In April, the I-T department had asked the companies to pay an additional tax for violation of the terms of the 10-year tax holiday, for setting up such units in export processing zones.

The issue, which is now with the Commissioner (Appeals) of Income-Tax, may not be pursued by the department.

The ministry is also considering an extension of the tax holiday under Section 10A and 10 B of the Income-Tax Act for the IT industry. It is in favour of accepting the plea made by the software industry.

Senior executives of some of the software companies and Nasscom officials, who recently met Finance Minister P Chidambaram as well as officials of the ministry to sort out the issue, have been informed that the government is in favour of an amicable resolution of the dispute.

The Income-Tax department had raised a tax notice on some of the units of these IT companies located in software technology parks, for which they had claimed tax exemptions under section 10A of the Act.

The department had said to qualify for the tax exemption, the companies were supposed to show that they had set up new units, instead of having simply expanded the existing ones.

Government sources had earlier said unless one could show that "the umbilical cord had been severed" between an existing unit and a new one, the objective of the tax exemption to promote fresh investment in the sector was not fulfilled.

For this purpose, the companies were supposed to provide separate books of accounts and profit figures of the units, for which they had applied for tax exemption. For the Centre, the subject is important as it pertains to the scope of tax concessions being provided for the information technology sector.

Given the critical role of the sector, the government is keen to ensure that it is not seen going back on a promise it has already made.

The ministry is also considering an extension of the sunset clause under the section, meant to encourage investment in export processing zones.

This is proposed to be done by extending the 100 per cent Income-Tax exemption from April 1, 2003. The current tax benefit has been reduced to 90 per cent and will expire by 2010.