From The Judiciary

Can a charitable trust be treated as a “person” under FEMA and penalized for accepting long-term funds from NRI trustees?

Farouk Educational Trust v. Enforcement Directorate, SAFEMA, New Delhi

Facts

Farouk Educational Trust (the trust) engaged in educational activities in Puducherry and Tamil Nadu. The trust received an aggregate amount of approximately INR 375.3 million from five of its NRI trustees during FY 2006–07 to FY 2017–18. The trust contended that these amounts were intended to support its charitable objectives; the receipts were consistently reflected in its books of account as loans/advances from trustees. There were no formal loan agreements, no interest was paid, and the amounts remained outstanding for several years and were not repaid within the period prescribed under the FEMA borrowing regulations. Consequently, the Enforcement Directorate (ED) initiated proceedings alleging that the trust had unlawfully accepted and retained borrowings from persons resident outside India in contravention of FEMA provisions.

Assessee's Arguments

• The trust contended that a charitable trust does not fall within the definition of a “person” under section 2(u) of FEMA and, therefore, the provisions governing borrowing from persons resident outside India were not applicable to it.
• The trust argued that the amounts received from the NRI trustees were in the nature of voluntary contributions intended to support the trust's educational and charitable activities, and not commercial borrowings or loans.
• The trust further submitted that section 6(3)(e) of FEMA had been omitted by the Finance Act, 2015, and consequently, no proceedings could be continued or sustained on the basis of a provision that no longer existed.
• Without prejudice, it was contended that there was no deliberate or mala fide violation, as the funds were utilized solely for charitable purposes and no personal or commercial benefit was derived from the transactions.

ED’s Arguments

• The ED argued that the trust squarely falls within the ambit of an “artificial juridical person” under section 2(u)(vi) of FEMA and is therefore a “person” liable to comply with FEMA regulations.
• The amounts received from the NRI trustees were consistently disclosed in the trust's audited financial statements as loans/advances, clearly evidencing their character as borrowings rather than donations.
• Since the borrowings remained outstanding beyond the permissible period of three years prescribed under the FEMA Borrowing and Lending in Rupees Regulations, 2000, the trust had committed a clear contravention of FEMA.
• ED also submitted that the omission of section 6(3)(e) did not invalidate the proceedings, as the complaint and adjudication process had been initiated while the provision was still in force.
• Further, FEMA being a civil regulatory statute, proof of mens rea or intention is not required; once the contravention is established, the penalty is liable to follow.

Held

• The SAFEMA Tribunal held that a trust is an artificial juridical person and consequently falls within the definition of a “person” under section 2(u) of FEMA.
• The Tribunal observed that the amounts received from the NRI trustees had been consistently disclosed in the trust's books as loans/advances and therefore could not subsequently be recharacterized as donations.
• Since these borrowings were retained beyond the permissible period prescribed under the FEMA Borrowing and Lending in Rupees Regulations, 2000, the trust was found to have contravened FEMA provisions.
• The Tribunal confirmed that because the complaint and Show Cause Notice (SCN) were initiated in 2018, before the notification issued in October 2019 of the Finance Act's omission clause, the action under Section 6(3)(e) was legally sound.
• While affirming the finding of violation, the Tribunal took note of the charitable nature of the trust's activities and the absence of any personal gain and accordingly reduced the penalty from INR 50 million to INR 10 million.

Our Comments

This ruling confirms that a trust is a “person” under FEMA and must comply with foreign exchange regulations. The Tribunal emphasized that the accounting treatment of a transaction is crucial, and funds recorded as loans cannot later be claimed as donations. The case also reiterates that FEMA violations can attract penalties even without wrongful intent, making regulatory compliance essential for charitable trusts.

Where a Tax Residency Certificate (TRC) is not conclusive, should the Revenue prove abuse to invoke the Limitation of Benefits (LOB) clause?

Emerging India Focus Funds [TS-1594-ITAT-2026(DEL)]

Facts

Emerging India Focus Funds, a Mauritius tax resident holding a valid Tax Residency Certificate (TRC) and registered as a Category-I FPI with SEBI, earned capital gains of about INR 2.591 billion on redemption of equity-oriented mutual fund units during AY 2023–24. The assessee claimed exemption under Article 13(4) of the India–Mauritius DTAA. The Revenue denied the exemption and sought to tax the gains under Article 13(3A), while also invoking the Limitation of Benefits (LOB) provisions under Article 27A. A significant factor was the revocation of the Global Business Licence (GBL) of the assessee’s management shareholder, Emerging India Fund Management Ltd. (EIFML).

