From The Judiciary

Whether salary reimbursement for seconded employees to a foreign entity is taxable in India as FTS or treated as non-taxable salary reimbursement?

Ruling

Goldman Sachs International [TS-569-ITAT-2026(Mum)]

Facts

Goldman Sachs International (assessee), a UK tax resident providing financial services to group entities, seconded employees to its Indian group companies during AY 2023–24. Under the secondment arrangement, employees worked under the control and supervision of the Indian entities, which bear the employment costs and deduct tax under Section 192, while a portion of the salary paid overseas by the assessee was reimbursed by the Indian entities on a cost-to-cost basis without markup.

The assessee claimed that such salary reimbursement was not taxable in India. However, the AO treated the reimbursement as Fees for Technical Services (FTS), and the Dispute Resolution Panel (DRP) also upheld the AO’s order;thus the assessee is in appeal before the Tribunal.

Revenue’s Arguments

Revenue contended that seconded employees provided technical, managerial, and consultancy services, and that the reimbursement therefore qualifies as FTS.

The provision of skilled personnel amounts to rendering technical services, making the payment taxable in India.

Revenue also submitted that the employees remained employees of the foreign entity and that the payment could not, therefore, be treated as mere reimbursement.

Assessee’s Arguments

Assessee submitted that the seconded employees worked under the control and supervision of the Indian entities, thereby constituting an employer-employee relationship with those entities.

Reimbursement was purely cost-to-cost without any profit element, and hence, no income accrued in India.

Assessee contended that salary payments are specifically excluded from the definition of FTS under Section 9(1)(vii) and the DTAA.

Assessee placed reliance on its own case, Goldman Sachs Services Pvt. Ltd. (Bangalore ITAT), and other rulings of the Karnataka HC.

Held

Mumbai ITAT (ITAT) ruled in favor of the assessee and held that the reimbursement of salary is not taxable as FTS.

• ITAT relied on judicial precedents, including the assessee’s own case as well as the decisions in Abbey Business Services and Flipkart Internet, wherein it was held that secondment arrangements resulting in salary reimbursement do not constitute FTS where an employer–employee relationship exists between the secondees and the Indian entity.
• ITAT observed that the Revenue had not brought any material on record to factually distinguish the year under consideration from the preceding years in the assessee’s own case.

Accordingly, ITAT found no reason to deviate from the view already taken in earlier years, which had also been upheld by the Hon’ble Karnataka High Court, namely that secondment arrangements involving reimbursement of salary do not give rise to FTS where the employees work under the control and supervision of the Indian entity and the payments are in the nature of salary.

Our Comments

This ruling reinforces that reimbursement of salary for seconded employees, without markup and under an employer–employee relationship with the Indian entity, is not taxable as FTS in India.

---

Whether this ruling lays down any binding principle on treaty residency, or does it merely underscore that ‘tie-breaker’ determinations fail in the absence of cogent evidence?

Vishal K Wanchoo [TS-559-ITAT-2026(DEL)]

Facts

The assessee, a US citizen, was on an international assignment in India from May 2011 to February 2020, qualified as a Resident and Ordinarily Resident (ROR) in India for AY 2020-21 under Section 6, while also being a US tax resident for calendar year 2019–20, resulting in dual residency.

In his return, he declared a total income of INR 214.6 million and claimed exemption of US income of INR 46.2 million crore under the tie-breaker provisions of Article 4(2) of the India–US DTAA, contending that his personal and economic ties were closer to the US.

The Assessing Officer (AO) rejected the claim and taxed the US income in India, citing his long stay and employment in India, directorships in Indian companies, and substantial Indian-source income. The CIT(A) upheld the AO’s order, which was subsequently challenged before the Delhi ITAT.

Revenue’s Arguments

The assessee failed to furnish sufficient evidence to substantiate his claim of stronger ties with the US. The US income disclosed the included spouse’s income, without a clear bifurcation.

The assessee stayed in India for nearly 9 years, indicating a strong physical presence and the income earned in India was substantially higher than the income reported in the US.

The assessee’s place of birth and background suggest continued familial connections in India.

Economic ties were predominantly in India and outweighed the claimed ties with the US.

Assessee’s Arguments

The assessee argued that although he was technically resident in both India and the US, Section 90(2) r.w. Article 4(2) permits application of DTAA provisions where beneficial.

His personal ties were primarily in the US, as his spouse and children were residing there.

He had long-term employment with a US company since 1982, and his stay in India was only temporary due to an assignment.

His US citizenship, including voting rights and civic obligations, indicated a closer association with the US.

After completing the assignment, he returned to the US and continued to reside there.

Held

• ITAT observed that the case involves the determination of treaty residency through the “tie-breaker” rule under the India-US DTAA, which requires a proper evaluation of the assessee’s center of vital interests.
• While the assessee claimed that his personal ties (family residence) were in the US, the Revenue contended that his economic ties were predominantly in India.
• However, the ITAT found that crucial facts - such as evidence of family residence, clear bifurcation of US income between the assessee and his spouse, and comprehensive details of economic and personal connections - were not adequately brought on record.

