From The Judiciary

M&A Tax Update

ITAT - Non-Resident Claim, Disallows Residence-Based Tax Planning

Binny Bansal¹ [TS-18-ITAT-2026(Bang)

Facts

Mr. Binny Bansal, Flipkart Co founder, moved to Singapore for employment in February 2019. In FY 2019-20, he sold shares of Flipkart Pvt. Ltd. (Singapore) and claimed non-resident status under the Income Tax Act and capital gains exemption under the India–Singapore DTAA. The tax authorities treated him as an Indian resident and taxed the gains in India.

Assesses Argument

• He was a person “being outside India” and merely visiting India; hence, eligible for the 182-day relaxation under Explanation 1(b) to section 6(1)(c);
• Alternatively, benefit under Explanation 1(a) applied as he left India for employment outside India;
• His permanent home, family life, employment, banking, and daily affairs were in Singapore;
• Economic ties in India were largely passive legacy investments acquired while resident and constrained by FEMA;
• Even if dual residency existed, treaty tie-breaker rules favored Singapore.

Tribunal’s Findings

• Mr. Bansal satisfied the 60-day + 365-day test under section 6(1)(c) and was a resident under the Act.
• The relaxation under Explanation 1(b) (“being outside India”) applies only to existing non-residents visiting India, and not to individuals who recently migrated abroad.
• Explanation 1(a) (year of departure) is available only in the year an individual leaves India and cannot not be invoked for FY 2019-20.
• Under Article 4 of the DTAA, even assuming dual residency, the center of vital interests remained in India, given the assesses substantial India-centric investments, business interests, and economic exposure.
• Treaty protection under Article 13 was therefore denied, and capital gains were taxable in India.

Our Comments

The ruling underscores that physical relocation alone does not determine tax residency; a demonstrable shift in personal, economic, and investment nexus is essential. By adopting a substance-over-form approach, the ITAT has set a cautionary precedent for globally mobile Indian founders and investors, especially in years involving significant capital transactions. Founders and HNIs must carefully reassess mobility strategies, especially in years involving liquidity events. Robust documentation and clean factual timelines are critical.

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M&A/International Tax Update

Supreme Court Judgment in the Tiger Global Case - A Shift Towards Substance-Based Taxation

Tiger Global International² II Holdings [TS-38-SC-2026]

The Supreme Court of India, in its recent judgment in the Tiger Global case, has delivered a significant ruling on the availability of tax treaty benefits and the application of anti-avoidance provisions in cross-border investments.

Facts

Tiger Global, a foreign investment fund, realized substantial capital gains from the sale of its Flipkart stake to Walmart in 2018. The investment was routed through Mauritius-based entities. Relying on the India–Mauritius Double Taxation Avoidance Agreement (DTAA), Tiger Global claimed exemption from capital gains tax in India on the basis that it was a tax resident of Mauritius and held valid Tax Residency Certificates (TRCs).

Assesses Contentions

Tiger Global argued that, under the DTAA, capital gains arising from the sale of shares were taxable only in Mauritius, not in India. It contended that possession of valid TRCs was sufficient to establish its eligibility for treaty benefits. The assesse further claimed that the investment structure was lawful and that the tax authorities could not deny treaty protection merely by questioning the commercial motive behind the arrangement.

Supreme Court’s Findings

The Supreme Court rejected the assesses arguments and held that treaty benefits are not automatic. The Court emphasized that tax authorities are entitled to examine the substance of the arrangement rather than its legal form. It ruled that entities created primarily to obtain tax advantages, without real commercial substance or decision-making presence, can be treated as impermissible avoidance arrangements under the General Anti-Avoidance Rules (GAAR). The Court further clarified that holding a TRC is not conclusive proof of genuine tax residency, and “grandfathering” benefits would apply only to bona fide structures.

Accordingly, the Supreme Court reversed the Delhi High Court’s judgment and upheld the Revenue’s power to deny treaty relief.

Our Comments

This judgment reinforces India’s shift towards substance-over-form taxation. It sends a strong message that tax treaties cannot be misused for aggressive tax planning and that real economic presence is crucial to claim treaty benefits. The ruling is likely to have wide implications for foreign investors using intermediary jurisdictions and underscores the increasing importance of commercial substance in cross-border investments involving Indian assets.