Assessee’s Arguments

• Units of mutual funds are legally distinct from shares and therefore gains from redemption of mutual fund units cannot be treated as gains from alienation of "shares" under Article 13(3A). Accordingly, Article 13(4) granting exemption should apply.
• The assessee relied on the ITAT ruling in its own case for AY 2022-23, where mutual fund units were held to be different from shares.
• Revocation of the GBL of EIFML did not affect the assessee's own TRC, GBL, FPI registration, or treaty eligibility. The SEBI proceedings resulted only in a monetary settlement and did not prohibit business operations.
• The Revenue could not raise entirely new allegations regarding lack of substance and treaty eligibility at the appellate stage.

Revenue’s Arguments

• Equity-oriented mutual funds substantially derive value from shares and should be treated akin to shares for purposes of Article 13(3A).
• The assessee lacked commercial substance in Mauritius, having no employees, no physical assets, no office infrastructure, and payment of management fees to related parties that were allegedly not at arm's length (ALP).
• Following revocation of EIFML's license and SEBI findings on "fit and proper" status, the assessee was effectively unmanaged, raising concerns of treaty shopping and conduit arrangements.
• Relying on the Supreme Court's decision in Tiger Global, the Revenue argued that a TRC is only a threshold requirement and not conclusive proof of treaty entitlement.

Held

• The Delhi ITAT followed its earlier decision in the assessee's own case and held that units of equity-oriented mutual funds and shares are distinct instruments. Consequently, gains from redemption of mutual fund units do not automatically fall within Article 13(3A).
• The ITAT observed that after the Supreme Court's ruling in Tiger Global, mere production of a Mauritian TRC is not conclusive and the Revenue is entitled to examine issues of substance, abuse, and applicability of anti-abuse provisions.
• ITAT noted unresolved questions regarding who exercised management and decision-making powers after revocation of EIFML's license and whether the assessee possessed sufficient commercial substance in Mauritius.
• Since the assessee had not been given a proper opportunity to rebut these issues, the ITAT set aside the treaty eligibility and Article 27A questions and remanded the matter to the Assessing Officer for fresh adjudication after granting the assessee an adequate opportunity to be heard.

Our Comments

This ruling is significant as it demonstrates the growing impact of the Supreme Court's Tiger Global decision on Mauritius treaty structures. While the Tribunal reaffirmed that mutual fund units are not equivalent to shares for DTAA purposes, it also clarified that possession of a TRC no longer ends the inquiry. Revenue authorities may now scrutinize the commercial substance, management control, and possible treaty abuse of Mauritius entities. The decision suggests that taxpayers with offshore holding and investment structures should be prepared to substantiate genuine management and operational substance, particularly where LOB or anti-abuse provisions are invoked.

Additional Director General (Adjudication) v. Ericsson India PVT. LTD

[(2026) 47 Centax 180 (S.C.) | [1 October 2026]

Issue

Whether royalty paid for technical know-how and intellectual property to an overseas group entity should be added to the assessable value of imported components for customs valuation?

Facts

• Ericsson India imported components from its related overseas entity for manufacturing and assembly in India.
• Separately, it paid royalty to LM Ericsson Sweden for use of technical know-how, manufacturing processes, training, and Intellectual Property Rights (IPR).
• The DRI contended that such royalty was required to be added to the value of imported goods under Rule 10(1)(c) of the Customs Valuation Rules, 2007.
• The revenue contended that the royalty was linked to the imported components as it was computed on the sale value of finished products; and the access to the know-how and imports were interconnected, making royalty a condition of sale.
• Further, non-disclosure of royalty arrangements warranted invocation of the extended limitation period.
• However, the taxpayer argued that
  • The royalty was related to post-import manufacturing activities and use of technical know-how in India.
  • The payment of royalty was independent of component imports and not a condition for procurement.
  • Components were sourced not only from Ericsson Sweden but also from unrelated foreign suppliers and domestic vendors, demonstrating that imports were not contingent on payment of royalty.
  • Royalty arrangements were duly disclosed to the authorities through financial statements and transfer pricing documentation and thus the extended period was not invocable.

