12. INCOME TAXES

The following table accounts for the differences between the federal statutory tax rate of 35% and the Company's overall effective tax rate:


	Three Months Ended March 31,
	2012			2011
Statutory provision		35.0	%		35.0	%
State taxes, net of federal benefit		0.6	%		0.0	%
Foreign effective tax rates different from US statutory rate		(12.8	%)		(12.5	%)

Effective Income Tax Rate		22.8	%		22.5	%

The Company records provisions for income taxes based on enacted tax laws and rates in the various taxing jurisdictions in which it operates. In determining the tax provisions, the Company provides for tax uncertainties in income taxes, when it is more likely than not, based on the technical merits, that a tax position would not be sustained upon examination. Such uncertainties, which are recorded in income taxes payable, are based on management's estimates and accordingly, are subject to revision based on additional information. The provision no longer required for any particular tax year is credited to the current period's income tax expenses. Conversely, in the event of a future tax examination, any additional tax expense not previously provided for will be recognized in the period in which the actual liability is concluded or management determines that the Company will not prevail on certain tax positions taken in filed returns, based on the "more likely than not" concept.

Syntel Inc. and its subsidiaries file income tax returns in various tax jurisdictions. The Company is no longer subject to U.S. Federal tax examinations by tax authorities for years before 2008 and for State tax examinations for years before 2007.

Syntel India, the Company's India subsidiary, has disputed tax matters for the financial years 1996-97 to 2007-08 pending at various levels of Indian tax authorities. Financial year 2008-09 and onwards are open for regular tax scrutiny by the Indian tax authorities. However, the tax authorities in India are authorized to reopen the already concluded tax assessments and may re-open the case of Syntel India for financial years 2005-06 and onwards.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as part of income tax expense. During the quarter ended March 31, 2012, the Company recognized interest of approximately $1.52 million. The Company had accrued approximately $1.56 million and $0.06 million for interest and penalties as of March 31, 2012 and December 31, 2011, respectively.

The liability for unrecognized tax benefits was $20.55 million and $18.41 million as of March 31, 2012 and December 31, 2011, respectively.

The Company's amount of unrecognized tax benefits for the tax disputes of $1.94 million and potential tax disputes of $3.63 million could change in the next twelve months as the court cases and global tax audits progress. At this time, due to the uncertain nature of this process, it is not reasonably possible to estimate an overall range of possible change.

Syntel's software development centers/units are located in Mumbai, Chennai, Pune and Gurgaon, India. Software development centers/units enjoy favorable tax provisions due to their registration in a Special Economic Zone (SEZ), as an Export Oriented Unit (EOU) and as units located in Software Technologies Parks of India (STPI).

Units registered with STPI, EOU's and certain units located in a SEZ were exempt from payment of corporate income taxes for ten years of operations on the profits generated by these units or until March 31, 2011 (substituted for "2010" by Finance (No. 2) Act, 2009), whichever was earlier. Certain units located in SEZ are eligible for 100% exemption from payment of corporate taxes for their first five years of operation and 50% exemption for the next two years and a further 50% exemption for another three years, subject to fulfillment of certain criteria . New units in a SEZ operational after April 1, 2005 are eligible for 100% exemption from payment of corporate taxes for their first five years of operation, 50% exemption for the next five years and a further 50% exemption for another five years, subject to fulfillment of certain criteria .

Six SEZ units located at Mumbai have already ceased to enjoy the above-mentioned tax exemption. One SEZ unit located at Mumbai completed its tax holiday period on April 1, 2012. Further, three more SEZ units located at Mumbai completed their first five years of 100% exemption from payment of corporate taxes effective April 1, 2008, therefore only 50% of the profits of these units would be eligible for tax exemption. Also, the EOU located at Chennai has ceased to enjoy the above-mentioned tax exemption effective April 1, 2007. During the year ended December 31, 2008, Syntel started a Software Development unit in the Pune SEZ and during the year 2009, the Company started one more Software Development unit in the Pune SEZ. During the year ended December 31, 2010, the Company started a Software Development unit in the Syntel-Chennai SEZ. Further, the Company's four STPI units ceased to enjoy tax exemption effective April 1, 2011 due to expiration of the statutory period for tax exemption. During the quarter ended September 30, 2011, the Company started a Software Development SEZ unit in Airoli, Navi Mumbai.

