iGate asked to pay Rs 11 cr tax for onsite work after Infosys

Mumbai: Software companies could end up paying tax on a sizeable part of their income, depending on how much work they do onsite, as tax authorities hold that onsite services are not eligible for tax sops.

In the second such notice sent out to a software firm, iGate Corp has been asked to pay tax on pure onsite software development and work that involves deputation of technical manpower, also referred to as 'body-shopping'. The first such notice was sent to Infosys Technologies .

iGate has said it is not involved in deputation of technical manpower (DTM) while agreeing that income from this activity is not eligible for tax benefits under Section 10A. This section deals with tax exemption for software export profits for specified units such as export-oriented units or units registered with the Software Technology Parks (STP) of India . The tax holiday is valid till March 2011.

The income-tax department has asked iGate to pay around Rs 11 crore for the assessment year 2007-08 categorising its business under four heads, deputing of technical manpower, purely onsite services without offshore content, software work with predominantly onsite component of over 70% and the balance being done offshore, onsite-offshore work with over 30% offshore component done from STP or SEZ units.

"The kind of services that Infosys, TCS, Wipro offer are similar. So if two companies have got the order now, there could be more getting it later. The companies we spoke to said they will appeal if they receive such an order," said an analyst with an overseas brokerage. "The re-opening of these cases could affect companies with units in SEZs that have started less than 10 years ago, even if the tax claims are eventually unsuccessful," said TP Ostwal, a chartered accountant and tax advisor.

iGate did not respond to a mail from ET requesting its comments on the issue. For the assessment year 2007-08, the company had a turnover of 747 crore and a profit before tax of 50.38 crore. Infosys had said it would it appeal against the I-T department's order.

"The proportion of DTM receipts to overall revenue receipts was estimated to be as high as 80% about a decade back. This proportion is reported to have steadily declined to about roughly 40%... DTM contract receipts are also derogatively known as 'Body Shopping' receipts," the I-T department said about Indian software companies. All activities where the liability of iGate was limited to supply manpower and the control and supervision of work was with the client have been categorised as DTM.

Additionally, profits from pure onsite work where the software development contracts do not have any mention of the STP or SEZ undertakings have also been considered as not eligible for exemption. These contracts are with the US branches and executed entirely in US or Europe.