Infosys gets service tax notice for Rs 33 crore

Others 1689 views 6 replies

anthony

Finance

7918 Points Joined August 2007

The Indian IT sector continues to be in the news for all wrong reasons with another leading firm Infosys coming under the government scanner for alleged evasion of service tax worth Rs 33 crore on commission paid by the company for its global issue. "We have issued showcause notice as the company has not paid service tax on the underwriting commission paid by Infosys towards American Depository Receipt (ADR) for the years 2003, 2005 and 2006," said a senior tax official. The service tax commissionerate in Bangalore issued showcause notice to the company on October 24, 2008, he said. By sponsoring ADRs in the overseas markets, the company aimed at increasing foreign share holding in the firm. However, the company in this regard has said the notice is not a determination of any liability and that the company has time till the first week of February to reply. "We strongly believe that since it is a sponsored ADR program, the company had not taken any taxable services and only facilitated the issue. The services were basically taken by the selling shareholders. We will be replying in detail to the authorities in due course," Infosys Technologies Chief Financial Officer Balakrishnan V told PTI. Companies which sponsor ADRs do it with an intention of increasing the liquidity of its foreign-listed stocks. The move is also aimed at increasing market capital in these foreign bourses, getting the stocks to be covered by global analysts and held by well-known, long-term investors. – www.economictimes.indiatimes.com

Replies (6)

Rajesh Kumar

Advocate- Tax

7806 Points Joined December 2008

Making allegation is the easiest thing in india. Anybody can make allegation against anybody, anytime- there is no problem. The is no penalty in India for making false or baseless allegation. Issuing a Show Cause notice is an act of making allegation. Department keeps on making allegation through SCN. Most os the notices do not survive. However, the department or is officers never loose anything- in fact even the newspapers never report as to what happened to that notice.

This notice is frivolous on the face of it. It will meet the same fate like othe frivolous notices. However, till that time the company will suffer- and will not get any compensation for such unjustified sufference.

Making allegation is also a thriving business in India.

Guest

Information is sketchy to have any useful discussion. Whether service received from abroadis a taxable service, whether Infosys is a service recepient or india sellers are service recepient are some of the information required to start a discussion

dhamodaran

consultant

24 Points Joined January 2009

At a time when corporate India is in the news for all the wrong reasons, if there is one corporate house in India that you can trust blindly, that is none other than M/s Infosys Technologies. In that context, this newspaper article comes at a wrong time and seems to be motivated.

Having said that and having followed the company for more than a decade, it is a well-known fact that the company had long been pursuing a strategy to get into a global index like Nasdaq. It has been well articulated by the company themselves in various forums.

In order to achieve this objective, the company wanted to increase their floating stock in the US markets but at the same time, the company did not want to dilute their equity. The only way to achieve this objective is to swap the Indian ownership to a foreign ownership. The equity markets were benign during the last four to five years (but for 2008) and there existed a premium in the US markets over the domestic markets. The company has utilized this opportunity and increased the liquidity in US markets through these three sponsored ADR issues.

The moot point here is, not whether the service tax department is right in issuing the SCN but whether the company is right in claiming that the company had not received any services and their shareholders only have received them?

Going by the comments made by some members like Mr. Rajesh Kumar, they seem to have made a thorough study of the SCN. We are also trying to get a copy of SCN, by applying through RTI Act. If any member already possesses a copy, they may please post them, for the benefit of all.

HarshaRamachandra

Management Consultant

26 Points Joined January 2009

If any Member has the copy of the SCN / gist of the issues alleged in the SCN, the same may kindly be posted on the net.

Let me bring about my experiences in association with one such ADR issue.

The ADR issue is guided by FEMA / RBI Notifications. The sponsored ADR issue is guided by FEMA Notfn 41/2001-RB dated March 2, 2001

The RBI’s regulation A.P. (DIR Series) Circular No. 52 dated 23rd November 2002 discusses about the sponsored ADR / Divestment by shareholders of their holdings of Indian companies, in the overseas markets.

The gist of the said regulations is that, the process of divestment would be initiated by such Indian companies whose shares are being offered for divestment in the overseas market. As per Indian regulations, only a Company can sponsor an ADR. However, SEC regulations also allows the Depository / or other interest parties so sponsor an ADR (Depending on the level of ADR).

The RBI guidelines also stipulate that, the sponsoring Company shall pass on all the proceeds to its participating share holder, after deducting expenses.

I presume, it is these expenses for which the Dept is demanding Service Tax. Obviously, the demand is being made under the draconian reverse charge mechanism. In such cases, the moot point would be rather who primarily brings the services into India and not who ultimately consumes it. As these expenses are deducted and passed on to the share holders who are participating the ADR issue, I presume the Dept expects M/s Infosys Technology Ltd to deduct the Service Tax portion too.

In this respect, I agree with Mr Damodharan, regarding the thorough study of the SCN before commenting on whether the notice is frivolous / flippant or serious. I request the forums members to post any information on the SCN / gist of the SCN before discussing about the merits of the SCN.

With Regards

Harsha R N

Rajesh Kumar

Advocate- Tax

7806 Points Joined December 2008

Well the moot point is different.

Section 64(1) says that provision of service tax shall extend to whole of india except the state of J & K. Reading this section with Section 66A, service tax even through reverse charge can be made only when services are received in India.

When a service is said to have been received in India has been defined in Import of services rules. The rules has to be read with Section 66A and Section 64.

Even is it is presumed that Infosys has taken services for ADR sponsering- the service has been provided outside india, service has been received outside india, services has been used outside india, shares has been sold outside india- by what stretch of imagination it can be said the the services has been recieved in India.

Merely because payment has been made from an Indian company is of no relevance. Say an employee of infosys goes to US and use telephone in US. As he is on official visit, such telephone charges are paid by the company. Can we say this is import of telecom service?

dhamodaran

consultant

24 Points Joined January 2009

Rajesh's point is very valid as import of service rules imply that underwriting services, if received by Indian company from a foreign service provider is taxable only when the service is partly performed in India, meaning to say that the service will be out of the tax net, if service was performed completely outside India or in other words the service provider did not provide any portion of the said service in India. The much-awaited SCN copy will throw light on whether the department has taken the above into cognizance or was blind to the same. I am also not sure whether the service tax claim is on underwriting in specific or merchant banking at large. One of the reports i read quoted the service tax claim as being applied on merchant banking services, received. Apparently merchant banking is not exempted under import of service rules, irrespective of service being performed outside India or partly in India. The scn copy would settle most of these doubts