Syntel KPO units located in Mumbai and Pune were exempt from payment of corporate income taxes on the profits generated by these units until March 31, 2011 (substituted for "2010" by Finance (No. 2) Act, 2009). During the year ended December 31, 2008, Syntel started a KPO unit in the Pune SEZ. During the quarter ended June 30, 2011, Syntel started a KPO SEZ unit in Airoli, Navi Mumbai.

Syntel's Special Economic Zone (SEZ) in Pune, set up under the SEZ Act 2005, commenced operations in 2008. The SEZ for Chennai commenced operations in 2010. Income from operation of the SEZ, as a developer, is exempt from payment of corporate income taxes for ten out of 15 years from the date of SEZ notification.

Provision for Indian Income Tax is made only in respect of business profits generated from software development units, to the extent they are not covered by the above exemptions and on income from treasury operations and other income.

Syntel India had not provided for disputed Indian income tax liabilities amounting to $2.09 million for the financial years 1995-96 to 2001-02, which is after recognizing certain tax liabilities aggregating $0.04 million. During the quarter ended June 30, 2011, Syntel India reviewed the disputed tax provision for financial year 1995-96, 1998-99, 1999-2000 and 2001-02 in view of the recent Supreme Court judgment. Accordingly, disputed Indian income tax liabilities were reduced to $1.53 million and Syntel India reversed a provision of uncertain tax liability of $0.04 million. Syntel India has obtained an opinion from one independent legal counsel (a former Chief Justice of the Supreme Court of India) for the financial year 1998-99 and opinions from another independent legal counsel (also a former Chief Justice of the Supreme Court of India) for the financial years 1995-96, 1996-97, 1997-98, 1999-2000 and 2000-01 and for subsequent periods, which support Syntel India's position in this matter.

For the financial year 1998-99, the appeal filed by the Income Tax Department has been dismissed by the Income Tax Appellate Tribunal "ITAT" and the matter stands in favor of Syntel India. The Income Tax Department has filed a further appeal before the Bombay High Court. On July 23, 2009, the Bombay High Court dismissed the Income Tax Department Appeal on the grounds that the tax appeal was filed late. The Income Tax Department has not filed further appeal before the Supreme Court of India. A similar appeal filed by Syntel India with the Commissioner of Income Tax (Appeals) ("CIT(A)") for the financial year 1999-2000 was, however, dismissed in March 2004. Syntel India has appealed this decision with the ITAT. During the year 2007, Syntel India received a favorable order from the ITAT on this appeal. The Income Tax Department filed a further appeal before the Bombay High Court. On July 23, 2009, the Bombay High Court dismissed the Income Tax Department Appeal on the grounds that the tax appeal was filed late. The Income Tax Department has not filed a further appeal before the Supreme Court of India.

Syntel India had also received orders for appeals filed with the CIT(A) against the demands raised by the Income Tax Officer for similar matters relating to the financial years 1995-96, 1996-97, 1997-98, 2000-01 and 2001-02 and received a favorable decision for 1995-96 and the contention of Syntel India was partially upheld for the other years. Syntel India has gone into further appeal with the ITAT for the amounts not allowed by the CIT(A). The Income Tax Department has appealed the favorable decisions for 1995-96 and the partially favorable decisions for the other years with the ITAT. Syntel India has received a favorable order from ITAT. The Income Tax Department has filed further appeals before the Bombay High Court for the financial years 1996-97, 1997-98 and 2000-01. The Bombay High Court has dismissed the Income Tax Department appeal and upheld the ITAT orders on December 15, 2009. The Income Tax Department has filed a review petition before the Bombay High Court. The Income Tax Department review petition was rejected due to filing defects. The Income Tax Department may rectify the defects and re-submit the review petition.

