50 per cent of manpower can be considered fungible within units and tax holiday should not be denied. This re-clarification is a welcome step and reflects the progressive thinking of the new leadership at the helm, which is able to adapt itself to the business nuances and make positive changes for the well-being of the IT sector,” said Rajiv Chugh, Tax Partner, EY.

Software association Nasscom also welcomed the clarifications from the CBDT.

“The circular allows the flexibility to account for the total manpower at the enterprise as well as unit level, which is a great step to ease the technicalities involved in the process. The decision to not apply the ruling to cases which have completed assessment is also a great help to the industry. This is a great step forward by the government and we are hopeful that other such matters, which have been long up for discussion are taken up and worked towards achieving swift closures,” it said in a statement.

The industry’s argument was that there was a need of technical persons with prior experience to manage critical functions of software development in a new unit and the movement of technical manpower should not be a constraint in availing tax benefit.

Assessee also has a choice of complying with the condition of net addition of new technical manpower in all units being equal to 50 per cent of total technical manpower of new unit in which case also 10A/10AA benefit would not be denied.