From The Judiciary

ITAT Mumbai: Taxability on conversion of private company into an Limited Liability Partnership (LLP)

ISC Specialty Chemicals LLP [ITA NO 457/Mum/2025]

Facts

The assessee, ISC Specialty Chemicals Private Limited, was converted into an LLP pursuant to Section 56 of the Limited Liability Partnership Act, 2008. Upon conversion, all assets and liabilities were transferred to the LLP. In the course of assessment proceedings an addition of INR 145.8 million was made by the officer alleging violation of conditions of Section 47(xiiib), as the book value of assets exceeded INR 50 million. The Assessing Officer (AO) invoked Section 47A(4) to treat the transaction as a taxable transfer under Section 45, attracting capital gains tax. On appeal, the CIT(A) upheld the AO’s order. Assessee filed an appeal before ITAT on below grounds:

• The transfer was undertaken as a going concern, with no individual valuation assigned to the assets and liabilities; all items were transferred at book value.
• Accordingly, the book value constituted both the cost of acquisition and the full value of consideration, resulting in Nil capital gains.
• Since no exemption under Section 47(xiiib) was claimed, the invocation of Section 47A(4) (which deals with withdrawal of exemption) was erroneous and inapplicable.

Held

The ITAT, acknowledged that the assessee did not satisfy the cumulative conditions under Section 47(xiiib). Thus, the transaction constituted a transfer under Section 45. However, relying on established judicial precedentsincluding decisions of the Supreme Court¹ and Bombay High Court² - the Tribunal ruled that the ‘full value of consideration’ under Section 48 should be based on actual consideration received (i.e., book value) and not the market value.

Since the book value of assets equaled their cost of acquisition, no capital gain arose under the computation mechanism of Section 48. The Tribunal held that even if the exemption u/s 47(xiiib) was not available, the conversion at book value did not result in any taxable capital gains.

Our Comments

This ruling underscores that capital gains tax can only arise if there is a positive difference between the full value of consideration and the cost of acquisition, and mere failure to comply with Section 47(xiiib) does not automatically trigger taxable gains if there is no actual gain under Section 48.

ITAT Mumbai: Transfer of Tenancy rights taxable under capital gains, not as other income u/s 56(2)(x) (b)(B)

Vasant Nagorao Barabde [TS-642-ITAT-2025(Mum)]

Facts

The assessee received a residential property having stamp duty value of INR 28.89 million in exchange for the tenancy rights. As per the agreement, the assessee was the primary tenant, followed by the name of his daughter as the secondary tenant.

AO made an addition of INR 28.89 million under Section 56(2)(x)(b)(B) alleging receipt of immovable property without adequate consideration. Assessee filed an appeal before ITAT on below grounds:

• Tenancy rights were solely held by his daughter even though the agreement mentioned both their names. Therefore, on transfer of such rights, any capital gain arising from such transfer should be assessed in her hands alone.
• Furthermore, even if the AO dismissed the above claim and capital gain was taxed in assessee’s hands, he contended that since the entire gains were reinvested in a new property which was allotted by the builder, the said transaction would still attract nil tax after claiming exemption u/s 54F.

Held

The ITAT ruled that receiving a new flat in a redevelopment project constitutes extinguishment of rights, not receipt of property for inadequate consideration. Therefore, such transactions are not taxable under Section 56(2)(x)(b)(B) as income from other sources. Instead, they may attract capital gains tax, with potential exemptions under Section 54F.

ITAT allowed the assessee's appeal, directing the deletion of the addition made under Section 56(2)(x)(b) (B) and granting the Section 54F exemption, resulting in no taxable capital gain from the transaction.

Our Comments

This decision sets a valuable precedent in clarifying the tax treatment of redevelopment transactions. It ensures that capital gains arising from such transactions are assessed appropriately and not misclassified under the head ‘other sources.’ It also affirms the importance of judicial discretion in granting exemptions to uphold the substantive rights of taxpayers.

