From The Judiciary

Whether grandfathered Long-Term Capital Gains (LTCG) exempt under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreements (DTAA) can be adjusted against grandfathered long-term or short-term capital losses?

Bay Capital India Fund Limited [TS-382-ITAT-2025(Mum)]

Facts

The assessee, a company incorporated in Mauritius and licensed by the Financial Services Commission of Mauritius as a Collective Investment Scheme, holds a valid TRC.

For the assessment year under consideration, the assessee filed its return of income on 23 September 2019, declaring total income as Nil, carrying forward short-term and long-term capital losses. In the return, the assessee claimed an exemption on long-term capital gains earned from the sale of listed equity shares in India. This exemption was claimed on the basis that the shares were acquired before 1 April 2017, and thus fall under the "grandfathered sale" provisions of the India-Mauritius DTAA.

The return was processed wherein the long-term and short-term capital losses amounting arising from the sale of equity shares acquired after 1 April 2017 (non-grandfathered sales), were set off against the long-term capital gains. As a result, the net long-term capital gains were determined and taxed at the applicable special rate.

The assessee appealed the decision to the learned CIT(A) who dismissed the appeal, concluding that the assessee had incorrectly claimed two different options for the same class of assets in the same assessment year. Specifically, the assessee claimed exemption under the DTAA for long-term capital gains on grandfathered shares while simultaneously applying the provisions of the ITA for treating short-term and long-term capital losses as taxable for the same class of assets.

Held

The Tribunal, after considering the submissions of both parties and reviewing the relevant provisions of the law ruled in favor of the assessee. It observed that the entire long-term capital gains earned by the assessee from the grandfathered sale of shares are exempt from taxation in India under Article 13(4) of the DTAA. Consequently, these gains cannot be considered part of the taxable income of the assessee, and the capital losses incurred on non-grandfathered shares cannot be set off against the exempt gains.

The Tribunal also relied on precedents from similar cases, including the Assessee’s own case in the assessment year 2021-22 and the decision in Matrix Partners India Investment Holdings, LLC vs DCIT⁶, which upheld that exempt capital gains under the DTAA cannot be included in the computation of the total income for setting off capital losses. In line with these precedents, the Tribunal directed the Assessing Officer to:

• Allow the exemption of the entire long-term capital gains earned from the grandfathered sale of shares.
• Permit the carry forward of the long-term and short-term capital losses incurred by the assessee to subsequent years, as per the provisions of the ITA.

Our Comments

This judgment underscores the importance of honouring treaty provisions, particularly the non-taxability of grandfathered LTCG under Article 13(4) of the India-Mauritius DTAA, and emphasizes that such gains cannot be offset by non-grandfathered capital losses, preserving the integrity of tax exemptions and ensuring taxpayers treaty benefits are upheld.

Do services rendered without human intervention or transfer of know-how constitute “Fees for Included Services” under the DTAA, considering the ‘make available’ clause?

Sita Information Networking Computing USA Inc. [TS-389-ITAT-2025(Mum)]

Facts

The Sita Information Networking Computing USA Inc. (assessee) is a company incorporated in USA and a tax resident therein. The assessee does not have any office or place of business in India. The assessee provides application-based IT services, primarily through two service lines: Airport System Solutions and Passenger System Solutions. These services are provided remotely from the Assessee’s data center located in Atlanta, Georgia, USA, and are accessed by Indian airlines.

The Assessing Officer, while completing assessments under Section 143(3) r.w.s. 144C(3) of ITA for AYs 2014–15 to 2021–22, held that the income earned by the assessee from Airport System Solutions and Passenger Services was taxable in India as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Act and also as "fees for included services" under Article 12(4) of the India-USA DTAA. The AO reasoned that the services involved technical inputs and therefore qualified as technical services.

The CIT(A) deleted the additions made by the AO, reasoned that it does not involve human intervention, does not satisfy make available clause, and relied on several judicial precedents.

