MR CHYTHANYA K. K., Partner, Raghuraman & Chythanya, Bangalore.

Tax incentives have emerged as a key issue in the Government's move to fuel growth by allowing the creation of special industrial zones such as software technology parks (STPs) and entities such as export-oriented units (EOUs).

Sections 10A and 10B of the Income-Tax Act, 1961 occupy an important place in the scheme of tax incentives.

They go a long way in influencing the decision-makers as far as setting up of these zones is concerned, and provisions relating to tax holiday have not been free from controversies, according to Mr Chythanya K. K., a chartered accountant and advocate, and Partner, Raghuraman & Chythanya, a Bangalore-based legal firm.

Speaking to Business Line on select controversial issues and dispelling certain points of doubt, he said that there are no enabling provisions in Sections 10A and 10B on extending the benefit of tax holiday to a supporting software developer who is not a direct exporter.

However, there is no condition anywhere in these sections, either, that an EOU/STP unit should be a direct exporter.

"It must be noted that the terms `computer software' and `export turnover' are defined slightly differently in 10A and 10B. Nowhere in these sections is the term `export' defined. Accordingly, what is considered as export under the Foreign Trade Policy should be adopted for the purpose of these sections too."

As per the sections, computer software means any computer programme recorded on a disc, tape, perforated media or other information storage device; or any customised electronic data or any product or service of similar nature that is transmitted or exported from India by any means.

"There is no mention as to who shall export the computer software. Similarly, `export turnover' is defined to mean the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible forex."

It does not include freight, telecommunication charges or insurance attributable to delivery outside India, or expenses incurred in forex in providing technical services outside the country.

Besides, there is no condition that such export shall be made out of India, he added.

Moreover, the policy clarifies that an EOU/STP unit may export goods manufactured or software developed by it through another exporter or similar units.

"Further, supplies from DTA to EOU/STP units will be regarded as deemed exports. Therefore, a supporting manufacturer who is an EOU/STP unit supplying computer software to another EOU/STP will qualify for the benefit, not as a supporting manufacturer but as an exporter per se."

Mr Chythanya said that as long as the manufacturer satisfies the conditions of these sections, the benefit of tax holiday cannot be denied merely on the basis that the company is not a direct exporter.

He added that a "slight change in the language" of this subsection actually recognises that transactions between two STP/EOU units could also be export.

Since such export is not out of India, there is no question of receiving in or bringing into India the sale proceeds in convertible forex.

He also said that the fear of double deduction resulting when the supporting and exporting units are both allowed deduction is misplaced, "because the sale consideration of the supporting unit would be the cost for the exporting unit. The exporting unit can claim benefit only in respect of profits remaining after taking into account such cost."

On whether Customs bonding is a mandatory requirement for an STP to claim tax holiday, Mr Chythanya said that again, there are no specific requirements in the relevant sections that the STP should be Customs-bonded.

"The principal objective of Customs bonding is to monitor duty-free purchases. In the case of an STP not making any duty-free purchase, no such bonding is necessary."

He added that STPI's Delhi and Chennai offices have issued clarifications that the Customs bonding is not a mandatory requirement for an STP to carry out software development unless the unit intends to avail itself of any Customs or excise duty concessions.

"As long as STP registration remains in force, and as long as conditions of Section 10A are complied with, it is not permissible for the income-tax authorities to deny the benefit of tax holiday merely on the basis that the STP area is not Customs-bonded."

Many units in these designated zones earn income not arising from the activity of export but relating to their business.

Mr Chythanya said that it should be permissible for any such unit to claim the benefit of tax holiday in respect of incomes on the basis that they could be said to be derived from the business of the undertaking.

Elaborating on the nature of such income sources, he said that units could earn additional income from interest, rent, hire charges, weighment charges, sale of import licence, scrap and spares, service income, commission and brokerage, technical service income, liquidated damages, forex gain and insurance receipts.

"Disputes arise between the assessee and the Department as to whether these incomes qualify for tax holiday. There is a tendency on the part of the Department to concede a narrow interpretation of export profits by over-emphasising on the phrase `derived from'."

The Department then holds that unless there is an immediate nexus between the income and the export, such income cannot be said to be derived from export.

However, Mr Chythanya said, the computation mechanism provided for by sub-section 4 is worded more liberally compared to sub-section 1.

"Sub-section 1 refers to profits and gains derived by units from export of computer software, while sub-section 4 refers to the profits of the business of the undertaking as part of the formula for computation of profits derived from export of computer software."

Citing the instance of UP Electronic Corporation (276 ITR 45 ALL.), he said that it was held that the term `business' is to be given a wide meaning.

"With the rapid advancement and growth in the field of science and technology, even the consultancy services offered would be covered under the term `business'."

D. Murali
C. Ramesh