DIRECT TAXES CIRCULAR

SECTION 10A l EXEMPTION FOR NEW
INDUSTRIAL UNDERTAKINGS IN FTZ

156. Clarification regarding tax holiday under sections 10A and 10B for units producing computer software in Export Processing Zones (EPZs), Software Technology Parks (STPs) or 100% Export-Oriented Units (EOUs)

Section 10A of the Income-tax Act provides for a five-year total tax holiday to industrial undertakings which manufacture or produce any article or thing and are set up in notified Free Trade Zones (FTZs). This provision was introduced by the Finance Act, 1981.

Similarly, section 10B of the Income-tax Act allows a five-year tax holiday to approved 100% export-oriented undertakings (EOUs) which manufacture or produce any article or thing. This provision was introduced by the Finance Act, 1988.

Finance Act, 1993 extended the tax holiday under section 10A to industrial units in approved Electronic Hardware Technology Parks (EHTP) or Software Technology Parks (STP). This provision is applicable to undertakings that begin production in a previous year relevant to assessment year 1994-95 or after. By the same Finance Act, an Explanation of the term “produce” was inserted to state that “produce” includes production of computer programmes.

Certain issues arising from the abovementioned provisions are causing disputes between the Income-tax Department and the software export sector and, therefore, need to be clarified.

Development of programmes on-site

Since computer programmes are not physical goods but are developed as a result of an intellectual analysis of the systems and methods followed by the purchaser of the programme, it is often prepared on-site, with the software personnel going to the client’s premises. Doubts have been raised whether units taking up such production of software at the client’s premises would be eligible for the tax holiday.

The Government’s policy on tax incentive to software exports is reflected in the provisions of section 80HHE introduced in 1991. Under this provision, technical services provided outside India, for the development or production of computer software, are included for the purpose of the tax incentive.

Similarly, for the purpose of section 10A or 10B, as long as a unit in the EPZ/EOU/STP itself produces computer programmes and exports them, it should not matter whether the programme is actually written within the premises of the unit. It is, accordingly, clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the client’s site abroad, such unit should not be denied the tax holiday under section 10A or 10B on the ground that it was prepared on-site, as long as the software is a product of the unit, i.e., it is produced by the unit.

Software exporting units in EPZs/EOUs
Commencing production before 1-4-1994

Unlike STPs which have come into existence only recently, EPZs are operating from 1981 and EOUs from 1988. Several software exporting units have been operating in EPZs or as EOUs even before STPs were created. Being units in EPZs/EOUs, they were being allowed the tax holiday under section 10A/10B. It has been brought to the notice of the Board that, in several cases, such units are now being denied the tax holiday for earlier years and are being allowed the benefit only for assessment year 1994-95 onwards. Assessing Officers are often taking the view that, since the Explanation of the term “produce” to include production of computer programmes—has been inserted only with effect from assessment year 1994-95, the existing EPZ/EOU units exporting software would get the benefit only from assessment year 1994-95 and not for earlier assessment years.

Such a view, is not in consonance with the intention of the Government. Finance Act, 1993 extended the scope of the tax holiday to units in STPs but did not curtail the scope in respect of existing software exporting units in EPZs/EOUs, already availing of the incentive. The Explanation of the term “produce” is clarificatory in nature and was inserted in 1993 primarily because, in that year, the tax holiday was extended to units in STPs - which produce only computer software.

Accordingly, it is clarified that units in EPZs/EOUs which export software are as much eligible for availing of the five-year tax holiday under sections 10A and 10B as any other units in EPZ/EOU, even for the period prior to the previous year relevant to the assessment year 1994-95. The conditions stipulated in the provisions have, of course, to be fulfilled. The insertion of the Explanation of the term “produce” in 1993 should not be taken as a ground for denying the tax holiday to such units for earlier years.

Circular : No. 694, dated 23-11-1994.

157. Free trade zones specified for the purposes of section 10A under Explanation (i) thereto - Effective from assessment year 1988-89 onwards

In exercise of the powers conferred by clause (i) of the Explanation to section 10A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby specify the following free trade zones for the purposes of the said section for the assessment years commencing on or after the 1st day of April, 1988:

(i) Falta Export Processing Zone in West Bengal;

(ii) Madras Export Processing Zone in Tamil Nadu;

(iii) Cochin Export Processing Zone in Kerala;

(iv) Noida Export Processing Zone at Noida in Uttar Pradesh.

Notification : No. SO 3231, dated 29-9-1987.

158. Software Technology Parks Scheme

1.0 Attention is invited to the Ministry of Commerce Notification No. 33/(RE)/ 92-97, dated 22nd March, 1994, notifying the above Scheme. In exercise of the powers conferred in sub-section (1) of section 3 of the Foreign Trade (Development and Regulation) Act, 1992, the Central Government hereby notifies the following amended Software Technology Park (STP) Scheme.

2.0 Software Technology Parks (STP) Scheme :

2.1 The Software Technology Park (STP) Scheme is a 100 per cent Export Oriented Scheme for undertaking software development for export using data communication link or in the form of physical exports including export of professional services.