In the absence of evidence, the ITAT held that it was not possible to determine the assessee’s center of vital interests. ITAT, relied on the principles laid down in the case of Ashok Kumar Pandey 167 taxmann.com 286 (Mum.)-ITA 3986/Mum/2023 and remitted the matter back to AO, to re-examine the issue after considering factors relating to personal and economic ties and after providing the assessee a reasonable opportunity of being heard.

The ruling underscores that treaty residency under the tie-breaker rule is a fact-specific determination that require clear evidence of personal and economic ties and cannot rest on mere assertions. In the absence of such substantiation, the Tribunal remanded the matter for proper factual examination.

Following the Supreme Court's decision in the Tiger Global case, Mauritius and India recently discussed concerns around the potential application of General Anti-Avoidance Rules (GAAR) for investments made prior to 2017.

---

Highlights of Cabinet Meeting – 3 April 2026 - Friday

Cabinet has taken note that, following the Supreme Court of India’s judgement in the Tiger Global case, which raised concerns among investors about the potential application of GAAR to pre-2017 investments, the Mauritius Prime Minister raised the matter with the Indian Prime Minister during his recent visit to India. Prime Minister Modi gave the assurance of the India’s continued stance of not taking any action that would undermine the benefits Mauritius currently enjoys under the Double Taxation Avoidance Agreement.

On 31 March 2026, the Central Board of Direct Taxes of India issued the Income Tax (Amendment) Rules 2026, providing further clarification on the application of the GAAR under the Indian Income Tax Act. The new Rules specify that GAAR shall apply to arrangements made on or after 01 April 2017, while investments undertaken prior to that date will remain outside its scope, thereby providing clarity on the treatment of legacy investments.

The new Rules are expected to provide reassurance and certainty to foreign investors and private equity funds regarding the taxation of exits from such investments.

Whether a refund of tax paid twice, due to a mistake, can be denied solely on the grounds of the limitation prescribed under Section 54 of the CGST Act?

Rajendra Narayan Mohanty v. Joint Commissioner of State Tax, CT & GST Circle, Cuttack, CT & GST Officer, Cuttack I East Circle

[2026 (2) TMI 1101 - Orissa High Court]

Facts

• The petitioner failed to discharge the tax liability while filing regular GST returns and subsequently rectified the default by paying the tax through Form DRC-03 in February 2021, utilizing input tax credit (ITC) along with payment of applicable interest at the time of filing the Annual return.
• Subsequently, due to erroneous professional advice, the petitioner again discharged the same liability through Form DRC-03 in September 2022 through the electronic cash ledger, resulting in double payment of tax for the same transaction.
• The said double payment was identified only during the adjudication proceedings for FY 2019–20 and was acknowledged by the adjudicating officers.
• Upon discovery, the petitioner filed a refund application in August 2025 seeking a refund of the excess tax paid.
• However, the refund was rejected by the department on the grounds that it was filed beyond the time limit prescribed under Section 54 of the CGST Act, read with clause (h) of paragraph (2) of the Explanation thereto (i.e., 2 years from the relevant date - date of payment of tax).
• Aggrieved by the rejection, the petitioner filed a writ petition challenging the same.

Ruling

• The Hon’ble Orissa High Court examined the interplay between statutory limitation under the GST law and the constitutional mandate under Article 265.
• The Court noted that there was no dispute on the facts and that the same tax liability had been discharged twice, as acknowledged by the department itself.
• The Court held that retaining the excess amount paid by the State is not permissible, as it violates Article 265 of the Constitution of India.
• It is observed that where a payment is made under a mistake and is not legally due, it does not assume the character of “tax” in the strict legal sense, emphasizing that Section 54 is designed to govern the refund of “tax” paid under the provisions of the GST law. Given the unlawful collection of tax, such a limitation cannot legitimize the retention of money and is overridden by the constitutional mandate of Article 265, thereby proving that the machinery provision for refund cannot be stretched to defeat a substantive right arising from constitutional principles.
• The Court also reiterated that the validity of an administrative order must be tested on the basis of the reasons contained therein and cannot be supplemented by new grounds during litigation.
• The Hon’ble Court permitted the petitioner to file a fresh refund application and directed the tax authorities to process the same expeditiously, with applicable interest in case of delay.

Our Comments

The ruling reinforces the principle that refund claims arising from payments made under mistake stand on a different footing from routine refund claims under the GST framework. Where the amount itself is not legally due, denial of a refund merely on the grounds of limitation under Section 54 is not sustainable.

A key takeaway is the Court’s reliance on Article 265 as a substantive limitation on the State’s power to retain money. The judgment clearly establishes that procedural timelines cannot legitimize the retention of amounts collected without the law authority.

Significantly, the Court implicitly characterizes such excess payments as a “deposit” rather than “tax”, thereby placing them outside the ambit of Section 54. This distinction could have wider implications for similar refund disputes.

