June 11, 2016 3:00 pm JST
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India casts tax net over IBM again

GANGADHAR S. PATIL, Contributing writer

An IBM office in Bangalore's Manyata Technology Park (Photo by 101Reporters.com)

BANGALORE, India -- Income tax authorities in India have accused a local subsidiary of U.S. information technology group IBM of improperly claiming tax exemptions on $150 million worth of software exports.

A February order from the Income Tax Department's dispute resolution panel, recently obtained by the Nikkei Asian Review, is expected to generate demands for at least $100 million in additional taxes from the Bangalore-headquartered company.

The panel's findings appear to reinforce an October 2013 tax demand for more than $800 million that the tax authority had slapped on IBM India on similar grounds.

India has been embroiled in tax rows over the last few years with Vodafone, Nokia, Shell and Cairn Energy, all of which face billions of dollars in back tax over issues ranging from capital gains to transfer pricing.

With foreign investors accusing the government of a lack of clarity in its tax enforcement , the Income Tax Department appears to be delaying action against IBM India. With this latest claim, IBM India could be liable for more than $1 billion in back taxes, including penalties and interest.

IBM India, which employs nearly 150,000 staff, has been involved in tax tussles with the government since 2011, and has received tax notices for three consecutive assessment years beginning with 2007.

The company has challenged all three notices, and two are awaiting court hearings. Tax consultants said all three pointed to a similar pattern of alleged violations, in which IBM India was unable to convince the Income Tax Department that the revenues in question were proceeds from software exports.

IBM India declined to comment on the issue.

Tax holiday confusion

According to the tax authority, IBM India sought to claim tax exemptions under a tax holiday scheme open to IT companies that operated under Software Technology Parks of India, a government program aimed at boosting software exports.

The program exempted eligible IT companies from tax on income generated from software exports between 2000 and 2011. To take advantage of the tax incentives , IBM India set up least 10 units in such software technology parks and special economic zones across the country.

But to claim the exemption, companies had to prove that revenues received in foreign currency were directly related to the exports they generated. Companies had to submit detailed documentation including copies of software development contracts, invoices and software export forms corresponding to each credit in their bank accounts.

Instead of doing this, IBM submitted a sample trail "from order to realization of export proceeds" in respect of two transactions, which the panel said was not a "correct approach." The company was also unable to furnish details of the sources of credits in its bank account to establish that the money represented export proceeds.

Instead of explaining the sources of the funds deposited, IBM India furnished only an extract of the bank account. "The details required by the assessing officer were never furnished by the assessee," said the panel.

The panel said that IBM India was unable to link its export invoices to software development agreements and the credits in its bank account.

"The assessee has failed to furnish necessary information supported by the documents to establish the claim ... accordingly we uphold the disallowance of [the tax] deduction," said the order.

Rerouted income

The findings have drawn the attention of the Enforcement Directorate, an agency that investigates economic crimes such as money laundering. The ED has already initiated a probe into whether the company routed income earned elsewhere to India in possible violatation of the Foreign Exchange Management Act, according to a senior official at the directorate's Bangalore office.

Tax experts said the latest order would strengthen the department's previous claims and significantly increase IBM India's tax burden.

According to Dhananjayan Subramanian, a Chennai-based chartered accountant and independent tax consultant, since the dispute resolution panel has confirmed the order, the tax department could initiate a recovery process unless the company appealed to the Income Tax Appellate Tribunal.

"The department could use the panel order to back its earlier claims," he said.

However, given the unresolved legacy tax claims against Vodafone, Nokia and Cairn, the course of action that the Income Tax department will take against IBM India is uncertain.

The Indian government has attracted criticism from foreign investors for a lack of clarity on taxation issues, especially after an attempt by the previous government to impose taxes retrospectively. In January 2015, Prime Minister Narendra Modi's government sent out a strong message that it would not pursue old tax claims by appealing against existing high court orders.

In this year's budget, Minister of Finance Arun Jaitley offered a one-time settlement of pending tax disputes where companies could pay tax arrears and get a waiver of interest and penalties, provided they withdrew all appeals against the government in all judicial forums, including international arbitration proceedings.

But in an apparent U-turn, Jaitley told investors in New York in April that the government would pursue all "appealable" tax evasion cases. "There is no company in the world that is immune from paying taxes," he said.

The IBM India case should be a straightforward issue of whether or not the company misused a tax concession. But tax consultants said that even routine tax cases would evoke fears of arbitrariness and undermine investor confidence until the government clears the air.

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