2.17 Income taxes

Income tax expense in the statement of comprehensive income comprises:

(In Rs. crore)
 
Year ended March 31,
  2010 2009
Current taxes    
Domestic taxes 1,594 690
Foreign taxes 465 345
  2,059 1,035
Deferred taxes    
Domestic taxes (474) (137)
Foreign taxes 96 21
  (378) (116)
Income tax expense 1,681 919

Entire deferred income tax for the year ended March 31, 2010 and 2009 relates to origination and reversal of temporary differences.

Income tax benefits of Rs. 10 crore each on exercise of employee stock options have been recognized in share premium for the year ended March 31, 2010 and 2009, respectively. Further, for the year ended March 31, 2010, a deferred tax liability of Rs. 8 crore relating to an available-for-sale financial asset has been recognized in other comprehensive income. 

A reconciliation of the income tax provision to the amount computed by applying the statutory income tax rate to the income before income taxes is summarized below:

(In Rs. crore)
 
Year ended March 31,
  2010 2009
Profit before income taxes 7,900 6,894
Enacted tax rates in India 33.99% 33.99%
Computed expected tax expense 2,685 2,343
Foreign tax credit relief (213)
Tax effect due to non-taxable income for Indian tax purposes (551) (1,513)
Tax effect due to set off provisions on brought forward losses (104)
Tax reversals, net (489) (108)
Effect of exempt income (51)
Interest and penalties 22 5
Effect of unrecognized deferred tax assets 16 30
Effect of differential foreign tax rates 84 84
Effect of non-deductible expenses 26 30
Temporary difference related to branch profits 247 37
Others 9 11
Income tax expense 1,681 919

The foreign tax expense is due to income taxes payable overseas, principally in the United States of America. The Company benefits from certain significant tax incentives provided to software firms under Indian tax laws. These incentives include those for facilities set up under the Special Economic Zones Act, 2005 and software development facilities designated as 'Software Technology Parks' (the STP Tax Holiday). The STP Tax Holiday is available for ten consecutive years, beginning from the financial year when the unit started producing computer software or April 1, 1999, whichever is earlier. The Indian Government, through the Finance Act, 2009, has extended the tax holiday for the STP units until March 31, 2011. Most of the Company’s STP units have already completed the tax holiday period and for the remaining STP units the tax holiday will expire by the end of fiscal 2011. Under the Special Economic Zones Act, 2005 scheme, units in designated special economic zones which begin providing services on or after April 1, 2005 are eligible for a deduction of 100 percent of profits or gains derived from the export of services for the first five years from commencement of provision of services and 50 percent of such profits or gains for a further five years. Certain tax benefits are also available for a further period of five years subject to the unit meeting defined conditions.

Infosys is subject to a 15% Branch Profit Tax (BPT) in the U.S. to the extent its U.S. branch's net profit during the year is greater than the increase in the net assets of the U.S. branch during the fiscal year, computed in accordance with the Internal Revenue Code. As of March 31, 2010, Infosys' U.S. branch net assets amounted to approximately Rs. 2,267 crore. As of March 31, 2010, the Company has provided for branch profit tax of Rs. 232 crore for its U.S branch, as the Company estimates that these branch profits are expected to be distributed in the foreseeable future.   

Deferred income tax liabilities have not been recognized on temporary differences amounting to Rs. 1,052 crore and Rs. 850 crore as of March 31, 2010 and 2009, respectively, associated with investments in subsidiaries and branches as it is probable that the temporary differences will not reverse in the foreseeable future.

The gross movement in the current income tax asset/ (liability) for the year ended March 31, 2010 and 2009 is as follows:

(In Rs. crore)
 
Year ended March 31,
  2010 2009
Net current income tax asset/ (liability) at the beginning (307) (184)
Translation differences (4)
Income tax benefit arising on exercise of stock options 10 10
Minimum alternate tax credit utilized(1) 549
Income tax paid 1,754 902
Income tax expense (2,059) (1,035)
Net current income tax asset/ (liability) at the end (57) (307)
(1)Minimum alternate tax of Rs. 288 crore was recognized and utilized during the year ended March 31, 2010. 