Syntel India has also not provided for other disputed Indian income tax liabilities aggregating to $5.47 million for the financial years 2001-02 to 2004-05, which is after recognizing tax on certain tax liabilities aggregating $0.02 million provided for uncertain income tax positions, against which Syntel India has filed appeals with the CIT(A). Syntel India has obtained opinions from independent legal counsels, which support Syntel India's stand in this matter. Syntel India has received an order from the CIT(A) for the financial year 2001-02 and the contention of Syntel India was partially upheld. Syntel India has gone into further appeal with the ITAT in relation to the amounts not allowed by the CIT(A). The Income Tax Department has also filed a further appeal against the relief granted to Syntel India by CIT(A). Syntel India has received a favorable order from the ITAT on January 24, 2009, wherein the contention of Syntel India was fully upheld for financial year 2001-02. The Income Tax Department has filed a further appeal before the Bombay High Court against the order of ITAT in respect to tax on one item only. Accordingly, Syntel India tax disputes were reduced for the financial year 2001-02 by $2.4 million. The Bombay High Court has dismissed the Income Tax Department Appeal on account of a delay in filing the tax appeal on July 22, 2009. The Income Tax Department has not filed a further appeal before Supreme Court of India.

Syntel India has received the order for appeal filed with CIT(A) relating to financial year 2002-03 and financial year 2003-04, wherein the contention of Syntel India is partially upheld. Syntel India has gone into further appeal with the ITAT for the amounts not allowed by the CIT(A). The Income Tax Department has also filed a further appeal against the relief granted to Syntel India by CIT(A). Syntel India and Income Tax Department appeals are re-fixed for hearing before ITAT on May 30, 2012.

For the financial year 2004-05, the appeal of Syntel India was fully allowed by CIT(A). The Income Tax Department has filed a further appeal with ITAT for the amounts allowed by the CIT(A) except one item. The Income Tax department's appeal was rejected by ITAT. The Income Tax department has filed a further appeal before the Bombay High Court for the amounts allowed by the ITAT, except an item on which CIT(A) had granted relief to Syntel India and the Income Tax department had not filed an appeal on the aforesaid item before ITAT. Accordingly, Syntel India has reversed a tax provision of $0.33 million during the year ended December 31, 2010. The Income Tax department Appeal for the financial year 2004-05 was scheduled for a hearing before the Bombay High Court on April 19, 2012, which is to be rescheduled for hearing on August 29, 2012. For the financial year 2005-06, the Indian Income Tax Department has decided against Syntel India in respect to a particular tax position, and Syntel India has filed an appeal with the CIT(A). During the year ended December 31, 2010, Syntel India's appeal for the financial year was fully allowed by CIT (A). The Income Tax Department has filed a further appeal with ITAT for the amounts allowed by the CIT (A). For the financial year 2006-07, the Indian Income Tax Department decided against Syntel India in respect to a particular tax position and Syntel India filed an appeal with the CIT(A). During the quarter ended September 30, 2011, the Company received an order for appeal filed with CIT(A) that partially upholds Syntel India's contentions. Syntel India has filed a further appeal with the ITAT for the amounts not allowed by the CIT(A). The Income Tax department has filed a further appeal for the amounts allowed by the CIT(A). For the financial year 2007-08, the Indian Income Tax Department has decided against Syntel India in respect to particular tax position and Syntel India has filed an appeal with the CIT(A).

For the financial year 2006-07, the Indian Income Tax Department has decided against the Syntel KPO entity in respect to a particular tax position and the Syntel KPO entity has filed an appeal with the CIT(A). During the year ended December 31, 2011, the Syntel KPO entity has received an order for appeal filed with CIT(A) wherein, the contention of Syntel India is upheld. The Income Tax department has filed a further appeal for the amounts allowed by the CIT(A). For the financial year 2007-08, the Income Tax Department has decided against the Syntel KPO entity with respect to a particular tax position and the Syntel KPO entity has filed an appeal with the CIT(A). For the financial year 2007-08, the Income Tax Department has also decided against Syntel International Private Limited (SIPL) in respect to a particular tax position and SIPL has filed an appeal with the CIT (A).

The Company has provided for a tax liability amounting to $4.89 million including accrued interest of $1.2 million on tax refunds against the unrecognized tax liability in the books for the financial years 1996-97 to 2007-08, (except for financial year 1998-99, financial year 1999-2000, financial year 2001-02 and financial year 2004-05) on a particular tax matter. Syntel India has been contending the taxability of the same with the Indian Income Tax Department. For the financial years 1998-99 and 1999-2000, the ITAT held the matter in favor of Syntel India. The Income Tax Department filed a further appeal before the Bombay High Court for the amount allowed by ITAT. On July 23, 2009, the Bombay High Court dismissed the Income Tax Department Appeal on the grounds that the tax appeal was filed late. The Income Tax Department has not filed a further appeal before the Supreme Court of India. During the quarter ended June 30, 2011, Syntel India reviewed the disputed tax provision for financial year 1995-96, 1998-99, 1999-2000 and 2001-02 in view of the recent Supreme Court judgment. Accordingly, during the quarter ended June 30, 2011, Syntel India has reversed the provision of uncertain tax liability of $0.83M.

