From The Judiciary

Whether ESOP costs cross-charged by a foreign parent company to its Indian subsidiary are allowable as a business expenditure under Section 37(1)?

Linde Engineering India Private Ltd [TS-1093-ITAT- 2026(Ahd)]

Facts

The assessee, a subsidiary of Linde Plc, participated in the Group's Long-Term Incentive Plan (LTIP), under which stock options of the parent company were granted to eligible employees of the assessee. During AY 2021-22, the assessee recorded ESOP expenses of INR 37.0 million in its books but claimed a tax deduction of only INR 5.17 million, representing the actual liability crystallized upon employees' exercise of stock options. The Assessing Officer (AO) disallowed the claim on the ground that the expenditure was related to the issuance of shares by the parent company and, therefore, constituted capital expenditure not allowable as a deduction. The CIT(A) upheld the disallowance, following which the assessee preferred an appeal before the ITAT.

Assessee’s Arguments

• The ESOP expenditure represented employee compensation incurred wholly and exclusively for business purposes and was allowable as a revenue expenditure under Section 37(1).
• The assessee did not issue any shares; the foreign parent company issued the shares, while the assessee merely reimbursed the cost attributable to stock options exercised by its employees.
• The expenditure did not result in the acquisition of any capital asset or enduring benefit to the assessee.
• Reliance was placed on judicial precedents, including the Karnataka High Court's decision in Biocon Ltd., wherein ESOP discount was held to be an allowable business expenditure.

Revenue’s Arguments

• The ESOP expenditure was intrinsically connected with the issue of shares and was therefore capital in nature.
• Since the expenditure related to the share capital of the parent company, it could not be regarded as revenue expenditure deductible under Section 37(1).
• The AO and the CIT(A) were justified in disallowing the claim as the payment was not incurred for the assessee's business operations but in connection with issuance of shares.

Held

The Ahmedabad ITAT held in favor of the assessee and deleted the disallowance towards ESOP expenditure. The ITAT placed reliance on the case of Biocon Ltd., 121 taxmann.com 351 (Karnataka High Court), which recognized ESOP discount as an allowable employee compensation expense. The grounds of the judgment are as follows:

• The Tribunal observed that the shares under the ESOP scheme were issued by the foreign parent company and not by the assessee; therefore, the expenditure could not be regarded as one incurred towards raising the assessee's share capital.
• The cross-charged amount represented employee compensation paid in respect of employees of the assessee and was incurred wholly and exclusively for its business.
• The expenditure did not result in acquisition of any capital asset or confer any enduring capital advantage upon the assessee.
• ESOP cost incurred under a cross-charge arrangement constitutes revenue expenditure and is allowable under Section 37(1).
• Accordingly, the disallowance made by the AO and sustained by the CIT(A) was held to be unsustainable and was directed to be deleted.

Our Comments

This ruling reaffirms that the deductibility of ESOP expenditure depends on its true commercial character rather than the entity issuing the shares, thereby treating cross-charged ESOP costs as employee compensation and not capital expenditure.

---

Can a non-resident be subjected to further profit attribution in India when its Indian affiliate has already been remunerated in excess of the profits attributable to the Permanent Establishment (PE)?

Sabre Asia Pacific Pte. Ltd [TS-994-ITAT-2026(Mum)]

Facts

Sabre Asia Pacific Pte. Ltd., a Singapore tax resident, operates a Computerized Reservation System (CRS)/Global Distribution System (GDS) for airline bookings. Its wholly owned Indian subsidiary, Sabre Travel Network India Pvt. Ltd. (STNIPL), acts as the National Marketing Company (NMC) and markets the Sabre GDS in India.

For AY 2020-21, the assessee earned gross receipts from Indian bookings amounting to INR 1.65 billion and paid marketing service fees of INR 1.11 billion to STNIPL.

