From The Judiciary

Whether the secondment of employees to an Indian subsidiary constitutes a Permanent Establishment (PE) for the foreign company in India?

Mitsui Mining and Smelting Company Limited [TS-1028-ITAT-2025(DEL)]

Facts

The assessee was a non-resident company incorporated/established in Japan. It was engaged in the business of manufacturing and sale of functional engineered materials and electronic materials. It had a subsidiary named MKCI in India, engaged in the business of manufacturing Catalytic convertors and selling catalytic convertors in India. These convertors were used in automobile industries. The assessee used to provide certain precious metal/chemicals as Offshore sales to its India subsidiary.

The assessee received certain receipts from the Indian subsidiary as reimbursement of remuneration of seconded employees. These employees were getting part of their salary in India and part of their salaries in Japan via present assessee.

After analyzing the agreements of seconded employees between assessee and the India subsidiary, the Assessing Officer (AO) held that the employees of the assessee were exercising complete control over the physical premises of the Indian subsidiary and also carrying out sales operations in India and, hence, the assessee was having Permanent Establishment (PE) in India under Article 5 of India-Japan Treaty. The Dispute Resolution Panel (DRP) upheld the view of the AO.

Held

Tribunal held that AO and DRP misunderstood the Secondment Agreement. The agreement clearly says that:

• The seconded employees would work as part of the MKCI and help with its business in India.
• The seconded employees would be full-time employees of MKCI, working under its control, direction, and supervision.
• These employees would work in their personal capacity, not on behalf of the foreign company (MMS).
• The foreign company is not responsible for any losses caused by these employees while working at MKCI.
• The foreign company has no rights over MKCI's assets and employees.

This means that there was no employer-employee relationship between the foreign company (assessee) and the seconded employees.

According to Article 5 of the India-Japan Tax Treaty, a PE exists only if a foreign company has a fixed place of business in India and conducts business through it. Since these conditions are not met, the tribunal upheld the view of assessee.

Our Comments

This case highlights that a foreign company does not create a Permanent Establishment in India through seconded employees if those employees are fully controlled and employed by the Indian subsidiary.

Whether the Principal Purpose Test (PPT) provisions under the Multilateral Instrument (MLI) can be invoked to deny benefits under the India–Ireland DTAA in the absence of a specific notification under Section 90(1) of the Income-tax Act?

Sky High Appeal XLIII Leasing Company Limited [TS-1085-ITAT-2025(Mum)]

The assessee, an Ireland-based company, was engaged in the global business of aircraft leasing and had entered into dry operating lease agreements with IndiGo, a leading Indian airline. In its return of income, the assessee declared nil taxable income in India, asserting that (i) lease rentals received were not “royalty” under Article 12(3)(a) of the India-Ireland DTAA, which specifically excludes payments for the use of aircraft; (ii) in the absence of a PE in India under Article 5, the income constituted business profits taxable only in Ireland under Article 7; and (iii) alternatively, the income was exempt under Article 8(1) of the DTAA as it was derived from the operation of aircraft in international traffic.

The DRP upheld the AO’s key findings, highlighting that the use of an Irish SPV, lacking operational infrastructure or employees, did not establish a genuine presence in Ireland. The DRP also observed that the lease arrangements bore hallmarks of finance leases, based on risk allocation, non-cancellable terms, sub-leasing rights, and the alignment with the aircraft’s economic life. It will lead to addition of tax at the rate of 10% on gross receipts.

Held

The Mumbai ITAT ruled in favor of Sky-High Appeal XLIII Leasing Company, an Ireland-based aircraft lessor, holding that lease rentals earned from IndiGo under dry operating lease arrangements were not taxable in India under the India-Ireland DTAA. This decision represents a significant setback for the Revenue, which had sought to deny treaty benefits by invoking the PPT under the MLI.

The Tribunal categorically rejected the Revenue’s reliance on Articles 6 and 7 of the MLI, which house the PPT provisions, citing the Supreme Court's ruling in Nestlé SA. The ITAT held that no treaty modification via MLI can be enforced under Indian law unless separately notified under Section 90(1) of the Income-tax Act. Although both the India-Ireland DTAA and the MLI were notified independently, the Tribunal noted that the specific impact of the MLI on the India-Ireland DTAA had not been separately notified — a legal requirement per Nestlé.

