From The Judiciary

M&A Tax

Taxability of Software License Payments under India–Canada DTAA

Computer Modelling Group Ltd [TS-270-ITAT-2026, Delhi ITAT]

Facts

The issue was whether payments received by Computer Modelling Group Ltd., a Canada-based company providing reservoir simulation software to Indian oil and gas companies, were taxable in India. The company supplied software licenses along with maintenance, support, and training services. The tax department treated these receipts as royalty and fees for technical services (FTS) under the Income-tax Act and the India–Canada DTAA.

Assesses Argument

The assesse argued that the software supplied was a copyrighted product and not a transfer of copyright; therefore, the payments could not be treated as royalty. It further contended that the support and training services did not “make available” technical knowledge, a requirement for taxation as Fees for Included Services (FIS) under the DTAA. Since the company had no Permanent Establishment (PE) in India, its income should not be taxable in India.

Tribunal’s Findings

The Delhi ITAT, relying on the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd., held that payments for software licenses are not royalty as they involve the sale of a copyrighted article. The Tribunal also distinguished the Paradigm Geophysical case, noting that the assesse sold standardized off‑the‑shelf software, not customized solutions.

The services also failed the “make available” test. In the absence of a PE in India, the receipts were held not taxable in India.

Our Comments

This ruling underscores that standardized software licenses are not “royalty” under DTAA, aligning with global jurisprudence. It highlights the Revenue’s burden to prove PE, stressing evidence over assumptions in cross‑border taxation. The customized vs. off‑the‑shelf software distinction remains central to taxability. By maintaining consistency with earlier years, the ITAT reduces litigation risk and offers clarity for foreign software providers, reflecting a taxpayer‑friendly interpretation of DTAA provisions.

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Supreme Court Ruling: Share Substitution on Amalgamation Not Taxable Until Realized

Jindal Equipment Leasing & Consultancy Services Ltd. v. CIT [2026] 182 taxmann.com 219

Facts

The Supreme Court (SC) considered whether receipt of shares on amalgamation is taxable when the original shares were held as stock-in-trade. The assesse, engaged in share trading, held shares of a company as trading assets. Pursuant to a court-approved amalgamation scheme, those shares were cancelled, and the assesse received shares of the amalgamated company in substitution.

The tax department argued that the shares were held as stock-in-trade, and their substitution effectively constituted to the realization of trading assets. Hence, the difference in value represented business income taxable under section 28.

Assesses Contentions

The assesse contended that the receipt of new shares was merely a consequence of the amalgamation and did not amount to a sale or transfer. Since no actual profit was realized, the transaction did not give rise to taxable income. It argued that tax could arise only when the substituted shares were eventually sold.

Supreme Court’s observations and decision

The Supreme Court held that the receipt of shares in an amalgamated company in exchange for shares of the amalgamating company does not amount to a taxable event. It was observed that such a substitution takes place by operation of law under a scheme of amalgamation and does not constitute a sale or transfer. Since no real profit is realized at the time of substitution, no business income arises under section 28. The Court emphasized that taxation must be based on real income and not on notional or hypothetical gains. Accordingly, tax liability would arise only when the substituted shares are actually sold.

Our Comments

The ruling provides clarity that mere substitution of shares during amalgamation does not trigger immediate tax liability, even when the shares are held as stock-in-trade. It reinforces the principle that only real and realized income should be taxed. The decision offers relief to businesses and financial entities holding shares as trading assets in corporate restructuring transactions. It also reduces the risk of litigation in cases involving share exchanges pursuant to amalgamation schemes.

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International Tax

Whether a foreign company can claim exemption from capital gains tax under a Double Taxation Avoidance Agreement (DTAA) merely on the basis of a Tax Residency Certificate (TRC), even when it lacks commercial substance and is alleged to be a shell or conduit entity created to obtain treaty benefits?

Hareon Solar Singapore Pvt. Ltd [TS-112-ITAT-2026(DEL)]

Facts

The assesse is a private limited company incorporated in Singapore in 2015 and claimed to be a tax resident of Singapore during the relevant assessment year. Its principal activity was making investments in companies engaged in the production, sale, and trading of power. During the year, the assesse earned long-term capital gains from the sale of equity shares and Compulsory Convertible Debentures (CCDs) of Renew Solar Energy (Karnataka) Pvt. Ltd. to Renew Solar Power Pvt. Ltd. The assesse claimed exemption from tax in India on these capital gains under Article 13 of the India–Singapore Double Taxation Avoidance Agreement (DTAA). It also contended that it satisfied the Limitation of Benefits (LOB) clause under Article 24A of the treaty, which provides that a Singapore resident will not be considered a shell or conduit company if it incurs operational expenditure of at least SGD 200,000 in Singapore during the relevant period.