 

The tax effects of significant temporary differences that resulted in deferred income tax assets and liabilities are as follows:

(In Rs. crore)
 
 As of March 31,
  2010  2009
Deferred income tax assets    
Property, plant and equipment 217 129
Minimum alternate tax credit carry-forwards 42 284
Deductible temporary difference on computer software 25
Trade receivables 28 8
Compensated absences 50 9
Accumulated subsidiary losses 86
Others 26 17
Total deferred income tax assets 474 447
Deferred income tax liabilities    
Intangible asset (2) (2)
Temporary difference related to branch profits (232) (37)
Available-for-sale financial asset (8)
Total deferred income tax liabilities (242) (39)
Total deferred income tax assets 232 408
     
Deferred income tax assets to be recovered after 12 months 368 409
Deferred income tax liability to be settled after 12 months (175) (2)
Deferred income tax assets to be recovered within 12 months 106 38
Deferred income tax liability to be settled within 12 months (67) (37)
  232 408

In assessing the realizability of deferred income tax assets, management considers whether some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversals of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible, management believes that the Company will realize the benefits of those deductible differences. The amount of the deferred income tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

The gross movement in the deferred income tax account for the year ended March 31, 2010 and 2009 is as follows:

(In Rs. crore)
 
Year ended March 31,
  2010 2009
Net deferred income tax asset at the beginning 408 292
Translation differences 3                         –
Credits relating to temporary differences 378 116
Minimum alternate tax credit utilized(1) (549)
Temporary difference on available-for-sale financial asset (8)
Net deferred income tax asset at the end 232 408
(1)Minimum alternate tax of Rs. 288 crore was recognized and utilized during the year ended March 31, 2010.

The credits relating to temporary differences during the year ended March 31, 2010 and 2009 are primarily on account of compensated absences, accumulated subsidiary losses and property, plant and equipment.  

Pursuant to the enacted changes in the Indian Income Tax Laws effective April 1, 2007, a Minimum Alternate Tax (MAT) has been extended to income in respect of which a deduction may be claimed under sections 10A and 10AA of the Income Tax Act; consequently the Company has calculated its tax liability for current domestic taxes after considering MAT. The excess tax paid under MAT provisions being over and above regular tax liability can be carried forward and set off against future tax liabilities computed under regular tax provisions. The Company was required to pay MAT, and, accordingly, a deferred income tax asset of Rs. 42 crore and Rs. 284 crore has been recognized on the balance sheet as of March 31, 2010 and 2009, respectively, which can be carried forward for a period of ten years from the year of recognition.

2.18 Earnings per equity share

The following is a reconciliation of the equity shares used in the computation of basic and diluted earnings per equity share:

 
Year ended March 31,
  2010 2009
Basic earnings per equity share - weighted average number of equity shares outstanding(1) 570,475,923 569,656,611
Effect of dilutive common equivalent shares - share options outstanding 640,108 972,970
Diluted earnings per equity share - weighted average number of equity shares and common equivalent shares outstanding 571,116,031 570,629,581
(1)Excludes treasury shares

For the year ended March 31, 2009, options to purchase 48,000 equity shares and 401,728 equity shares under the 1998 Plan and the 1999 Plan, respectively, were not considered for calculating diluted earnings per equity share as their effect was anti-dilutive. For the year ended March 31, 2010 there were no outstanding options to purchase equity shares which had an anti-dilutive effect.

2.19 Related party transactions

List of subsidiaries:

Particulars  Country
Holding as of March 31,
    2010 2009
Infosys BPO India 99.98% 99.98%
Infosys Australia Australia 100% 100%
Infosys China China 100% 100%
Infosys Consulting U.S.A 100% 100%
Infosys Mexico Mexico 100% 100%
Infosys BPO s. r. o (1) Czech Republic 99.98% 99.98%
Infosys BPO (Poland) Sp.Z.o.o (1) Poland 99.98% 99.98%
Infosys BPO (Thailand) Limited (1) Thailand 99.98% 99.98%
Mainstream Software Pty. Ltd (2) Australia 100% 100%
Infosys Sweden (3) Sweden 100%
Infosys Brasil (4) Brazil 100%
Infosys Consulting India Limited(5) India 100%
Infosys Public Services, Inc. (6) U.S.A 100%
McCamish Systems LLC(1) (Refer Note 2.3) U.S.A 99.98%
(1) Infosys BPO s.r.o, Infosys BPO (Poland) Sp Z.o.o, Infosys BPO (Thailand) Limited and McCamish Systems LLC are wholly-owned subsidiaries of Infosys BPO.
(2) Mainstream Software Pty. Ltd, is a wholly owned subsidiary of Infosys Australia.
(3) During fiscal 2009, the Company incorporated wholly-owned subsidiary, Infosys Technologies (Sweden) AB, which was capitalised on July 8, 2009.
(4) On August 7, 2009 the Company incorporated wholly-owned subsidiary, Infosys Tecnologia DO Brasil LTDA.
(5) On August 19, 2009 Infosys Consulting incorporated wholly-owned subsidiary, Infosys Consulting India Limited.
(6) On October 9, 2009 the Company incorporated wholly-owned subsidiary, Infosys Public Services, Inc.

Infosys has provided guarantee for performance of certain contracts entered into by its subsidiaries.

List of other related parties:

Particulars
Country
Nature of relationship
Infosys Technologies Limited Employees' Gratuity Fund Trust India Post-employment benefit plans of Infosys
Infosys Technologies Limited Employees' Provident Fund Trust India Post-employment benefit plans of Infosys
Infosys Technologies Limited Employees' Superannuation Fund Trust India Post-employment benefit plans of Infosys
Infosys BPO Limited Employees’ Superannuation Fund Trust India Post-employment benefit plan of Infosys BPO
Infosys BPO Limited Employees’ Gratuity Fund Trust India Post-employment benefit plan of Infosys BPO
Infosys Technologies Limited Employees’ Welfare Trust India Employee Welfare Trust of Infosys
Infosys Science Foundation India Controlled trust
Refer Note 2.12 for information on transactions with post-employment benefit plans mentioned above.

 

Transactions with key management personnel

The table below describes the compensation to key management personnel which comprise directors and members of the executive council:

(In Rs. crore)
 
Year ended March 31,
  2010 2009
Salaries and other short-term employee benefits 28 28
Other long-term benefits 3 1
  31 29

2.20 Segment reporting

IFRS 8 establishes standards for the way that public business enterprises report information about operating segments and related disclosures about products and services, geographic areas, and major customers. The Company's operations predominantly relate to providing IT solutions, delivered to customers located globally, across various industry segments. The Chief Operating Decision Maker evaluates the Company's performance and allocates resources based on an analysis of various performance indicators by industry classes and geographic segmentation of customers. Accordingly, segment information has been presented both along industry classes and geographic segmentation of customers. The accounting principles used in the preparation of the financial statements are consistently applied to record revenue and expenditure in individual segments, and are as set out in the significant accounting policies.

Industry segments for the Company are primarily financial services comprising enterprises providing banking, finance and insurance services, manufacturing enterprises, enterprises in the telecommunications (telecom) and retail industries, and others such as utilities, transportation and logistics companies. Geographic segmentation is based on business sourced from that geographic region and delivered from both on-site and off-shore. North America comprises the United States of America, Canada and Mexico, Europe includes continental Europe (both the east and the west), Ireland and the United Kingdom, and the Rest of the World comprising all other places except those mentioned above and India.

Revenue and identifiable operating expenses in relation to segments are categorized based on items that are individually identifiable to that segment. Allocated expenses of segments include expenses incurred for rendering services from the Company's offshore software development centers and on-site expenses, which are categorized in relation to the associated turnover of the segment. Certain expenses such as depreciation, which form a significant component of total expenses, are not specifically allocable to specific segments as the underlying assets are used interchangeably. Management believes that it is not practical to provide segment disclosures relating to those costs and expenses, and accordingly these expenses are separately disclosed as 'unallocated' and adjusted against the total income of the Company.