The Tribunal dismissed the Revenue’s argument that the DTAA, being a ‘Covered Tax Agreement’, automatically incorporated the PPT provisions. It clarified that the so-called ‘synthesized text’ of the treaty (which includes MLI modifications) was merely explanatory, carried no legal force, and had not been notified in the Official Gazette. Therefore, the MLI provisions could not be treated as self-executing, and their application against the assessee was legally unsustainable. The ITAT emphasized that while the MLI is intended to enhance efficiency in implementing BEPS-related treaty measures, domestic legal requirements, particularly a Section 90(1) notification, cannot be bypassed. As such, the Revenue’s invocation of the PPT under the MLI failed on jurisdictional grounds.

Even assuming arguendo that the MLI applied, the ITAT found no abuse of the treaty. The assessee held a valid Irish Tax Residency Certificate (TRC), had substantial commercial presence in Ireland, and operated under a genuine business model supported by Ireland’s globally recognized aircraft leasing infrastructure. The Tribunal ruled that mere tax advantage or SPV structure does not imply treaty shopping or artificial avoidance, particularly when supported by commercial rationale.

The ITAT further rejected the existence of a PE in India under Article 5 of the DTAA. It ruled that the mere physical presence of the aircraft in India did not amount to a fixed place PE, and there were no personnel or business operations carried out by the assessee in India.

Lastly, the Tribunal upheld the applicability of Article 8(1) of the DTAA, ruling that lease income from aircraft deployed on both domestic and international routes by IndiGo qualifies as income from the operation of aircraft in international traffic, and is therefore taxable only in the state of residence (Ireland).

Our Comments

This ruling highlights the importance of strict statutory compliance for treaty modifications under Indian tax law, especially concerning the applicability of the MLI and PPT provisions. It underscores that treaty benefits cannot be denied without a valid Section 90(1) notification and reaffirms that genuine commercial substance in cross-border structures must be respected, not merely disregarded on perceived tax motives.

ITAT: Quashes GAAR proceedings; Can't question timing of stock market transactions by investor

Anvida Bandi TS-1110-HC-2025(TEL)

Facts

The petitioner, a long-term investor, earned long-term capital gains in FY 2019–20 but incurred a INR 176.5 million short-term capital loss trading HCL Technologies shares. The tax authorities invoked General Anti-Avoidance Rules (GAAR), deemed the loss booking an Impermissible Avoidance Arrangement (IAA), and disallowed set-off of the short-term loss against long-term gains under Section 144BA(6). The petitioner challenged this order through a writ petition.

Assessee’s Argument

The trades were genuine, conducted through a recognized stock exchange via her sole DEMAT account, with no knowledge of counterparties or pre-arranged arrangements. The transactions were part of a continuous investment portfolio, not isolated events. The Revenue failed to show any tax-avoidance motive or dealings with related parties, and there was no evidence linking the acquisition and disposal of shares to a tax-avoidance scheme. Mere timing of transactions without lack of commercial substance or contrivance does not satisfy GAAR’s requirements under Section 96.

Respondent’s Argument

The authorities contended that the HCL share trades were executed with the primary purpose of manufacturing a loss to offset substantial long-term capital gains, thereby invoking GAAR. They viewed the entire sequence of transactions as a scheme lacking any bona fide commercial purpose, qualifying it as an IAA under GAAR. Consequently, the GAAR invocation was formalized through a valid order issued under Section 144BA(6).

ITATs Decision

The Department failed to establish any collusive or structured arrangement in the HCL share trades, which were genuine and conducted at arm’s length. Lacking evidence of a dominant tax avoidance motive and a tainted element, GAAR invocation was unsustainable. Consequently, the order under Section 144BA(6) was set aside, and the writ petition was allowed without costs.

Our Comments

This ruling sets a precedent that protects genuine investors from arbitrary GAAR proceedings. It underscores the importance of substance over form and cautions tax authorities against overreach in interpreting tax avoidance. For M&A and investment professionals, it serves as a reminder to maintain robust documentation and ensure transparency in trading practices, but also offers reassurance that legitimate transactions will not be penalized merely for their timing.

Whether initiation of overlapping departmental proceedings for the same contravention is barred under Section 6(2)(b) of the CGST Act, and what constitutes ‘initiation of proceedings’ for the purposes of this Section?

Armour Security (India) Ltd. vs. Commissioner, CGST, Delhi East Commissionerate [(2025) 33 Centax 222 (S.C.)]