However, the Assessing Officer (AO) rejected the assesse’ s claim. The AO observed that the assesse’ s immediate holding company was located in Hong Kong and its ultimate holding company was based in China, both jurisdictions where capital gains are generally taxed in the source country. The AO further noted that the effective control and management of the assesse were not exercised in Singapore, as the individuals managing the funds were located outside Singapore. The assesse also had no employees and had not incurred normal business expenses required for day-to-day operations. Based on these facts, the AO concluded that the assesse was merely a shell or conduit company lacking commercial substance, created primarily to obtain treaty benefits under the India–Singapore DTAA. The draft assessment order issued by the AO was upheld by the Dispute Resolution Panel (DRP), which rejected the assesse’ s objections.

Held

The Delhi Income Tax Appellate Tribunal (ITAT) upheld the decision in favour of the Revenue. The Tribunal observed that the Singapore entity had been interposed solely to route investment into Renew Solar Energy (Karnataka) Limited, India. The ultimate Chinese parent company was already supplying solar PV modules to the Indian company for a solar power project and had an obligation under the joint venture agreement to make investments in the Indian entity. The Tribunal noted that the Chinese parent could have invested directly in the Indian company; therefore, routing the investment through a Singapore subsidiary lacked commercial justification and appeared intended solely to obtain tax advantages under the treaty. The Tribunal also emphasized that the assesse had no independent source of funds or business operations and was entirely financed by its Hong Kong parent, which in turn was a subsidiary of the Chinese parent company. In the absence of genuine commercial substance or economic rationale, the Singapore company was considered a shell or conduit entity. The Tribunal further held that mere possession a Tax Residency Certificate (TRC) is not conclusive for claiming treaty benefits, and that the surrounding facts must also demonstrate real economic substance and effective management in the treaty jurisdiction.

Accordingly, the Tribunal held that the Limitation of Benefits provisions under Article 24A of the India–Singapore DTAA were attracted, and the assesse was not entitled to treaty benefits. The capital gains arising from the transfer of shares and CCDs were therefore taxable in India based on the source rule. The Tribunal also clarified that even if treaty benefits had been previously granted in relation to interest on CCDs, that would not automatically entitle the assesse to similar benefits for capital gains, since “two wrongs do not make a right.” The decision relied on the principles laid down by the Supreme Court in the Tiger Global case, reaffirming that treaty benefits can be denied where an entity lacks commercial substance and is used primarily for treaty shopping.

Our Comments

This judgment reinforces that a Tax Residency Certificate alone is not conclusive for claiming DTAA benefits if the entity lacks real commercial substance. It underscores the judiciary’s strong stance against treaty shopping through shell or conduit companies created solely to obtain tax advantages.

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Whether reinsurance premiums earned by a foreign company from overseas direct business can be attributed to and taxed in India merely because the company has an Indian branch or earlier subsidiary?

General Reinsurance AG [TS-151-ITAT-2026(Mum)]

Facts

General Reinsurance AG (assesse) is a German tax resident and is part of the Berkshire Hathaway Group, engaged in the global reinsurance business.

The company earlier operated in India through an Indian subsidiary with the name Gen Re Support Services Mumbai Private Limited (GSSMPL), which was involved in support function. Earlier, during AY 2015-16, the ITAT bench held that the reinsurance premium earned by the assesse from Indian insurance companies was not taxable in India by ITAT Bench.

During AY 2018-19, the assesse had established its Indian branch with the approval of IRDAI and discontinued the subsidiary arrangement.

The company earned reinsurance premiums from direct business conducted outside India through its overseas offices. India Branch does not service reinsurance contracts or assist in the negotiation or settlement of any claim in respect of the direct business of the assesse.

However, the Revenue sought to tax a portion of the overseas reinsurance income in India

Revenue’s Arguments

• The Revenue contended that the company’s Indian presence created a taxable nexus in India.
• The Revenue alleged that the India Branch is the PE of the assesse, exercising indirect authority to negotiate and enter into contracts on behalf of the assesse, and is also habitually securing orders for or on behalf of the assesse.
• Based on this, the Revenue claimed that the Indian branch constituted a PE or Dependent Agent Permanent Establishment (DAPE). Therefore, a portion of the global reinsurance premium should be attributed to Indian operations.
• In the case of FTS payment, the revenue held the Indian branch to be resident in India and held that the payment made by the Indian branch to the head office (assesse) is a payment made by a resident to a non-resident, bringing it within the scope of FTS u/s. 9(1)(vii)(b) of the Act.