The AO held that the assessee had a PE in India and attributed 10% of gross receipts INR 165.1 million to the Indian PE, treating the same as taxable in India. The assessee contended that since the marketing fees paid to STNIPL exceeded the profits attributable to the PE, no further income could be taxed in India.

Revenue’s Arguments

• The assessee had a business connection and a PE in India through STNIPL.
• The entire gross receipts from Indian operations were attributable to the Indian PE.
• Income attributable to India should be computed at 10% of gross receipts, resulting in taxable income of INR 165.1 million.
• Marketing service fees paid to STNIPL related to the entire Indian business and could not be adjusted against only the profits attributed to the PE.
• Since income was determined on a gross basis, no deduction for marketing fees was allowable.
• Alternatively, the balance amount of INR 544.3 million (gross receipts minus marketing fees) represented income attributable to India and should be taxed.

Assessee’s Arguments

• The issue of PE was already covered against the assessee by earlier Tribunal decisions, but those same decisions also governed profit attribution.
• As per earlier ITAT rulings, only 10% of gross receipts from Indian bookings could be attributed to Indian operations.
• The income attributable to the PE worked out to INR 165.1 million, whereas marketing service fees paid to STNIPL amounted to INR 1.11 billion.
• Since the remuneration paid to the Indian subsidiary exceeded the profits attributable to the PE, no further income remained taxable in India.
• Reliance was placed on earlier decisions in the assessee’s own case and other judicial precedents supporting the principle that no further profit attribution is warranted where the Indian entity has already been adequately compensated.

Held

• The ITAT upheld the existence of a PE in India, following its earlier decisions in the assessee’s own case.
• However, the Tribunal held that profit attribution must be determined in accordance with the consistent view adopted in earlier years.
• Where the marketing fees/commission paid to the Indian subsidiary exceed the income attributable to the PE, no further income can be taxed in India.
• Since STNIPL received marketing fees of INR 1.11 billion, which was substantially higher than the attributed income of INR 165.1 million, no additional profits were taxable in India.
• Accordingly, the addition of INR 165.1 million made by the Revenue on account of profit attribution to the PE was deleted.

Our Comments

The ruling reaffirms that no further profits can be attributed to an Indian PE where the remuneration paid to the Indian affiliate exceeds the income attributable to such PE.

---

OECD publishes new analysis on the economic impacts of the Global Minimum Tax

Excerpts from oecd.org, dated 15 July 2026

The OECD released the 2026 Economic Impact Assessment of the Global Minimum Tax (GMT), providing new estimates of the expected effects of the GMT and presenting preliminary evidence from its first year of implementation. The findings were presented during an OECD webinar.

The updated assessment incorporates more recent data, improved modeling, and information on the current state of GMT implementation and the recently agreed Side-by-Side Package. It examines the expected effects of the GMT on effective tax rates, tax rate differentials, profit shifting and tax revenues.

The OECD also released a separate analysis, MNE Responses to the GMT, based on 2024 consolidated financial statement data, providing an initial assessment of outcomes following the first year of GMT implementation. The preliminary evidence suggests increases in effective tax rates among in-scope multinational enterprises relative to out-of-scope firms, while finding no statistically significant evidence of reductions in investment or employment among in-scope firms during the first year of implementation.

Key findings

Relative to a hypothetical scenario where the GMT was not implemented anywhere, the analysis found the following expected effects, noting these may take time to be realized.

• Average jurisdiction-level effective tax rates are estimated to increase by 2.8-3.7% points on average under the current GMT framework, with effective tax rates in investment hubs estimated to rise by 5.5-6.9% points.
• Effective tax rate differentials between jurisdictions are estimated to decline by 19-25%, potentially improving capital allocation.
• The GMT is estimated to reduce profit-shifting substantially, with an estimated reduction of between 22.6-44.6%.
• Global CIT revenues are estimated to rise by 3.2-5.4% per year.
• Initial post-implementation 2024 data suggests positive effective tax rate impacts of the GMT and finds no evidence of negative effects on investment or employment.

