A government clarification last year saved IT companies from additional tax demands, but that hasn't deterred the taxman. 

At least two IT companies have now moved court seeking to put a stop to income tax reassessment. 

The I-T department has initiated reassessment proceedings against Infosys and HP on the ground that the companies claimed deductions for software developed and manpower deployed at a client's place even though these activities had no link with its units in India that were eligible for tax exemption. 

Under the Software Technology Park (STP) scheme - which existed from 1991 to 2011 - IT companies were eligible for tax exemption on their software exports from units registered with the scheme for 10 years. The department earlier slapped claims on IT companies on the ground that software developed abroad at a client's place and deputation of technical manpower abroad for software development activities like upgrade, testing, maintenance, modification and troubleshooting were not eligible for tax exemption under the STP scheme. 

IT companies challenged the department's claims and in January last year, the Central Board for Direct Taxes (CBDT) clarified that both those activities - software developed abroad and deputation of technical manpower abroad at the client's place for software development - would amount to 'deemed export' and would be eligible for tax benefits under the STP scheme. That was a setback to the I-T department. But not for long. 

In the same clarification, the CBDT also observed that "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 I-T department has latched on to that observation and noted that its investigations showed that "a large body of work" abroad had no link with the STP units in India. In Infosys' case, the department has also said that it treated capital expenses such as on DG installation, landscaping done for the first time and curtain glazing as revenue expenses, and benefited from such classification. 

Both HP and Infosys have filed preliminary objections to the reassessment notice and have filed writ petitions before the Karnataka high court to stop the reassessment. Infosys has filed writ petitions for assessment years 2004-05, 2005-06 and 2006-07; HP has done it for assessment year 2005-06. The court has granted interim stays. 

HP declined to comment on the matter. Infosys CFO Rajiv Bansal said all the company's projects abroad were linked to STP or SEZ units in India. "The classification is clarified in the Rangachary Committee report that has been submitted. But I guess the tax authorities would need some more time to implement that," he said. 

In its last annual report, Infosys had said that Indian income tax authorities were claiming additional tax of Rs 1,088 crore, including interest of Rs 313 crore, for fiscal years 2005, 2006, 2007 and 2008. (Times of India)