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International Tax

Whether a Permanent Establishment (PE) is entitled to claim deduction of expenses incurred for earning taxable income, even if such expenses are reimbursed to the Head Office?

FCS Computer Systems SPte. Ltd [TS-24-ITAT-2026(DEL)]

Facts

The FCS Computer Systems S Pte. Ltd (Assesse), a tax resident of Singapore. It provides hospitality software solutions and related services to hotels worldwide. To cater to the Indian market, the Assesse established a Branch Office (BO) in India with approval of the Reserve Bank of India, which constituted a PE under Article 5 of the India-Singapore DTAA.

The Indian BO earned income from the sale of software products and ancillary services, including software maintenance. During the relevant assessment year, the BO a claimed deduction of INR 16.9 Million, representing the cost of procurement of software and the reimbursement of expenses incurred by the Head Office on a cost to cost basis, without any markup. The Assessing Officer (AO) disallowed the said expenses, thereby increasing the taxable income.

AO’s Arguments

• The expenses claimed were incurred by the Head Office (HO), and payments made by the BO amounted to transactions with the same legal entity.
• Since the payments were reimbursements, the principle of mutuality applied, and hence such expenses could not be allowed.
• The BO, being a PE, was not entitled to claim a deduction for procurement costs and reimbursed expenses charged by the HO.

Assesses Arguments

• The BO/PE is to be treated as a separate and independent taxable entity under Article 7 of the India–Singapore DTAA.
• The expenses represented the actual costs incurred for the business of the PE, including procurement of software and operational support, and were mandatorily incurred to earn income in India.
• Similar deductions had been consistently allowed by the Revenue in earlier assessment years (AYs 2012-13 to 2021-22).
• Assesse relied on the decision of the Hon’ble Supreme Court in Hyatt International Southwest Asia Ltd and the Special Bench ruling in Mashreq Bank PSC.

Held

The Delhi ITAT (ITAT) held that the disallowance of procurement costs and reimbursed expenses was unsustainable, and the issue was decided in favor of the Assesse on the basis of the following reasons

• A PE is required to be treated as a distinct and separate enterprise for the purpose of profit attribution under Article 7 of the DTAA.
• All expenses incurred for the business of the PE, whether incurred in India or outside India, are allowable deductions while computing PE profits.
• The costs claimed were integral to the distribution business of the Indian BO and were incurred on a cost-to-cost basis without markup.
• The Revenue, having accepted the same treatment in earlier years, could not take a divergent view in the absence of any change in facts.

Accordingly, the ITAT allowed the deduction of INR 16.9 Million and allowed the Assesses appeal

Our Comments

The case highlights that PE is separate entity and legitimate expenses incurred for earning taxable income cannot be disallowed when they are paid to the Head Office on a cost-to-cost basis.

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Whether mere remote or virtual rendering of services, without any physical presence of employees or personnel in India, can trigger the existence of a service permanent establishment under Article 5(2)(k) of the India-UK DTAA for withholding tax purposes?

Ernst And Young LLP [TS-34-HC-2026(DEL)]

Facts

Ernst and Young LLP (the petitioner) filed a writ petition before the Delhi High Court challenging an order and certificate dated 17.09.2025 issued under Section 195(2) of the Income Tax Act, 1961.

The petitioner had sought a Nil Withholding Certificate for prospective payments aggregating to INR 17.5 Billion proposed to be made to its UK group entity, Ernst & Young (EMEIA) Services Limited (EMEIA), for the period up to 31.03.2026.

The Assessing Officer (AO) rejected the application and directed withholding tax at 5.25%, holding that the payments constituted business income taxable in India, on the ground that EMEIA had a Virtual Service Permanent Establishment (PE) in India under Article 5(2)(k) of the India-UK DTAA.

AO’s Arguments

• The writ petition was not maintainable due to availability of an alternative statutory remedy under Section 264 of the Act.
• Proceedings under Section 195(2) are protective and prima facie, and judicial review should be limited.
• Article 5(2)(k) of the India-UK DTAA does not require physical presence, but merely furnishing of services “through employees or other personnel within the contracting state.”
• Since the petitioner and EMEIA were associated enterprises, the 30-day threshold under Article 5(2)(k)(ii) applied and stood satisfied.
• Even if the Court disagreed with the Assessing Officer, the matter should be remanded for fresh consideration rather than granting direct relief.

