From The Judiciary

Whether a foreign company can escape PE exposure in India when services are largely remote, on-site presence is below 90 days, customer premises are not at its disposal, and reliance is placed on dubious evidence like LinkedIn profiles?

IMAX Theatre Services Ltd [TS-688-ITAT-2026(DEL)]

Facts

The assessee, IMAX Theatre Services Ltd., is a Canadian tax resident engaged in providing theatre system maintenance services globally, including India. The services were rendered through a combination of remote access support and limited on-site visits through an Australian vendor. The total duration of on-site services in India was only 67 days during the relevant year. The Assessing Officer alleged that the assessee had a Fixed Place PE as well as a Service/Supervisory PE in India and accordingly attributed income accordingly.

Revenue’s Arguments

• The Revenue contended that remote access to theatre systems in India constituted a Fixed Place PE as the assessee was effectively carrying on business through such systems.
• It was argued that the vendor personnel were effectively functioning as an employee or dependent agent of the assessee and were carrying out multiple activities in India.
• The Revenue relied on the LinkedIn profile of the individual to establish an employment relationship with the assessee.
• It was further contended that services rendered remotely should be considered for determining the existence of a Service PE.
• The authorities also asserted that the assessee had a Supervisory PE in India based on the nature of activities carried out.

Assessee’s Arguments

• The assessee argued that the remote access was limited, customer-controlled, and used only for maintenance purposes, without any business control over the systems in India.
• It was submitted that none of the essential tests for establishing a Fixed Place PE namely, place of business, disposal, permanence, and business activity were satisfied.
• The assessee emphasized that on-site services were rendered only for 67 days, which is below the 90-day threshold prescribed under the DTAA for Service PE.
• It was clarified that the vendor employee was not an employee of the assessee, and an affidavit was provided to substantiate this fact.
• The assessee also argued that the concept of a “virtual PE” based on remote services is not recognized under the India–Canada DTAA.

Held

Delhi ITAT (ITAT) ruled in favor of the assessee that it has no fixed place PE under Article 5(1) of India-Canada DTAA (DTAA) as none of the test for satisfaction of fixed place PE stands fulfilled

• The Tribunal held that the assessee did not have a Fixed Place PE in India as none of the essential conditions, including disposal and permanence, were satisfied.
• It was further held that no Service or Supervisory PE existed since the on-site presence in India was only 67 days, which is below the 90-day threshold.
• The ITAT categorically ruled that remote or virtual services couldn’t create a PE in the absence of specific provisions in the DTAA.
• The Tribunal rejected the reliance on the LinkedIn profile as evidence and accepted the affidavit as credible proof of employment status.
• Since no PE was established, the Tribunal held that no attribution of profits in India was warranted and allowed the appeal in favor of the assessee.

Our Comments

This ruling reinforces that a Permanent Establishment cannot be created in India merely through remote service delivery or limited on-site presence below treaty thresholds, in the absence of disposal over premises and explicit DTAA recognition of a "virtual PE".

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Whether a payer can be held liable under section 195 of the Income-Tax Act, 1961, for failure to deduct tax at source on payments made to non-residents, when the taxability of such income in India arises only due to a retrospective amendment introduced after the date of transaction, and consequently whether such payer can be treated as an assessee-in-default under sections 201(1) and 201(1A)?

TATA Industries Ltd. [TS-677-ITAT-2026(Mum)]

Facts

The assessee, Tata Industries Ltd., entered into an agreement in September 2005 to purchase shares of AT&T Cellular Pvt. Ltd. (a Mauritius company) from its non-resident shareholders based in the USA (New Cingular Wireless Services Inc. and MMM Holdings LLC). AT&T Cellular Pvt. Ltd., Mauritius, indirectly held shares in an Indian telecom joint venture, Birla Tata AT&T Ltd.(later Idea Cellular Ltd.).

In 1995, AT&T Corporation entered into a joint venture with Grasim Industries Ltd. for telecom operations in India through Birla AT&T Communications Ltd. Over time, multiple restructurings occurred, and eventually the business evolved into Birla Tata AT&T Ltd. (BTAL), which later became Idea Cellular Ltd.

The AO examined three key issues:

• Whether TIL should have obtained approval under section 195(2) or ensured compliance under section 195(3)/197 before remittance
• Whether income arising to US shareholders was chargeable to tax in India under section 9(1)(i) and DTAA
• Quantum and rate of capital gains taxable in India (if applicable)

Further appeal with the CIT(A), it held that the issue under consideration was squarely covered by the judgment of the Hon’ble Supreme Court in the case of Vodafone International Holdings B.V. and accordingly decided the matter in favor of the assessee. Aggrieved by the said order, the Revenue filed an appeal before the Mumbai Tribunal.