For the financial years 1996-97 to 1997-98 and 2000-01, Syntel India has received a favorable order from the ITAT, wherein the contention of Syntel India was upheld for these years. The Income Tax Department has filed a further appeal before the Bombay High Court for the amount allowed by ITAT. The Bombay High Court has dismissed the appeals filed by the Income Tax Department for the financial years 1996-97, 1997-98 and 2000-01 at the admission stage, on the grounds that no substantial question of law arose from the appeals filed by the Income Tax Department, as the ITAT gave a specific finding which was based on facts. The Income Tax Department filed a review petition before the Bombay High Court on June 2, 2010. The Income Tax Department review petition was rejected due to filing defects. The Income Tax Department may rectify the defects and re-submit the review petition.

For the financial years 2001-02 and 2002-03, the CIT(A) held against Syntel India and Syntel India filed a further appeal with the ITAT. For the financial year 2001-02, the Income Tax Department appeal was dismissed by ITAT and the Income Tax Department filed a further appeal before the Bombay High Court in respect to one item only. The Bombay High Court dismissed the Income Tax Department appeal on account of a delay in filing the tax appeal on July 22, 2009. The Income Tax Department has not filed a further appeal before the Supreme Court of India. For the financial year 2003-04, the CIT(A) partially allowed the appeal in favor of Syntel India. Syntel India filed an appeal with the ITAT for the amounts not allowed by the CIT(A). The Income Tax Department filed a further appeal with ITAT for the amounts allowed by the CIT(A). For the financial year 2004-05, the Income Tax Department filed an appeal against the relief granted to Company by CIT(A) except one item. The Income Tax Department's appeal was rejected by ITAT. The Income Tax Department filed a further appeal before the Bombay High Court for the amounts allowed by the ITAT except an item on which CIT(A) had granted relief to the Company and the Income Tax Department had not filed an appeal before ITAT. Accordingly, the Company reversed a tax provision of $0.33 million during the quarter ended March 31, 2010. The appeal is scheduled for a hearing before Bombay High Court on April 19, 2012, which is to be rescheduled for hearing on August 29, 2012. For the financial year 2005-06, the Indian Income Tax Department decided against Syntel India in respect to a particular tax position and Syntel India filed an appeal with the CIT(A). During the year ended December 31, 2010, the Syntel India's appeal for the financial year 2005-06 was fully allowed by CIT(A). The Income Tax Department filed a further appeal with ITAT for the amounts allowed by the CIT(A). For the financial year 2006-07, the Indian Income Tax Department decided against Syntel India in respect to a particular tax position and Syntel India has filed an appeal with the CIT(A). Based on the tax assessment of financial year 2006-07 and on earlier financial years, a tax provision on a potential tax dispute is no longer required. Accordingly, the Company has reversed a tax provision of $0.40 million during the year ended December 31, 2010. During the quarter ended September 30, 2011, Syntel India received an order for appeal filed with CIT (A) wherein, the contention of Syntel India is partially upheld. Syntel India has gone into further appeal with the ITAT for the amounts not allowed by the CIT (A). The Income Tax department has filed further appeal for the amounts allowed by the CIT (A). For the financial year 2007-08, the Indian Income Tax Department has decided against the Syntel India respect to a particular tax position and the Syntel India has filed an appeal with the CIT(A).

On April 9, 2012, Syntel India received the refund orders dated March 30, 2012 along with refund checks dated April 9, 2012 of $9.19 million. Out of $9.19 million , $6.58 million is the principal amount of the advance tax paid and the remainder is the interest amount of $2.61 million on tax refunds from Indian Income Tax Department. Syntel India has allocated $1.5 million as interest on unrecognized tax benefits and recognized the interest income of $1.12 million for the quarter ended March 31, 2012. Further, Syntel India has received refund orders dated April 9, 2012 for the financial year 2009-10 and 2010-11 with a refund of $2.26 million including interest of $0.18 million. Syntel India will recognize the interest of $0.18 million in the three months ended June 30, 2012.

