From The Judiciary

Can the presence of expatriate employees in India, by itself, create a Supervisory Permanent Establishment (PE) under a tax treaty?

Toyota Tsusho Corporation C/O. Deloitte Haskings & Sells LLP TS-1522-ITAT-2026(DEL)

Facts

The assessee, Toyota Tsusho Corporation, a Japanese company, provided supervision services, secondment services, offshore supplies, software usage services and technical services to various Indian entities. The AO held that the assessee had a Supervisory PE in India under Article 5(4) of the India–Japan DTAA and attributed income from FTS, offshore supplies and other receipts to such PE. The AO aggregated the stay of various Japanese expatriates across projects and concluded that the six-month threshold for Supervisory PE was met. The CIT(A) granted relief in respect of most projects but held that a Supervisory PE existed in relation to Toyota Lakozy Auto Pvt. Ltd. Both the assessee and Revenue appealed before the ITAT.

Assessee Arguments

• Article 5(4) requires fulfilment of two cumulative conditions:
  • Supervisory activities must be carried on for more than six months.
  • Such activities must be connected with a building site, construction, installation or assembly project.
• Mere presence of employees in India cannot create a Supervisory PE.
• Duration test must be applied project-wise and not employee-wise.
• Toyota Lakozy was merely an automobile dealer and was not engaged in any construction, installation or assembly project.
• Offshore supplies were concluded outside India, title passed outside India and consideration was received outside India; hence such profits were not taxable in India.
• Salary reimbursements for seconded employees were pure cost-to-cost reimbursements and did not constitute taxable FTS.

Revenue Arguments

• Expatriates of the assessee were present in India for extensive periods and performed supervisory functions.
• Multiple employee stays should be aggregated for determining the PE threshold.
• Contracts involving offshore supply and supervisory services formed integrated arrangements, and profits from offshore supplies should be attributed to the PE.
• FTS receipts and loan agreement fees were connected with the PE and taxable in India.

Held

The Delhi ITAT decided the matter in favor of the assessee and held that the assessee does not have a Supervisory PE in India.

• The six-month condition and the requirement of connection with a building site/construction/installation/assembly project are cumulative and mandatory.
• The duration test must be applied project-wise; employee-days cannot be aggregated.
• Toyota Lakozy was engaged merely in automobile dealership activities and not in any qualifying installation or construction project.
• Mere presence of employees in India does not create a Supervisory PE.
• Since no PE existed, no income attribution could be made.
• Offshore supply profits were not taxable as the contracts, transfer of title and receipt of consideration occurred outside India.
• Reimbursement of expatriate salaries on a cost-to-cost basis was not taxable as FTS.

Our Comments

The ruling affirms that the non-discrimination article cannot be invoked to claim tax rates reserved for domestic companies and reinforces the validity of differential tax treatment for foreign companies under Indian law. It also clarifies that treaty benefits do not override withholding tax obligations and that a foreign company's status remains unchanged despite operating through an Indian PE. Additionally, the decision upholds the favourable position that ATMs qualify as computers for depreciation purposes.

Can a foreign bank operating in India through a Permanent Establishment claim the lower tax rate applicable to Indian companies by invoking the non-discrimination clause under a tax treaty?

The Royal Bank of Scotland N.V. [TS-1532-HC-2026(CAL)]

Facts

The assessee, a tax resident of the Netherlands, carried on banking operations in India through a Permanent Establishment (PE). For the relevant assessment year, the assessee claimed that its Indian PE should be taxed at the same rate as a domestic company under the non-discrimination provision of the India–Netherlands DTAA. The assessee also claimed deduction of interest paid by the Indian branch to its Head Office and overseas branches while computing taxable profits. The Revenue denied the benefit of the domestic company tax rate and disallowed the interest deduction.

The matter ultimately reached the Calcutta High Court.

Assessee Arguments

• The non-discrimination clause under the India-Netherlands DTAA requires that an Indian PE of a Dutch enterprise should not be subjected to taxation less favourable than that imposed on Indian enterprises carrying on similar activities.
• Consequently, the PE should be taxed at the rate applicable to domestic companies.
• Interest paid by the PE to the Head Office and overseas branches should be allowable as a deduction while computing business profits under the DTAA.
• If the interest payment is not treated as deductible because it is a payment to self, then the corresponding interest received from the Head Office should also not be taxed.
• ATMs should be treated as computers and therefore qualify for a higher rate of depreciation.