Today’s webinar outlined the methodology, assumptions and results of the updated assessment and provided stakeholders with an opportunity to discuss the analysis and its implications. The webinar highlighted the role of the GMT in strengthening international tax co-operation, reducing BEPS activity, and enhancing stability in the international tax system.

The OECD will continue to monitor the implementation and impacts of the GMT as additional data become available. The updated assessment and accompanying analysis are intended to support the ongoing evaluation of the GMT and its effects over time.

Whether the Gujarat High Court is correct in holding that no GST is applicable on assignment/transfer of leasehold rights in an industrial plot having a building constructed thereon?

Union of India vs Gujarat Chamber of Commerce and Industry [(2026) 44 Centax 280 (S.C.)]

Facts

• Gujarat Industrial Development Corporation (GIDC) had allotted industrial plots on long-term lease, whereby lessees/assignors, having acquired leasehold rights and constructed buildings on such plots, transferred or assigned those rights to third-party purchasers (assignees) for a lump-sum consideration.
• The Gujarat High Court observed that leasehold rights in the industrial plot constitute benefits arising out of immovable property and when a lessee transfers/ assigns such rights to another person, the assignee merely steps into the shoes of the original lessee.
• Such transaction amounts to assignment/sale/transfer of rights in immovable property and does not amount to a taxable “supply” under Section 7 of the GST law. Accordingly, GST is not chargeable on the lump-sum consideration received for the assignment of leasehold rights in the industrial plot.
• The Union of India challenged the said High Court judgment before the Supreme Court by filing Special Leave Petitions.

Ruling

• The Supreme Court noted that it had already dismissed a similar Special Leave Petition against the judgment given by the Bombay High Court in the case of Assistant Commissioner (Anti Evasion) vs Aerocom Cushions (P.) Ltd. [(2026) 42 Centax 414 (S.C.)]
• Since the matter was similar, the Court found no reason to interfere with the Gujarat High Court judgment.
• Consequently, the SLPs filed by the Union of India were dismissed.

Our Comments

The Supreme Court's refusal to interfere with the Gujarat High Court ruling reinforces the view that assignment of leasehold rights in land is not liable to GST, and it provides significant relief to businesses transferring industrial plots allotted by development authorities.

The Courts acknowledged that leasehold rights constitute a valuable interest in immovable property and assignment of such rights amounts to a transfer of that interest and is therefore distinct from a supply of goods or services. This approach is consistent with established principles under the Transfer of Property Act, 1882.

Whether Section16 (2) (c) of the CGST Act, 2017, which lays down the condition for availment of Input Tax Credit (ITC) upon actual payment of tax by the supplier to the Government, is unconstitutional?

Bhandari Scrap Traders vs Union of India & Ors [SLP (C) Nos. 23931, 24088 & 24103 of 2026 | Supreme Court | Order dated 24 July 2026]

Facts

• The petitioner before the Gujarat High Court contended that a bona fide purchaser who has paid GST to the supplier and fulfilled all statutory compliances should not be denied ITC merely because the supplier failed to deposit tax with the Government and thus Section 16(2) (c) is arbitrary and violates Articles 14, 19(1)(g), 265 and 300A of the Constitution.
• Alternatively, the provision should be read down and applied only in cases involving fraud, collusion or connivance between the purchaser and supplier.
• While providing judgment on the issue, the Gujarat High Court emphasized on the judgment provided by the Kerala High Court in case of M. Trade Links vs. Union of India [(2024) 19 Centax 131 (Ker.)], Substitute with wherein the Hon’ble Court analyzed a scenario where, without Section 16(2) (c) where the inter-state supplier's supplier in the originating State defaults payment of tax (CGST + SGST collected) and the inter-state supplier is allowed to take credit based on their invoice, the originating State Government will have to transfer the amounts it never received in the tax period in a financial year to the destination States, causing loss to the tune of several crores in each tax period. This renders the whole GST law and schemes unworkable. Therefore, as contended, the conditions cannot be said to be onerous or in violation of the Constitution, and Section 16(2)(c) is neither unconstitutional nor onerous on the taxpayer.
• The Gujarat High Court further observed that considering the overall scheme of the Act, any "reading down" (narrow interpretation) of Section 16(2)(c) would trigger cascading fiscal consequences. The legal position under the former VAT regime was materially different, as input tax credit was confined within the originating state. In contrast, the GST regime is destination-based; therefore, input tax credit must operate seamlessly across state lines for inter-State supplies, requiring strict compliance to maintain fiscal balance.
• The Court analyzed clause 5(b) of the Statement of Objections and Reasons underlying the GST statute, which emphatically mentions about “input tax credit making it available in respect of taxes paid”. Thus, availing of ITC is intrinsically connected with the factum of “taxes paid”.

