I-T dept seeks SC view on telecom expenses of software companies

Written by Indu Bhan | Indu Bhan | New Delhi | Updated: Jul 4 2012, 06:28am hrs
The income tax department on Tuesday sought clarification from the Supreme Court on whether telecommunication expenses incurred by the software companies are to be included as part of their total turnover for tax purposes.

Excluding such expenses from the purview of total turnover would permit the companies to obtain additional tax deductions under Section 10A of the Income Tax Act, 1961. The department has also raised another question whether unabsorbed losses and depreciation of non-software technology park units, which are eligible for tax exemptions, could be set off against the profit of such unit.

A bench headed by chief justice SH Kapadia has issued notice to around three dozen firms including Genpact India, Oracle Solutions, Huawei Technologies, Infosys Technologies, Samsung Electronics, Tech Mahindra, Swiss company Honeywell Technologies, Mphasis Software & Services, Khoday India, etc on the issues. While the department has filed around 31 appeals against the Karnataka High Court judgments, it has challenged the Delhi High Court's November last years' judgment in the two cases against Genpact India.

As per the Delhi HC decision, Genpact can derive significant tax benefits based on deductions permitted to newly established undertakings for export of articles such as computer software. The Delhi HC had followed the Karnataka HC's decision (CIT Vs Tata Elxsi Ltd) and accepted Genpact's stand that the export turnover was a component of total turnover, and since export turnover allowed for exclusion of telecommunication expenses, it should be excluded from total turnover as well.

The Karnataka HC had in turn followed the Bombay HC's judgment (CIT Vs Gem Plus Jewellery) and held that for computation of tax holiday benefit, what is excluded from export turnover must necessarily be excluded from total turnover as well while computing the deduction under Section 10A .

The HC had observed that where a particular word is not defined by the legislature, and an ordinary meaning is to be attributed to it, such ordinary meaning should be in conformity with the context in which such a word is used.

The revenue in its appeals before the apex court said that Section 10A which provides for a deduction of profits and gains which are derived by an undertaking from the export of articles or things or computer software has to be computed in terms of Section 10A(4).

The subsection 4 stipulates that profits derived from the export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.