Revenue Arguments

• The assessee remained a foreign company and could not be equated with a domestic company merely because it operated through an Indian PE.
• Domestic companies and foreign companies are not similarly situated for tax purposes.
• Explanation 1 to Section 90 specifically clarifies that a higher rate of tax applicable to foreign companies does not amount to discrimination.
• Interest paid by the PE to the Head Office attracted withholding tax provisions and, in the absence of TDS compliance, was liable for disallowance.
• Interest received from the Head Office and overseas branches was taxable in the hands of the PE.

Held

• The High Court held that the assessee was not entitled to the tax rate applicable to domestic companies.
• A foreign company and a domestic company are not in the same circumstances because a domestic company is taxable on its global income, whereas a foreign company is generally taxable only on income accruing or arising in India.
• The differential tax rate prescribed for foreign companies does not violate the non-discrimination clause of the DTAA.
• The Court upheld the disallowance of interest paid to the Head Office due to non-compliance with withholding tax requirements.
• Interest received from the Head Office and overseas branches was held to be taxable.
• The Court accepted the assessee's claim that ATMs are computers and therefore eligible for higher depreciation.
• Accordingly, relief was granted only on the depreciation issue.

Our Comments

The ruling affirms that the non-discrimination article cannot be invoked to claim tax rates reserved for domestic companies and reinforces the validity of differential tax treatment for foreign companies under Indian law. It also clarifies that treaty benefits do not override withholding tax obligations and that a foreign company's status remains unchanged despite operating through an Indian PE. Additionally, the decision upholds the favorable position that ATMs qualify as computers for depreciation purposes.

Torrent Power Ltd. & Ors. v. Union of India & Ors.

[(2026) 45 Centax 217 (Guj.) / 2026 (112) GSTL 82 (Guj.)]

Issue

Whether:

• (i) a corporate guarantee issued by a holding company to its subsidiary without consideration constitutes a taxable supply under GST:
• (ii) Rule 28(2) prescribing a deemed valuation mechanism for corporate guarantees, is valid;
• (iii) GST can be levied retrospectively for periods prior to 26 October 2023; and
• (iv) proceedings under section 74 can be invoked in such cases.

Facts

The petitioners provided corporate guarantees to banks/financial institutions on behalf of their subsidiaries without charging any consideration. The GST department treated such guarantees as supplies between related persons under Schedule I of the CGST Act. Rule 28(2), inserted w.e.f. 26 October 2023, prescribed a deemed value of 1% of the guaranteed amount per annum or actual consideration, whichever is higher. The petitioners challenged the GST levy, the validity of Rule 28(2), related CBIC circulars, and the proceedings initiated under section 74 before the Gujarat High Court.

Ruling

Corporate guarantee is a taxable supply

The Gujarat High Court held that a corporate guarantee provided by a holding company for its subsidiary constitutes a supply of service under GST, even when provided without consideration. The holding company and subsidiary are related persons, and the subsidiary is the ultimate beneficiary and recipient of the guarantee. Therefore, the transaction falls within Section 7(1)(c) read with Schedule I of the CGST Act.

Corporate guarantee is in the course of business

The Court rejected the petitioners’ argument that furnishing a corporate guarantee is merely a shareholder activity. It held that facilitating financing for a subsidiary is incidental and ancillary to the business interests of the holding company and therefore qualifies as a business activity under Section 2(17) of the CGST Act.

Corporate guarantee is not an ‘actionable claim’

The Court held that a corporate guarantee creates only a contingent and secondary liability and cannot be equated with an actionable claim. Accordingly, it would not fall within the Schedule III exclusion from GST.

Validity of Rule 28(2)

The Court upheld the constitutional validity of Rule 28(2) and Section 15(4). It held that the Government had the power to prescribe a special valuation mechanism for corporate guarantees based on GST Council recommendations. However, the Court found the expression “whichever is higher” in Rule 28(2) to be arbitrary and violative of Articles 14 and 19(1)(g) of the Constitution because it compelled taxpayers to adopt 1% valuation even where actual consideration was lower. Accordingly, the expression was read down.

No retrospective levy prior to 26 October 2023

The Court held that applying Rule 28(2) to corporate guarantees for periods prior to its introduction would be harsh, unfair and unconstitutional. Therefore, GST based on the deemed 1% valuation cannot be levied for periods prior to 26 October 2023. However, GST may apply prospectively for periods after that date if the guarantee continues.

Section 74 proceedings unsustainable

The Court observed that the dispute involved interpretation of a complex legal issue and that the facts were already known to the department. Mere non-disclosure or a different interpretation of law could not amount to fraud, wilful misstatement or suppression of facts. Accordingly, the show cause notices and orders issued under Section 74 were quashed by the Court.

