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TCS can enjoy export tax benefit after demerger too

Hema Ramakrishnan

The tax benefit enjoyed by TCS, a division of Tata Sons, will not be withdrawn even after its demerger into a separate company, provided Tata Sons holds at least 51 per cent of the equity in the new corporate entity.

NEW DELHI, Aug. 28

TATA Consultancy Services (TCS) may well be able to shelter its export profits even after it is hived off into a new corporate entity distinct from that of Tata Sons Ltd, its parent.

This follows a new ruling by the Central Board of Direct Taxes (CBDT) which has held that tax exemption for export earnings of an entity will not be lost from a restructuring exercise even where the promoter happened to be a company. The only caveat is that the beneficial ownership of not less than 51 per cent of the new entity must continue to be held by the original promoters. In simple terms, what this means is that the tax benefit enjoyed by TCS, a division of Tata Sons, will not be withdrawn even after its demerger into a separate company, provided Tata Sons holds at least 51 per cent of the equity in the new corporate entity. The Finance Ministry has thus removed a road-block for the proposed equity issue of TCS expected to be in the region of Rs 4,000 crore to Rs 5,000 crore. The CBDT clarification thus expands the scope of entitlement of tax-breaks on export profits made by software units where the promoter happened to be a company.

Hitherto, such exemption was thought to be available only for reorganisation involving promoter entities that were either a partnership firm or a proprietary concern. A 100 per cent tax deduction is given under Section 10 A of the Income Tax Act 1961 to profits from export earnings of units in free trade zones, software technology parks or SEZs. A similar deduction is available under Section 10 B for 100 per cent export oriented units (EOUs) for a period of 10 consecutive years.

However, in order to prevent trading in incentives by shell companies, the Government had in 2000-01 stipulated that the tax deduction will not be available where during any previous year, if the beneficial ownership or the beneficial interest in the undertaking is transferred by any means. This was done by inserting a new sub-section 9 to Section 10 A and Section 10 B.

The new provision was, however, not intended to bring within its purview cases of genuine business reorganisation. Exceptions were made in the Finance Act 2001 in the case of private companies becoming companies in which the public are substantially interested and disinvestment of equity shares by venture capital funds or companies.

The provisions were further relaxed in this year's Budget, with the Finance Ministry stating that the tax incentive would not be discontinued in cases where a proprietory concern or a partnership is succeeded by a company, provided the beneficial ownership of not less than 51 per cent continues to be held by the original promoters.

However, the Tatas had sought a further clarification from the CBDT on the new provisions to enable TCS to continue availing itself of the tax deduction after demerger.

CBDT has now held that "since undertakings can be owned by a body corporate, this (i.e. the benefit of tax deduction) will hold good even if the proprietor happens to be a body corporate. This is, however, subject to the condition that the aggregate of the shareholding in the company of the partners of the firm or sole proprietor in case of a proprietorship concern is not less than 51 per cent of the total voting power in the company and their shareholding continues to be as such for the period for which the deduction is being claimed by the company in respect of the undertaking.

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TCS can enjoy export tax benefit after demerger too


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