Patni Computer Systems has been asked by the Income-Tax Department to pay up Rs 63 crore, after being denied tax deduction for its software development units located in Software Technology Parks of India (STPI) area.

Under Section 10A of the Income Tax Act, 1961, companies are provided a ten-year tax holiday for setting up software development units in STPI zones. The company has received an assessment order along with a notice of demand from the Income-Tax officer (Technical)-II, Pune, on December 31, in connection with the regular assessment of the company's income-tax return for the year ended March 31, 2004, said a statement from the company to the stock exchanges on Thursday.

The assessing officer has denied the tax deduction upon the premise that such benefits are applicable for companies whose new units in STPI zones are not in the same business as their existing units. The provisions of Section 10A do not apply to Patni as benefits are for new "business" undertakings and are available only for "new businesses". The assessing officer has also stated that the business has been "split" as the company grew over the last several years. Same businesses in new undertakings shall not qualify for such benefits etc and is therefore disallowed under Section 10A of the Income Tax Act, 1961, said Patni's statement to the BSE. However, company officials refused to elaborate further on this matter.

The company will file an appeal challenging the assessment order before the Commissioner (Appeals), on or before January 30.

Analysts believe that this matter could affect the company's financial results. "If PCS makes provisions against the tax deductions as soon as possible, it will surely affect their next quarter numbers," said an analyst who did not wish to be named. He said that Wipro and TCS had been through similar situations but had obtained orders that were ultimately in their favour.

The company statement also said that if it fails to prevail in its appeal, the company's financial results for such reporting period could also be adversely affected. The company's net profit for the year ended December 2005 was Rs 198.71 crore.