From The Judiciary

Whether capital gains arising from the sale of shares between two foreign entities be taxed in India when the underlying assets are located in India, or do the provisions of the India–Singapore DTAA grant exclusive taxing rights to the country of the seller’s residence?

eBay Singapore Services Private Limited [TS-1343-ITAT-2025(Mum)]

Facts

eBay Singapore Services Pte. Ltd., a company incorporated in Singapore, sold its shares of Flipkart Singapore to another Singapore company, FIT Holdings. The sale resulted in short-term capital gains amounting to around INR 222.57 billion. eBay claimed that the gains were not taxable in India under Article 13(5) of the India–Singapore Double Taxation Avoidance Agreement (DTAA).

It produced a Tax Residency Certificate (TRC) from the Singapore authorities evidencing that it was a tax resident of Singapore.

The Income tax authority argued:

• That eBay Singapore’s real management and control was in the U.S., not in Singapore, so it should not get DTAA benefits.
• The sale indirectly involved Indian assets (Flipkart India), so the gain should be taxable in India under Section 9(1)(i) read with Explanation 5 of the Income Tax Act, which taxes indirect transfers of Indian assets.

The Revenue also relied on the Supreme Court’s preliminary observations in the Tiger Global case involving Flipkart shares, to support its claim.

Held

The ITAT (Mumbai) ruled in favour of eBay Singapore.

The Tribunal held that.

• eBay Singapore was eligible for DTAA benefits since it had a valid Singapore TRC.
• Under Article 13(5) of the India–Singapore DTAA, the right to tax capital gains on shares rests only with the country of the seller’s residence — i.e., Singapore, not India.
• The sale was between two Singapore companies, and therefore, India had no taxing rights under the treaty.
• Although India’s domestic law (Section 9) may deem indirect transfers taxable, treaty provisions prevail if they are more beneficial to the taxpayer (as per Section 90(2) of the Income Tax Act).
• The India–Singapore DTAA does not include a “look-through” clause (unlike treaties with Mauritius or Cyprus), meaning India cannot tax gains from shares of a foreign company even if that company indirectly owns Indian assets.
• The reference to the Tiger Global case¹ was not relevant here, as there was no evidence of a layered or artificial transaction by eBay Singapore.

Our Comments

This ruling highlights the importance of treaty eligibility and genuine tax residency (supported by a valid TRC) in claiming DTAA benefits, as well as the primacy of treaty provisions over domestic law in cases of indirect transfer taxation.

Whether the provisions of the Multilateral Instrument (MLI) can automatically modify or override the India–Ireland DTAA without a separate country-specific notification under Section 90(1) of the Income-tax Act, and consequently, whether the lease income earned by Irish aircraft lessors like Kosi Aviation Leasing Ltd. from Indian airlines becomes taxable in India or gives rise to a Permanent Establishment (PE)?

Kosi Aviation Leasing Ltd [TS-1296-ITAT-2025(DEL)]

Facts

Kosi Aviation Leasing Ltd., an Irish tax-resident company incorporated in 2017, was engaged in leasing commercial aircraft to Indian airlines. For Assessment Year 2022–23, the company had leased an aircraft to Inter Globe Aviation Ltd. (IndiGo) under an Aircraft Specific Lease Agreement. The assessee claimed that the lease was an operating lease, meaning the income was taxable only in Ireland under Article 8 of the India–Ireland DTAA. The Assessing Officer disagreed, treating the lease as a financial lease and reclassifying the lease rental as interest income taxable in India under Article 11. The Revenue also argued that the MLI modified the India–Ireland DTAA and invoked the Principal Purpose Test (PPT) to deny treaty benefits. Additionally, it was alleged that the leased aircraft constituted a PE of the assessee in India.

Held

The Delhi ITAT ruled comprehensively in favor of the assessee on all major issues. First, regarding the nature of the lease, the Tribunal held it to be an operating lease based on the absence of any transfer of ownership, purchase option, or use of the aircraft for its entire economic life. The aircraft was to be returned to the lessor after the lease term, retaining significant residual value. Relying on its earlier decisions in Celestial Aviation Trading 15 Ltd. and InterGlobe Aviation Ltd., the ITAT confirmed that such leases qualify as operating leases and, therefore, the income falls under Article 8 of the DTAA, exempt from Indian taxation.

On the issue of MLI, the Tribunal, relying on the Mumbai ITAT ruling in Sky High Leasing, clarified that a single omnibus notification issued under Section 90(1) of the Income-tax Act does not automatically legislate or implement amendments in existing DTAAs. The ITAT reiterated that a specific country-wise notification is mandatory under Section 90(1) wherever the MLI modifies or alters the provisions of a bilateral tax treaty. In the absence of such a notification for Ireland, the MLI lacks legal binding force and cannot be invoked to deny DTAA benefits.

