When American Senator Charles Schumer described Indian software firms as `chop shops’, few imagined that the taxman back home could add salt to the slur. Indeed, Indian income-tax authorities are beginning to claim tax on the money that software firms make by sending their boys to work with companies in the US, Europe and other markets—a business that is known as onshore software development, or simply ‘body shopping’.
For the I-T department, this is an activity that involves export of manpower and not export of software. Driven by the underlying argument, tax offices have sent notices to software companies. Close to 10 companies, including some of the big names, have received income-tax notices in the last few days, a senior I-T department official told reporters.
Body shopping, or `time and material contracts’, receipts could be as high as 50% of total revenue receipts of IT companies based out of India. These are arrangements where IT professionals from India are sent for short assignments of 3-6 months to work in companies abroad. The foreign company pays the Indian firm for the services of each professional while the Indian company pays a daily allowance to these professionals over and above the salary paid to them.
The tax authorities are making the claim on the premise that during these brief assignments, the professionals sent from India are under the “control and supervision” of the company abroad, which also “owns” the services they render or the products they develop.
“It’s a technical issue that would be appealed… There are companies that have received notices. However, companies that have organised such activities under a separate overseas subsidiary will not be impacted,” said the CFO of a software company who refused to be quoted on the subject.
