From The Judiciary

Whether undisclosed foreign bank deposits and investments in a UAE entity can be taxed under the Black Money Act where the assessee fails to explain their source and disclosure status?

Ashok Shankar [TS-1192-ITAT-2026(DEL)]

Facts

A search and seizure operation under section 132 was conducted on the Sanjay Bhandari Group on 27 April 2016, during which the assessee, Mr. Ashok Shankar, was also covered. Information was received from the UAE Competent Authority under the Exchange of Information Article of the India-UAE DTAA revealing that the assessee maintained a bank account with Emirates NBD Bank, Dubai, and was an authorized signatory thereto. The information further revealed deposits aggregating AED 5,025 (out of which AED 5,000 was the disputed amount) in the account. The UAE authorities also provided account opening forms, KYC records, and customer information forms signed by the assessee.

Additionally, information was received that the assessee was a Director and shareholder of Santech International FZE, UAE, holding 10% share capital amounting to AED 3,000. The Revenue observed that neither the foreign bank account nor the investment in Santech UAE was disclosed in the assessee's income tax returns or in Schedule FA, nor was any declaration made under the Black Money Act, 2015. Consequently, proceedings under section 10(1) of the Black Money Act were initiated, and additions were made under sections 3, 4 and 5 of the Act.

Assessee’s Arguments

• The assessee contended that the AED 5,000 credited to the Emirates NBD Bank account was not his deposit but was transferred by his friend to start a business in Dubai.
• Since the proposed business never materialized, only bank maintenance charges were debited, and the account was eventually closed in April 2017 with a nil balance.
• As regards Santech UAE, the assessee submitted that the company was established by Mr. Sanjay Bhandari around FY 2005-06 and that although his name appeared as a Director and 10% shareholder, he had not contributed any capital towards the shareholding.
• He claimed that he merely assisted in opening the bank account and was not aware of subsequent developments. The assessee also argued that no foreign asset existed during the relevant previous year and, therefore, no addition could be made for AY 2020-21.

Revenue’s Arguments

• The Revenue argued that the foreign bank account stood in the assessee's name and the assessee was the authorized signatory, supported by documentary evidence received from UAE authorities, including KYC documents and account opening forms.
• The Revenue emphasized that the assessee failed to substantiate his claim that a friend made the AED 5,000 deposit, as he furnished no details of the friend or supporting evidence.
• Further, the assessee was a signatory to the Memorandum and Articles of Association of Santech UAE and held a 10% shareholding corresponding to paid-up capital of AED 3,000.
• The Revenue contended that neither the bank account nor the investment was disclosed in the income tax returns, Schedule FA, or through a declaration under section 59 of the Black Money Act.
• Since these assets had never suffered tax in India and remained undisclosed, they were liable to be taxed under sections 3, 4, and 5 of the Black Money Act

Held

• The ITAT upheld the additions made under the Black Money Act and dismissed the assessee's appeal.
• The Tribunal held that the assessee, being a tax resident of India, had failed to disclose the foreign bank account and investment in Santech UAE either in his returns of income, Schedule FA, or under the compliance window provided under the Black Money Act.
• The Tribunal observed that the assessee failed to provide satisfactory evidence regarding the source of the AED 5,000 deposited in the foreign bank account and similarly failed to explain the source of the AED 3,000 investment in Santech UAE.
• The Tribunal noted that the assessee's explanations did not inspire confidence and that facts, especially within the knowledge of the assessee, had been withheld.
• Accordingly, the Tribunal held that the undisclosed foreign assets were chargeable to tax under sections 3, 4 and 5 of the Black Money Act. It sustained the assessment order and the penalty levied under section 41.

Our Comments

The decision reiterates that mere denial of ownership or unsupported explanations are insufficient to rebut documentary evidence obtained through international exchange-of-information mechanisms. The case highlights the stringent disclosure requirements under the Black Money Act. It emphasizes the importance of reporting foreign assets in Schedule FA and maintaining documentary evidence regarding the source of such investments.

Can a Permanent Establishment be constituted merely based on group affiliation and presence of expatriates in an Indian affiliate, without evidence of business activities being carried on for the foreign enterprise?

Honda Trading Asia Company Ltd [TS-1194-ITAT-2026(DEL)]

Facts

Honda Trading Asia Company Ltd., Thailand (HTAS), engaged in the business of supplying raw materials, spare parts and capital goods to Honda Cars India Ltd. (HCIL). The Revenue alleged that HTAS had a Permanent Establishment (PE) in India based on survey proceedings conducted at HCIL, wherein statements of expatriate employees deputed by Honda Motor Co. Ltd., Japan (HMJ) were recorded.