Assesses Arguments

• The sole basis for denying the Nil Withholding Certificate was the alleged existence of a virtual service PE, which is not recognized under the India-UK DTAA.
• The issue stood conclusively covered in favor of the assesse by the Delhi High Court’s decision in Commissioner of Income Tax v. Clifford Chance Pte. Ltd., where a similar provision under the India-Singapore DTAA was interpreted.
• Article 5(2)(k) of the India-UK DTAA is pari materia with Article 5(6) of the India-Singapore DTAA, which requires physical presence of employees in India for constitution of a service PE.
• Since EMEIA had no employees physically present in India, no service PE could be said to exist.
• The Assessing Officer had already examined all relevant agreements and documents; hence, remand was unnecessary and the Court should directly direct issuance of a Nil Withholding Certificate.

Held

The Delhi High Court passed the order in favor of the assesse by setting aside the impugned certificate and order dated 17.09.2025 and remanded the matter to the Assessing Officer to pass a fresh order in accordance with law, keeping in view the principles laid down in Clifford Chance, on the basis of the following reasons

• Both the India-UK DTAA and the India-Singapore DTAA contemplate rendition of services in India by employees of the non-resident enterprise, and the relevant provisions are pari materia
• The expression “within the Contracting State” used in Article 5(2)(k) carries a clear territorial connotation, which necessarily requires physical presence of employees or personnel in India.
• In the absence of personnel physically performing services in India, there can be no furnishing of services within India, and consequently, no service PE can be said to exist.
• The concept of a “virtual service PE” is neither recognized under the DTAA nor under the Domestic Act, and cannot be read into the treaty by judicial interpretation.
• The Revenue’s contention that Article 5(2)(k) does not mandate physical presence was found to be untenable in view of the binding precedent laid down by the Delhi High Court in Clifford Chance.
• Tax treaties, having been negotiated bilaterally, must be interpreted strictly, and courts cannot import concepts that are conspicuously absent from the treaty text.

Our Comments

This judgment highlights that a service permanent establishment under Article 5(2)(k) of the India–UK DTAA requires physical presence of employees or personnel in India. It clarifies that remote or virtual rendition of services, by itself, cannot create a “virtual service PE”, as such a concept is neither recognized in the DTAA nor under the Domestic Act. The Court reiterates that tax treaties must be interpreted strictly, and taxing rights cannot be expanded by reading in concepts absent from the treaty text.

Can a transferee company, following amalgamation, claim a refund of unutilized ITC that remained with the dissolved transferor where the ITC transfer under Section 18(3) of the CGST Act and Rule 41 was only partial, despite procedural irregularities in GST registration or cancellation?

M/s Alstom Transport India Ltd. v. Additional Commissioner, CGST & Central Excise (Appeals) [TS-29-HC(GUJ)-2026-GST]

Facts

• Alstom Transport India Ltd. (ATIL), the petitioner, was formed pursuant to an order of the NCLT dated 10 August 2023 approving the amalgamation and dissolution of Alstom Rail Transportation India Pvt. Ltd. (ARTIPL / transferor company) and two other group entities, with the scheme taking effect on 22 September 2023 upon filing with the Registrar of Companies and due intimation to the GST authorities on 10 October 2023.
• Prior to amalgamation, ARTIPL had exported goods in April 2023 and accumulated unutilized Input Tax Credit (ITC), of which only a part was transferred to ATIL through Form GST ITC‑02 filed on 20 October 2023 under Section 18(3) of the CGST Act, leaving a balance in ARTIPL’s electronic credit ledger.
• ARTIPL thereafter filed refund applications from January 2024 for the remaining unutilized ITC, which were sanctioned by orders dated 28 February 2024 and partially refunded. The department reviewed these orders on 29 July 2024, filed an appeal, and the appellate authority set aside the refund by orders dated 8 January 2025.
• Meanwhile, although ARTIPL stood merged under company law, it continued to be treated as a registered person under GST until its registration was cancelled prospectively on 29 November 2024, leading ATIL to institute the present writ petitions challenging the appellate orders.