CESTAT ruling (upheld by the Supreme Court)

• The Hon’ble Tribunal held that the technical co-operation agreements related to technical know-how and intellectual property used in the manufacture and assembly of finished products in India, constituting post-importation activities.
• The royalty payments were not a condition of sale of the imported components, nor did the agreements mandate import of such components as a precondition for access to the technology.
• It was further held that merely including the value of imported components in the royalty computation formula does not establish a nexus between the royalty and the imported goods for customs valuation purposes.
• Accordingly, the royalty paid to LM Ericsson Sweden was held to be non-includible in the assessable value of imported goods under Rule 10(1)(c) of the Customs Valuation Rules, 2007.
• Further, as the royalty arrangements had been disclosed through financial statements and transfer pricing documentation, no suppression of facts was established and the extended limitation period was held to be inapplicable.

Supreme Court decision

The Hon’ble Supreme Court dismissed the Revenue's appeal and affirmed the CESTAT ruling, holding that the royalty payments related to post-importation manufacturing activities and were not a condition of sale of the imported goods. Consequently, such royalty was not includible in the assessable value of the imports.

Our Comments

This is a significant Supreme Court ruling, reaffirming that royalty payments for technical know-how and intellectual property rights are not includible in the customs value of imported goods where such payments relate to post-importation activities and are not a condition of sale of the imports. The mere existence of a royalty arrangement does not automatically trigger customs valuation implications. The judgment provides welcome relief to businesses operating under technology transfer, licensing and IP arrangements, and underscores the importance of carefully structuring agreements to clearly distinguish import transactions from post-importation commercial activities.

Gopinath TM v. Mukand Limited

[(2026) 47 Centax 166 (Tri. – GST – Bengaluru)]

Issue

Whether GST paid on account of a retrospective price escalation for pre-GST supplies attracts interest under Section 50 of the Central Goods and Services Tax Act, 2017 (CGST Act) from the date of issuance of debit notes or from the original date of clearance?

Facts

• Goods were cleared by the taxpayer during April 2017 to June 2017 under the pre-GST regime under contracts containing price escalation clauses.
• Pursuant to upward price revisions, the taxpayer issued debit notes / supplementary invoices in September and October 2018 under Section 142(2)(a) of the CGST Act and voluntarily discharged differential GST.
• The adjudicating authority appropriated the tax so paid and raised a demand for interest under Section 50, along with penalty under Section 122.
• While the Commissioner (Appeals) set aside the demand, the Revenue filed an appeal before the Goods and Services Tax Appellate Tribunal (GSTAT).
• The Revenue contended that the differential tax pertained to the original supplies and, therefore, interest was payable from the original date of supply and not from the date of issuance of the debit notes.
• The taxpayer argued that GST was discharged in the returns for the period in which the debit notes were issued and that Section 142(2)(a), being a transitional provision applicable to pre-GST transactions, treated such supplementary invoices as deemed supplies under the GST regime, thereby negating any liability to interest.

Ruling

• The Tribunal held that section 142(2)(a) merely provides a transitional mechanism for reporting and discharging tax on post-GST price revisions relating to pre-GST supplies and does not extinguish the underlying interest liability.
• The deeming fiction under Section 142(2)(a) is procedural in nature and cannot alter the economic reality that the additional consideration relates to the original supply transaction.
• Sections 34(4) and 39(7) govern the reporting and payment mechanism under GST but do not modify the point in time when the value accrued or the tax liability arose.
• Accordingly, the differential tax was held to relate back to the original period of clearance, and interest under Section 50 was held payable from the original date of supply until the date of payment of tax.
• The Revenue's appeal was consequently allowed on the issue of interest liability.

Our Comments

The present ruling pertains to a scenario where the underlying supplies were made during the erstwhile excise regime, while the corresponding debit notes were issued after the introduction of GST. Nevertheless, tax authorities may seek to rely on the principles laid down in this decision to initiate proceedings even in cases involving supplies made entirely under GST, particularly on the basis that sections 34 and 39 are merely procedural and reporting provisions.

Tax authorities may contend that a debit note merely quantifies additional consideration for an already completed supply, and that interest is payable on the resulting differential tax. Accordingly, it remains to be seen whether the authorities will extend the principles emerging from this ruling to GST-era transactions and use them as the basis for future litigation over interest on differential tax discharged through debit notes.

