After Infosys & Wipro, TCS Under Lens for Body Shopping

The Human Angle 45% of TCS' $8-b revenues come from onshore work It's now the turn of India's largest software company to spell out its stand on a tricky point that tax authorities have been raking up. After Infosys and Wipro, the Income tax department has initiated scrutiny on Tata Consultancy Services (TCS) for claiming tax benefits for onshore services, often derogatorily called 'body shopping'. Onshore software services account for close to 45% of TCS' $8 billion revenues.In a scrutiny notice initiated a few days ago, the I-T department has revisited its argument that onshore software services provided by Indian exporters boil down to export of manpower, rather than software, a senior tax official said. Onshore development refers to the practice of IT companies sending their staff to work in overseas markets, including the US and Europe. Often, such services are rendered in the premises of the overseas client. The tax department has argued that since professionals are under the control and supervision of the company abroad, the contract between the local software firm and the foreign client amounts to export of manpower. Simultaneously, tax authorities say that many software companies often book the earnings from such onshore work in their units located in the Software Technology Parks of India (STPI) to avail tax benefits. Responding to an email, a TCS spokesperson said: "As a policy we do not comment on tax related issues." According to a senior tax practitioner, the timing of the notice is important. "While there is no longer tax holiday for STPIs and EOUs (except for units in SEZs) from April 1, 2011, the government continues to be under pressure to generate revenues," said Indraneel Roy Chaudhury, Tax Leader, South India Practice, PwC. Interestingly, under Indian tax rules, "human resource services" can get the benefit of tax holiday. "But on this," he said, "one needs to examine contracts to determine what would fall within this purview." Trading Punches Over IT Taxman claim Onsite services by software companies boil down to manpower export Earnings from onsite services are booked in STPI units to avail tax benefits Expert Take Government under pressure to up revenues No reason why onsite services should not qualify for tax holiday Software cos, they say, have an edge in tussle Cos Have an Edge, Say Experts In a 'scrutiny notice', the department raises specific issues to give the tax payer an opportunity to explain its stand. It can take the department four to five months after that to make a tax demand. So far, only Infosys figures among large software companies to have received a tax demand for . 450 crore. Last month, the I-T department issued a scrutiny notice to Wipro, seeking details of onsite services it provided to clients. Tax experts feel that the software companies may have an edge in the tussle. "The revenue authorities have been contesting tax holiday for body shopping for several companies now on the basis that this results in export of manpower and not export of software. This issue was clarified in 1994 when Circular no. 694 was issued clarifying that the place of writing of software is not relevant. The STPI unit should be entitled to the tax holiday so long as the software is the product of the unit," says Shefali Goradia, partner at the tax advisory firm BMR Advisors. While the Income Tax department notice refers to the assessment year 2008-09, tax officials say that there is a distinct possibility that similar issues may be raised for other years as well. Significantly, onshore services has been coming down as a percentage of revenue for all service providers as more work moves to cost competitive locations such as India, referred to as offshore locations. Besides, business models have also undergone changes, resulting in a third category called "nearshore services", referring to services provided from locations like Eastern Europe and Latin America, coming into use. According to Goradia, the Foreign Trade Policy also allows sub-contracting to other units in Domestic Tariff Area as well as to foreign job workers. "Therefore, in spirit, there is no reason why on-site development of software by employees of Indian companies should not qualify for the tax holiday," she says.