Facts

• The petitioner received show cause notice under Section 73 of the CGST Act/SGST from the State GST authorities alleging under-declaration of turnover vis-à-vis E-way Bills, and excess claim of ITC during FY 2020-21.
• Subsequently, the Central GST authorities conducted a search at the registered premises of the petitioner under Section 67(2) of the CGST Act whereby certain electronic gadgets and documents were seized. This was followed by issuance of summons to four directors under Section 70.
• Pursuant to receipt of one more summons from the Central GST authorities, the petitioner approached the Delhi High Court challenging both summons.
• They argued that the Central GST authorities investigated same ‘subject matter’ that was previously investigated by State GST authorities and condemned the jurisdiction for initiating parallel proceedings by two different authorities under Section 6(2)(b).
• However, the High Court refused to interfere with the summons issued, holding that the expression “any proceeding” in Section 6(2)(b) cannot be construed to include a search or investigation.
• The High Court noted that the intent of the statute, viz. Section 6(2)(b), is to prevent parallel proceedings relating to assessment, particularly those initiated under Sections 73 and 74 respectively of the CGST Act or any other analogous provisions.
• Aggrieved thereby, the petitioner approached the Apex Court.

Ruling

While dismissing the SLP, SC concluded as follows:

• Section 6(2)(b) of the CGST Act bars the ‘initiation of any proceedings’ on the ‘same subject matter’.
• Any action arising from the audit of accounts or detailed scrutiny of returns must be initiated by the tax administration to which the taxpayer is assigned.
• Intelligence-based enforcement action can be initiated by any one of the Central or State tax administrations despite the taxpayer having been assigned to the other administration.
• Parallel proceedings should not be initiated when one of the tax administrations has already initiated intelligence-based enforcement action.
• All actions that are initiated as a measure for probing an inquiry or gathering of evidence or information do not constitute ‘proceedings’ within the meaning of Section 6(2)(b).
• The expression ‘initiation of proceedings’ in Section 6(2)(b) refers to the formal commencement of adjudicatory proceedings by issuance of show cause notice, and does not encompass the issuance of summons, or the conduct of any search, or seizure etc.
• The expression ‘subject matter’ refers to any tax liability, deficiency, or obligation arising from any specific contravention which the Department seeks to assess or recover.
• Where any two proceedings seek to assess or recover an identical or a partial overlap in the tax liability, deficiency or obligation arising from any specific contravention, the bar of Section 6(2)(b) would be immediately attracted.

• Where the proceedings concern distinct infractions, the same would not constitute a ‘same subject matter’ even if the tax liability, deficiency, or obligation is same or similar, and the bar under Section 6(2)(b) would not apply.
• The two-fold test for determining whether a subject matter is ‘same’ entails:
  • Determining if an authority has already proceeded on an identical liability of tax or alleged offence by the assessee on the same facts.
  • Determining if the demand or relief sought is identical.

SC also issued following guidelines in cases where, after the commencement of an inquiry/investigation by one authority, another inquiry/investigation on the same subject matter is initiated by a different authority:

• The assessee is obliged to comply/respond to any summons/show cause notice issued by the Central/State tax authority.
• The assessee shall forthwith inform, in writing, the later authority if another inquiry/investigation on the same matter is ongoing.
• If inquiries are on distinct subject matters, the authorities must clarify to the assessee in writing.
• Any show cause notice issued in respect of a liability already covered by an existing show cause notice shall be quashed.
• The authorities shall decide inter-se which of them will continue with the inquiry/investigation. The taxable person has no locus to claim which authority should proceed with the inquiry/investigation in a particular matter.
• However, where the authorities are unable to reach a decision, the authority that first initiated the inquiry/investigation shall be empowered to carry it to its logical conclusion and the Courts in such case would be competent to pass an order for transferring the inquiry/investigation to that authority.
• If it is found that the authorities are not complying with these aforementioned guidelines, it shall be open to the taxable person to file a writ petition before the concerned High Court under Article 226 of the Constitution.

Our Comments

The Apex Court has provided long-awaited and critical clarity on the interpretation of scope of Section 6(2)(b) of the CGST Act. It has unequivocally held that proceedings commence only with the issuance of a show cause notice, and not with summons, search, or investigation. It has thus settled the cleavage of opinions given by various High Courts till date.

The Court has also urged the Directorate General of GST Intelligence (DGGI) to create a robust real-time data-sharing system between Central and State authorities for better coordination and visibility.

The judgment strikes a balance between protecting Revenue’s interests vis-à-vis safeguarding the taxpayers from undue harassment.

While taxpayers must comply with inquiries/summons, they are protected from duplicate show cause notices on the same liability, ensuring certainty and avoiding conflicting adjudications.

For tax authorities, the judgement bars parallel recovery notices, mandates harmonious vigilance between Central and State bodies, and cautions against mechanical use of summons.

ITAT Remits TP addition qua interest on outstanding receivables

Acme Cleantech Solutions Pvt. Ltd [ITA No.: 508/Del/2022]

M/s Acme Cleantech Solutions Pvt. Ltd. is a provider of telecommunication equipment, comprehensive passive infrastructure solutions including enclosures, cooling and power solutions to wireless telecom players and related services to mobile operators in India as well as overseas. The assessee entered into international transactions with its associated enterprises (“AEs”) during AY 2017-18 and AY 2018-19. Basis this fact, assessee’s case was referred to Transfer Pricing Officer (TPO) by the AO.