Assesses Arguments

• The Indian branch is not a separate legal entity but merely an extension of the same foreign company.
• The branch did not participate in negotiation, conclusion, or underwriting of the reinsurance contracts relating to overseas direct business. All such contracts were negotiated, executed, and managed entirely by the company's overseas offices.
• Since the Indian branch had no role in generating the overseas reinsurance premium, there was no basis for attributing such income to India.
• Assesse Hence, the assesse argued that income from overseas direct business should not be attributed to the Indian PE on the above grounds and on the basis of its own previous case for AY 2025-16.
• Payments made by the Indian branch to the head office for IT and management costs cannot be treated as FTS under section 9(1)(vii)(b) because the branch and head office are the same legal entity. Reliance was placed on the Sumitomo Mitsui Banking Corporation case and the India–Germany DTAA protocol.

Held

The Tribunal upheld the decision in favour of the Assesse, it observed that:

• A branch office is not a separate legal person from the foreign company. Therefore, the Indian branch cannot be treated as a dependent agent of the same entity.
• The Tribunal further examined the actual role of the Indian branch in relation to the overseas reinsurance business. It found that:
  • The Indian branch had no involvement in negotiating reinsurance contracts for the overseas direct business and did not participate in their execution.
  • The branch did not undertake underwriting or risk assessment for those transactions.
• Since the Indian branch did not contribute to the generation of the overseas reinsurance premium, there was no economic nexus between the Indian operations and that income. Accordingly, the Tribunal held that:
  • The Indian branch cannot be treated as a DAPE for those transactions, and no portion of the overseas reinsurance premium can be attributed to India.
  • Therefore, the reinsurance premium earned by overseas offices from direct business is not taxable in India.
  • In case of FTS, payments from the Indian branch to the head office for IT and management costs are not FTS and not taxable in India under the Act and DTAA.

Our Comments

This judgment highlights that a branch cannot be treated as a DAPE of its own entity, and that income can be taxed in India only if the Indian establishment is actually involved in generating it; mere presence of a branch or subsidiary is insufficient without a functional and economic nexus.

Whether IGST paid on ocean freight under CIF contract was eligible as a refund or was to be credited to Consumer Welfare Fund since incidence of tax had been passed onto consumers?

Union of India vs. Torrent Power Ltd. [(2026) 39 Centax 265 (SC)]

Facts

• The respondent, a power generation and distribution company in Gujarat, had imported natural gas on a CIF basis for its operations.
• On such CIF imports, the respondent had paid IGST on ocean freight under the reverse charge mechanism, as per Notification No. 10/2017 IGST (Rate).
• After the levy on ocean freight was declared unconstitutional by the Apex Court in Mohit Minerals Pvt. Ltd. vs. Union of India [2020 (33) G.S.T.L. 321 (Guj.)], the respondent filed refund applications for the taxes paid.
• However, the Tax authorities denied the refund, stating that the respondent had passed on the tax burden onto its consumers, as the IGST amounts were already included in the electricity tariffs approved by the Gujarat Electricity Regulatory Commission (GERC).
• The Tax authorities, therefore, held that, as per the principle of unjust enrichment, the amount must be transferred to the Consumer Welfare Fund (CWF) in terms of Section 57 of the CGST Act, and not refunded to the respondent.
• Such rejection was challenged before the Gujarat High Court, which directed that the refund should be paid to the respondent, subject to its proposal to deposit the refunded amount in a separate account and return it to consumers through tariff reduction.
• The Revenue thus filed an appeal before the Supreme Court, arguing that the High Court had adopted a procedure not contemplated by the CGST Act, which mandates crediting such refunded amounts to the Consumer Welfare Fund when the incidence of tax has been passed on to consumers.

Ruling

• The Supreme Court held that the High Court’s approach was contrary to the statutory scheme, because under Sections 54(5), 54(8)(e), and 57 of the CGST Act, when the tax burden is passed on to consumers, any refundable amount must be credited to the Consumer Welfare Fund and not refunded to the assessee.
• Since the respondent had admittedly passed on the tax burden to consumers, the statutory exception allowing a refund to the applicant did not apply.
• Supreme Court observed that the procedure suggested by the respondent and accepted by the High Court introduced an altogether alien modality for disbursal of refund not contemplated by Section 54 and Rules framed therein.
• Moreover, it would be an unworkable exercise for the authorities concerned to verify whether the consumers who actually bore the tax burden were the beneficiaries of such a refund (which was to be offered as revenue to GERC under the Electricity Act, 2003).
• The Supreme Court, therefore, set aside the High Court order and directed the respondent to transfer the amount to the tax authorities so as to be credited to the Consumer Welfare Fund.

Our Comments

The ruling underscores that refund eligibility must strictly align with statutory provisions, and that industries operating under regulated pricing must anticipate refund scrutiny when consumer incidence is evident. The decision brings clarity to the treatment of ocean freight related refunds and reinforces discipline in GST refund administration.