2.2 A Software Technology Park (STP) may be set up by the Central Government, State Governments, public or private sector undertakings or any combination thereof. An STP may be an individual unit by itself or it may be one of such units located in an area designated as STP Complex by the Department of Electronics.

2.3 The scheme is administered by the Department of Electronics, Government of India, through Directors of respective Software Technology Parks which form part of the Software Technology Parks of India, a society established by the Department of Electronics, Government of India and registered under the Societies Registration Act, 1860. An application in the prescribed format for establishing a Software Technology Park unit may be submitted to the Chief Executive of the Software Technology Park Complex along with the details of the software project. Such application will be considered by an Inter-Ministerial Standing Committee (IMSC) constituted under the Chairmanship of the Secretary, Department of Electronics, Government of India, notified, vide Gazette No. 294 [G.S.R. No. 526(E)], dated August 13, 1991, published in sub-section (i) of section 3 of Part II of the Extraordinary Gazette of India and reconstituted by Notification No. SO 177(E), dated February 22, 1993, published in Part II, section 3, sub-section (ii) of the Extraordinary Gazette of India.

2.4 An STP unit may import, free of duty, all types of goods, including capital goods, required by it for manufacture, production or processing provided they are not prohibited items in the Negative List of imports. The Software Technology Parks of India (STPI), may also import, free of duty, all types of goods, for creating the central facility for use by software development units in the STP Complex. STP units shall also be permitted to import capital goods on loan from clients for specified periods for executing specified projects.

2.5 The STP unit will be a duty-free custom-bonded area. The normal procedure applicable for custom bonding will be followed.

2.6 The entire software (including consultancy fees, software services and sale of software) developed by the STP unit shall be exported except the sales in the Domestic Tariff Area (DTA). The sales in the DTA shall be permissible up to 25 per cent of the production in value terms made by the STP unit.

2.7 The following supplies shall be counted towards the fulfilment of the export obligation of the STP unit:

2.7-1 Supplies specified in para 121 of the EXIM Policy.

2.7-2 Supplies effected in DTA against payment in foreign exchange.

2.8 The STP unit shall be eligible for the following benefits.

2.8-1 Tax holiday : The STP will be exempted from payment of corporate income-tax for a block of five years in the first eight years of its operation.

2.8-2 100 per cent foreign equity : Foreign equity up to 100 per cent is permissible in the case of STP units.

2.9 Supplies made from DTA to an STP unit will be regarded as deemed exports and will be eligible for the benefit specified in paragraphs 106 and 122 of the Export and Import Policy (1992-97). Such benefits shall be available provided the goods supplied to the STP unit are manufactured in the country.

2.10 The provisions of paragraphs 96, 104, 109, 110 and 112 to 117 of Chapter IX of the Export and Import Policy (1992-97) applicable to export oriented units (EOUs) and units in Export Processing Zones (EPZs) shall also apply to the STP units subject to the following modifications :

(a) The word “STP” shall be substituted for the word “EOU/EPZ” “EOU” or “EPZs”, wherever they occur, in the paragraphs.

(b) The words “Development Commissioner” wherever they occur shall be substituted by the words “Chief Executive of the STP Society”.

2.11 The export obligation of an STP unit in net foreign exchange terms shall be as follows :

Export obligation

1.5 × (CIF value of the hardware imported) + 1.5 × (wage bill).

Notes :

(i) The obligation on the hardware part will be fulfilled over a period of four years.

(ii) The obligation on wage bill will be on annual basis.

(iii) Net foreign exchange for this purpose will be foreign exchange inflows as a result of software exports less foreign exchange outflows on account of all expenditure whatsoever other than hardware.

(iv) If any capital goods imported duty free are leased from a domestic leasing company, the CIF value of the capital goods shall be included in the value of the hardware imported.

2.12 Use of computer system in STP for training purpose will also be allowed subject to the condition that no computer terminal will be installed outside the STP for this purpose.

3.0 The provisions of the STP Scheme contained in this notification shall not be applicable to the software units established in accordance with the EHTP Scheme, to an EOU or software units established in an EPZ.

This notification is issued in public interest.

Notification : No. SO 388(E), dated 30-4-1995.

159. Electronic Hardware Technology Park (EHTP) Scheme

1. Attention is invited to Ministry of Commerce Notification No. 42/N-83/92-97, dated 14th September, 1992, notifying the above Scheme.

2. In pursuance of the powers vested in sub-section (1) of section 3 of the Foreign Trade (Development and Regulation) Act, 1992, the Central Government hereby notifies the following amended Electronic Hardware Technology Park (EHTP) Scheme.

3. An Electronic Hardware Technology Park (EHTP) may be set up by the Central Government, State Governments, public or private sector undertakings or any combination thereof. An EHTP may be an individual unit by itself or a unit located in an area designated as an EHTP.