Finally, on the PE issue, the ITAT held that the mere presence of an aircraft in India did not constitute a fixed place PE, as the lessee did not have disposal or control over the lessor’s place of business. Thus, the aircraft could not be considered a PE of the assessee. Concluding that all income arose from international operations covered under Article 8, the ITAT directed that the lease rentals were not taxable in India, thereby allowing the appeals in favor of Kosi Aviation Leasing Ltd. and other similarly placed Irish lessors.

Our Comments

This Delhi ITAT ruling reinforces that the MLI cannot automatically amend or override existing DTAAs without a specific country-wise notification under Section 90(1) of the Income-tax Act, rendering it unenforceable otherwise. The judgment upholds the supremacy of bilateral treaty procedures and protects genuine cross-border leasing arrangements. It further clarifies that lease income from operating leases remains exempt under the India–Ireland DTAA and does not create a PE in India.

Whether increasing the grammage/quantity of the product or offering free schemes instead of reducing the MRP to pass on benefit of GST rate reduction, could be considered as ‘profiteering’?

Sharma Trading Company vs. Union of India [(2025) 35 Centax 59(Del.)]

Facts

• The National Anti-Profiteering Authority (NAPA) had found that the petitioner, a distributor of Hindustan Unilever Ltd. (HUL), had not passed on the benefit of GST rate reduction from 28% to 18% (w.e.f. 15 November 2017) to the consumers on the product Vaseline VTM 400 ML.
• While the product MRP continued to remain the same, the base price was increased thereby amounting to profiteering by the petitioner.
• Accordingly, the petitioner was directed to deposit the profiteered amount in the Consumer Welfare Fund, and a penalty was imposed under Section 122 of the CGST Act r/w Rule 133 of the CGST Rules.
• Challenging the said finding, the petitioner approached the Delhi HC. It argued that the grammage/quantity of the subject product was increased by 100 ml after the change in GST rate, while also offering Dove soap bar as a free product.
• In addition to the above, the petitioner challenged the provisions of Section 171 and Rule 126 as being unconstitutional, violating Articles 14 and 19 of the Constitution.

Ruling

• The HC rejected the challenge to the constitutional validity of the provisions by following its earlier decision in Reckitt Benckiser India (P) Ltd. vs. UOI [2024 (82) G.S.T.L. 344].
• As regards the question of whether the petitioner had passed on the benefit to the consumers, HC observed, “While commercial realities have to be taken into consideration in such matters, the benefits extended to the consumer are also of utmost importance. The purpose of reduction in GST is to make products and services more cost effective for the consumers. The said purpose would be defeated if the price is kept the same and some unknown quantity is increased in the product, even without the consumer requesting for the increased quantity product.”

• It further observed, “A deadline, once fixed by way of notifications, cannot be sought to be violated merely on the ground that some special scheme is being launched or the product is being sought to be given with some other product or the grammage or the quantity of the product is being increased.”
• Since Section 54(3) envisages only two scenarios, viz. zero-rated supplies without payment of tax and inverted duty structure, the opinion of Single Judge Bench would involve a judicial re-writing of the provision, which is impermissible in law.
• The Court opined that all schemes in operation ought to have been recalibrated with the reduction in GST rates. There may be some transitional problems, however, the purpose of the reduction in GST rates cannot be defeated.
• The Court pressed upon the legislative intent and rationale behind anti-profiteering measures, which is to safeguard consumers’ interests and guarantee that businesses would transfer the benefits of lower tax rates and input tax credits to the final consumers.
• As regards the penalty, it noted the Revenue’s submission that all penalty proceedings had been withdrawn by the NAA and therefore, this issue was infructuous.

Our Comments

Section 171 of the CGST Act continues to withstand the Constitutional challenge. The anti-profiteering framework has judicial endorsement as a consumer welfare mechanism.

The judgement emphasizes that any GST rate reduction must reflect in the price or invoice value of the product. Schemes, offers, or quantity/grammage enhancements cannot substitute for actual price reduction.

Given the above, dealers/distributors must re-align their software, pricing, and billing immediately upon a GST rate change.

Manufacturers and distributors should coordinate on base-price adjustments to avoid downstream profiteering liability.

The Court has recognized practical difficulties (existing stock, labelling, schemes) but ruled that these cannot justify non-compliance.

It reiterated that sale below MRP is permissible to pass on tax benefits, but businesses cannot claim price inflexibility as a defense.

Recharacterization unwarranted: ITAT finds Netflix India a limited-risk distributor, not a full-fledged entrepreneur, drops INR 4.45 billion adjustment.

Netflix Entertainment Services India LLP²

Facts

Netflix India was assessed for AY 2021–22. It had Distribution Agreements with Netflix International B.V. (NIBV) and Netflix US to distribute global Netflix content in India. Its functions were limited to marketing, invoicing, customer support, and regulatory compliance, earning a fixed ROS of 1.36% on a cost-plus basis. The Transfer Pricing Officer (TPO) recharacterised Netflix India as a full-fledged entrepreneur and proposed a INR 4.4493 billion transfer pricing adjustment. The adjustment was challenged before the Dispute Resolution Panel (DRP) and later appealed to the ITAT.