Our Comments

This ruling marks a significant departure from the Bombay High Court's decision in D P Jain & Co. Infrastructure (P.) Ltd. v. Union of India [(2026) 42 Centax 208 (Bom.) = 2026 (110) G.S.T.L. 40 (Bombay)], which held that corporate guarantees provided without consideration are not taxable under GST. In contrast, the Gujarat High Court has held that such guarantees are taxable as supplies between related persons under Schedule I. The ruling strikes a balanced approach. While it confirms that corporate guarantees are subject to GST, it strips the tax department of its most aggressive tools. By stopping retrospective taxation and removing the rigid 'whichever is higher' valuation rule, the Court ensured a fair outcome. The government can collect its tax, but it cannot ignore economic reality and fair play. Given the conflicting views of two High Courts on the fundamental issue of taxability, the GST treatment of corporate guarantees remains unsettled and is likely to require final resolution by the Supreme Court. Until then, both rulings will continue to play a key role in ‘corporate guarantee’ litigation under the GST law.

M/s. McKinsey Global Services India Pvt. Ltd. (now known as McKinsey Global Capabilities and Services Pvt. Ltd.) v. Joint Commissioner (Appeals-II) & Anr.

[2026 (9) TMI 1656 – Madras High Court]

Issue

Whether an SEZ unit is entitled to claim refund of unutilized input tax credit (ITC) under the GST refund framework.

Facts

The petitioner, an SEZ unit, had filed a refund claim of INR 86.7 million (approx.) towards accumulated ITC. However, the application was rejected by the department on the ground that only suppliers to SEZ units are eligible to claim refund. The petitioner challenged the rejection before the Madras High Court, relying on earlier judicial precedents recognizing the refund entitlement of SEZ units.

Ruling

The Madras High Court held that:

• An SEZ unit is entitled to claim refund of unutilized ITC under section 54 of the CGST Act r/w rule 89 of the CGST Rules.
• Refund entitlement is not restricted only to suppliers making supplies to SEZ units.
• The issue was already settled by earlier decisions, including in Platinum Holdings Private Limited v. Additional Commissioner of GST & Central Excise [2021 (47) GSTL 30 (Mad.)], wherein the Court had observed that rule 89(1) does not envisage any such restriction and applies to any entity. The Court had reiterated the settled position that there can be no insertion of a word or phrase in a statutory provision or in a rule which must be read and applied, as framed.
• Accordingly, the impugned rejection orders were set aside, and the writ petition was allowed.

Our Comments

This ruling is a significant relief for SEZ units as it reaffirms that they are independently entitled to claim refund of unutilized ITC under the GST framework, and such entitlement cannot be denied on the ground that only suppliers to SEZ units can seek refund. The judgment strengthens the principle of zero-rating applicable to SEZ operations and discourages denial of substantive tax benefits based on procedural interpretations. It is expected to provide greater certainty to SEZ taxpayers and support refund claims in similar ongoing disputes. By confirming that SEZ units can directly claim refunds on unused ITC, the Court has stopped a problematic tax department practice. Ultimately, it gives businesses a strong legal tool to free up blocked corporate cash flow.

ITAT: TPO exceeded jurisdiction u/s 92CA by determining PE existence and consequent taxability of profits

Ingram Micro (India) Exports Pvt. Ltd.
[TS-727-ITAT-2026(Mum)-TP]

The assessee is a Singapore-incorporated company and a wholly owned subsidiary of Ingram Micro India Private Limited (“IMIPL”), an Indian company engaged in the distribution of IT products of leading technology vendors. The assessee commenced its operations in September 2001 with the objective of expanding the Ingram Micro group’s customer base in India, Bangladesh and Sri Lanka. It also catered to certain Indian customers who preferred to procure products from overseas to avail the benefit of customs duty exemption schemes.

Assessee submitted that its management and day-to-day business operations were conducted from Singapore. However, it procured certain sales processing, marketing and bookkeeping related support services from IMIPL. The remuneration for such services was stated to have been received by IMIPL in the form of rebate incentives paid by third-party vendors on sales made in India by the assessee.

For the year under consideration, assessee did not file the return of income and Form 3CEB, claiming that its business income was not taxable in India considering it did not have a PE in India, and that the profits arising from its Indian operations were not liable to tax in India under Article 7 of the said DTAA.