Revenue’s Arguments

• The Revenue contended that the transaction effectively resulted in an indirect transfer of shares of an Indian company, and hence gains were taxable in India under Section 9(1)(i).
• It argued that the Mauritius entity lacked substance and the real transaction involved the sale of shares of Idea Cellular Ltd. (Indian company).
• The retrospective amendment (Explanation 4 & 5 to Section 9(1)(i)) clarified that indirect transfers are taxable in India from 1962 onwards.
• Accordingly, the assessee was required to deduct TDS under Section 195 on such payments.

Assessee’s Arguments

• The assessee argued that under the law prevailing in September 2005, indirect transfer of foreign shares was not taxable in India, as per the Supreme Court ruling in Vodafone International Holdings.
• It is submitted that Section 195 applies only when the payment is chargeable to tax in India; since the transaction was not taxable, no TDS obligation arose.
• The retrospective amendment introduced in 2012 could not impose withholding obligations with retrospective effect, as “law does not compel impossibility.”
• The assessee also contended that it acted bona fide based on the legal position at the time of payment.

Held

Mumbai ITAT affirms CIT(A)’s order holding that payments made by Tata Industries Ltd. (Assessee) to non-resident shareholders for the purchase of shares of a Mauritius company were not chargeable to tax in India u/s 9(1)(i) and therefore it had no TDS obligation on such remittance, based on the following grounds:

• The Tribunal upheld that, based on the law prevailing in 2005 and the Supreme Court’s ruling in Vodafone, indirect transfer of foreign shares was not taxable in India.
• It held that TDS liability under Section 195 arises only when the sum is chargeable to tax in India.
• The Tribunal agreed that retrospective amendments to Section 9(1)(i) cannot create a withholding obligation for past transactions.
• It emphasized that taxpayers cannot be expected to comply with provisions not in existence at the time of the transaction (“law does not demand the impossible”).
• Accordingly, the assessee was not an assessee in default, and the demand raised under Sections 201(1) and 201(1A) was quashed.

Our Comments

This case highlights that TDS under section 195 applies only when the underlying payment is chargeable to tax in India, and that the indirect transfer provisions were not applicable prior to 2012, as clarified in the Vodafone ruling. Retrospective amendments cannot create new withholding tax obligations for past transactions.

Whether an order passed under Section 73 of the Uttar Pradesh Goods and Services Tax Act, 2017 can be sustained when the assessee's GST registration had already been cancelled, and the show-cause notice was served after cancellation only through the GST portal?

Jag Narain Dubey vs State of U.P. Thru. Chief Commissioner of Commercial Tax Lko and Anr [2026 (6) TMI 54 - ALLAHABAD HIGH COURT]

Facts

• The petitioner's GST registration was cancelled on 22 October 2021, following which the business operations were discontinued.
• Subsequently, the GST Department initiated proceedings under Section 73 and issued a show-cause notice by uploading it on the GST portal.
• Thereafter, an order dated 10 December 2025 was passed by the Assistant Commissioner, State GST.
• Aggrieved, the petitioner filed a writ petition before the High Court contending that, following cancellation of registration, he could not reasonably be expected to regularly access the GST portal and, therefore, service of notice through the portal alone could not be treated as valid service.

Ruling

• The High Court observed that once the GST registration stands cancelled, the taxpayer cannot be expected to regularly monitor the GST portal.
• Where proceedings are initiated after cancellation of registration, the Department must ensure service of notice through other prescribed modes.
• Mere uploading of a show-cause notice on the GST portal, without any additional mode of communication, does not amount to effective service and is contrary to the principles of natural justice.
• Accordingly, the order dated 10 December 2025 passed under Section 73 was quashed and set aside.
• The GST Department was directed to issue a fresh notice to the petitioner and proceed afresh in accordance with law.

Our Comments

• The ruling reinforces that valid service of notice is a fundamental prerequisite for adjudication proceedings under GST. The decision clarifies that portal-based communication alone may not be sufficient where the taxpayer's registration has already been cancelled and business activities have ceased.
• The judgment strengthens the principles of natural justice by requiring the tax authorities to adopt an effective mode of communication before passing adverse orders.
• At the same time, the Court has balanced taxpayer rights with revenue interests by permitting the Department to reinitiate proceedings after effecting proper service of notice.

Whether preferential location charges (PLCs) collected from buyers of flats are liable to GST as an independent supply or form part of the composite supply of construction services taxable at the same rate as the underlying construction service?