Whether PE loss set off permitted against ECB interest under DTAA?

Abu Dhabi Commercial Bank PJSC Wework India Management Private Limited [TS-762-ITAT-2025(Mum)]

Facts

The assessee, Abu Dhabi Commercial Bank PJSC, is a non-resident banking company headquartered in the UAE and a tax resident of UAE. It operates in India through two branches. During the relevant AY, the assessee earned interest income from External Commercial Borrowing (ECB) loans advanced directly from its UAE head office to Indian clients. This interest income was offered to tax at a concessional rate of 5% under Article 11(2) of the India– UAE DTAA, after setting off some amount of business losses incurred by its Indian Permanent Establishment (PE).

The AO disallowed the set-off of these losses, contending that Article 11(2) mandates taxation of interest income on a gross basis—without allowing any deductions or adjustments for losses.

The Dispute Resolution Panel (DRP) upheld the AO’s position, rejecting the assessee’s claims both under the DTAA and under Section 115A(1)(a)(iiaa) of the Income Tax Act

Held

The Mumbai ITAT ruled in favour of the assessee, allowing the set-off of losses incurred by its Indian PE against interest income earned from ECBs.

Key Findings:

1. Interpretation of Article 11(2) of India–UAE DTAA:
   • The term ‘gross interest’ does not exclude the set-off of business losses incurred by the PE. Referring to the OECD Model Tax Convention (2017), the Tribunal clarified that ‘gross income’ means income before deduction of expenses but does not bar inter-head setoff under domestic law.
2. Application of Domestic Law:
   • Article 25(1) of the DTAA states that domestic law applies unless expressly overridden by the treaty.
   • Since Article 11(2) expressly requires income to be computed under domestic law, the Tribunal held that taxability must be determined under domestic provisions before applying the treaty’s concessional rates.
   • The assessee, having not claimed any direct expense deductions from interest income, validly set off PE business losses under Section 71 of the Income-tax Act.
3. Alternative Claim under Section 115A(1)(a)(iiaa):
   • The Tribunal accepted the assessee’s alternate claim for concessional taxation at 5% under Section 115A(1)(a) (iiaa).
   • Referring to the CBDT press release dated 21 September 2012, which waived the requirement for case-by-case RBI approval under Section 194LC if ECB guidelines are complied with, the Tribunal found no RBI noncompliance allegations.
   • Accordingly, the concessional 5% tax rate was upheld on the ECB interest income.

Our Comments

This judgment highlights the need to interpret DTAA provisions harmoniously with domestic law. The Tribunal clarified that the “gross interest” clause does not bar permissible set-offs under Indian tax rules, preserving the integrity of lawful tax computation.

Is income from providing standardized flight simulator services, used by Indian pilots, taxable in India as fee for technical services?

Ethiopian Airlines Group [TS-731-ITAT-2025(DEL)]

Facts

Ethiopian Airlines (assessee), based in Ethiopia, provides flight simulator and pilot training services to a Dubai-based company called Flight Simulation Technique Services (FSTC). This Dubai company has a related entity in India, Flight Simulation Technique Centre (FSTL), which contracts with Indian airlines like Jet Airways and Indigo to deliver pilot training locally in India. Although the actual training is conducted in India through FSTL, the simulators and training expertise come from Ethiopian Airlines via the Dubai company.

For these services, the payment from FSTL were treated by the AO as fees for technical services (FTS) under Section 9(1)(vii) and held liable to tax in India.

The DRP ruled that the income from simulator services is taxable in India under Section 9(1)(vii), as the payment location reflects the place of service utilization. It rejected the assessee’s claim that the income arose outside India, citing the apex court’s ruling in GVK Industries, and directed the AO to tax the income accordingly.

