The Indian tax department has renewed efforts to review income tax assessments from Infosys and Hewlett-Packard, despite a government clarification last year.
The Income Tax (I-T) department initiated proceedings against the two tech vendors to reassess their income tax filings, according to a Times of India report. It alleged they had claimed deductions for software development and manpower deployment at a customer site despite the fact these had no links to the customer's Indian business units, which would have been eligible for tax exemptions.
The Indian government in 1991 introduced the Software Technology Park (STP) scheme, which ended in 2011, that allowed IT companies to enjoy a 10-year tax exemption on their software exports from their India-based business units. However, the I-T department had called out IT companies for claiming against these exemptions for software developed and technical manpower deployed at a customer location overseas, to carry out development work such as software upgrades, testing, maintenance, and modification, which were not eligible for the STP scheme.
Last year, the department had ordered various IT companies including Infosys, India's second-largest software services exporter, to pay up 5.77 billion rupees (US$105.3 million) in additional taxes related to software development work conducted overseas.
The tech vendors appealed against the I-T department's claims, which were followed by a clarification from the Central Board for Direct Taxes (CBDT) that those activities--software developed abroad and deployment of technical manpower abroad at the client's place for software development--would amount to "deemed export" and eligible for tax exemptions under the STP scheme.
CBDT also noted: "There must exist a direct and intimate nexus or connection of development of software done abroad with the eligible units set up in India, and such development of software should be pursuant to a contract between the client and the eligible unit."
The tax department said its assessment revealed significant work overseas had no link to with the STP-related units in India.
According to the Times of India report, Infosy and HP had filed objections to the reassessment order and asked the Karnataka high court to block the reassessment. The court had previously granted interim stays for similar petitions filed by the companies, including in 2004 and 2005.