Software is generally exported through leased lines — dedicated cables — that transmit data and connect the seller to the buyer in different locations. The telecom service providers’ statement during the tax department’s probe is significant in light of the income tax department’s notice to IBM India last week for evading crores of rupees in taxes under an export promotion scheme.
In response to dna’s questionnaire, IBM India did not specifically respond to queries on leased lines and its foreign bank account. However, the company’s spokesperson said: “IBM does not agree with the tax department’s claims and will aggressively defend itself through the appropriate judicial process.”
IBM India not only under-reported revenue of Rs7,288 crore in 2008-09 to evade tax to the tune of Rs5,357 crore but it also showed sales in India as exports to claim tax exemption under the STPI scheme, according to the tax department. Under the Software Technology Park of India (STPI) scheme, IT companies are eligible for 100 per cent tax exemption on income generated from software exports as defined in section 10A and 10B of the I-T Act 1961 or under 10AA if they are located in a special economic zone (SEZ). IBM India has several units in STPIs and SEZs across the country that claim tax exemption on income from software exports.
IBM India claimed that it had exported software in 2008-09. But telecom companies, VSNL (Tata) and AT&T and others, denied providing leased line services to IBM India to export software from their eligible Software Technology Park of India or special economic zone locations, such as in Bangalore, Hyderabad, Gurgaon, etc. Rather, the companies gave it connection only within the country, according to the tax department’s notice.
In order to milk the export promotion scheme, IBM India also violated the Foreign Exchange Management Act and deceived the Reserve Bank of India. These and other violations came to light after the tax department initiated a thorough probe into the company’s affairs when IBM India failed to furnish software development agreements, software export forms (softex) despite several summons and show cause notices. The investigation reveals that thousands of invoices submitted by IBM India to STPI and SEZ authorities were different from the invoices referred to in its HSBC bank account in New York in which sale proceeds were credited. The department suspects these to be “bogus invoices”.
STPI and SEZ officials’ complicity in the case is apparent from the fact that even though IBM India did not have software development agreements, STPI and SEZ authorities cleared thousands of the company’s invoices and softex forms between 2004 and 2012. The tax department’s notice observes that STPI and SEZ officials “rendered a valuable co-operation to IBM India,” especially between 2010-2012 when they hurriedly cleared IBM India’s invoices and softex forms to cover up the irregularities as the same was being probed by the tax department.
The department’s probe also revealed that IBM India’s HSBC bank account in New York had been opened without the mandatory permission from the RBI. It was through this account that the company had been routing its alleged export proceeds. When the tax department brought this violation to IBM India’s notice, the company swiftly obtained RBI’s approval by submitting false certificates and documents to the central bank. It was only after the tax department intervened that the RBI immediately revoked its permission and asked the department to “take any action as it deems fit”.
Gangadhar Patil @gangadharpb
Published Date: Nov 09, 2013