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HC upholds Income Tax Department's view on taxing Infosys for onsite services
November, 05th 2011

An old tax case has come back to haunt Infosys, the country's second-largest software company. In a ruling that backs the Income-Tax Department's claim of Rs 100 crore, the Karnataka High Court has upheld the view of tax authorities that the work carried out by Infosys for clients overseas, from 1992-93 to 1996-97, is in the nature of 'technical services'.

The judgement could have implications for the subsequent years as well and lead to substantial tax claims on Infosys, with similar ramifications for some of the other software exporters.

Indian software exporters such as Infosys send their employees overseas to work on client projects. In most cases, the employees work out of the client's premises. For a majority of Indian service providers, including Infosys, nearly half the revenue comes from work it does overseas, better known as onsite locations.

The I-T department contended that gross export earnings from providing technical services were not eligible for tax exemption but only the net export earnings after deduction of expenses incurred in foreign exchange, such as salaries paid to these employees, under Section 80HHE. Under such arrangements while the client company abroad pays for every professional deputed, the Indian firm pays a regular salary and a daily allowance to each of them for all days spent abroad at the premises of the overseas client.

"This issue of 80HHE has earlier been decided in our favour by ITAT. However, it appears that the Hon'ble Karnataka High court has allowed the revenue appeal on this specific issue. Once we get a copy of the order, we will study and decide on future course of action," Infosys said in response to an ET query.

Infosys had contested the tax authorities claim that it was in the business of providing technical services in the appellate tribunal.

All along the company maintained that it is in the business of software development. The appellate tribunal ruled in favour of Infosys, following which the I-T department challenged the order in the Karnataka High Court.

Under Section 80HHE, which has now been phased out, export income from software development and technical services are eligible for tax exemption. While no tax was payable on earnings from software development, in the case of technical services, only the net export income - arrived after reducing the expenditures abroad - is exempt, and the firm has to pay taxes on the rest of its income.

For example, consider a software company with a total turnover of Rs 1,000 crore and a profit of Rs 100 crore. If its export turnover from software development is Rs 900 crore, then an income of Rs 90 crore is tax exempt and it has to pay tax only on Rs 10 crore of income.

However, if the same company has an export turnover of Rs 900 crore from technical services, it has to deduct the salary and other expenses incurred in foreign exchange and compute the net export turnover to arrive at the tax exempt income. For example, if the expenses incurred in foreign exchange is Rs 300 crore, then the net export income is Rs 600 crore and only Rs 60 crore is tax exempt.

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