ITAT holds - TPO cannot question commercial expediency

Tractors and Farm Equipment Ltd, ITA No.2054/Chny/2025 for Assessment Year (‘AY’) 2013-14

Facts

The Assesse is engaged in the business of manufacturing and selling of tractors, engineering plastic components and batteries, and trading in related parts and attachments. The Assesse has made payments toward market study expenses to its Associated Enterprise (AE) in Turkey as a part of its business expansion.

The Ld. Transfer Pricing Officer (TPO), during the course of the assessment proceedings, determined the transaction relating to the export of tractors to AE in Turkey at arm’s length, based on the overall margins of the Assesse, after taking into account the payments made towards market study expenses. However, transfer pricing (TP) adjustment was made with respect to the international transaction pertaining to the payment of market study expenses to the same AE, by determining its arm’s length price (ALP) as Nil. The Ld. TPO argued that the Assesse could not demonstrate whether any substantial benefit has been received from such expenses.

The Commission of Income Tax CIT(A) also upheld the position of the TPO. Aggrieved by the order of the CIT(A), the Assesse appealed before the Hon’ble Income Tax Appellant Tribunal (ITAT).

Assesse’ s contention

The Assesse submitted that, for the purpose of establishing its AE in Turkey, a market study was undertaken to analyze competing tractor brands. Following the market study, substantial investments were made, which subsequently led to an increase in tractor sales in Turkey.

The Assesse contended that the TPO cannot step into the shoes of a businessman to determine whether a particular expenditure ought to have been incurred. Such decisions, it was argued, must be evaluated solely from the perspective of commercial expediency.

Revenue’s contention

The Revenue contended that the information provided by the AE is readily available in the public domain through various websites, and that the research details submitted are generic in nature. Accordingly, it was argued that the Assesse has failed to substantiate the benefit derived from the market study.

Held by ITAT

The Hon’ble ITAT held that the Assesse had duly discharged its onus of substantiating the benefit derived from the payments made towards the market study. It was further observed that the jurisdiction of the TPO is limited to determining the ALP of an international transaction, and that the question of commercial expediency of an expenditure cannot form the basis for determining the ALP at Nil. Accordingly, the TP adjustment with respect of the market study expenses was directed to be deleted.

Our Comments

Taxpayers need to ensure that they maintain robust and contemporaneous documentation demonstrating that specific benefits have been derived along with the business necessity for such services. Documentation typically shall include description of the services, need benefit test, evidence of service receipt, cost base and allocation method along with the details of the benchmarking approach.

Absence of intent to evade tax does not amount to misreporting of income

Verizon Data Services India Private Limited, W.P.No 18377 of 2024 and W.M.P.Nos. 20189 & 20190 of 2024 for Assessment Year (AY) 2020-21

Facts

The Assesse in its TP Study Report (TPSR) determined the international transactions were at arm’s length based on an external benchmarking analysis. However, the Ld. TPO conducted an independent search and concluded that the operating margin of the Assesse is not within the arm’s length range of comparable companies. Accordingly, during the course of the proceedings TP, an adjustment was made by the Ld. TPO thereby resulting into increase of income of the Assesse in the Return of Income (ROI).

Pursuant to the TP adjustment, a penalty u/s 270A of the Act¹ was imposed on the Assesse. The Assesse’ s application for immunity from the penalty was rejected, following which a writ petition has been filed before the Madras High Court seeking immunity under Section 270AA of the Act.

Assesse’ s contention

The Assesse contended that the Assessment Order itself refers to misreporting of income, making the denial of immunity beyond authority of law. Additionally, the TP adjustment led to an upward revision of the ROI which can be characterized as under reporting rather than misreporting.

The Assesse further contended that it has complied with the provisions of Chapter X of the Act while reporting the international transactions.

Revenue’s contention

The Revenue contended that the Assessing Officer (AO) had considered the submissions filed by the Assesse and alleged that the under-reporting of income was a consequence of misreporting, purportedly arising from the TP adjustment made by the TPO while determining the ALP of the international transactions of the Assesse.

Ruling

The HC held that “misreporting of income” is an aggravated form of under-reporting, characterized by a deliberate and willful attempt to evade tax. Unless there is deliberate and conscious concealment or furnishing of false particulars, it cannot be inferred that under-reporting is a consequence of misreporting of income.

HC held that assessee had maintained information and documents as prescribed u/s Sec 92D of the Act and complied with all statutory requirements under Chapter X of the Act. HC opined that the nature of the TP adjustment made by the TPO involves estimation and ALP determination which cannot be equated with concealment or misrepresentation.

Our Comments

The Hon’ble HC clearly distinguished between under reporting and misreporting, emphasizing that deliberate concealment or willful attempt to evade tax triggers the latter. Transfer pricing adjustments, which inherently involve estimation and ALP determination, should not automatically be construed as misreporting. This ruling reinforces the importance of maintaining proper documentation and complying with statutory provisions under Chapter X.