Ruling

• The Supreme Court dismissed the Special Leave Petitions and expressed agreement with the Gujarat High Court's judgment upholding the constitutional validity of Section 16(2)(c) of the CGST Act.
• The Apex Court held that the GST framework is materially different from the erstwhile VAT regime and, therefore, decisions rendered under the Delhi VAT Act cannot automatically be applied to GST.
• The Court highlighted the mechanism under Section 41 read with Rule 37A which permits re-claiming of ITC once the supplier discharges the tax liability, thereby balancing the interests of revenue and recipients. Thus, the statutory mechanism does not permanently deprive the purchasing dealer of ITC; rather, the credit is restored upon payment of tax into the Government treasury. Mere delay or hardship in availing ITC, therefore, cannot constitute a valid ground for reading down Section 16(2)(c) of the CGST Act.
• The judgment reaffirmed that ITC is not a constitutional or vested right, but a statutory concession, subject to the conditions and restrictions prescribed under the Act.

Our Comments

The decision is a significant ruling on the ITC framework and strengthens the Revenue's position in disputes involving supplier tax defaults. The Court has effectively distinguished decisions in case of Arise India, On Quest Merchandising and Shanti Kiran, rendered on the basis of the Delhi VAT Act from the GST regime.

The ruling will impact the bona fide purchasers in a view that mere possession of invoices, receipt of goods/ services, and payment of GST to the supplier may not, by themselves, safeguard ITC where supplier tax payment requirements remain unfulfilled.

Taxpayers may need to strengthen vendor-compliance monitoring and contractual safeguards, as the risk associated with supplier defaults continues to have direct implications for ITC eligibility.

The Gujarat High Court observed that while Section 16(2) (c) is intended to protect the GST system and prevent revenue leakage, genuine buyers should not suffer because of their suppliers' tax payment defaults. The Court suggested that the Government implement a real-time, technology-based system to verify whether suppliers have paid tax against specific invoices. It also emphasized that tax authorities should first recover dues from defaulting suppliers instead of forcing bona fide purchasers to pursue complex alternative remedies.

Delhi ITAT: Goodwill Booked on Demerger Was a Revenue-Neutral Accounting Entry, Not an ‘International Transaction’; Section 271AA Penalty Deleted

TPV Technology India Pvt. Ltd.¹ (Taxpayer) for AY 2015-16

Facts

The Taxpayer, an Indian wholly owned subsidiary of Top Victory Investments Ltd., Hong Kong (TVIL HK), markets TPV group products in India. For AY 2015-16, the jurisdictional Assessing Officer (AO) referred the case to the TPO, who noted that a goodwill entry of INR 1.90 billion had not been disclosed in Form 3CEB and treated it as an international transaction.

Under a High Court-approved demerger, TVIL-IBO was merged with the Taxpayer at written-down value. Since liabilities exceeded assets, the Taxpayer booked INR 1.90 billion as goodwill under AS-14. INR 1.50 billion was written off but added back for tax purposes; therefore, no tax benefit was claimed. The Taxpayer argued this was only a balancing entry, not an asset acquisition or transfer under section 92B.