The assessee argued that the services were standard automated services delivered through its proprietary software and data center infrastructure, without any human intervention or transfer of technical knowledge to the recipient and also does not make available any technical knowledge, skill, or know-how to the Indian clients, which is a key condition under Article 12(4)(b) of the DTAA for taxing services as included services.

Held

The assessee argued that the services were standard automated services delivered through its proprietary software and data center infrastructure, without any human intervention or transfer of technical knowledge to the recipient and also does not make available any technical knowledge, skill, or know-how to the Indian clients, which is a key condition under Article 12(4)(b) of the DTAA for taxing services as included services.

The Tribunal stated that, for a service to qualify as “fees for included services” under Article 12(4)(b) of the India-USA DTAA, it must "make available" technical knowledge, skill, experience, know-how, or processes to the recipient — that is, the recipient must be enabled to apply the technology independently. In this case, the services merely allowed Indian airlines to access and use the functionalities hosted on the Assessee’s platform, and did not involve any transfer of technical capability. Accordingly, the Tribunal concluded that the income was not taxable in India under the provisions of the Act or the DTAA.

• Allow the exemption of the entire long-term capital gains earned from the grandfathered sale of shares.
• Permit the carry forward of the long-term and short-term capital losses incurred by the assessee to subsequent years, as per the provisions of the ITA.

Our Comments

This judgment highlights the significance of the term ‘make available’ to qualify a service as FTS under the DTAA and clarifies that mere use of technology or remote access to software without transferring technical knowledge does not satisfy the criteria.

M&A Tax Update

Income Tax Appellate Tribunal (ITAT) Kolkata quashes penalty levied under Black Money Act where investments were made from explained sources and there was a inadvertent omission in reporting the Foreign Asset in Income Tax Return (ITR).

Gaurav Kumar Chopra vs. JCIT, Kolkata [TS-426-ITAT-2025(Kol)]

Facts

• The Assessee, an individual, has filed its return of income for AY 2017-18 by declaring income of INR 3.071 million.
• A search was conducted on the residential and business premises of the Group and notices under Section 143(2) and 142(1) the ITA issued on the Assessee.
• Assessing Officer (AO) passed an assessment order u/s 143(3) of the Act and initiated penalty proceedings under Section 41 of the Black Money Act, 2015 (BMA), for non-disclosure of Foreign Assets (FA).
• Assessee filed appeal before the CIT(A) and disclosed that the investments were made from explained sources and were inadvertently omitted to disclose FA in Schedule FA and request to abeyance the penalty till disposal of the appeal.
• After considering the fact, CIT(A) passed an order for granting a relief from the penalty, by considering that AO made additions based on solely non-disclosure of FA in Schedule FA without assessing the genuineness of the source.
• Challenging this, the Revenue appealed to the ITAT, who upheld that Foreign Assets were not disclosed in Schedule FA, hence presumed to be undisclosed.

Decision by Kolkata ITAT:

On further appeal, the Kolkata ITAT deleted the penalty levied under Section 41 of the BMA holding that assessee had made a minor foreign investment that too from disclosed source of funds and had inadvertently missed to report the same in Schedule FA of the income tax return. The ITAT further laid that both substantive and procedural fairness must be kept in mind in case of penalty proceedings.

Our Comments

This is a welcome ruling where the ITAT has laid that in absence of any deliberate concealment, an inadvertent omission does not warrant penal actions under the BMA. The onus of proof will however be on the assessee.

ITAT Mumbai: ITAT Special Bench holds that surcharge shall be applicable as per income slab for Private Discretionary trusts for determining the Maximum marginal rate.

