Your SlideShare is downloading. ×
CBDT clarifies on allowability of deduction under Section 10A/10AA on transfer of technical man-power in the case of software industry
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

CBDT clarifies on allowability of deduction under Section 10A/10AA on transfer of technical man-power in the case of software industry

205
views

Published on

Recently, CBDT has issued a Circular clarifying that mere transfer or re-deployment of existing technical manpower from an existing unit to a new SEZ unit in the first year of commencement of business …

Recently, CBDT has issued a Circular clarifying that mere transfer or re-deployment of existing technical manpower from an existing unit to a new SEZ unit in the first year of commencement of business will not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred does not exceed 20 per cent of the total technical manpower actually engaged in developing software at any point of time in the given year in the new unit.

Published in: Education

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
205
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
3
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA CBDT clarifies on allowability of deduction under Section 10A/10AA on transfer of technical man-power in the case of software industry 29 July 2014 Background Section 10AA of the Income-tax Act, 1961 (the Act), inter- alia, provides for deduction in respect of the profits derived by a unit set up in Special Economic Zone (SEZ) from export of computer software or from providing any Information Technology Enabled Services (ITES). The said deduction is available if, inter alia, the new SEZ is not formed by split-up or reconstruction of an existing business or by transfer of used plant or machinery. However, the deduction is available if the earlier used plant and machinery will not exceed twenty percent of total value of the plant or machinery used in new business. The tax department, in certain cases, has considered the transfer/redeployment of technical manpower from the existing units of a taxpayer engaged in computer software development to its new SEZ unit, as splitting up or reconstruction of the existing business and therefore, denied the deduction under Section 10AA of the Act. In this regard, the software industry has represented before the Central Board of Direct Taxes (CBDT) that there is a limited pool available with a software developer of skilled, talented and experienced manpower with domain knowledge. Given the highly technical and competitive nature of software development, some technical persons having prior experience are required to manage the critical functions of software development in a new unit. Accordingly, the movement of technical manpower from an existing unit to a new SEZ unit should not be a constraint in availing deduction under Section 10AA of the Act. Further, attention was also drawn to the Instruction 1 which states that there is no bar on transfer of manpower to SEZ units. Also, there is a specific prohibition on transfer of plant or machinery from an existing unit to a new SEZ unit under Section 10AA, subject to a ceiling of 20 per cent but no such bar on transfer/redeployment of manpower has been explicitly laid down in the Section. ___________ 1 Instruction No.70, dated 9 November 2010 issued by the Ministry of Commerce
  • 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. CBDT clarification Recently, the CBDT has issued a Circular 2 clarifying that mere transfer or re-deployment of existing technical manpower from an existing unit to a new SEZ unit in the first year of commencement of business will not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred does not exceed 20 per cent of the total technical manpower actually engaged in developing software at any point of time in the given year in the new unit. Further the CBDT has clarified that the circular will be applicable only in the case of taxpayers engaged in the development of software or in providing IT Enabled Services in SEZ units eligible for deduction under Section 10A or 10AA of the Act. Our comments There has been litigation on whether transfer or redeployment of technical manpower of an existing unit to a new SEZ unit for software development activities like upgradation, testing, maintenance, modification, trouble- shooting, etc. would result in the denial of deduction under Section 10AA of the Act. Various Courts/Tribunal have dealt with this issue. The Bombay High Court in the case of Metropolitan Springs (P.) Ltd. 3 had held that even if some members of the staff were common to the old and new unit, it will not be bar on the eligibility of deduction under Section 80J of the Act. The Chennai Tribunal in the case of DSM Soft (P) Ltd4 had held that transferring existing employees (about one- third of total employees at year end), by themselves would not make the new unit ineligible for tax relief under Section 10A of the Act. The Software Technology Park (STP) unit was not formed by splitting up or reconstruction of a business already in existence and was eligible for tax relief under Section 10A of the Act. Further the Chennai Tribunal in the case of Servion Global Solutions Ltd. 5 held that the fact that there are some old unit’s employees in the new unit cannot be taken as a ground for denying the benefit under Section 10A of the Act. ______________ 2 Circular No. 12/2014, dated 18 July 2014 3 CIT v. Metropolitan Springs (P) Ltd [1991] 58 Taxman 72 (Bom) 4 ITO v. DSM Soft (P) Ltd [2008] 115 ITD 1 (Chennai) 5 ITO v. Servion Global Solutions Ltd [2008] 115 ITD 95 (Chennai) It is pertinent to note that the Rangachary Committee had examined this issue in its report on the ‘Taxation of Development Centres and the IT sector’ 6 . The Committee had recommended that the Act may be amended prospectively to provide that 50 per cent of the billable employees in the SEZ unit in its first year should be new employees and also provide that this condition would have been satisfied if the taxpayer is able to demonstrate that the net addition of new billable employees of the enterprise level is not least equal to the number that represents 50 per cent of the total billable employees of the new SEZ unit. The Committee had also suggested that in cases where deduction has been denied and the taxpayer is before the Commissioner of Income-tax (Appeals) [CIT(A)] or Dispute Resolution Panel (DRP), the issue may be allowed to be decided by the CIT(A) or DRP in accordance with the law and the tax officers should be directed to either concede the issue or not contest the same further. In cases where the CIT(A) or Income-tax Appellate Tribunal (the Tribunal) or High Court has decided this issue in favour of the taxpayer, no further appeal should be filed by Revenue. Wherever Revenue has already filed further appeal on this issue before the Tribunal, High Court or Supreme Court, as the case may be, the relevant ground of appeal may be withdrawn immediately. The CBDT has now clarified that mere transfer or re- deployment of existing technical manpower from an existing-unit to a new SEZ unit in the first year of commencement of business will not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred does not exceed 20 per cent of the total technical manpower actually engaged in developing software at any point of time in the given year in the new unit. ___________________ 6 Source: www.itatonline.org
  • 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

×