On appeal to the Tribunal the assessee contended that the agreement was between two non-residents (the assessee and FSTC), and the services were rendered outside India; hence, income did not accrue or arise in India. It was further submitted that the payments received were in the nature of business income not taxable in India in the absence of a Permanent Establishment (PE), in terms of Article 7 of the India-Ethiopia DTAA. The assessee also argued that the simulator facility constituted a standard facility and did not amount to rendering of technical services.

Held

The tribunal carefully considered the arguments from both the assessee and the tax department regarding whether the income earned from providing simulator and related services to Indian clients should be taxed in India. It found no valid reason to support the tax authorities’ position.

The tribunal noted that neither the assessee nor the Dubaibased intermediary had a presence in India or directly provided services in India that would justify taxation here. Although the tax department argued that under the amended Section 9(1)(vii) and Article 12(3)(b) of the India- Ethiopia Tax Treaty, the location of service or residence is irrelevant, the tribunal rejected this. It held that the services provided by the assessee were standard simulator access used by Indian pilots in Ethiopia—not specialized or customized services. Citing recent court rulings, the tribunal concluded that such standard services do not qualify as "fees for technical services" (FTS) and thus are not taxable in India. Therefore, the tax department's assessment was found to be unjustified, and the appeal filed by the assessee was upheld.

Our Comments

This case highlights that technical services under Section 9(1)(vii) imply specialized, exclusive services catering to the special needs of the user; mere provision of facilities or standardized services available to all does not constitute technical services taxable in India.

Whether refund of unutilized Input Tax Credit (ITC) is eligible upon discontinuation or closure of business?

SICPA India Pvt. Ltd. vs. Union of India [(2025) 31 Centax 268 (Sikkim)]

Facts

On discontinuance of business, the petitioner had filed for refund of unutilized ITC lying in the Electronic Credit Ledger, after adjusting the tax liabilities and ITC reversals. However, the GST authorities as well as the First Appellate Authority rejected the same on the ground that the current regulations, viz. Section 54(3) and Section 29 of the CGST Act, did not provide for refund of unutilized ITC in case of discontinuation or closure of business.

Aggrieved thereby, the petitioner approached the Sikkim High Court (HC) contending that the exception carved out in Section 54(3) for claiming refund of unutilized ITC could not take away the vested right of ITC accrued to them and refund thereof under Section 49(6) of the CGST Act.

On the other hand, Revenue defended their stand contesting that Section 49(6) does not independently provide for refund but is dependent on the conditions stipulated under Section 54. Moreover, Section 29(5) provides for reversal of ITC upon cancellation of registration but not a refund.

Ruling:

• HC noted that Section 49(6) provides that any balance in the Electronic Credit or Cash Ledger after discharge of liabilities may be refunded in accordance with Section 54.
• Section 54 details the procedure and grounds for refund claims. However, sub-section (3) thereof specifically restricts refund of unutilized ITC to two scenarios:
  • zero-rated supplies without payment of tax, and
  • when credit has accumulated due to higher input tax rates compared to output tax rates.

• The Court observed that the statute does not expressly prohibit refund of unutilized ITC on business closure. Although Section 54(3) deals only with two circumstances where refunds can be made, the statute also does not provide for retention of tax without the authority of law.
• In this regard, HC referred to the Karnataka HC ruling in Union of India vs. Slovak India Trading Co. Pvt. Ltd. [(2006) 5 STT 332 (Karnataka)] wherein the Court had concurred with CESTAT that there was no express prohibition in Rule 5 of the CENVAT Credit Rules 2002 with respect to refund of unutilized CENVAT credit on closure of the company.
• Accordingly, HC allowed the writ petition and set aside the order-in-appeal.
• The Court further clarified that the failure to exhaust alternative statutory remedy such as appeal or revision under Section 112, does not preclude the petitioner from seeking relief through a writ petition.

Our Comments

The Court’s decision makes it clear that the GST law does not specifically deny refund of unutilized ITC when a business closes/discontinues, thus protecting the rights of taxpayers to claim what they are owed.

The ruling balances the regulations and taxpayers’ rights, ensuring that tax credits earned in good faith are not unfairly withheld.

