The Income-Tax (I-T) department has asked India?s largest software services exporter Tata Consultancy Services (TCS) to pay R655.96 crore this year. The sum, which relates to the assessment year 2007-08, is one of the largest tax demands served on IT companies in recent times.
Sources told FE that the department disallowed the company?s claims on multiple items, including state taxes paid overseas, software expenses claimed as revenue expenditure, deduction claimed under Section 10 A (STPI Act) and transfer pricing issues.
The overall tax demand on TCS between assessment year 2005-06 and 2007-08 now totals a whopping R1,600 crore. The department had raised a demand of R515 crore for assessment year 2006-07 and R419.64 crore for 2005-06.
When contacted, a TCS spokesperson told FE that as a policy, the firm does not respond to tax-related issues. Typically, companies disputing tax demands pay up at least a portion of the claim before appealing to a tax tribunal.
Infosys, which was recently asked to pay Rs 450 crore for wrongfully claiming tax exemption on onshore services by declaring them as software exports (popularly called body shopping), paid 50% of the demand before going for appeal. Frequent tax demands have prompted technology companies to complain that the I-T department views the sector only as a cash cow. As recently as March, the department had asked Mahindra Satyam to pay Rs 616 crore as withholding tax. One of the largest demands raised in a single assessment year was for Rs 820 crore on Slocum Investment (now HCL Corporation) in December 2004. The dispute related to capital gains computation on sale of shares. The Income-Tax Appellate Tribunal set aside the demand in 2006.
Vishweshwar Mudigonda, senior director at Deloitte India said that some of the issues such as transfer pricing have been nagging the IT industry for six years. Transfer pricing refers to the selling of goods or services to a subsidiary overseas at an inflated price, reducing profitability and thereby the tax liability. Indian taxation laws now require that services sold to a subsidiary be at ?arm?s length? price or the price at which a third party should be willing to buy the service. The I-T department often disputes the profits declared by multinational firms. ?The I-T department has also disallowed software expenses claimed by many Indian companies as revenue expenditure and instead allowed the same as a capital expenditure with consequential depreciation. The other dispute is that when you buy a licence, there are limited rights to use the software. Payments are considered as payments towards a copyrighted article. The I-T department is contesting that it is royalty,? Mudigonda said.
Similarly, the department denies tax holiday if a company converts its units into 10 A after having claimed deductions on Section 80 HHE.
No longer relevant, 80 HHE in the past provided tax relief for exporters.