Consumer tariff paid to State discoms is a valid internal CUP for captive power transfers: Mumbai ITAT

Aditya Birla Real Estate Limited¹

The taxpayer, engaged inter alia in cement manufacturing and power generation, operates captive power plants at Raipur. As captive generation fell short of the cement units’ requirement, it purchased power from the external State distribution companies. The taxpayer priced the inter-unit transfers, reported as specified domestic transactions (SDT), at the monthly rates paid by the cement units to these distribution companies.

The Ld. Transfer Pricing Officer (TPO), after calling for information under section 133(6), replaced these rates with the rates at which the distribution companies procured power from generating stations and made adjustments of INR 638.9 million and INR 431.0 million, respectively. The Ld. CIT(A) deleted both adjustments, and the Revenue appealed before the Hon’ble Income Tax Appellate Tribunal (ITAT).

Taxpayer’s contention

The taxpayer contended that its cement units had actually purchased electricity from independent distribution companies during the same periods, and those contemporaneous purchase rates constituted an internal Comparable Uncontrolled Price (CUP) for the captive supply. It relied on the Supreme Court ruling in Jindal Steel & Power Ltd., the High Court ruling in DCM Shriram Ltd., Rungta Mines Ltd. and the ITAT ruling in Aditya Birla Nuvo Ltd.

Revenue’s contention

The Revenue contended that the captive plant, being a generator, should be the tested party and compared with generator-level prices. The consumer tariff of a distribution licensee embeds transmission, wheeling, distribution and network costs, besides the licensee’s margin, none of which the captive plant incurs. It argued that after the 2013 amendment, the Explanation to section 80-IA (8), read with section 80A(6), requires the arm’s length price to be measured from the seller’s standpoint; that Jindal Steel was rendered under the pre-amendment law; and that Sanghi Industries Ltd. supported a generator-side rate.

Held

The Hon’ble ITAT held that the 2013 amendment brings an SDT within the arm’s length framework but does not prescribe the comparable. Selection of the CUP remains governed by the transaction-specific requirements of section 92C and Rule 10B, and the word ‘or’ in the Explanation to section 80-IA(8) neither gives the taxpayer a choice nor mandates a generator-to-generator comparison.

Functional differences between a captive generator and a distribution license are relevant, but the real inquiry is whether they materially affect the price of electricity supplied to the consuming unit. Following DCM Shriram and Rungta Mines, the regulated nature of the tariff and the distribution functions do not, by themselves, exclude the consumer tariff.

The generator-side rates adopted by the Ld. TPO related to a different stage of the supply chain and were not shown to be available to the cement units. The Ld. TPO also did not quantify any adjustment to bridge the distribution-stage differences.

Sanghi Industries was distinguished, as the captive plants had made no sales to third parties at a different rate. The order of the Ld. CIT(A) was upheld and the Revenue’s appeals for both years were dismissed.

Our Comments

The ruling supports recipient-side market evidence where the consuming unit actually procures the same product from independent parties. Taxpayers should retain month-wise invoices, tariff orders, and evidence that the captive plant did not make third-party sales at a different rate.

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Royalty at the boundary of the arm’s length range is ALP under Rule 10CA(5); Nil ALP for intra-group services rejected: Mumbai ITAT

Schueco India Private Limited²

The taxpayer, a subsidiary of Schueco International KG, Germany, sells aluminum and steel profile systems, fittings and accessories to fabricators and supports them on system selection, design, workshop layouts and training. It paid royalties of INR 45.5 million at 4% of the net invoice price for know-how, construction drawings, specifications and trademarks, benchmarked under CUP, arriving at a range of 3% to 5%. It also paid INR 12.1 million for three intra-group services, namely SBS (ERP system) services, CPS (customer and project management system) services and administrative support, charged at cost plus 5% and benchmarked under TNMM with the AE as the tested party.

The Ld. TPO determined the ALP of both transactions at nil under the Other Method. The DRP excluded three license agreements, arrived at a range of 3% to 4%, adopted the median of 3%, and sustained a royalty adjustment of INR 11.4 million. It upheld the nil ALP for the services and, alternatively, disallowed the payment under section 37(1).

Taxpayer’s contention

The taxpayer contended that it was not a passive distributor and used the licensed know-how in project-level technical support, while its local advertisement spend was routine and created no marketing intangible. As the actual rate of 4% fell within the DRP’s own range, Rule 10CA(5) required to be accepted. For the services, it furnished agreements, user lists, service tickets, emails and allocation workings based on locations, users and revenue share, and submitted that it had no internal IT team and that the amounts charged were below the allocable cost.

