TAX HOLIDAY SCHEME

Sandeep Chaufla

The tax holiday incentives under the Income-Tax Act have always been a bone of contention between the Tax Department and the assessees for obvious reasons since it involves revenue impact worth thousands of crores of rupees.

This year, in the tax assessments concluded for financial year 2002-03 (time barred by March 31, 2006) in some cases, the Assessing Officers had raised an issue, a rather un-necessary one, on the requirement of obtaining approval from the Inter-Ministerial Standing Committee (IMSC) by the assessees claiming tax holiday benefit under Section 10A (on profits from export of computer software by an undertaking set up in a Software Technology Park).

In some cases, the officers had given a show cause to the assessees that since the STP approval was not that of the Central Government, the benefit under Section 10A should be denied.

THE PROCESS

It is evident from an analysis of Section 10A and the STP scheme that to be eligible for tax holiday, the undertaking should begin to produce or manufacture (including software) in any Software Technology Parks of India set-up under the STP scheme on or after April 1, 1993.

The STP scheme, announced by the Centre in 1994, provided that an STP may be set up by the Central or State government, public or private sector undertakings or any combination thereof.

The Scheme is to be administered by the Department of Electronics, through Directors of respective STPs, which form part of the Software Technology Parks of India, a society established by the Department of Electronics, and registered under the Societies Registration Act, 1860.

Typically, the approvals obtained by the assessee from STPI state that the approval is issued under the authority of the Government of India under the delegated powers.

In some cases, even the Green Card (issued to undertakings entitled to benefits under the STP scheme) is issued to the assessees under the authority of the Chairman, Inter-Ministerial Standing Committee on Software Technology Parks Scheme.

In 1997, the Government had delegated its powers to accord approval to units under the STP scheme to the Directors of STP.

Therefore, the assessee cannot be required to get specific approvals from the Government of India or the IMSC.

Further, neither Section 10A nor the STP scheme requires the assessee to seek any approval from the Government or the IMSC.

Once the undertaking has been approved by the STPI and the assessee has fulfilled Section 10A conditions, it cannot be denied the tax holiday benefit.

Even if the IMSC approval is required, that is to be obtained by the STPI and not the assessee.

Therefore, seeking an IMSC approval by STPI is management between two government functionaries and cannot, in any circumstance, prejudice the interests of the assessee (being third party), who is following the conditions set by the STP scheme. The assessees are not privy to the internal records and documents of either the IMSC or the STPI.

It has time and again been held by the courts that beneficial provisions should be read in a manner as to further the cause for which the benefit was extended and not to defeat the purpose by raking up administrative issues with which the assessee's are not concerned with at all.

UNWARRANTED?

Further, where the exemption in respect of export of computer software by undertakings set up under the STP scheme has been allowed by the Tax Department since 1993, to rake up issues after almost 12 years of the operation of the scheme is quite unwarranted.

Ultimately, it required the intervention of the Central Board of Direct Taxes, which we believe came quite late in the day, to rest the zeal of some of the tax officers to deny the tax holiday benefit to the software exporters and raise untenable demands on them.

The CBDT also instructed the tax officers not to press for the tax demand made consequent to this issue.

All this underscores the need for better coordination among the various government departments and functionaries, including the tax officers and the CBDT, so that assessees are not put to undue hardship.

(The author is Director, BSR & Co.)

(This article was published in the Business Line print edition dated April 20, 2006)
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