DLF Limited vs The Commissioner of Central Goods and Service Tax and others

[2026 (5) TMI 1358 – PUNJAB AND HARYANA HIGH COURT]

Facts

The petitioner approached the Authority for Advance Ruling (AAR) on 10 June 2019 seeking clarification on the GST treatment of preferential location charges collected from buyers.

• Vide order dated 28 August 2020, the Advance Ruling Authority held that the preferential location charges are liable to GST separately and independently from the consideration received towards construction/ development service.
• Aggrieved by the ruling, the petitioner filed an appeal under Section 101 of the Central Goods and Services Tax (CGST) Act, 2017. However, the Appellate Authority for Advance Ruling (AAAR) dismissed the appeal on 28 March 2022 and upheld the findings of the Advance Ruling Authority.
• Subsequently, during the 54th meeting held on 9 September 2024, the GST Council recommended that preferential location charges collected by developers should not be taxed separately and instead be treated as part of the consideration for the construction service.
• Pursuant to the recommendation, the Central Board of Indirect Taxes and Customs (CBIC) issued a GST Circular on 11 October 2024 clarifying that the choice of location of an apartment is intrinsically linked to the supply of construction services. Accordingly, preferential location charge collected prior to issuance of the completion certificate constitutes part of the consideration for construction services and is liable to GST at the same rate as applicable to construction services.
• Relying on the aforesaid recommendation and Circular, the petitioner challenged the validity of the AAR and AAAR orders before the High Court.

Ruling

• In view of the GST Circular, the Court held that preferential location charges cannot be regarded as an independent supply and are liable to GST in the same manner as the underlying construction services.
• The court further observed that the Circular, having been issued under Section 168(1) of the CGST Act, 2017, is binding on the tax authorities. Being clarificatory in nature, the Circular would operate retrospectively.
• Accordingly, the Court held that the AAR order dated 20 August 2020 and the AAAR order dated 28 March 2022, which treated preferential location charges as a separately taxable supply, were unsustainable under law.
• Consequently, the Court quashed both the Orders and held that the preferential location charges form part of the composite supply of construction services and are not liable to be taxed separately, allowing the writ petition.

Our Comments

• The judgment provides significant relief to the real estate sector by settling the long-standing controversy regarding the GST treatment of preferential location charges, where the Court reaffirmed that preferential location charges are intrinsically linked to the supply of construction services and cannot be artificially segregated as an independent supply for taxation purposes.
• A key aspect is the Court's recognition of the CBIC Circular dated 11 October 2024 as clarificatory in nature and having retrospective operation.
• The decision reinforces the settled principle of composite supply under GST, namely that charges intrinsically linked to the principal supply should assume the tax treatment of such principal supply rather than being subjected to separate taxation.

Tribunal rejects invocation of benefit test, deletes TP adjustment qua Franchise fee payment

Royal Canin India Pvt Ltd (ITA No.8837/MUM/2025)

The Assessee, a wholly owned subsidiary of Royal Canin SAS, France, is engaged in the marketing, distribution, and sale of pet nutrition products in India. The Assessee operated under a franchise model that granted it exclusive rights to use the “Royal Canin System,” comprising trademarks, brand name, manufacturing and marketing know-how, and various centralized support services. In addition, the Assessee availed intra-group services and purchased finished goods from its AE.

The Transfer Pricing Officer (TPO) determined the arm’s length price (ALP) of the franchise fee at nil on the grounds that the payment was duplicative of the cost of goods purchased from AEs and that the Assessee failed to demonstrate any economic benefit from the arrangement. Consequently, a significant transfer pricing adjustment was made, which was upheld by the Dispute Resolution Panel (DRP).

Held

The Tribunal deleted the TP adjustment, holding that the franchise fee was a genuine payment for distinct commercial rights, including trademarks, intangibles, know-how, and centralized support services. It rejected the Revenue’s duplication argument, noting that the intellectual property was not owned by the manufacturing entities and therefore required separate compensation.

The Tribunal further held that use of the “Royal Canin” brand and business system showed benefit to the Assessee. It reiterated that the TPO cannot determine a Nil ALP based on a “need-benefit” test or question commercial expediency, as its role is confined to benchmarking under the prescribed methods.

Our Comments

The ruling affirms that franchise fees for IP, trademarks, and support services are distinct from product purchase costs and cannot be assigned a Nil ALP without proper benchmarking. It also reiterates that the TPO cannot question commercial expediency through a benefit test and highlights the need for consistency in transfer pricing assessments.

