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Demands on IT companies to be relaxed by the Income-Tax department?
May, 28th 2012

There is a flicker of hope for Indian software companies battling a barrage of claims from the Income-Tax Department.

In the last few days, the Central Board of Direct Taxes, an arm of the finance ministry, has asked tax offices in cities where the software firms are based to share their views and details on tax notices served on these companies. The board is taking a relook at the tax demands and may come out with a clarification that is expected to soften the tax blow on many software companies, including some of the big names in the Indian IT industry, a tax official told ET.

In the last two years, several software companies came under tax scrutiny as assessing officers argued that tax exemption cannot be claimed by companies for 'body shopping' deals as well as on earnings from exporting software that was not developed within software technology parks (STP), export-oriented units (EoU) and special economic zones (SEZs).

The CBDT review is underway at a time the outlook for the country's export-focussed IT industry has worsened, with commentary from a few top IT firms reflecting the uncertainty that their clients - especially those in the financial services sector - are facing.

Revenue growth for the country's top four software firms is at its lowest since 2009, when the IT sector felt the heat of recession and reduced spends. While Nasscom, the apex software industry body, has predicted an 11-14 per cent growth for fiscal 2013, there are more sceptics than believers in this target. Many analysts believe Nasscom will have to eventually revise this target. Some large players, which give out guidance, have forecast slower than 11 per cent growth or scaled down the guidance they had given earlier.

Against such a backdrop, software exporters are believed to have lobbied with the government on issues raised by the Income-Tax Department. On onshore software development, derogatorily called body shopping, the tax department's view was that 'deputation and technical manpower' (DTM) contracts were not software exports, and hence not eligible for tax exemption under Section 10A/AA of the Income Tax Act. According to the tax office, in such contracts, Indian companies deputed software professionals at the premises of overseas clients for three to six months during which they were under the supervision of the clients.

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