The Ld. AO treated IMIPL as the assessee’s Permanent Establishment (PE) in India and proposed an addition of 100% of the rebate incentives received by IMIPL from vendors for services rendered by it. The DRP upheld the proposed addition; however, on appeal, the Tribunal, vide its order dated 7 February 2013, set aside the assessment and remanded the matter to the Ld. AO for fresh adjudication in accordance with its directions.

During the remand proceedings, the AO referred the matter to the Transfer Pricing Officer (“TPO”) under section 92CA of the Income Tax Act. The TPO proceeded to determine that the assessee had a PE in India and attributed profits to such PE. The Dispute Resolution Panel (“DRP”) upheld the findings of the TPO and attributed 95% of the relevant profits to the Indian PE.

Aggrieved, the assessee challenged, inter alia, the jurisdiction of the TPO to adjudicate upon the existence of PE and the consequential profit attribution.

The Hon’ble Tribunal held that the jurisdiction of the TPO under section 92CA is restricted to determination of the arm’s length price (“ALP”) of an identified international transaction. The determination of existence of a PE and the consequent taxability and attribution of profits under the relevant tax treaty are separate issues and do not fall within the jurisdiction of the TPO.

The ITAT further observed that a general reference to the TPO, without identifying a specific international transaction for which ALP was required to be determined, cannot confer jurisdiction upon the TPO to adjudicate issues relating to PE. Accordingly, the TPO had exceeded its jurisdiction by determining the existence of PE and attributing profits thereto. Since the AO had also not independently adjudicated the PE issue as directed by the earlier order of the ITAT, the consequential adjustment could not be sustained.

Our comments

The ruling reinforces the limited and transaction-specific jurisdiction of the TPO under section 92CA. Taxpayers should carefully examine the scope of the reference made to the TPO and ensure that issues relating to PE, treaty applicability and profit attribution are appropriately distinguished from ALP determination. Further, where a matter has been specifically remanded to the AO, the same should be independently adjudicated by the AO rather than being transferred to the TPO under the guise of transfer pricing proceedings.

ITAT: Earlier APA and acceptance of comparables relevant where FAR remains consistent; turnover filter cannot be applied mechanically

Utimaco Technologies Private Limited
[ITA No.: 1805/Mum/2026]

Utimaco Technologies Private Limited is engaged in distribution of livescreen/software solutions in the Indian sub-continent and is part of the Celltick group.

During AY 2022-23, the assessee entered into international transactions with its Associated Enterprises (“AEs”) and benchmarked the same using the Transactional Net Margin Method (“TNMM”). The assessee maintained contemporaneous transfer pricing documentation and selected comparable companies based on its functional analysis.

During the transfer pricing proceedings, the TPO rejected the assessee’s benchmarking analysis, applied a turnover filter, rejected seven companies selected by the assessee and introduced ten new comparables. The TPO determined the ALP margin at 18.08% as against the assessee’s operating margin of 10.23%, resulting in a transfer pricing adjustment of INR 32 million. The DRP had upheld the adjustment.

Before the Hon’ble ITAT, the assessee relied upon an Advance Pricing Agreement (“APA”) entered into with the CBDT for earlier assessment years and contended that there was no material change in its Functions, Assets and Risks (“FAR”) profile. The assessee also submitted that certain comparables had been accepted by the Revenue in the immediately preceding year.

The Hon’ble Tribunal observed that although an APA is not mechanically binding for years falling outside its coverage period, the methodology and FAR analysis adopted therein remain relevant and persuasive where the taxpayer demonstrates continuity in its business and FAR profile. The Tribunal further held that where comparables have been accepted in an earlier year and there is no material change in the FAR profile, a departure by the Revenue should be supported by cogent reasons.

The ITAT also considered the application of the turnover filter and held that exclusion of companies solely on the basis of turnover, without demonstrating its material impact on profitability or comparability, was not justified. Accordingly, certain companies accepted in the preceding year were directed to be retained, subject to satisfaction of other comparability criteria.

Our comments

The ruling underscores the importance of maintaining a consistent FAR profile and benchmarking methodology across assessment years. Although an APA does not automatically apply to years outside its agreed term, the FAR analysis and transfer pricing approach accepted under the APA can serve as persuasive evidence, particularly where there has been no material change in the underlying facts or business circumstances.

The decision also reiterates that while taxpayers may draw support from the acceptance of comparable companies in prior years, such acceptance cannot substitute the statutory comparability analysis required under transfer pricing regulations. Additionally, the ruling emphasizes that turnover-based filters should not be applied as a matter of routine; rather, taxpayers and tax authorities must demonstrate the economic rationale and relevance of such filters in establishing comparability.