Ruling

• The Hon’ble Court dismissed the writ petitions filed by the petitioner and upheld the appellate order, which had set aside the refund of unutilized ITC sanctioned in favor of the erstwhile transferor company.
• It was held that a refund under GST is a statutory right, not a constitutional or equitable right, and must strictly conform to the provisions of the CGST Act and Rules. Upon amalgamation sanctioned by the NCLT on 10 August 2023, ARTIPL ceased to exist as a distinct legal entity, and under Section 87(2) of the CGST Act, its GST registration ought to have been cancelled with effect from the date of the NCLT order. However, both the transferor (ARTIPL)and the transferee (ATIL) as well as the departmental officers committed serious procedural irregularities in relation to registration and cancellation.
• The Court found that
  • ARTIPL failed to apply for cancellation of its GST registration within the statutory time after amalgamation.
  • ATIL applied for and obtained GST registration in violation of Sections 22(4) and 25, including retrospective registration prior to its legal existence.
  • The jurisdictional GST authorities facilitated these irregularities by delayed and improper action.

• On the substantive issue of ITC, the Court held that Section 18(3) read with Rule 41 requires transfer of the entire unutilized ITC upon amalgamation through Form GST ITC 02. ARTIPL could not selectively transfer part of the ITC and thereafter seek a refund of the balance under Section 54(3). Such a partial transfer followed by a refund was found to be contrary to the statutory scheme and resulted in an impermissible and absurd outcome.
• Applying the principles of strict interpretation of taxing statutes, the Court rejected the petitioner’s plea that the rights and liabilities of ARTIPL automatically entitled ATIL to claim a refund of the retained ITC. The Court further invoked the doctrine of pari delicto, holding that where both parties are equally at fault, neither can seek equitable relief.
• Accordingly, the Court concluded that no illegality was committed by the Appellate authority in cancelling the refund, dismissed the writ petitions, and directed the Revenue to issue administrative instructions to ensure strict compliance with GST registration and cancellation provisions in cases of amalgamation, so as to avoid future complications.

Our Comments

This judgment reinforces a special statutory regime for handling ITC in amalgamations - Section 18(3) of the CGST Act, read with Rule 41 (FORM GST ITC‑02) is the exclusive mechanism to move unutilized ITC from the transferor to the transferee. Partial transfer followed by a refund claim of the retained balance is impermissible. Refund under Section 54(3) is strictly statutory, available only to the registered person who holds the credit in its electronic credit ledger and who independently meets the statutory conditions (e.g., zero rated supplies without payment of tax or permissible inverted duty).

The Court also censured registration/cancellation irregularities by both entities and the department and applied the doctrine of pari delicto to deny equitable relief. Importantly, the ruling does not bar a transferee from ever claiming refunds; it bars refunds where the statutory transfer/refund architecture is bypassed or misused.

This judgment is a compliance signal that in amalgamations, ITC follows the, entity via ITC 02, and the refund follows eligibility. If you get the sequence, forms, and dates right, the economic value of ITC survives the corporate restructuring without inviting avoidable litigation.

A comprehensive circular outlining the GST implications of such amalgamation / demerger scenarios would provide greater clarity.

TP Jurisdiction Cannot Be Expanded by Substance-Over-Form: Resident AE Not Deemed Third Party – Mumbai Income-tax Appellate Tribunal (ITAT)

Maersk Tankers India Private Limited³

Facts

The taxpayer, an Indian resident company of the Maersk Tankers Group, transferred its India Technical Management Support Services business to Lionheart Shipping Pvt. Ltd. (Lionheart), another Indian resident group entity, by way of slump sale under a Business Transfer Agreement as part of a global divestment. Capital gains were offered u/s 50B. Though the transaction was between resident AEs, it was disclosed in Form 3CEB (Clause 18) with a clarification that it was neither an international transaction nor a specified domestic transaction.

The Transfer Pricing Officer (TPO) treated the transaction as a deemed international transaction u/s 92B(2) and made a transfer pricing (TP) adjustment. The Dispute Resolution Panel (DRP) upheld the adjustment, holding that the transaction was effectively governed by prior agreements and group-level decisions involving non-resident (NR) entities.