4. The Scheme will be administered by the Department of Electronics, Government of India, New Delhi. All applications for establishing an area to be designated as an EHTP or for setting up an individual unit as an EHTP may be made to the Department of Electronics. Such applications will be considered by an Inter-Ministerial Standing Committee (IMSC) constituted under the chairmanship of the Secretary, Department of Electronics.

5. An EHTP unit may in terms of the customs notification issued for the purpose, import free of duty all types of goods, including capital goods required by it for its production, provided they are not prohibited items in the negative list of imports of the Export and Import Policy (1992-97). Second-hand capital goods may also be imported by EHTP units in accordance with the policy.

6. An EHTP will be a duty-free and bonded area and the manufacturing operations in the EHTP unit would be carried out in customs bond.

7. The entire production of an EHTP unit shall be exported except the sales in the Domestic Tariff Area (DTA) according to the following norms:—

	Value addition	Permissible sale in the
	achieved by the EHTP	Domestic Tariff Area (DTA)
(a)	Less than 15 per cent	Nil.
(b)	15 per cent - 25 per cent	Upto 30 per cent of the production in value terms of electronic items including components manufactured by the EHTP unit.
(c)	More than 25 per cent	Upto 40 per cent of the production in value terms of electronic items including components manufactured by the EHTP unit.

Note:—1. An EHTP unit may bunch the products manufactured by it for sale in the DTA within its entitlement.

8. The following supplies shall be counted towards fulfilment of the export obligation of EHTP units:—

(a) Supplies specified in para 121 of the EXIM policy;

(b) Supplies effected in DTA against payment in foreign exchange.

9. The EHTP unit will be eligible for the following benefits :—

(i) Tax holiday - The EHTP will be exempted from payment of corporate income-tax for a block of five years in the first eight years of its operation.

(ii) Clubbing of Net Foreign Exchange (NFE) - The NFE earned by an ERTP unit can be clubbed with the NFE of its parent/associate company in the DTA for the purpose of according Export House/Trading House/Star Trading House status for the latter. NFE for this purpose will be calculated according to the formula given in para 138 of Chapter XII of the Export and Import Policy (1992-97).

(iii) 100 per cent foreign equity - Foreign equity upto 100 per cent is permissible in the case of EHTP units.

10. Supplies made from the DTA to an EHTP unit will be regarded as deemed exports and will be eligible for the benefits specified in paragraphs 106 and 122 of the Export and Import Policy (1992-97). Such benefits shall be available provided the goods supplied to the EHTP unit are manufactured in the country and the supplies are made against a letter of authority issued by an officer designated in this behalf by the Department of Electronics, Government of India.

11. The provisions of paragraphs 96, 104, 105, 109, 110 and 111 to 117, Chapter IX of the Export and Import Policy (1992-97) applicable to Export Oriented Units (EOUs) and units in Export Processing Zones (EPZs) shall also apply to the EHTP units subject to the following modifications :—

(a) The word “EHTP” shall be substituted for the words “EOU/EPZ” or “EOUs” or “EPZs”, wherever they occur, in these paragraphs.

(b) The words “Development Commissioner”, wherever they occur, shall be substituted by the words “the officer designated by the Department of Electronics, Government of India”.

12. “Value addition” for the purpose of this scheme shall be expressed as a percentage and shall be calculated for a period of five years according to the following formula:—

Value addition = A-B/A x 100

Where A is the FOB value of exports realised by the EHTP unit and B is the sum total of the CIF value of all imported inputs, the CIF value of all imported capital goods and the value of all payments made in foreign exchange by way of commission, royalty, fees or any other charges. “Inputs” means raw materials, intermediates, components, consumables, parts and packaging materials.

If any input is obtained from another EHTP unit, the value of such input shall be included under B.

If any capital goods imported duty free are leased from a domestic leasing company, the CIF value of the capital goods shall be included under B.

13. An EHTP unit may be set up for both software and hardware in an integrated manner subject to the condition that the minimum value addition for the software components will be 60 per cent and the DTA sale of software shall be restricted to 25 per cent of the production of software in value terms.

14. In respect of an electronic unit established in an EPZ or as an EOU under Chapter IX of that policy, the provisions of that Chapter will apply.

15. This notification is issued in public interest.

Notification : No. SO 387(E), dated 30-4-1995.

160. Information Technology enabled products or services

In exercise of the powers conferred by clause (b) of item (i) of Explanation 2 of section 10A, clause (b) of item (i) of Explanation 2 of section 10B and clause (b) of Explanation to section 80HHE of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby specifies the following Information Technology enabled products or services, as the case may be, for the purpose of said clauses, namely :—

(i) Back-office Operations;

(ii) Call Centres;

(iii) Content Development or Animation;

(iv) Data Processing;

(v) Engineering and Design;

(vi) Geographic Information System Services;

(vii) Human Resource Services;

(viii) Insurance Claim Processing;

(ix) Legal Databases;

(x) Medical Transcription;

(xi) Payroll;

(xii) Remote Maintenance;

(xiii) Revenue Accounting;

(xiv) Support Centres, and

(xv) Web-site Services.

Notification : No. SO 890(E), dated 26-9-2000.