The AO rejected this and imposed a section 271AA penalty, relying on Smifs Securities and Explanation (e) to section 92B to treat the demerger as an international transaction.

The CIT(A) deleted the penalty, holding that no goodwill was actually acquired and was merely a book entry, the entry was revenue-neutral, going by Whirlpool of India Ltd. (Delhi HC), an international transaction must first be shown to exist under Chapter X, Smifs Securities was distinguishable (as it dealt with depreciation under section 32, not transfer pricing), and the penalty notice was vague (as it did not spell out the actual default and even referred to section 271(1)(c) rather than 271AA). The CIT(A) also held that reasonable cause under section 273B had been established. Aggrieved by the CIT(A) order, the Revenue appealed to the ITAT.

Taxpayer’s Contention

The Taxpayer argued that the CIT(A) rightly deleted the penalty because the goodwill was only an accounting entry, had no revenue impact, and the Taxpayer had disclosed everything honestly, both in its notes to accounts and to its tax accountant.

Revenue’s Contention

The Revenue argued that the demerger increased the Taxpayer’s assets and therefore fell within analyze 92B, especially Explanation (e) on business reorganizations.

Held

The ITAT upheld the CIT(A)’s order, noting the revenueneutral nature of the goodwill entry and dismissing the Revenue’s appeal. However, it did not independently analyze whether the demerger could fall within Explanation (e) to section 92B.

Our Comments

The ruling reinforces that Chapter X applies only where an international transaction first exists. Revenue-neutral treatment and full disclosure can support reasonable cause under section 273B, and a vague penalty notice may itself be invalid.

However, the decision is fact-specific and should not be read as a broad rule that demerger-related goodwill can never fall within section 92B.

Mumbai ITAT: Coca-Cola India Branch Debt-Free status

Coca-Cola India Inc² (Taxpayer) for AY 2002-03

Facts

The Taxpayer, an Indian branch of Coca-Cola Inc., USA, provides consultancy and support services to Indian group entities and charges a 5% mark-up on relevant costs, while receiving certain reimbursements at cost.

The TPO noted delayed recoveries from AEs, with an average credit of 537 days and sundry debtors of INR 1.15 billion against consultancy fees of INR 463.3 million. Treating this as an interest-free funding benefit, the TPO made a working capital adjustment, resulting in an adjusted margin of 21.83%.

Taxpayer Contention

The Taxpayer argued that it was debt-free, funded entirely by its Head Office, and incurred no borrowing or interest cost. Therefore, delayed AE recoveries created no opportunity cost and did not warrant a working capital adjustment.

The Taxpayer relied on the decisions in Bechtel India Pvt. Ltd., which held that no adjustment for receivables or working capital was justified where the taxpayer is debtfree and does not incur interest costs.

Revenue’s Contention

The Revenue argued that the Taxpayer allowed delayed, interest-free recoveries exceeding 530 days and earned only a 2.98% margin despite claiming a 5% mark-up. It supported the TPO’s method by relying on Bechtel India and Apache Footwear.

Held

The ITAT accepted that the Taxpayer was effectively debtfree, funded by its Head Office, and had no interest cost. It followed the favorable Bechtel India ruling for AY 2013-14, affirmed by the Delhi High Court, and declined to follow the Revenue-favorable Bechtel India ruling for AY 2012-13, since the same High Court had stayed that ruling.

The ITAT held that a working capital adjustment can be made only where the Taxpayer has borrowings and incurs borrowing costs. Since the Taxpayer had no borrowings and no interest expenditure, the adjustment made by the TPO was based merely on assumptions.

Our Comments

This ruling confirms that working capital or receivables adjustments require proof of actual borrowing or opportunity cost. Where a branch is Head Office-funded and debt-free, delayed AE recoveries alone should not justify an adjustment.