The decision also aligns with a broader judicial trend of granting relief beyond statutory limitation in appropriate cases, particularly where the taxpayer demonstrates bona fide conduct, absence of unjust enrichment, and lack of prejudice to the revenue. Such relief, however, is typically granted in the context of writ jurisdiction and remains fact-specific.

It is also noteworthy that, the while the Court referred to judicial precedents recognizing that such situations are subject to the provisions of the Limitation Act, 1963, and that the limitation commences from the date of discovery of the mistake (particularly under Section 17), it did not base its decision on this ground. The ruling, therefore, suggests that in cases of erroneous or mistaken payments, the question is not merely when limitation begins to run, but whether limitation applies at all, thereby elevating the issue from one of procedural compliance to one of constitutional entitlement.

Bombay HC: Allows writ petition quashing final assessment order passed sans draft order

Hansgrohe India Pvt. Ltd.²

Facts

The Petitioner entered into international transactions during AY 2023–24, making it an “eligible assessee” as contemplated under section 144C of the Income Tax Act.

The Faceless AO passed a final assessment order directly under section 143(3), read with section 144B, without issuing a draft assessment order.

Aggrieved, the Petitioner filed a writ petition before the Hon’ble Bombay High Court challenging the final assessment order.

Petitioner’s contention

The Petitioner contended that, since it is an “eligible assessee”, the issuance and service of a draft assessment order under section 144C are mandatory to enable filing objections before the DRP.

Revenue’s contention

Revenue did not dispute that a draft assessment order ought to have been issued in the present case.

Revenue suggested that the final assessment order be set aside and treated as a draft assessment order to enable the Petitioner to approach the DRP; alternatively, it sought remand for following the procedure under section 144B.

Held

The Bombay HC held that the provisions of section 144B(1) (particularly clauses (xxi) to (xxix)) make section 144C procedure applicable, and therefore a draft assessment order must be served on an eligible assessee to enable DRP objections.

Since the Faceless AO issued a final assessment order without serving a draft order, the Court held that this constituted a breach of mandatory procedure and quashed the final assessment order.

The Court also rejected the Revenue’s proposal to treat the final assessment order as a draft assessment order.

Our Comments

The decision reiterates that issuance of a draft assessment order under section 144C is mandatory for eligible assessees, including in the faceless assessment framework.

Any final assessment order passed without following this procedure remains vulnerable to being struck down as a jurisdictional defect.

ITAT Hyd: Deletes the adjustment made on Restricted Stock Units allotted to employees of WhatsApp Application Services by Facebook Inc

WhatsApp Application Services Pvt Ltd³

Facts

The Appellant is engaged in providing marketing and customer support services to its AE on a cost-plus mark-up basis for AY 2020–21. The case was selected for scrutiny, and reference was made to the TPO for the determination of the arm’s length price (ALP) of its international transactions. The TPO proposed (i) a margin adjustment in respect of the primary transaction of marketing and customer support services, and (ii) a separate TP adjustment in respect of Restricted Stock Units (RSUs)/ESOPs granted by the ultimate parent company (Facebook Inc.) to employees of the Appellant.

The AO issued a draft assessment order incorporating the proposed TP adjustments. Aggrieved, the Appellant filed objections before the Ld. DRP. Pursuant to DRP directions, the TP adjustment on the primary transaction was dropped, while the RSU/ESOP adjustment was sustained and incorporated in the final assessment order.

Appellant’s contention

The Appellant contended that the RSUs/ESOPs were granted directly by its ultimate parent (Facebook Inc.) to employees of the Appellant, and no cost was incurred or booked by the Appellant in its profit and loss account in respect of such RSUs/ESOPs.

The Appellant submitted that it had only deducted and deposited TDS on the perquisite value in the hands of employees, and such TDS was reimbursed by the AE without any mark-up.

The Appellant further relied on the inter-company arrangement to state that IncomeTax/taxes were excluded from the cost base for services.

Revenue’s contention

The Revenue argued that even if the Appellant did not incur a direct RSU/ESOP cost, the grant of RSUs/ESOPs to employees could confer an indirect benefit to the Appellant (e.g., employee retention/motivation), and therefore a mark-up should be attributed to such benefit.

Held

The ITAT held that the mere grant of RSUs/ESOPs by the parent to employees does not ipso facto create a liability or cost in the hands of the Indian entity. It noted that the Appellant did not incur any cost or book any expenditure in respect of RSUs/ESOPs and had only deposited TDS on the perquisite value, which was reimbursed without mark-up.

Accordingly, the ITAT held that imputing a hypothetical value/benefit and applying a mark-up were contrary to the TP framework, and directed the AO/TPO to delete the TP adjustment relating to RSUs/ESOPs.

Our Comments

The ruling affirms that mere grant of RSUs/ESOPs by parent company to Indian employees does not create a liability in the hands of the Indian company. It emphasizes that under Rule 10B(1)(e)(i), margins should be computed with reference to costs actually incurred. Thus, imputing a hypothetical or opportunity cost based on a surmised economic benefit is contrary to the provisions of the Act and the related Rules.