Araadhya Jain Trust vs. Income Tax Officer [TS-366-ITAT-2025]

Facts

• The assessee, a Private Discretionary Trust, filed its return for AY 2023–24 declaring income of INR 485,290 and while calculating the rate for Maximum Marginal Rate (MMR) under Section 164 read with Section 2(29C) of the ITA, it applied surcharge charge as per income slab.
• The CPC, while processing the return, applied the highest surcharge rate on this MMR.
• Challenging this, the assessee appealed to the CIT(A), who upheld the surcharge at the highest rate, interpreting the phrase “if any” in Section 2(29C) would mean, ‘If the levy of surcharge is at all available under the Finance Act or not’ as confirming surcharge applicability regardless of income level.

Decision by Mumbai ITAT:

On further appeal, the Tribunal held that the phrase “including surcharge on income-tax, if any” in Section 2(29C) implies surcharge applies only if income exceeds thresholds specified in the Finance Act. Thus, in case of Private Discretionary Trusts, surcharge on income-tax under the MMR regime must be levied based on the slab thresholds prescribed in the Finance Act 2023—not at the highest rate indiscriminately. The case was thus decided in favor of the assessee.

Our Comments

This aspect has been a matter of judicial interpretation in the past and the Special Bench ruling marks an important victory for private discretionary trusts, confirming that surcharge liability must be based on actual income levels/ slab.

The Constitutional validity of GST provisions insofar as they seek to tax the services provided by Clubs/Associations to their members by disregarding the principle of mutuality.

Indian Medical Association vs. Union of India [W.A. No. 1659 and 1487 of 2024 and W.A. 468 of 2025]

Facts

• Vanguard Emerging Markets Stock Index Fund a Series of VISPLC C/o. (assessee), a tax resident of Ireland is registered under SEBI as a Foreign Portfolio Investor (FPI). In the relevant financial year, the assessee earned shortterm capital gains through the sale of rights entitlement (RE) in shares of an Indian company. The assessee had also incurred capital loss from transfer of Indian company shares which was carried forward to subsequent years. The Assessing Officer (AO) treated the rights entitlement as being similar to shares, thereby bringing the gains under the scope of Article 13(5), making them subject to taxation in India. Additionally, the AO offset the Short-Term Capital Gains (STCG) from the rights entitlement against the Short-Term Capital Loss (STCL) from shares, asserting that before granting relief under the DTAA, income must first be computed in accordance with the normal provisions of the ITA. The assessee made an appeal to the DRP, which held that RE and equity shares were closely related assets. Aggrieved by this, the assessee appealed to the Mumbai Tribunal.
• The petitioner runs various mutual schemes for the benefit of its member-doctors, such as Social Security Scheme, Kerala Health Scheme, Professional Disability Support Scheme, Pension Scheme etc. To receive these benefits, the member-doctors contribute an admission/annual fee.
• In light of the principle of mutuality, the petitioner bona fide believed that no GST was payable on the services provided inasmuch as effectively the services were provided by the members of the Association to themselves.
• However, pursuant to the retrospective amendment to Sections 2(17) and 7 of the CGST Act (through Finance Act, 2021) that expanded the definition of ‘supply’ to cover within its ambit “activities or transactions between associations and members” and to deem the association and members as two separate persons for the purposes of GST, the DGGI authorities initiated recovery proceedings against the petitioner.
• Hence, the petitioner challenged the retrospective levy before Kerala HC.
• While the Single Judge Bench upheld the taxability of services by Club/Association to its members, it found the retroactive operation to be legally unsustainable on the principles of fairness.
• Consequently, both the petitioner as well as the Revenue approached the Division Bench (DB).