Fringe Benefit Tax ("FBT") was introduced on April 1, 2005. FBT is payable at the enacted rates for corporations (taxed at 33.99% including surcharge, education cess and secondary and higher education cess), on certain expenses calculated at predetermined rates on the expenses incurred. FBT is a separate section in the Indian Income tax and is payable even by a company which is otherwise not liable to pay income taxes as per the Computation of Income. Accordingly, Indian entities and the Company had provided towards FBT in Year April 1, 2005 to March 31, 2009. Since FBT is a tax on expenditures the amounts were grouped along with the respective expense heads and not as tax expense by the Company. This was in line with industry practice.

The Company had provided and paid FBT on certain expenses. However, the Company has contested with the Tax Department the payment of FBT on these expenses. The Income Tax Department has not issued notice for FBT assessment of Financial Year 2007-08 and Financial Year 2008-09 and the time of issuing notice for the regular assessment expired on September 30, 2010. The time of issuing notice for rectification was expired on March 31, 2011 and the Company has received a FBT refund along with interest for Financial Year 2008-09 and is likely to receive a FBT refund for Financial Year 2007-08. Accordingly, the Company has reversed FBT of $1.07 million. The Company has received the FBT refund of $0.38 million for Financial Year 2007-08 by order dated March 30, 2012.

All the above tax exposures involve complex issues and may need an extended period to resolve the issues with the Indian income tax authorities. Management, after consultation with legal counsel, believes that the resolution of the above matters will not have a material adverse effect on the Company's consolidated financial position.

Syntel Europe Limited has accumulated losses of $ 1.06 million and $ 0.79 million as at March 31, 2102 and December 31, 2011. As per UK tax laws, carrying back of tax losses against profits of the previous 12 months and carry forward of tax losses against future profits for an unlimited period are allowed. Accordingly, Syntel Europe Limited carried back the tax losses and filed a refund claim of $0.19 million for tax year 2010 during 2011. Syntel Europe Limited has deferred tax assets of $0.28 million on a balance of accumulated losses as of March 31, 2012.

Branch Profit Tax

Syntel India is subject to a 15% USA Branch Profit Tax (BPT) related to its effectively connected income in the USA, to the extent its U.S. taxable adjusted net income during the taxable year is not invested in the USA. The Company expects that U.S. profits earned on or after January 1, 2008 will be permanently invested in the U.S. Accordingly, effective January 1, 2008, a provision for Branch profit taxes is not required. The accumulated deferred tax liability of $1.73 million as of December 31, 2007 will continue to be carried forward. Estimated additional Branch Profit taxes which would be due, if US profits were not to be permanently invested, are approximately $4.62 million as of March 31, 2012.

Undistributed Earnings of Foreign Subsidiaries

The Company intends to use the remaining accumulated and future earnings of foreign subsidiaries to expand operations outside the United States and accordingly, undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outside the United States and no provision for U.S. Federal and State income tax or applicable dividend distribution tax has been provided thereon. If the Company determines to repatriate all undistributed repatriable earnings of foreign subsidiaries as of March 31, 2012, the Company would have accrued taxes of approximately $193.1 million.

SERVICE TAX AUDIT

During the three months ended September 30, 2010, a service tax audit was conducted for the Adyar facility in Chennai; the scope of the audit was to review transactions covered under Central Excise and Customs Act, by the office of Accountant General (Commercial Receipt Audit). The Development Commissioner (DC) has issued a letter stating the audit objections raised by officer of the audit team. Most of the observations are pertaining to Service tax and are for an amount of $3.85 million. Syntel India has filed a reply to said notice and further information.

Further to our reply and information filed earlier, Syntel India has received a letter dated July 13, 2011 from the DC, indicating that the audit objections amounting to $3.0 million, out of the total amount of $3.85 million, have been closed. Syntel is pursuing closure of the balance of the audit objections of approximately $0.85 million.

Syntel India has obtained the views of a tax consultant in this matter and has filed an appropriate reply to the audit observations. The letter does not constitute any demand against Syntel India. Based on the consultant's advice, Syntel India will be in a position to defend the objections raised, and therefore no provision has been made in the books.