156. Clarification regarding tax holiday under sections 10A and 10B for units producing computer software in Export Processing Zones (EPZs), Software Technology Parks (STPs) or 100% Export-Oriented Units (EOUs)

Section 10A of the Income-tax Act provides for a five-year total tax holiday to industrial undertakings which manufacture or produce any article or thing and are set up in notified Free Trade Zones (FTZs). This provision was introduced by the Finance Act, 1981.

Similarly, section 10B of the Income-tax Act allows a five-year tax holiday to approved 100% export-oriented undertakings (EOUs) which manufacture or produce any article or thing. This provision was introduced by the Finance Act, 1988.

Finance Act, 1993 extended the tax holiday under section 10A to industrial units in approved Electronic Hardware Technology Parks (EHTP) or Software Technology Parks (STP). This provision is applicable to undertakings that begin production in a previous year relevant to assessment year 1994-95 or after. By the same Finance Act, an Explanation of the term “produce” was inserted to state that “produce” includes production of computer programmes.

Certain issues arising from the abovementioned provisions are causing disputes between the Income-tax Department and the software export sector and, therefore, need to be clarified.


Since computer programmes are not physical goods but are developed as a result of an intellectual analysis of the systems and methods followed by the purchaser of the programme, it is often prepared on-site, with the software personnel going to the client’s premises. Doubts have been raised whether units taking up such production of software at the client’s premises would be eligible for the tax holiday.

The Government’s policy on tax incentive to software exports is reflected in the provisions of section 80HHE introduced in 1991. Under this provision, technical services provided outside India, for the development or production of computer software, are included for the purpose of the tax incentive.

Similarly, for the purpose of section 10A or 10B, as long as a unit in the EPZ/EOU/STP itself produces computer programmes and exports them, it should not matter whether the programme is actually written within the premises of the unit. It is, accordingly, clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the client’s site abroad, such unit should not be denied the tax holiday under section 10A or 10B on the ground that it was prepared on-site, as long as the software is a product of the unit,i.e., it is produced by the unit.


Unlike STPs which have come into existence only recently, EPZs are operating from 1981 and EOUs from 1988. Several software exporting units have been operating in EPZs or as EOUs even before STPs were created. Being units  in EPZs/EOUs, they were being allowed the tax holiday under section 10A/10B. It has been brought to the notice of the Board that, in several cases, such units are now being denied the tax holiday for earlier years and are being allowed the benefit only for assessment year 1994-95 onwards. Assessing Officers are often taking the view that, since the Explanation of the term “produce” to include production of computer programmes—has been inserted only with effect from assessment year 1994-95, the existing EPZ/EOU units exporting software would get the benefit only from assessment year 1994-95 and not for earlier assessment years.

Such a view, is not in consonance with the intention of the Government. Finance Act, 1993 extended the scope of the tax holiday to units in STPs but did not curtail the scope in respect of existing software exporting units in EPZs/EOUs, already availing of the incentive. The Explanation of the term “produce” is clarificatory in nature and was inserted in 1993 primarily because, in that year, the tax holiday was extended to units in STPs – which produce only computer software.

Accordingly, it is clarified that units in EPZs/EOUs which export software are as much eligible for availing of the five-year tax holiday under sections 10A and 10B as any other units in EPZ/EOU, even for the period prior to the previous year relevant to the assessment year 1994-95. The conditions stipulated in the provisions have, of course, to be fulfilled. The insertion of the Explanation of the term “produce” in 1993 should not be taken as a ground for denying the tax holiday to such units for earlier years.

Circular : No. 694, dated 23-11-1994.

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