Ruling

On the constitutionality of impugned amendments

• Analyzing the Constitutional scheme of GST, DB observed that the levy of tax is on the "supply" of "goods or services or both” for a consideration. The concept of "supply" and "service" as understood under the Constitution and the CGST/SGST Acts (before their amendment) both excluded transactions informed by the principle of mutuality i.e. a supply/service from one entity to itself (self-supply/self-service). Thus, even if there is now a deemed "supply", based on the amendments effected to the CGST/SGST Acts, there is no deemed "service" in circumstances where the service is rendered by a Club/Association to its members, since the definition of ‘service’ has not been amended.
• Moreover, the Constitution has not been amended to deem a supply of service by a Club or Association to its members as a taxable supply.
• Rejecting the Revenue’s contention that it is always open to the legislature to provide an artificial meaning to a word for the purposes of the Statute, DB observed, “When a word/concept in the Constitution has been interpreted by the Supreme Court in a particular manner, a legislative body, that derives its competence to enact a Statute from the Constitution, cannot give to the word/concept a meaning that goes against the meaning assigned to the same word/concept by the Supreme Court in the context of its setting under the Constitution.”
• DB further observed, the SC having held in State of West Bengal vs. Calcutta Club Ltd [(2019) 19 SCC 107] that the principle of mutuality has survived the 46th amendment to the Constitution, so long as the said judgement holds sway as a binding precedent and/or the Constitution is not amended suitably to remove the concept of mutuality from the concepts of supply and service thereunder, the impugned amendment to the CGST/SGST Acts must necessarily fail the test of constitutionality.

On the retroactive/retrospective operation of the impugned amendments

• Recording its agreement with the application of principle of fairness by the Single Judge Bench, DB observed, “The insertion of a statutory provision that alters the basis of indirect taxation with retrospective effect, so as to tax persons for a prior period when they had not anticipated such a levy and, consequently, had not obtained an opportunity to collect the tax from the recipient of their services, militates against the concept of Rule of Law.”

Our Comments

While the judgement fortifies the application of mutuality principle under the GST law, a question arises as to whether similar entities/bodies such as cooperative housing societies, trade associations, etc. can decide not to discharge GST on activities undertaken for their members basis the same?

In fact, could they contemplate claiming the refund of taxes paid during the past period, subject to the principles of unjust enrichment, i.e. the incidence of tax was not passed onto their members?

There is a high probability that the Revenue could carry this matter to the Supreme Court. However, until there is a stay and the Apex Court renders its final verdict, the taxpayers could leverage on the Kerala HC’s ruling.

ITAT: Upholds use of Royalty Savings Method over TPO's CUP for determining ALP of intangibles

Heubach Colour Pvt Ltd [ITA No.547 & Ahm/2012, A.Y. 2007-08]

Facts

In AY 2007–08, Heubach Colour Pvt. Ltd. (the assessee) acquired the business of Avecia from its AE, Colour Ltd., for INR 6.097 billion, including intangibles like trademarks, know-how, and goodwill. The assessee used a valuation by M/s. Dalal & Shah applying the NPV/Royalty Savings Method under the Income Approach per Organisation for Economic Co-operation and Development (OECD) guidelines.

The Transfer Pricing Officer (TPO) rejected the assessee's valuation method and applied the Comparable Uncontrolled Price (CUP) method, using the purchase price amounting to INR 69.4 million based on a transaction entered between Colour Ltd. and Avecia Ltd in 2002 as the ALP. This led to an upward adjustment of INR 5.403 billion. Further, the TPO treated the differential amount of INR 5.403 billion as "cash asset" transferred to the AE without consideration, resulting in a duplicate adjustment.

Additionally, the TPO rejected the assessee’s method of TNMM for the transaction of export of pigment products to its AE amounting to INR 6.636 billion, citing insufficient FAR analysis. TPO applied a 15% royalty markup to all sales, including both Avecia and non-Avecia products, leading to an additional adjustment of INR 328.3 million.

Assessee’s Contention

The assessee objected to the TPO’s use of the CUP method, arguing that the valuation done for intangibles in 2002 was not comparable to the valuation in 2007 due to differences in economic conditions, contractual terms and business model changes. Further, the assessee cited Rule 10B(4) which prohibits the use of outdated data.

In connection to the treatment of differential amount of INR 5.403 billion as cash asset, the assessee argued that it amounted to double taxation and was impermissible. With respect to the sale of goods, the assessee contended that the royalty markup should only apply to Avecia-related sales, and not non-Avecia products. The assessee proposed a reduced adjustment of INR 1.364 billion , based on a 6.5% royalty rate for Avecia sales.