Higher profitability of the eligible unit, by itself, is no ground for invoking Section 80-IA(10)

Imperial Jewels (I.T.A. No. 5477/Mum/2024)

The Assessee, engaged in the manufacture and export of studded jewelry, claimed a deduction under Section 10AA for its SEZ unit and reported certain transactions as specified domestic transactions in Form 3CEB, benchmarking them under TNMM.

The TPO invoked Section 80-IA(10), alleging that the Assessee had earned excessive profits through arrangements with related parties, as its margins exceeded those of comparable companies. Accordingly, a downward adjustment was proposed, which was ultimately restricted to INR 3.849 million pursuant to the DRP's directions.

Held

The Tribunal deleted the adjustment, holding that Section 80-IA(10) could not be invoked merely because of relatedparty transactions or higher profits. It held that the Revenue must prove an arrangement yielding more than ordinary profits through proper benchmarking, which it failed to do, as no evidence of profit shifting, price manipulation, or artificial structuring was on record.

The Tribunal also noted that higher profits may stem from legitimate factors such as efficiency, economies of scale, or favorable market conditions. It further noted that similar adjustments had not been sustained in earlier years and that the Assessee remained profitable even after the tax holiday, weakening the allegation of profit inflation.

Our Comments

The ruling reiterates that Section 80-IA(10) cannot be invoked mechanically and requires the Revenue to first establish “ordinary profits” through objective benchmarking. It recognizes that higher margins may arise from legitimate operational efficiencies and commercial factors. The decision also underscores that transfer pricing adjustments affecting eligible profits must be evidence-based, and highlights that consistency in past assessments and post-tax holiday profitability are relevant defenses against allegations of profit shifting.

Impact of an Undisclosed Guarantee on the risk profile of intra-group financing

Luxembourg Co. (LuxCo) vs. Luxembourg Tax Authorities, 18 March 2026

Whether an undisclosed counter-guarantee agreement constitutes a new fact enabling the tax authorities to reopen and reassess prior tax years under the extended ten-year limitation period;

Whether the existence of a corporate-guarantee arrangement justifies the guarantor assuming the entire credit risk, and pursuant to it, treating the entire income from financial activities as the guarantor’s income.

Facts

• The case concerns Luxembourg Co. (LuxCo), Belgian Co. (BelCo), and BelCo’s Luxembourg branch (the Branch), which was established in 2007 to undertake intra-group financing activities.
• The Branch entered into advance tax agreements (ATA) with the Luxembourg Tax Authority (LTA) in 2007 and 2014.
• Under a 2014 advance tax ruling, BelCo's Luxembourg branch was treated as carrying on financing activities while assuming only limited credit risk, allowing it to claim a notional interest deduction equal to 99% of its financing income.
• Following an exchange of information with the Belgian Tax Authority (BTA) in 2019, the LTA discovered an undisclosed counter-guarantee agreement dated 8 March 2012, which had not been submitted during the ruling process.
• The BTA relied on the agreement to conclude that the relevant credit risk was borne by LuxCo in Luxembourg rather than by BelCo in Belgium.
• Treating the counter-guarantee and the information received from Belgium as new facts, the LTA reopened prior years under the extended 10-year limitation period and sought to attribute the Branch's financing income to LuxCo.
• It also rejected LuxCo's position that it acted merely as a shareholder, noting that an independent party would not assume such credit risk without appropriate remuneration.
• After its administrative complaint was dismissed, LuxCo appealed to the Administrative Tribunal.

Ruling

• The Tribunal rejected LuxCo’s argument that the ordinary five-year limitation period applied.
• It held that the undisclosed counter-guarantee constituted a new fact and that, because this information was unavailable when the original assessments were issued, the tax authorities were entitled to rely on the extended ten-year limitation period.
• The reassessments were therefore valid and timely.
• However, the Tribunal did not accept the tax administration’s attempt to attribute the Branch’s entire notional interest deduction to LuxCo.
• Although it agreed that LuxCo had assumed credit risk and should therefore receive arm’s-length remuneration for its guarantee function, it found that the administration had failed to demonstrate that LuxCo performed all of the economically significant functions or exercised control over the financing activity as a whole.
• Accordingly, the Tribunal concluded that only an arm’slength guarantee fee, rather than the full financing income, could be attributed to LuxCo.

Our Comments

• The ruling highlights that undisclosed information can justify reassessments under an extended limitation period and weaken the protection afforded by tax rulings.
• It also reaffirms that assuming risk alone does not entitle an entity to all related profits; income must be attributed to the functions performed and the control exercised.
• Accordingly, a guarantee provider may be entitled only to an arm’s-length guarantee fee rather than the full financing return.