It also stresses that Courts have broad powers under Article 226 of the Constitution to step in, especially when there are no factual disagreements and only legal questions to resolve. This approach helps prevent unnecessary difficulties for taxpayers caused by strict procedural rules.

The Safe Harbor Rules provision cannot be invoked by the Transfer Pricing Officer (TPO) unless it is exercised by the assessee

Volkswagen Group Technology Solutions India Pvt. Ltd. [ITA No. 1950 / PUN / 2024] for Assessment Year (AY) 2020-21

Facts

The assessee is a captive service provider engaged in rendering Information Technology (IT) services exclusively to its AEs. For the purpose of benchmarking the international transaction of IT services, the assessee considered Transactional Net Margin Method (TNMM) as the most appropriate method, using the Profit Level Indicator (PLI) of Operating Profit to Operating Cost (OP/ OC).

While computing its own margins as well as those of the comparables for the relevant year under consideration, the assessee included foreign exchange gain/loss as part of operating income/expenses and accordingly determined the PLI.

However, the TPO, during the course of the assessment proceedings, invoking the provisions of the Safe Harbor Rules (SHR), rejected the approach adopted by the assessee and treated foreign exchange loss as nonoperating expense in nature. Also, the TPO treated foreign exchange gain as operating income for the purpose of computing PLI. Based on this differential treatment of forex gain/loss, TPO proceeded to make an upward adjustment to the assessee’s income for the year under consideration.

Aggrieved by the decision of TPO, the assessee filed its objections before the Dispute Resolution Panel (DRP) wherein DRP upheld the decision of the TPO.

Aggrieved by the decision of DRP the assessee filed an appeal before Income Tax Appellate Tribunal (ITAT).

Assessee's contention before the ITAT:

The assessee contended that the forex loss / gain has been treated operating in nature on account of normal business operations and the same have been offered to tax during the year under consideration.

The assessee further contends that the TPO and DRP has erroneously placed its reliance on SHR provisions i.e., Rule 10TA of the Income Tax Rules, 1962 (the Rules) wherein the assessee has not opted for it and hence shall not be applicable to the assessee. The assessee has placed reliance on various judicial precedents.

Revenue's contention before the ITAT:

The Revenue placed reliance on the mechanism of the SHR for the treatment of forex loss as non-operating in nature (in alignment with the approach adopted by the TPO and DRP).

Held by the ITAT

The ITAT observed the following:

• The TPO invoking Rule 10TA of the Rules covered under SHR provisions treated forex loss as non-operating in nature, even though the assessee has not voluntarily applied for the same.
• The TPO has considered foreign exchange loss incurred by the assessee on derivative transactions as operating in nature.
• The TPO has not provided any clarification for treating forex gain as non-operating in nature wherein such forex gain is directly linked to revenue receipt and hence the same will have an impact on PLI. Such non-alignment of forex gain/loss adopted by TPO resulted into inconsistency in the approach.

ITAT placing reliance on judicial precedent, stated that the SHR provision shall only be applied when the assessee has opted for the same. On the other hand, forex loss/gain is directed by the normal business as well as commercial principles. Typically, the forex gain/loss arising from business transaction is considered as operating in nature.

Considering the aforementioned observations, ITAT upheld that the PLI calculated by the assessee holds good and hence no adjustments was warranted post considering the same. Basis this decision ITAT dismissed the case declaring other grounds of appeal as unadjudicated.

Our Comments

The SHR provisions aim to simplify compliance and reduce litigation by allowing eligible taxpayers to adopt predefined margins or prices for specified international transactions. The SHR laws provides indicative approaches that the assessee may adopt to align their business operations with Transfer Pricing provision. However, SHR is only applicable when the assessee opts for the same. Also, it is pertinent to note that the assessee shall maintain consistency while determining the nature of the income / expense for calculating PLI for tested party and also for margin computation of the comparable companies.