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Taxmen ask Tata Sons to pay $42.5 M for TCS exports
By siliconindia staff writer
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Tuesday, 13 April 2004, 19:30 IST
MUMBAI: The Income Tax department has raised a tax demand of over Rs 200 crore on Tata Sons for exports carried out by its software division, Tata Consultancy Services (TCS).
A large part of the tax demand has arisen because of the denial of tax benefits claimed under Section 10A of the Income Tax Act, dealing with tax holidays for units set up at software parks.
The assessing officer has denied the company certain export incentives. The department has also brought some income from interest under the tax net, according to sources. Tata Sons is currently in talks with the department. A Tata Sons spokesperson said, We have studied the assessment order and will present the rectification and some miscalculation in it to the department soon. Under the law, a tax-payer can contest an assessment order before the appellate authorities, which include the commissioner (Appeal) and the Income Tax Appellate Tribunal (ITAT). According to sources, Tata Sons is likely to appeal against the assessment order.
Software companies are exempt from paying tax on their income under Section 10A and 10B of the Income Tax Act, that provides for tax holidays set up in software parks. TCS has been disallowed exemptions provided under these sections because the I-T department has interpreted the law to mean that the tax break is only for a new unit and not for expansion of an existing unit. A host of software companies have been similarly denied exemption claimed under Section 10A. The I-T departments demand on TCS is in line with a similar tax demand on Wipro by the Bangalore department, for additional tax payments of Rs 261 crore.
The department has denied the tax benefit on the ground that the 10-year tax holiday cannot be claimed for new units set up at various locations, on the strength of the licence originally granted to the company. The benefit given to the original unit cannot be applied to expansions. Section 10A of the Income Tax Act says, Profits and gains, as are derived by an undertaking and refers to the year in which the undertaking begins to manufacture.
The I-T department has taken the 10-year tax holiday provided under Section 10A on Wipro and TCS from 1992 onwards. However, Wipro and TCS do not count the 10-year period from their original licence date, but consider each expansion as a new undertaking. The I-T department is of the view that all activities relating to software services have been subsumed by the original licence, as there is only one undertaking. Software companies, on the other hand, feel that each addition to the original undertaking should be construed as a separate undertaking.
The I-T departments rationale is that tax concessions for the companies should cease in assessment year 02-03, but software services companies feel the concessions should run for each expansion separately. According to sources, software majors in the country are planning to apprise the government of the need to introduce clarity on the tax issue, as ambiguity on such matters will harm the long-term interest of the industry.