Taxpayer contention before the Hon’ble ITAT

The taxpayer submitted that the transaction was between two resident AEs and therefore outside section 92B(1), which requires at least one NR. Section 92B(2) was inapplicable since it applies only to transactions with a person other than an AE. Further, ultimate foreign control or group reorganization cannot convert a domestic transaction into an international transaction. Mere disclosure in Form 3CEB cannot confer jurisdiction.

Department contention before ITAT

The Department argued that although the transaction was between two resident AEs, it constituted an international transaction under section 92B(2) since both entities were ultimately controlled by NR group companies and the divestment formed part of a larger global reorganization involving prior agreements with foreign entities. The DRP, by applying the substance over form principle, held that Lionheart was effectively a third party in substance.

Held by Hon’ble ITAT

The ITAT held that the transaction failed the basic jurisdictional requirement of section 92B(1) as both contracting parties were resident entities. Further, section 92B(2) could not be invoked since it covers transactions with non-AEs. The ITAT rejected the “substance over form” approach of DRP, used to treat a domestic AE as a third party and held that Form 3CEB disclosure cannot override statutory conditions. Chapter X was held inapplicable.

Our Comments

The ruling reaffirms that TP jurisdiction is strictly statutory, rejecting substance-based expansion of section 92B. Domestic resident AE transactions cannot be deemed international merely due to foreign control or global restructuring, and procedural disclosure cannot expand jurisdiction.

Method Selection Must Follow Reliability, Not Convenience: Delhi ITAT Prioritizes CUP Method over TNMM for Royalty payments

Marks & Spencer (India) Pvt Ltd⁴

Facts

The taxpayer, Marks & Spencer (India) Pvt Ltd, is a wholly owned subsidiary of the Marks & Spencer group engaged in wholesale trading and sourcing support services. During the year, it paid royalty to its AE at 6% of total revenue for use of trademarks along with know-how, and for provision of business support services.

The taxpayer benchmarked the royalty by aggregating it with its trading business under the Transactional Net Margin Method (TNMM), contending that the royalty was inextricably linked to its core operations and could not be benchmarked separately. The TPO rejected this approach and determined the arm’s length price by applying a reduced royalty rate of 3.92%, resulting in a TP adjustment. The DRP upheld the adjustment. Aggrieved, the taxpayer appealed before the ITAT

Taxpayers contention before the ITAT

The taxpayer submitted that the royalty was paid under a valid commercial arrangement involving bundled services and proprietary rights that were integral to its business. It further contended that the TPO disregarded its TP analysis and applied the Comparable Uncontrolled Price (CUP) method arbitrarily. Instead of identifying comparable royalty agreements, the TPO compared the taxpayer’s royalty rate with royalty-to-sales ratios of companies selected in the TNMM set, based on disclosures in annual reports. The taxpayer argued that such data did not reveal the nature, scope, or terms of royalty arrangements and therefore could not constitute reliable CUP comparables.

Held by ITAT

The ITAT examined whether aggregation under TNMM was justified for bundled royalty and service payments. While acknowledging that the services were closely linked to the taxpayer’s business, it held that bundling and continuous services alone does not automatically warrant aggregation. Referring to the Delhi High Court ruling in Sony Ericsson Mobile, the ITAT noted that aggregation is appropriate only where transactions are so interlinked that combined benchmarking yields more reliable results. In the present case, it found no such complexity and observed that a traditional transactional method could be applied.

The ITAT held that the CUP method would be the most appropriate method, if reliable comparables for similar bundled services were available. However, it found the TPO’s selected comparables—primarily Indian manufacturers and local brand developers—inappropriate. Accordingly, the matter was remanded to the AO / TPO for fresh benchmarking, directing that CUP method be applied if suitable comparables exist; failing that, TNMM may be adopted.

Our Comments

The ITAT while recognising CUP method as preferable where exact comparables exist, the ITAT cautioned against mechanical application of the method using inappropriate comparables. The decision adopts a balanced approach, emphasising alignment with functional and economic substance. It also underscores that TNMM remains a valid alternative where reliable CUP data is unavailable. Taxpayers should exercise caution in aggregating transactions and consider maintaining separate corroborative benchmarking to support arm’s length compliance.