Fixed assets used in the Company's business are not identified to any of the reportable segments, as these are used interchangeably between segments. Management believes that it is currently not practicable to provide segment disclosures relating to total assets and liabilities since a meaningful segregation of the available data is onerous.

Geographical information on revenue and industry revenue information is collated based on individual customers invoiced or in relation to which the revenue is otherwise recognized.

2.20.1 Industry segments

(in Rs. crore)
Year ended March 31, 2010
Financial services Manufacturing Telecom Retail Others Total
Revenues 7,731 4,506 3,661 3,035 3,809 22,742
Identifiable operating expenses 3,068 1,993 1,284 1,243 1,544 9,132
Allocated expenses 1,953 1,139 926 767 964 5,749
Segment profit 2,710 1,374 1,451 1,025 1,301 7,861
Unallocable expenses           951
Operating profit           6,910
Other income, net           990
Profit before income taxes           7,900
Income tax expense           1,681
Net profit           6,219
Depreciation and amortization           942
Non-cash expenses other than depreciation and amortization           3

 

Year ended March 31, 2009
Financial services Manufacturing Telecom Retail Others Total
Revenues               7,358                   4,289 3,906    2,728    3,412   21,693
Identifiable operating expenses               3,042               1,830    1,431   1,120   1,347       8,770
Allocated expenses 1,942    1,133   1,033  720            900              5,728
Segment profit      2,374     1,326    1,442    888  1,165    7,195
Unallocable expenses           774
Operating profit           6,421
Other income, net           473
Profit before income taxes           6,894
Income tax expense           919
Net profit           5,975
Depreciation and amortization           767
Non-cash expenses other than depreciation and amortization           7

2.20.2 Geographic segments

(In Rs. crore)
Year ended March 31, 2010
North America Europe India Rest of the World Total
Revenues 14,972 5,237 270 2,263 22,742
Identifiable operating expenses 6,067 2,093 80 892 9,132
Allocated expenses 3,784 1,325 68 572 5,749
Segment profit 5,121 1,819 122 799 7,861
Unallocable expenses         951
Operating profit         6,910
Other income, net         990
Profit before income taxes         7,900
Income tax expense         1,681
Net profit         6,219
Depreciation and amortization         942
Non-cash expenses other than depreciation and amortization         3


Year ended March 31, 2009
North America Europe India Rest of the World Total
Revenues 13,736     5,705      284     1,968          21,693
Identifiable operating expenses          5,716      2,284        62       708            8,770
Allocated expenses       3,624   1,507          76      521     5,728
Segment profit      4,396 1,914   146 739  7,195
Unallocable expenses         774
Operating profit         6,421
Other income, net         473
Profit before income taxes         6,894
Income tax expense         919
Net profit         5,975
Depreciation and amortization         767
Non-cash expenses other than depreciation and amortization         7

2.20.3 Significant clients

No client individually accounted for more than 10% of the revenues in fiscal 2010 and 2009.  

2.21 Litigation

The Company is subject to legal proceedings and claims which have arisen in the ordinary course of its business. The Company’s management does not reasonably expect that legal actions, when ultimately concluded and determined, will have a material and adverse effect on the results of operations or the financial position of the Company.

2.22 Tax contingencies

The Company has received demands from the Indian taxation authorities for payment of additional tax of Rs. 214 crore including interest of Rs. 39 crore, upon completion of their tax review for fiscal 2005 and fiscal 2006. The demands for fiscal 2005 and fiscal 2006 were received during fiscal 2009 and fiscal 2010, respectively. The tax demands are mainly on account of disallowance of a portion of the deduction claimed by the Company under Section 10A of the Income tax Act. The deductible amount is determined by the ratio of export turnover to total turnover. The disallowance arose from certain expenses incurred in foreign currency being reduced from export turnover but not reduced from total turnover.

The Company is contesting the demands and management and its tax advisors believe that its position will likely be upheld in the appellate process. No additional provision has been accrued in the financial statements for the tax demands raised. Management believes that the ultimate outcome of this proceeding will not have a material adverse effect on the Company's financial position and results of operations. The tax demand with regard to fiscal 2005 and fiscal 2006 is pending before the Commissioner of Income tax (Appeals), Bangalore.