According to the Revenue, these expatriates were carrying on the business of HMJ and its group entities, including HTAS, from HCIL's premises. Based on such allegations, the Revenue sought to tax the profits arising from HTAS's offshore supplies to HCIL and made transfer pricing adjustments. HTAS, however, contended that it operated entirely from Thailand, had no office, employees, or fixed place of business in India, and merely supplied goods to HCIL on a principal-to-principal basis.

Revenue’s Arguments

• The Revenue argued that HCIL was economically and functionally dependent on HMJ and other Honda group entities, including HTAS. It relied heavily on survey statements showing that expatriate employees working in HCIL received a portion of their salaries from Japan and continued to have a lien over their employment with HMJ.
• According to the Revenue, these expatriates exercised control over key business functions of HCIL and simultaneously carried on the business of HMJ and its associated enterprises, including HTAS.
• Therefore, HCIL's premises constituted a fixed place PE available to HTAS in India.
• The Revenue further contended that once a PE existed, profits attributable to such PE were taxable in India, irrespective of the transfer pricing analysis undertaken in HCIL’s case.

Assessee’s Arguments

• HTAS submitted that it had no PE in India under Article 5 of the India-Thailand DTAA, as it neither maintained any office nor deputed any employees to India.
• It contended that the expatriates referred to by the Revenue were employees of HMJ working under the control and supervision of HCIL and were not rendering any services on behalf of HTAS.
• HTAS emphasized that its role was limited to offshore supply of raw materials and capital goods pursuant to purchase orders placed by HCIL.
• It also relied on the ruling of the Authority for Advance Rulings in the case of Honda Motor Co. Ltd., Japan, as well as earlier Tribunal decisions in its own case for AYs 2010-11, 2013-14, 2014-15 and 2015-16, wherein it had been held that HTAS did not have a PE in India.
• HTAS further argued that mere group affiliation with HMJ could not, by itself, result in the existence of a PE in India.

Held

• The Delhi ITAT held that HTAS did not have a PE in India.
• The Delhi ITAT observed that the Revenue had failed to bring any cogent material on record to establish that the expatriates deputed by HMJ to HCIL were providing services on behalf of HTAS.
• There was no evidence to show that HTAS had any office, fixed place of business, or employees in India.
• The Tribunal held that the Revenue's case rested merely on presumptions arising out of the group relationship between HMJ and HTAS and the presence of expatriates at HCIL.
• It reiterated that mere association within a corporate group cannot by itself establish a PE.
• Following the earlier coordinate bench decisions in HTAS's own case and the AAR ruling in the case of Honda Motor Japan, the ITAT concluded that HTAS had no PE in India.
• Consequently, the transfer pricing adjustments became infructuous and were not adjudicated.
• Accordingly, the appeals for AYs 2016-17 to 2019-20 were allowed in favor of the assessee on the PE issue.

Our Comments

The ruling reaffirms that mere group affiliation or presence of expatriates in India is insufficient to constitute a PE. The Revenue must demonstrate a clear nexus between the foreign entity's business and activities carried out in India through cogent evidence.

Goodwill amortization excluded from operating costs: Delhi ITAT reaffirms Transfer Pricing (TP) principles

Janes Defense India LLP. ITA No.5387/DEL/2024 for Assessment Year (‘AY’) 2021-22

Facts

The taxpayer, engaged in providing IT-enabled services (ITeS), acquired the support service business of “Jackal India" from IHS Global Private Limited through a slump sale transaction. The cost of Goodwill was included in the consideration towards acquisition.

During the initial transfer pricing proceedings, in the Show-cause notice (SCN), the Ld. Transfer Pricing Officer (TPO) treated amortization of Goodwill on acquisition as a non-operating expense; however, in the final order issued by the Ld. TPO, amortization of Goodwill was treated as an operating item, without any specific reasoning, resulting in a transfer pricing adjustment by the Ld. TPO.

The Dispute Resolution Panel (DRP) also upheld the position of the Ld. TPO, aggrieved of which the taxpayer has appealed before the Hon’ble Income Tax Appellate Tribunal (ITAT).

Taxpayer’s Contention

The taxpayer contended that the Ld. TPO violated the principles of natural justice by changing its position of treating amortization of Goodwill as non-operating in its final order, without giving the taxpayer any opportunity to rebut the revised view.

Further, the taxpayer contended that amortization of Goodwill was not claimed as a deduction in the Return of Income (ROI). Consequently, considering it as operating for TP purposes would result in double disallowance.

