Infosys Technologies Ltd. Tuesday said it will appeal against an order from the income tax department seeking more than 4 billion rupees ($88.8 million) in taxes for software sales made at the overseas premises of its international clients. The Economic Times newspaper earlier said the tax authority, which issued the order two weeks ago, refuses to recognize services rendered at overseas client locations as software exports. Citing the order, the report said Infosys won’t be eligible for tax exemptions on work delivered out of client locations overseas.

Under the government’s Software Technology Parks of India scheme, Indian software companies are entitled to tax breaks and don’t have to pay taxes on profits from exports until March 31 this year.

Mr. Balakrishnan Tuesday told local news channel ET NOW that the tax department’s order relates to the assessment year of 2007-2008 and that the amount was reported as a liability in the company’s accounting statement.

Infosys, India’s second-largest software exporter by sales, gets about 99% of its revenue from outside the country and sends employees on overseas assignments to work with clients for periods of three to six months.

In its latest quarter, Infosys earned about 50% of its total revenue from work done at client locations overseas.

“We had made detailed representation to the [tax] department on this issue,” Mr. Balakrishnan told Dow Jones Newswires.

Industry Surprised by the order

Tax experts’ view

Mr Abhishek Goenka, Partner, BMR Advisors, felt that the tax order had a larger implication for the industry and could lead to litigation. “Finally, the tax payer will prevail because services-at-client-location is built into the statute. However, it may lead to unnecessary hassle for companies,” he said.

The argument that the industry puts forth is that gathering of requirements from the customer, possibly design of the software, and post-development the implementation are all done at the customer site. All of these are integral to the software development that takes place in the country in STPI units with tax sops on exports.

In fact, Infosys could take some solace from a recent ruling against the tax department which had slapped a case against a Mumbai-based IT company.

The Bombay Tribunal in a ruling in March, 2010, had held that the Tax Department’s similar claim against Meridien Enterprises Computing Solution Pvt Ltd was unjustified. Mr Divya Baweja, tax and regulatory services, Walker Chandiok & Co, told Business Line that such claims by the Tax Department are common and have been happening for sometime now. In the case of Infosys, the tax authorities argue that the deputation and technical manpower contract for deputing software professionals abroad is not an eligible activity for claiming deduction under Section 10 A/10 AA of the Income-Tax Act.

Mr Baweja said that a company can claim deduction under Section 10 (A) only if it is rendering service and not deploying manpower.

“The onus is now on Infosys to provide documents to show that there is a linkage between onshore and offshore work. Infosys will have to demonstrate that people over there are rendering services, who they are reporting to, etc,” he said.

Mastek’s CEO and MD, Mr Sudhakar Ram, felt that the gap between policy and implementation led to such confusion.

“We have seen it in several instances that the Government intends something at the policy level which gets misinterpreted and then implemented at the operating level…the need of the hour is to have policy statements that are not merely statements but can be converted into better implementable procedures,” he said.

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