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CBDT Clarifies Sticky Issues Regarding Tax Holidays

In the drive towards cutting down on litigation and with the objective of creating a stable tax environment for industry, specifically for sectors like the IT / ITES sector, the issuance of the CBDT circular on tax holidays under the Income tax Act is a welcome move.

Taxand India takes a look at the clarifications put forward by the CBDT circular.

Onsite software development and manpower deputation
CBDT has clarified that the deputation of technical manpower abroad shall not in itself be considered detrimental to claiming tax exemption, provided that such deputation is for development of software and linked to onsite projects carried out by offshore Units in India claiming the holiday.

Statement of Work vs Master Service Agreement
The CBDT has clarified that typically a Statement of Work (SOW) outlining project specific obligations between the taxpayer and the client would prevail over the Master Service Agreement (MSA) which specify the broader and general contracting terms between parties. The exception however would be in a situation where the Assessing Officer is able to establish that there has been a reconstruction of existing business or non-fulfilment of a prescribed condition and the MSA is drawn up separately to couch such reality.

Migration or change of ownership of eligible unit/undertaking

  • Change in the ownership of an Unit/Undertaking in case of a slump sale of its business shall not hinder the entitlement of the purchaser to claim tax holiday for the unexpired period at the rates applicable for the residual tax holiday period.
  • Physical relocation of an eligible Special Economic Zone (SEZ) unit from one SEZ to another with the approval of the Board of Approvals shall not disentitle such unit from claiming tax holiday for the unexpired period.
  • The setting up and co-existence of a new Unit/Undertaking alongside an eligible Unit in the same location after obtaining necessary approvals from the competent authorities would not in itself amount to expansion of existing Unit/Undertaking.

Discover more: CBDT circular clarifies issues regarding tax holidays


Your Taxand contact for further queries is:
Mahesh Jaising
T. +91 80 4032 0140


Taxand's Take

Overall the clarifications issued by the CBDT are welcome and hopefully should eliminate litigation on high tax demand matters. It recognises a number of commercial and business realities and adds credence by adhering to the substance of transactions being undertaken by taxpayers. More importantly whether this circular sets the tone for the pending safe harbour rules that the IT industry has been waiting for will be something that all players will be eagerly watching, considering that Transfer Pricing disputes have, over the last few years, completely overshadowed all others.

Taxand's Take Author