The taxpayer, relying on various judicial precedents, contended that amortization of Goodwill is an extraordinary and non-recurring item arising from business acquisition with no nexus to the provision of services to the Associated Enterprise (AE). Accordingly, it should be treated as a non-operating item.

Revenue’s Contention

The Revenue contended that the taxpayer had recognized Goodwill as an intangible asset and amortized it as an expense in its profit & loss statement. Accordingly, it is a business expense that should be included in operating expenses.

Further, Revenue contended that TP provisions are separately governed by Chapter X. Consequently, tax treatment of Goodwill under normal computation provisions is irrelevant when determining arm's-length margins.

Relying on the taxpayer’s own FAR analysis, the Revenue contended that intangible assets form part of the asset base employed in the business. Goodwill, being a principal intangible asset recorded in the taxpayer's books, should be regarded as actively contributing to business operations. Thus, excluding only the amortization charge while retaining the benefit of Goodwill in revenue generation would distort the PLI computation.

Held

The Hon’ble ITAT distinguished between Goodwill and other intangible assets, noting that other intangible assets such as patents, trademarks, and technical know-how directly contribute to profit generation. In contrast, Goodwill arising from an acquisition is merely a consequence of a business purchase transaction.

Hon’ble ITAT emphasized that Goodwill created pursuant to a business acquisition or merger cannot be equated with revenue-generating operational assets. The corresponding amortization charge therefore lacks the characteristics of a normal recurring operating expense.

Therefore, the ITAT noted that multiple judicial authorities have consistently taken the view that Goodwill amortization is an abnormal item resulting from acquisition transactions and therefore falls outside the ambit of operating costs. Further, the Hon’ble ITAT observed that Goodwill may be amortized in the books over several years; its origin remains a one-time acquisition event rather than an operating activity. Consequently, its accounting treatment cannot alter its fundamental character for transfer pricing purposes.

Our Comments

This ruling reaffirms that transfer pricing analysis under TNMM should be driven by operational realities rather than acquisition-related accounting consequences. Considering amortization of Goodwill arising from a business acquisition as abnormal and non-operating, the Hon’ble ITAT has reinforced the principle that arm's-length profitability must be assessed based on costs incurred in the ordinary course of business and not be distorted by expenses linked to capital transactions or corporate restructuring events.

The Indian Hotels Company Limited ITA No.371/MUM/2010; ITA No. 841/MUM/2010; CO No. 169/MUM/2010 for Assessment Year (‘AY’) 2005-06

The Indian Hotels Company Limited ITA No.371/MUM/2010; ITA No. 841/MUM/2010; CO No. 169/MUM/2010 for Assessment Year (‘AY’) 2005-06

Facts

The taxpayer had provided a Letter of Comfort to the Bank for the loan granted to the AE, without charging any guarantee fee. The Ld. TPO treated the issuance of a Letter of Comfort to the AE as an international transaction and proposed an adjustment for not charging a guarantee commission. The Ld. CIT(A) deleted the TP adjustment. Aggrieved by the order, the Revenue filed an appeal before the Hon’ble ITAT.

Taxpayer Contention

Taxpayer contended that the Letter of Comfort was provided to the AE indicating its assurance towards complying with the terms of the financial transaction by the AE. The taxpayer did not guarantee performance in the event of default

Revenue’s Contention

The Revenue contended that the Letter of Comfort was provided to the AE to provide a benevolent advantage to the AE. Accordingly, issuing a Letter of Comfort is an international transaction for which a guarantee fee should have been charged.

Held

The Hon’ble ITAT observed that the taxpayer had not undertaken any binding obligation to repay the loans in the event of default by its AEs. Relying on the ruling of the Hon'ble Karnataka High Court in United Breweries Holdings Ltd. and the decision of the Chennai ITAT in TVS Logistics Services Ltd., the Hon’ble ITAT held that a Letter of Comfort is fundamentally different from a corporate guarantee. Since the Letter of Comfort did not create a legally enforceable obligation on the taxpayer, it was held to be outside the ambit of an "international transaction" under transfer pricing provisions.

Our Comments

The ruling reinforces the principle that not every form of shareholder support extended to an AE constitutes an international transaction for transfer pricing purposes. By distinguishing a non-binding Letter of Comfort from a legally enforceable corporate guarantee, the Hon’ble ITAT has appropriately focused on the substance and legal effect of the arrangement rather than its nomenclature.

This ruling provides useful guidance that transfer pricing exposure should arise only where an enforceable financial commitment or economic service is provided to an AE, thereby offering greater certainty to taxpayers in relation to intra-group financing and treasury support arrangements.