F. No. 178/84/2012-ITA.I
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
New Delhi, the 17th January 2013
Circular No. 01/2013
Subject: Issues relating to export of computer software-Direct tax benefits-Clarification reg.
The Indian Software Industry has been the beneficiary of direct tax incentives under the provisions like Sections 10A, 10AA & 10B of the Income -tax Act, 1961 in respect of their profits derived from the export of computer software. These provisions prescribe incentives to “units” or “undertakings”, established under different schemes, which are/were deriving profits from export of computer software subject to fulfilling the prescribed conditions.
2. It has been represented by the software companies that several issues arising from the above mentioned provisions are giving rise to disputes between them and the Income-tax authorities leading to denial of tax benefits and consequent litigation and, therefore, require clarification. Various issues highlighted by the Software Industry have been examined by the Board and the following clarifications are hereby issued -
(i) (a) WHETHER “ON-SITE” DEVELOPMENT OF COMPUTER SOFTWARE QUALIFIES AS AN EXPORT ACTIVITY FOR TAX BENEFITS UNDER SECTIONS 10A, 10AA AND 10B OF THE INCOME TAX ACT, 1961; AND
(b) WHETHER RECEIPTS FROM DEPUTATION OF TECHNICAL MANPOWER FOR SUCH “ON-SITE” SOFTWARE DEVELOPMENT ABROAD AT THE CLIENT’S PLACE ARE ELIGIBLE FOR DEDUCTION UNDER SECTIONS 10A, 10AA AND 10B.
(a) CBDT had earlier issued a Circular (Circular No. 694 dated 23.11.1994) which provided that a unit should not be denied tax-holiday under sections 10A or 10B on the ground that the computer software was prepared ‘on-site’, as long as it was a product of the unit, i.e., it is produced by the unit. However, certain doubts appear to have arisen following the insertion of Explanation 3 to sections 10A and 10B (vide Finance Act, 2001) and Explanation 2 to section 10AA (vide Special Economic Zones Act, 2005) providing that “the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India”, and a clarification has been sought on the impact of the Explanation on the tax-benefits as compared to the situation that existed prior to the amendments.
The matter has been examined. In view of the position of law as it stands now, it is clarified that the software developed abroad at a client’s place would be eligible for benefits under the respective provisions, because these would amount to ‘deemed export’ and tax benefits would not be denied merely on this ground. However, since the benefits under these provisions can be availed of only by the units or undertakings set up under specified schemes in India, it is necessary that there must exist a direct and intimate nexus or connection of - 2 - development of software done abroad with the eligible units set up in India and such development of software should be pursuant to a contract between the client and the eligible unit. To this extent, Circular No. 694 dated 23.11.1994 stands further clarified.
Please check the attached file for full circular.