ITAT order: The ITAT upheld the CIT(A)’s rejection of the CUP method, finding that the 2002 transaction was outdated, factually dissimilar, and did not reflect the economic conditions or contractual realities of the 2007 deal. Further, the ITAT accepted the NPV/Income Approach with adjustments, noting that although the method used by the valuer had flaws, it was acceptable in the absence of comparable uncontrolled transactions.

On the second issue, the ITAT agreed that the INR 5.403 billion could not be added twice, as a reduction in asset value and again as income. Therefore, the duplicate addition was rightly deleted by CIT(A). Lastly, the ITAT upheld the rejection of TNMM due to an incomplete FAR analysis but found the TPO’s adjustment excessive. It accepted the assessee’s contention that the markup should only apply to Avecia sales and reduced the adjustment from INR 3.283 billion to INR 1.776 billion.

Our Comments

It is recommended to maintain factual and legal merits to justify the royalty approach, as the ITAT rightly dismissed all the three grounds raised by the Department based on the authenticity and fairness of the data maintenance.

ITAT upholds segregation of trading and manufacturing activities and remits custom duty adjustment

Rajasthan Prime Steel Processing Center Pvt Ltd⁷

The taxpayer is a group company of Honda Trading Corporation, Japan, involved in manufacturing auto parts and trading steel coils, dies, auto components, and related services. Its business activities are divided into two segments:

Trading: Procurement of imported steel coils for supply to customers, including AEs.

Processing: Post-procurement, activities like slitting, blanking, and welding are performed on steel coils, which are then resold to AEs as processed, tailor-made goods.

During the TPO proceedings, the Ld. TPO classified the taxpayer’s processing activities as manufacturing, stating that the taxpayer’s role went beyond being a distributor. However, the taxpayer argued that the processing activities did not constitute manufacturing under Excise Laws as it had not made any heavy value addition in the processing work and should be considered part of its distribution activities. Additionally, the taxpayer incurred significant customs import duty charges for imported raw materials, which it treated as non-operating for margin calculations. The TPO rejected the adjustment sought for customs duties. The Ld. CIT(A) upheld the TPO’s stand for segmentation of business activity and allowed the treatment of import of custom duty charged as non-operating as originally done by the taxpayer.

ITAT Order

The Tribunal upheld TPO’s and CIT(A) stand of segmentation of business activity of taxpayer. It observed that taxpayer operated in two types of business activities – pure trading and trading after processing the goods as per specifications/tailor made. The tribunal refrains from getting into technicalities of the term manufacturing but stresses on the fact that tailor made goods are different than raw material because the said raw material passes through some processing activity.

Further, in relation to Custom duty, ITAT is of the opinion that the custom duty adjustments have to be done if it adversely affects the operating margin of the taxpayer than those of comparables. No doubt, a higher import content of raw material by itself does not warrant an adjustment in operating margins, but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond taxpayer's control. In case the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market, the idea is to make reasonable and accurate adjustment to eliminate such differences having material effect.

It also stated that taxpayer cannot be expected to get the details and particulars for comparable companies which are not in public domain, it is inevitable that some approximations and reasonable assumptions are to be made. Accordingly, ITAT directed the TPO to give suitable adjustment against the custom duty component while determining the Arm's Length Price (ALP) in order to bring uniformity.

Our Comments

It is essential for the taxpayer to possess a comprehensive understanding of all its business operations. Processing activities regardless of their extent, involve transformation and cannot be equated with mere trading. Moreover, the definition provided under one statute cannot be automatically applied to another statute unless the latter explicitly incorporates or references it. Furthermore, in the case of extraordinary items, outright exclusion of line item is not an appropriate approach, suitable adjustments taking reasonable assumptions should be made where comparable data is not available in the public domain.