The Ld. TPO vide its order dated 7 February 2012 computed the Arm’s Length Price (ALP) of the international transactions after making certain adjustment and thereafter, the AO passed the draft assessment order, against which the assessee filed its objection before the DRP. The Ld. DRP vide its order dated 20 January 2022 upheld the adjustment made by the TPO as well as also upheld the disallowance of other expenses made by the AO under the provisions of Domestic Law. The issue in Transfer Pricing was addition of notional interest on outstanding receivables from AE of INR 23,014,135.

The CIT(A) accepted the taxpayer’s contention, held the Indian entity as the tested party, and directed the AO to adopt the 4.5% APA margin for AY 2015-16. The Revenue appealed to the ITAT, arguing that the APA, dated 25 August 2023, was not in existence during the TP assessment and was admitted without following Rule 46A(3). It further contended that APA margins could not apply to non-APA years.

Aggrieved, the taxpayer appealed before the hon’ble Income Tax Appellate Tribunal (ITAT) that:

• that assessee has not charged any interest from the Non-Associated Enterprises.
• Similar disallowance was deleted by the Ld. CIT(A) in Assessment Year 2012-13 and 2013-14; and
• Revenue has not filed any appeal against that order;

and basis the principle of consistency, no TP addition shall be made.

The honorable Tribunal accepted the assessee’s contention and held that in case an enterprise could not charge any interest from the Non Associated Enterprises (Non AEs), then no addition qua interest on receivables outstanding with AE can be made by the TPO. However, the ITAT remitted the file to TPO for the fresh adjudication to consider the facts and figure i.e., what are the figures of amounts qua Non-AE, what was the period of credit given to the Non-AEs as well as AEs, etc.

Our Comments

The assessee relied on the principle of consistency in rebutting the contentions of the AO. Accordingly, it is recommended that there should be consistency in submissions made across multiple assessment years. Further, it is important to align credit period offered to AEs vis-à-vis Non-AEs.

ITAT: Upholds TPO's segregation but remits ALP-determination qua IGS for substantiating need, benefit etc

Portescap India Pvt. Ltd. [ITA No.: 6749/Mum/2024]

Portescap India Pvt. Ltd. is engaged in the business of manufacturing of special purpose motors and sub assemblies for electronic industries. Assessee filed its return for AY 2021-22, declaring income of INR 2.193 billion. During the year under consideration, the assessee has availed the Intra-Group Services (IGS) from its AEs and benchmarked such transaction along with other international transaction using the Transactional Net Margin Method (TNMM) on an aggregation basis.

During assessment proceedings, the case was referred to the TPO, wherein the taxpayer’s contention regarding benchmarking the transaction on aggregation basis using TNMM method were rejected. Thereafter, TPO segregated the IGS transactions on the ground that they were not closely linked and questioned the commercial expediency of the payments made towards such services. Further, TPO observed that the assessee had not furnished sufficient evidence to demonstrate the need for, actual rendition of, and benefits derived from the services received. Consequently, the TPO proposed an adjustment by treating the ALP of such services effectively as nil.

Aggrieved by the TPO order, the assessee appealed to DRP, which upheld the addition proposed by the Ld. AO/TPO. Thereafter, the assessee filed its appeal before ITAT.

Before the ITAT, the assessee argued that the payments were genuine, supported by agreements and invoices, and that benefits had been received during the rendition of the services. The assessee also contended that the aggregation approach was consistently followed from previous years which was accepted by TPO earlier. The Revenue, on the other hand, defended the segregation and the adjustment.

In the appeal to the ITAT, the ITAT ruled the matter partially in favor of both the assessee and TPO. It held that the actions of TPO was justified in segregation of intra group services from other transactions as they are not interlinked with each other. Further, ITAT stated that ‘every year is separate year, and the transactions have to be analyzed independently qua the year’ and therefore, rejected the assessee’s contention on the applicability of principle of res judicata.

Our Comments

The taxpayer cannot place sole reliance on aggregation under TNMM for IGS. Further, the taxpayer cannot justify the treatment of transactions on the basis of acceptance by the TPO in earlier years, as the ITAT has held that ‘each assessment year is a separate year, and transactions must be examined independently with reference to that year.’ Accordingly, robust documentation is required to be maintained in order to substantiate the need, rendition, benefit, and to demonstrate that the services are neither duplicative nor in the nature of shareholder activities.