TPO’s contention

The TPO observed that Netflix India’s ownership of Open Connect Appliances (OCAs) and Internet Service Provider (ISP) arrangements indicated technological and investment risk. Since Indian subscribers paid Netflix India directly, the TPO viewed it as the economic owner of the service – hence not a mere distributor but the main provider of content and technology in India, bearing entrepreneurial, pricing, marketing, and customer risks. Rejecting Transactional Net Margin Method, the TPO applied the Other Method (OM), treating Netflix India as licensing content and technology from its AEs and liable to pay royalty leading to a INR 4.4493 billion TP adjustment. The DRP upheld the TPO’s view.

Taxpayer's Contention

Taxpayer claimed to be a limited-risk distributor, not owning or licensing any IP in content or technology, which remained with Netflix US/NIBV. It only facilitated access via OCAs—logistical tools, not technological assets—and managed subscriptions and billing. Subscription pricing was set globally, with no control by Netflix India. All its costs were reimbursed by AEs, insulating it from business risk.

ITAT Order

The ITAT ruled in favor of the taxpayer, rejecting the recharacterization of Netflix India as a full-fledged entrepreneur. It held that Netflix India performs routine distribution and support functions, owns no IP or intangibles, bears limited or fully indemnified risks, and is not engaged in content creation or technology development. The OCAs were deemed logistical cache devices, not core technological assets. The distribution agreement appoints Netflix India as a non-exclusive distributor of access to the Netflix service in India, without any license to use, reproduce, alter, or sub-license content or technology. Customers similarly receive only limited access rights with no ownership or copyright transfer. Accepting the taxpayer’s FAR analysis, ITAT found that Netflix India’s functions are limited to promotion, distribution of access, and local support; it has no intangibles, minimal tangibles (offices, IT equipment, OCAs), and limited operational/regulatory risks. The workforce handles marketing support, operations, finance, and compliance. The ITAT upheld TNMM as the most appropriate method and dismissed references to royalty agreements selected by TPO as speculative. It concluded that Netflix India operates as a Limited Risk Distributor, and that mere technological presence (servers or caches) does not imply economic ownership.

Our Comments

The ruling reinforces economic reality over form and curbs aggressive TP recharacterizations in the digital economy. The ITAT has reaffirmed that functional characterization must align with contractual substance and actual conduct, not merely the economic footprint or customer-facing presence in India. By rejecting the TPO’s aggressive recharacterization of Netflix India as a full-fledged entrepreneur, the Tribunal has drawn a clear line between “distribution” and “ownership” functions in digital business models.

ITAT: Rejects Revenue's segregation approach, notes trading and service segments are interconnected.

M/s Juniper Networks Solution India Pvt. Ltd³

Facts

M/s Juniper Networks Solution India Pvt. Ltd., a wholly owned subsidiary of Juniper Networks International BV (JNIBV). The taxpayer, engaged in the distribution, sales, marketing, and customer support of networking equipment and software, had benchmarked all its international transactions using the Transactional Net Margin Method (TNMM) at the entity level for Assessment Year 2020–21.

The TPO noted two distinct activities, trading/distribution and maintenance services and held them to be functionally independent thereby rejecting the taxpayer’s aggregated entity-level TNMM. The DRP upheld this segmentation approach.

Taxpayer's Contention

The taxpayer argued that its trading and service functions formed an integrated business model, warranting application of TNMM at the aggregated entity level rather than on a segmented basis. It sought gross profit–based expense allocation, preferred RPM for trading as a pure distributor, requested a risk adjustment for its limited-risk profile, and opposed penalty proceedings under Section 270A, citing no concealment or misreporting.

TPO’s Contention

The TPO found the taxpayer’s trading and service activities functionally distinct, rejecting its integrated model claim. The TPO reworked segmental profitability using revenue ratio as the allocation key and proposed a separate adjustment for the trading segment, holding TNMM suitable as the most appropriate method based on available data and functions.

ITAT Order

The ITAT observed that the tax authorities erred in dividing the taxpayer’s business into trading and service segments merely based on revenue allocation. It held that the taxpayer’s core business is trading, and the related customer services are intrinsically linked and interdependent. The Tribunal noted that the taxpayer’s service activities exist primarily to support its trading operations and cannot be viewed independently. It emphasized that revenue recognition itself demonstrates that trading and service performance obligations are intertwined. The ITAT remarked that the case represented an “egg and chicken situation,” where the existence of one activity was contingent upon the other. Consequently, the ITAT ruled that the segmentation adopted by the TPO was inappropriate and accepted the taxpayer’s contention.

Our Comments

This ruling reinforces the principle that aggregation under TNMM is appropriate when transactions or business functions are closely interlinked. Artificial segmentation should not be applied unless there is clear functional, asset, and risk distinction between activities. The decision underscores the importance of analyzing the business model as a whole rather than mechanically separating revenue-generating functions for transfer pricing purposes.