Revenue’s contention

Revenue contended that the manufacturer uses manufacturing know-how, not a distributor, and that the taxpayer built the brand in India through its own promotion spend. For the services, related-party agreements and invoices were not adequate proof; time sheets were absent; the charges could include shareholder or duplicative activities; and revenue was not a suitable allocation key for every service.

Held

Royalty: The Hon’ble ITAT held that the view that know-how is relevant only to the manufacturer is not an invariable TP principle, particularly for engineered building systems, and the Ld. TPO had undertaken no analysis of non-routine marketing activity. Under Rule 10CA(4) to (6), the median applies only where the actual price falls outside the range. The 4% rate sat at the upper boundary of the DRP’s range of 3% to 4% and was therefore deemed to be the ALP under Rule 10CA(5).

Intra-group services: The need, rendition, benefit, duplication and shareholder activity tests are interconnected, and benefit is judged on reasonable expectation, not hindsight. Once rendition is established, the ALP must be determined through a prescribed method, and the Other Method still requires an objective pricing basis such as a comparable price or quotation. The Ld. TPO had identified none and had aggregated three distinct services to arrive at nil. The absence of timesheets did not discredit allocation keys based on users, locations, and revenue. The adjustment of INR 12.1 million and the alternative section 37(1) disallowance were deleted.

Our Comments

The ruling gives useful clarity on Rule 10CA endpoints and evidence-led service analysis. On intra-group services, it confirms that doubts on benefit or evidence cannot be converted into a nil ALP without a proper pricing exercise. Taxpayers should nonetheless maintain service-wise evidence such as user lists, tickets and allocation workings, as these records were central to the outcome here.

Interest on CCDs cannot be valued at nil by treating the instrument as equity: Mumbai ITAT

HCY Industrial Parks Private Limited ³

The taxpayer, engaged in developing and operating industrial and logistics parks, is a wholly owned subsidiary of ILP Core Ventures III Pte. Ltd., Singapore. It had issued compulsorily convertible debentures (CCDs) to its Associated Enterprise (AE). The instruments carried a 14% coupon, a moratorium, and compulsory conversion after 20 years at fair market value, subject to a floor. Interest of INR 34.0 million paid during the year was benchmarked under the Other Method by comparing the effective rate of 10.50% (after the moratorium) with the SBI PLR of 12.23%.

The Ld. TPO treated the CCDs as equity, determined the ALP of interest at nil and made an adjustment of INR 34.0 million. The Dispute Resolution Panel (DRP) upheld the adjustment and, alternatively, directed disallowance under sections 36(1)(iii) and 37(1). Aggrieved, the taxpayer appealed before the Hon’ble ITAT.

Taxpayer’s contention

The taxpayer contended that CCDs remain debt until conversion. Before conversion, the AE has no voting or dividend rights and does not share in any appreciation in equity value, and the number of shares is not fixed at issue but depends on fair market value at conversion. The Ld. TPO could price the interest but could not substitute the transaction with an assumed equity investment.

Revenue’s contention

The Revenue contended that the Ld. TPO left the legal form intact and merely priced the funding facility under Rule 10AB, concluding that an unrelated party would not pay interest on an instrument with no obligation to repay principal.

Held

The Hon’ble ITAT observed that although the holder cannot demand repayment in cash, no shares had been allotted during the year, the holder could not vote or receive dividends, and the contractual obligation to pay interest remained in force. The question was the ALP of that current obligation, which a conclusion about eventual equity ownership does not answer.

The authorities had also misstated the terms: the Ld. TPO referred to a 15-year tenure against 20 years in the agreement, and the DRP assumed a fixed conversion ratio whereas the clause linked conversion to future fair market value.

The Other Method requires reference to a same or similar uncontrolled transaction, and the Revenue identified none in which an investor received a nil pre-conversion return. Long tenor, absence of cash redemption and conversion rights are pricing characteristics to be addressed through comparables and adjustments, not proof that the price is zero.

The TP adjustment and the alternative disallowance were deleted. Section 94B and capitalization consequences were remitted for verification.

Our Comments

The ruling is a welcome check on nil-ALP determinations that rest on recharacterizing CCDs as equity, and it underlines that delineation must follow the actual contractual terms. Taxpayers issuing CCDs to AEs should benchmark the coupon using appropriate comparables with suitable adjustments, and keep the accounting treatment, Form 3CEB, and TP documentation consistent with the debt characterization.